Hello, this is Bae Ki-hyung, attorney at Cheongchul Law Firm (법무법인 청출).

On construction sites, it is not uncommon for the project owner (도급인, the party ordering the work) to abruptly declare termination of the contract mid-construction — the so-called "work cut-off" (공사 타절) — citing a sudden liquidity crunch or a change in business plans.

For the contractor (수급인), being thrown off the site overnight is bewildering and unfair when it has done nothing wrong: no delay, no defective work. Worse, it loses not only the costs already sunk into the project but also the expected profit — often hundreds of millions of won — it would have earned had the work been completed, which can push the company into serious financial distress.

In this article I explain, through the governing statute and Supreme Court precedent, whether an owner may unilaterally terminate a construction contract even where the contractor is not at fault, and how far the damages the contractor is legally entitled to recover extend.

The Owner's Discretionary Right of Termination and the Scope of Damages – Civil Code Article 673

[Question] Can the project owner terminate a construction contract at will even though the contractor has done nothing wrong? And if so, how is the contractor compensated for its substantial losses?

[Answer] To put the conclusion first: under Civil Code Article 673 (민법 제673조), so long as the work is not yet completed, the owner may terminate the contract at any time by "compensating the damages" sustained by the contractor.

This is referred to as the owner's "discretionary right of termination" (임의해제권).

Because a works contract is performed to the specific order of a particular client, the statute gives an owner who no longer needs the work completed — due to changed circumstances — a way out of the contract, while balancing that freedom by requiring it to make the contractor whole.

How far, then, does the "damage" the owner must compensate extend? On this point, Supreme Court Decision 2000Da37296, 37302 (May 10, 2002) sets out a clear standard.

1. Scope of damages (costs already incurred + future expected profit)

The Supreme Court held that the contractor's loss means "the sum of the expenses the contractor has already disbursed and the profit it would have obtained had it completed the work." In other words, the contractor may recover not only the materials and labor costs poured into the site, but also the margin (profit) it would have pocketed on completion.

2. The owner cannot assert comparative negligence or reduction of liquidated damages

In ordinary damages litigation, comparative negligence (과실상계) — reducing the award for the victim's own fault — is routinely applied. The Supreme Court, however, held that "the purpose of Civil Code Article 673 is to allow termination based on the owner's unilateral intention while requiring it, in exchange, to compensate in full the loss the contractor will sustain; accordingly, the owner may not assert comparative negligence or a reduction of the agreed amount of damages against the contractor." Since the termination stems from the owner's unilateral change of mind, its liability will not be trimmed.

3. A caveat to note: offsetting of gains (deductible benefits)

That said, any expense the contractor is spared, or any other benefit it obtains, because of the termination is deducted from the damages (손익상계, offsetting of gains). The Supreme Court held that where the contractor, freed by the termination, earns income by deploying its efforts on another site, or where it can obtain consideration by disposing of materials it had procured for completing the work, such amounts must naturally be deducted from the damages.

Practical strategy: responding to the owner's "pretextual termination"

A recurring problem in practice is how to respond to an owner's "pretextual termination" (꼼수 해제).

Because terminating unilaterally under Civil Code Article 673 obliges the owner to compensate even the contractor's expected profit, owners often try to avoid that exposure by forcing a narrative of contractor default — alleging defective work or delay — and terminating on that basis instead.

On this, Supreme Court Decision 2022Da246757 (Oct. 14, 2022) drew a clear line: "Where an owner has declared termination of a works contract on the ground of the contractor's default but it turns out that the requirements for default were not met, that circumstance alone does not mean the declaration also contained an intention to terminate at will under Civil Code Article 673." In short, if the owner tried to push the contractor out by blaming it and failed, that failed declaration does not automatically convert into a lawful discretionary termination that ends the matter with a mere damages obligation.

Accordingly, when an owner improperly tries to cut off the works on default grounds, the contractor should prove with clear progress records that it bears no fault, while at the same time meticulously appraising and claiming its sunk costs and lost expected profit (the damages) arising from the owner's unilateral cut-off.

Disputes over settlement and damages following a mid-project construction cut-off entangle precise appraisal of the work performed with complex termination doctrine, and the outcome can vary widely with the facts — so concrete legal review from the outset is essential.

Drawing on a deep understanding of complex cut-off disputes and damages practice on construction sites, Cheongchul Law Firm delivers the optimal legal solution for recovering the construction proceeds and lost profit rightfully owed to contractors unfairly forced off site. If you are struggling with a unilateral termination or the settlement of interim progress payments, please consult the professionals at Cheongchul Law Firm.

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

Cheongchul Law Firm is composed exclusively of attorneys from Korea's five largest law firms, the prosecution service, and major corporate legal teams. Rather than a single lawyer, we assemble a team of specialists in the fields relevant to each matter. Beyond resolving isolated issues, Cheongchul provides comprehensive solutions across the client's entire business, offering legal consulting focused on ultimately achieving what the client wants. If you need help reaching your goals, please do not hesitate to contact Cheongchul.