Hello, this is Attorney Jonghan Park of Cheongchul Law Firm.

In this installment, we examine the key practical issues concerning the procedure for selecting a contractor after the association has been established, the general meeting quorum required when the contractor agreement is modified, and the construction cost verification system newly introduced into the Urban Improvement Act.

[Question] Contractor Selection Procedure of an Improvement Project Association and Requirements for Modifying the Contractor Agreement

[Answer]

가. Legal Basis and Procedure for Contractor Selection

Article 29(4) of the Act on the Improvement of Urban Areas and Residential Environments (the "Urban Improvement Act") (도시정비법 제29조 제4항) provides that "the association shall, after obtaining approval for the establishment of the association, select a construction business operator or registered project operator as the contractor at a general meeting of the association by competitive bidding or a negotiated contract (limited to cases where competitive bidding has failed two or more times) pursuant to paragraph (1)," while providing an exception that, for an improvement project with 100 or fewer members, the contractor may be selected at the general meeting as prescribed by the articles of association.

The contractor selection procedure generally proceeds in the order of "bid announcement → on-site briefing → resolution of the board of representatives (deciding which bidders to submit to the general meeting) → joint presentation → general meeting resolution → contract execution." In particular, Urban Improvement Act Article 29(8) (도시정비법 제29조 제8항) provides that "the association shall hold joint presentations two or more times so that construction business operators or registered project operators participating in the bidding for contractor selection under paragraph (4) can provide information on construction to the owners of land, etc.," thereby codifying the joint presentation, previously a discretionary matter, as a statutory obligation of the association.

Meanwhile, in the case of Seoul, the city or provincial ordinance under Urban Improvement Act Article 118 (도시정비법 제118조, public support for improvement projects) requires that the contractor be selected after approval of the project implementation plan. Since the timing of contractor selection may thus be regulated differently by region (e.g., Article 77 of the Seoul Metropolitan Government Ordinance on Urban and Residential Environment Improvement (서울특별시 도시 및 주거환경 정비조례 제77조)), the ordinance of the local government where the association is located must always be checked.

In addition, contractor selection must be conducted through the competitive bidding system. Following the amendment of the Urban Improvement Act, restricted competitive bidding is no longer permitted for contractor selection, so only open competitive bidding is available.

Furthermore, requesting or providing money or other valuables is prohibited. However, construction business operators may propose to lend the interest on relocation loans from financial institutions, and in redevelopment projects (excluding reconstruction), they may propose to lend additional relocation funds at the interest rate at which they borrow from financial institutions.

나. Practical Points to Note at the General Meeting for Contractor Selection

A majority of the owners of land, etc. (association members) must attend in person, and where a re-vote or similar is conducted at the general meeting as prescribed by the articles of association, whether a majority of the members are attending in person must be confirmed again before the re-vote.

Attendance by proxy is recognized as attendance in person, but written resolutions are generally not recognized as attendance in person. Written resolutions must be submitted after receiving the written resolution form during the period and time and at the place designated by the association. Moreover, before the vote for contractor selection, each construction business operator must be given an opportunity to make a separate presentation to the members.

다. Where the Terms of the Construction Contract Differ from the General Meeting Resolution

After the terms of the contract with the contractor have been submitted as an agenda item and resolved at the general meeting, if those contract terms are subsequently modified, the general meeting quorum required differs depending on whether the modification is "substantial to the extent that it materially affects the interests of the association members."

The Supreme Court held that "where matters concerning 'the association's cost burden' or 'the selection of the contractor and designer and the terms to be included in the contract,' which are mandatory items of the articles of a housing reconstruction association and must undergo the strict procedure for amending the articles, have been substantially changed compared to the time of the original reconstruction resolution to the extent that they materially affect the interests of the members, even if it is not a procedure for amending the articles, Article 20(3) and Article 20(1) subparagraphs 8 and 15 of the former Act on the Improvement of Urban Areas and Residential Environments (구 도시 및 주거환경정비법 제20조 제3항, 제1항 제8호 및 제15호), which prescribe a supermajority consent requirement to protect the interests of the members, apply by analogy, and the consent of two-thirds or more of the members is required" (Supreme Court Decision 2010Du13463, Aug. 23, 2012).

Going further, the Supreme Court held that "where a reconstruction association concludes a contract with the contractor to the effect of changing the members' cost-sharing terms adopted at the original reconstruction resolution without obtaining the consent of two-thirds or more of the members required under the analogical application of the former Urban Improvement Act, the contract is void," and that "since a contract that violates mandatory provisions prescribing the requirements for contract formation is null and void, even if the counterparty acted in good faith and without negligence, there is no room for applying the doctrine of non-genuine declaration of intention under Civil Code Article 107 (민법 제107조) or the doctrine of apparent agency," thereby making clear that the two-thirds member consent requirement applies by analogy as a mandatory provision (Supreme Court Decision 2013Da49381, May 12, 2016).

라. Introduction and Operation of the Construction Cost Verification System

Urban Improvement Act Article 29-2 (도시정비법 제29조의2) establishes a construction cost verification system to address cases such as an increase in construction costs after the contract with the contractor has been concluded. Under this provision, the project implementer of a redevelopment or reconstruction project, after concluding the contract with the contractor, must request construction cost verification from the improvement project support organization under Urban Improvement Act Article 114 (도시정비법 제114조) when any of the following applies.

First, "where one-fifth or more of the owners of land, etc. or the association members request the project implementer to commission verification" (subparagraph 1);

Second, where "the rate of increase in construction costs (the ratio of the cumulative increase to the original contract amount, excluding the producer price inflation rate)" is (a) 10/100 or more where the contractor was selected before approval of the project implementation plan, or (b) 5/100 or more where the contractor was selected after approval of the project implementation plan (subparagraph 2);

Third, where, after the construction cost verification under subparagraph 1 or 2 has been completed, the rate of increase in construction costs (the ratio of the cumulative increase to the contract amount at the time of verification) is 3/100 or more (subparagraph 3).

The specific methods and procedures for such construction cost verification, as well as the verification fees, are prescribed in the "Standards for Verification of Construction Costs in Improvement Projects" (정비사업 공사비 검증기준) publicly notified by the Minister of Land, Infrastructure and Transport.

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