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

When entering into a construction contract (도급계약), the parties typically include a 'delay penalty' (지체상금) clause — liquidated damages that the contractor (시공사) pays to the client (발주처) if the work is not completed by the agreed deadline. It is usually calculated at 1/1000 to 3/1000 of the total contract price per day of delay, so if construction is delayed for several months due to unforeseen circumstances, the amount can snowball dramatically.

For a contractor facing delay penalties reaching hundreds of millions or even tens of billions of won, the project can bring not profit but the risk of bankruptcy. Here the client demands, "You sealed the contract, so pay the full amount by the formula," while the contractor counters that "the amount is far too harsh compared to the actual damages incurred," leading to fierce litigation.

Today, I will explain the legal nature of delay penalties imposed for construction delays and the criteria by which courts reduce an excessive claim ex officio, through clear statutes and precedents.

The Legal Nature of Delay Penalties and the Court's Ex Officio Reduction — Liquidated Damages and Civil Code Article 398(2) (민법 제398조 제2항)

[Question] If a delay penalty is calculated by the contract formula, must the contractor pay the full amount no matter how large it is?

[Answer] No. Numerous precedents, including Supreme Court Decision 98Da26590 (March 26, 1999), regard a delay penalty clause in a construction contract as, in principle, a 'predetermined amount of damages (손해배상액의 예정).'

Because of this legal nature, the client can claim the delay penalty by proving only the contractor's default, without proving the actual damages incurred. Conversely, even if the contractor proves that the client suffered no actual damages or less than the predetermined amount, it cannot be entirely relieved of liability for the delay penalty.

However, the most important point is that under Civil Code Article 398(2) (민법 제398조 제2항), if the predetermined amount is unfairly excessive, the court may 'appropriately reduce' it ex officio. In other words, if the delay penalty calculated by the formula is found to be unfairly large beyond what an ordinary member of society would accept, the court has the authority to reduce it.

So what factors does the court consider in reducing a delay penalty? The court judges reduction based not simply on whether the daily penalty rate is high, but on the finally calculated 'total delay penalty amount' (Supreme Court Decision 95Da11436, April 26, 1996). Specifically, as of the close of fact-finding arguments, it comprehensively considers the following circumstances to determine the reduction ratio.

1. The status of the contracting parties

The court examines differences in economic status or bargaining power between the client and the contractor.

2. The purpose and content of the contract

The court considers the nature, scale, and difficulty of the construction work.

3. The motive for predetermining damages

The court reviews the specific background and purpose behind including the delay penalty clause.

4. Comparison of actual damages and the predetermined amount

The court estimates the actual damage the client realistically suffered from the delay and compares it with the total delay penalty claimed.

5. Trade practices and economic conditions

The court comprehensively reflects the general practice of imposing delay penalties in the construction industry and the economic conditions at the time of construction.

The Contractor's Defense Strategy for Ex Officio Reduction and the Client's Response to Prove Damages

A contractor faced with an enormous delay penalty need not give up in advance based on the contract formula alone. The key defense strategy is to actively prove the unavoidable circumstances that led to the delay, that the client's actual damages were not large, and that the total delay penalty accounts for an excessively high proportion of the entire contract price, thereby obtaining a substantial 'ex officio reduction' from the court.

Conversely, the client should not optimistically assume that the full amount by the formula will be granted; it is important to specifically present the actual scale of damages — such as financing costs or business losses arising from the delay — to minimize the reduction.

Delay penalty reduction disputes involve not only an analysis of fault for the construction delay but also a comprehensive judgment on 'excessiveness,' in which the court's discretion plays a large role, so the outcome can vary greatly depending on the case, and specific legal review is necessary.

Cheongchul Law Firm, with a deep understanding of complex construction delay issues on-site and the legal principles of delay penalty reduction, provides optimal defense solutions to clients facing the crisis of excessive delay penalties. If you are struggling with an unfair delay penalty claim or an unsettled construction payment issue, we encourage you to consult with the experts at Cheongchul Law Firm.

-------

Attorney Bae Ki-hyung has worked at the Defense Installations Agency and in the construction/real estate teams of major law firms, providing legal advice on the entire process of national contracts and construction projects — including large-scale construction such as government-procured works, national defense facility projects, and SOC construction — and resolving related litigation with extensive experience and skill. If you need help with government-procured works, private construction, public procurement contracts, state property, local property, or public property, please feel free to contact us anytime.

* * *

Cheongchul Law Firm consists solely of attorneys from Korea's five largest law firms, the prosecution, and major corporate legal teams. Rather than a single attorney, a team of specialist attorneys in the relevant fields responds to each case. Beyond resolving isolated issues, Cheongchul provides comprehensive solutions for the entire business, offering legal consulting focused on ultimately achieving what the client wants. If you need help reaching your goals, do not hesitate to contact Cheongchul.