Hello, this is attorney Oh Seung-hyun of Cheongchul Law Firm.

"We paid hundreds of millions of won in development fees, and the delivery deadline has passed. The screens load, but the functions do not actually work. In real use it is full of errors, and people say a competing program is far better. Yet the developer insists it has built everything." As outsourced software development contracts for AI programs, LLM-based services and business automation systems surge, disputes are increasing in which the developer collects the fees but fails to meet the specifications agreed in the contract and neglects performance.

Two questions arise first in these cases. First, the developer says "we built it" — but what does "completion" mean legally? Second, what happens when the court entrusts an appraisal to an IT expert? Misunderstanding either answer can cost you hundreds of millions of won.

What "completion" means in a software works contract

(1) Partial functionality is not completion

Under the Civil Code's contract for work, the obligation to pay arises only when the contractor (the developer) delivers the completed work to the client (the ordering company). In a software development contract, "completion" of the work means a state that satisfies the specifications set out in the contract (the definition document and requirements specification) and can actually be used for the client's intended purpose. The mere fact that the developer runs a server and can display screens is not completion. Every function stated in the contract must operate normally, without errors.

(2) Supreme Court: completion requires the client's acceptance approval

In a 2023 decision the Supreme Court held that "delivery" of the work under a software contract for work does not end with the physical act of handing over files or access rights. It also includes the client inspecting the work and expressly or impliedly acknowledging (approving) that it has been completed as agreed (Supreme Court, Mar. 30, 2023, 2022Da289174). In other words, where the client has not signed an acceptance certificate or has raised objections to the delivery, delivery has not been completed and the state of delay in performance continues.

Therefore, if the development contract provides that "the date on which the client signs and seals the acceptance certificate shall be the acceptance completion date," completion itself is not recognized without that signature. However strongly the developer argues that "the functions have been implemented," completion is hard to establish while the client refuses acceptance or keeps pointing out errors.

When can the contract be terminated

(1) Termination for delay in performance — demand required after the deadline passes

Where the contract specifies a delivery deadline (development period), the developer falls into delay in performance if it fails to deliver a completed product after that deadline. The client may fix a reasonable period and demand performance, and may terminate the contract if performance is still not made within that period (Civil Code Article 544). In practice, it is common to send the demand by content-certified mail stating that "if a completed product meeting the specifications is not delivered within OO days, the contract will be terminated."

(2) Termination for refusal to perform — immediate, without a demand

Where the developer clearly indicates that it has neither the intention nor the ability to perform, the contract may be terminated immediately without a separate demand (analogous application of the proviso to Civil Code Article 544; Supreme Court precedent). Conduct such as the developer filing a mediation application with a dispute mediation body claiming that "the client is not paying," or letting more than 15 days pass without any response to the client's content-certified mail, may be recognized as an expression of refusal to perform. Once refusal to perform is recognized, the client may serve a notice of termination immediately, regardless of whether the delivery deadline has passed.

How appraisal works in IT development disputes

(1) Completion-percentage appraisal — beware of the trap

In software development disputes, courts sometimes ask an IT expert appraiser "what percentage complete is this program?" This appraisal method carries a serious trap. The developer's side argues that "since it is 80% complete, returning only a proportionate part of the fee is enough." But this is faulty logic. Unlike construction, software cannot be physically divided into completed portions, and once it falls short of the completion standard set in the contract it remains incomplete. Incomplete software has not been delivered to the client.

(2) Key precedent: full refund of development fees despite 61% completion (Seoul Central District Court 2017Gahap560201)

There is an important precedent addressing this point head-on. In a software development consignment works contract case, the Seoul Central District Court ordered a full refund of the development fees received and held the contract terminated — even though the court-appointed IT appraiser assessed the program's completion level at 61% — because the client's inspection and approval, the contractual requirement for completion, had not taken place (Seoul Central District Court, Oct. 18, 2019, 2017Gahap560201). In other words, even if the appraiser finds that 61% was built, the client can recover the entire fee if that does not satisfy the contractual completion requirement. It is a full refund, not a refund proportionate to the completion percentage.

(3) Framing the appraisal is decisive — an "identity" appraisal may matter more than completion level

Where there are indications that the developer sold the client's program to a third party without authorization or reused it as a similar service, an identity appraisal comparing the two programs becomes far more important than a "completion-percentage appraisal." If the source code, database and core algorithms of the program developed at the client's request are substantially identical to another product of the developer, this may constitute both breach of contract and copyright infringement. An identity appraisal is carried out by comparing the source code and version-control history (Git commit logs, etc.) of the two systems.

(4) Who should apply for the appraisal and bear the cost

The burden of proving completion and delivery lies with the developer (contractor) that claims completion (Supreme Court, June 24, 2015, 2014Da36702, 36719). Accordingly, the party that must apply to the court for an IT appraisal and deposit the appraisal fee is, in principle, the developer. The client has neither an obligation nor a practical benefit in applying first. In particular, where the source code and system exist only inside the developer's server (that is, where no deliverable has been handed to the client at all), the client structurally cannot even apply for an appraisal because there is no object to appraise. In such a case, an appraisal becomes possible only after the court orders production of the source code and version-control history through an order to produce documents.

Order to produce documents — the step that must precede any appraisal

Where the developer (defendant) does not produce the source code, version-control repository (Git, SVN, etc.), bug reports or test result reports, the client may apply to the court for an order to produce documents (Civil Procedure Act Article 347). If the court issues the order and the developer does not comply, the court may accept the client's assertions as true (Civil Procedure Act Article 349). Version-control history in particular records the date, author and content of each source-code change, making it key evidence for objectively confirming "how far development had actually progressed when the development deadline passed."

Practical checkpoints

• If the contract provides that "the acceptance completion date shall be the date on which the client signs and seals the acceptance certificate," completion is not legally recognized unless you sign. However strongly the developer claims "we completed it," this clause is your shield.

• Errors and defects found during testing must be recorded. Whether in a KakaoTalk chat room, email or an official feedback system, the date and the content of the error must remain on record to be usable as evidence later. Complaints made only verbally are hard to prove.

• If the developer fails to deliver a completed product past the deadline, immediately send content-certified mail notifying that "the contract will be terminated if delivery is not made within O days." At the appraisal or litigation stage, the existence of this notice determines whether the termination was lawful.

• Be wary of the developer's argument that "the appraisal says 61% complete, so returning only 39% is enough." Without the client's acceptance approval the work is incomplete, and proportionate refund according to the completion ratio is not the governing principle (Seoul Central District Court, Oct. 18, 2019, 2017Gahap560201).

• If there are indications that the developer secretly sold the program built at your request to a third party or reused it as a similar service, this allows separate claims for breach of contract and copyright infringement. In that case, pursue an identity appraisal of the two programs and secure the developer's internal contracts, sales materials and call records as evidence.

• If the developer will not produce the source code, apply to the court for an order to produce documents. If the developer fails to comply with the court order, your assertions may be accepted as true. The refusal to produce source code and version-control history is itself a basis for an adverse inference.

• AI and LLM-based software often carries special contractual standards beyond mere implementation of functions — data training completeness, accuracy of API integration, response accuracy rate and so on. Turning each standard specified in the contract's definition document and requirements specification into a checklist, and listing the unmet items, is a great help in litigation.

"We can show it to you directly. Would you like to log in?" When the developer says this, a screen that simply loads feels like completion. The law sees it differently. Without an acceptance certificate that the client understood and signed, an open screen is not completion. If you paid hundreds of millions of won in development fees and the functions promised in the contract were never implemented, there is a legal structure that lets you recover the entire amount — whatever the appraisal result may say.