Hello, this is attorney Bae Gi-hyung of Cheongchul Law Firm.

One of the situations contractors most fear on a construction site is a funding crisis at the client — in other words, the risk of insolvency. When interim payments fail to arrive on the agreed date, or rumours spread that the client's finances have deteriorated badly, the contractor is left with a deep anxiety: "If I keep building with my own money — materials and labour — will I end up receiving nothing at all?"

Yet simply withdrawing from the site and stopping work is not an easy decision either, because the client may turn around and demand enormous liquidated damages on the ground that the works were not completed within the contract period.

This post explains the "defence of insecurity" — the basis on which a contractor may lawfully suspend work and protect itself where the client faces insolvency or fails to pay interim amounts — through the relevant statute and Supreme Court precedent.

The defence of insecurity – requirements for suspending work when the client faces insolvency (Article 536(2) of the Civil Act)

[Question] My client has run into funding difficulties and I doubt whether the construction payments will be made. Can the contractor suspend work at its own initiative until payment is assured, without incurring liquidated damages?

[Answer] Where strict requirements are met, the contractor may lawfully suspend work by invoking the "defence of insecurity" under Article 536(2) of the Civil Act, and bears no liability for delay during the period of suspension.

In a typical construction contract the contractor bears the obligation to perform first. Article 536(2) of the Civil Act, however, creates an exception: "Where one party is obliged to perform first, and there are significant grounds making it difficult for the other party to perform, that party may refuse to perform its own obligation until the other party tenders performance."

The Supreme Court has set out the specific requirements for lawfully suspending work on this basis as follows.

1. Serious funding difficulties on the client's side (credit insecurity)

Supreme Court Decision 2003Da60136 (25 November 2005) held clearly that "where, in relation to a construction contract, there are significant grounds making it difficult for the client to perform its obligation to pay the construction price owing to a lack of resources, the contractor may refuse to perform its obligation to complete the works until payment is tendered, and bears no liability for delay in that respect." Where the client's insolvency or a succession of provisional attachments makes payment objectively unlikely, the contractor may therefore lawfully stop work.

2. Repeated non-payment of agreed interim amounts

Even without a clear insolvency event, suspension may be possible where the client withholds agreed interim payments without justification. Supreme Court Decision 2011Da93025 (29 March 2012) held that "where, under a contract for works performed over a considerable period with interim payments agreed at set intervals, the client fails without justification to make those payments, such that the contractor can no longer reasonably expect to be paid if it continues and requiring prior performance would be contrary to fairness, the contractor may refuse to perform its obligation to continue the works, even absent credit insecurity on the client's part."

3. A caveat: minor delay is not enough

That said, late payment alone does not automatically justify stopping work. In Supreme Court Decision 2001Da1386 (4 September 2002), concerning delay in paying part of an interim instalment, the defence of insecurity was not accepted. Halting the entire works on the pretext of a minor payment delay or partial non-payment may instead be assessed as the contractor's own default, exposing it to substantial liquidated damages.

The practical core – create a record by formal demand and certified mail before giving notice of suspension

Thorough preparation before invoking the defence of insecurity is essential.

Where the client's finances look doubtful or interim payments begin to fall behind, the contractor should not simply lock the site gates. It should (i) issue a written demand for prompt payment of the outstanding amounts, and (ii) send certified mail requiring a payment guarantee or a concrete funding plan for the remaining contract price, thereby creating an objective record. Only where the client then fails to offer a reasonable solution should the contractor give notice of a "lawful suspension of works based on the defence of insecurity" — that sequence is what allows a safe defence in any subsequent claim for liquidated damages.

Suspension of works and the defence of insecurity are a double-edged sword: a misjudgement can leave the contractor bearing billions of won in liquidated damages and liability for termination. Specific legal review before acting is indispensable.

Cheongchul Law Firm draws on a deep understanding of cash flow on construction projects and of the law governing termination of construction contracts to provide optimal solutions that minimise contractor losses amid client insolvency and protect the contract price properly due. If you are wrestling with unpaid interim amounts or the question of suspending works, please consult our specialists.

Attorney Bae Gi-hyung served at the Defense Installations Agency and in the construction and real estate teams of major law firms, advising on the entire process of government contracts and construction projects — including large-scale construction, defence facility projects and SOC projects — and resolving related litigation. If you need assistance with government construction works, private construction projects, public procurement contracts, or state, local and public property, please contact him at any time.

Cheongchul Law Firm is composed exclusively of attorneys from Korea's five largest law firms, the prosecution service and corporate legal teams, and responds with a team of specialists in the relevant fields rather than a single attorney. Cheongchul goes beyond resolving isolated issues to provide comprehensive solutions across a client's business, focusing on legal consulting that ultimately achieves what the client wants. If you need help reaching your goals, please do not hesitate to contact us.