Hello, this is Attorney Park Jong-han at Cheongchul Law Firm.

In construction contracts, when the contractor fails to complete work within the agreed period, they bear liquidated damages liability. We examine whether reduction of liquidated damages is possible and on what basis the reduction is calculated.

[Question] Reduction of Liquidated Damages for Delay

[Answer]

Liquidated damages constitute a pre-agreed damages amount, so courts may reduce them appropriately when deemed unreasonably excessive. Courts can make this reduction determination ex officio, without waiting for party arguments.

Article 398(2) of the Korean Civil Code (민법 제398조 제2항), governing liquidated damages reduction, is a mandatory provision. Therefore, agreements that pre-emptively exclude reduction claims are not permitted (Supreme Court Decision 2007Da40765, October 25, 2007).

The benchmark for reduction is the closing of fact-finding arguments, and the method is judged based on the total liquidated damages amount, not the daily rate. However, an unusually high daily rate can be a factor considered in reduction.

Common factors considered in reduction include: ① the parties' status, ② the contract's purpose and content, ③ the motivation for setting damages, ④ comparison between actual damages and the agreed amount, and ⑤ trade practices and economic conditions at the time.

Regarding whether comparative negligence applies when the principal is also at fault: courts hold that since various circumstances are already considered when reducing liquidated damages as pre-agreed damages, creditor negligence need not be separately considered for further reduction (See Supreme Court Decision 99Da57126, January 25, 2002).

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