[Contract Types Based on Competition Forms and Their Existence] - (3) Negotiated Contracts – Concepts and Major Reasons

Hello, this is Attorney Lee Young-kyung from Cheongchul Law Firm.

Today, I will explain 'negotiated contracts' for contract officers from the state, local governments, and public institutions, as well as practitioners from companies participating in bids.

[Question]

What is a negotiated contract and when can it be made?

[Answer]

1. Concept of Negotiated Contracts

A negotiated contract is a method of contracting where the contract officer selects a specific person to execute the contract without going through the competitive bidding process. This is based on Article 26 of the Enforcement Decree of the National Contracts Act and Article 25 of the Enforcement Decree of the Local Contract Act.

Article 26, Paragraph 1 of the Enforcement Decree of the National Contracts Act states, "The contract officer may contract by negotiated contract in any of the following cases," and the Enforcement Decree of the Local Contract Act contains similar provisions.

2. Main Reasons for Negotiated Contracts

The reasons for negotiated contracts can be broadly categorized into 1) urgent reasons, 2) cases where competition cannot be established, 3) direct production and purchase by small businesses, 4) contracts for goods and services with national veterans and organizations for the disabled, 5) other cases where competition is inefficient, 6) re-announce bidding, and 7) reasons for contract cancellation or termination.

Next, we will examine specific reasons in detail.

A.   Urgent Reasons

Under the National Contracts Act, ① natural disasters, prevention and control of infectious diseases, military movement for operational purposes, urgent events, urgent recovery needs for flood damage, and other emergencies, acute rises in the prices of raw materials, and urgent safety inspections and facility improvements to prevent accidents allow for negotiated contracts.

Here, 'urgent' means cases where it is difficult to achieve the purpose of the contract even through competitive bidding announcements.

In the case of local contracts, negotiated contracts are also possible for additional urgent situations related to emergency recovery, such as leasing equipment and purchasing materials, procuring goods and medicines for disaster victims, and setting up temporary relief facilities:

Additionally, ② matters requiring national security, national defense planning and intelligence activities, managing military facilities, diplomatic relations, and other similar cases where there is a need for security or confidentiality in the actions of national institutions, ③ when the head of the Defense Acquisition Program Administration manufactures or purchases military specifications from companies that developed military specifications, ④ in cases of emergency disasters where materials owned by the national or local governments are sold to the disaster-affected also allow for negotiated contracts.

B.   Cases Where Specific Skills are Needed or Competition Cannot be Established, Such as When There is Only One Producer of the Relevant Goods

① If it is difficult to separate the responsibilities for defects in future facilities related to construction and contracts with the previous or current contractor, negotiated contracts are possible. This is referred to as 'continuing construction' and is based on Article 15 of the Enforcement Decree of the National Contracts Act and Article 29 of the Enforcement Decree of the Local Contracts Act. It should be noted that this is a different concept from 'long-term continuous construction.'

'Difficulties in distinguishing responsibility for defects' refers to the following situations:

• When the current construction shares vertical foundations with previous works that are either in construction or within the defect warranty period

• When dismantling or altering parts of previous constructions to connect with the current work

② When there are two or more contractors on the same site, negotiated contracts are also possible if contracting with the current contractor.

'Cases where more than one contractor cannot be deployed on the same site' refers to situations where the current construction overlaps temporally or spatially with previous works.

However, in the case of local contracts, constructions that have less than 40% of the remaining work period compared to the current construction period are excluded from negotiated contracts.

③ Related to finishing works, negotiated contracts are also possible if contracting with the previous or current contractor. The specific scope of 'finishing works' slightly differs between national and local contracts:

• National Contract: finishing work related to ongoing previous constructions or finishing work related to previous constructions within the liability period, and ancillary facility construction such as back filling, retaining walls, and paving

• Local Contract: finishing work related to already constructed work and ancillary facility construction such as back filling, retaining walls, and paving, and in cases where there are two or more specialized constructions combined, the estimated cost of the current work must be less than 200 million won and the estimated cost of finishing work must be less than half of the total estimated cost of the current work

④ Negotiated contracts are also allowed for construction carried out in special regions such as adjacent areas where competition is virtually impossible.

⑤ Construction using special patented methods

Negotiated contracts are possible for construction applying patented methods or recently designated technologies under the Construction Technology Promotion Act, newly certified or verified technologies under the Environment Technology and Industry Support Act, and disaster prevention technologies designated under the Natural Disaster Countermeasures Act, where competition is virtually impossible.

C.   Contracts for Manufacturing and Purchasing Products Directly Produced by Small Enterprises

Negotiated contracts are also possible when purchasing or manufacturing products certified for performance as stipulated in the Act on Promotion of Purchase and Support of Small Enterprises, which are produced directly by small enterprises as defined in Article 2, Item 1 of the Small and Medium Enterprises Promotion Act (refer to Article 26, Paragraph 1, Item 3 of the Enforcement Decree of the National Contracts Act).

D.   Contracts with Organizations Established for Providing Jobs, Benefits, or Welfare Services to National Veterans or Persons with Disabilities

In the case of national contracts, negotiated contracts may be made with social welfare corporations established under the Welfare of Residents Act for the manufacturing and purchasing of goods or service contracts (limited to goods produced directly by the organization and services it directly performs), or for directly selling or renting items to such organizations (refer to Article 26, Paragraph 1, Item 4 of the Enforcement Decree of the National Contracts Act).

In the case of local contracts, additionally, when it is necessary to involve a majority of local residents for community development and for constructions with an estimated price of less than 20 million won or for contracts with representatives of local residents below 50 million won as defined by administrative regulations, negotiated contracts are also allowed.

In the next post, we will look at negotiated contracts for small contracts, re-announced tenders, contract termination, and other related matters.

Cheongchul Law Firm, established by attorneys from the four major law firms, specializes in corporate law, providing comprehensive solutions related to national contracts, bidding, and investigations by the Fair Trade Commission related to bidding. If you have any questions, please feel free to contact us via email or phone.