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

When work stops on a construction site because of an unexpected dispute, or the contractor demobilises, one of the most common points of conflict between employer and contractor is whether the building is incomplete, or whether it is complete but affected by defects.

The contractor argues that "the principal works are finished, so the works are complete, and what remains is merely defective", and claims the full outstanding contract sum. The employer responds that "much of the work departs from the drawings or is missing altogether, so as a building it remains incomplete and not a won is payable" — and hard-fought litigation follows.

This article sets out the objective test the Korean courts apply to distinguish incompleteness from defect, and the decisive legal consequences that follow from it in disputes worth billions of won over contract sums and liquidated damages.

The Supreme Court's test for distinguishing incompleteness from defect

[Question] Where work stops before it has been completed exactly in accordance with the drawings, how is that classified in law — incompleteness or defect — and how do the consequences differ?

[Answer] The Korean Supreme Court draws a strict distinction based not on whether the work is flawless but on whether the last of the originally planned stages has, on the face of it, been finished.

That classification determines whether the outstanding sum can be claimed at all and whether liquidated damages keep accruing.

Supreme Court Decision 2012Da61162 of 30 October 2014 and many others set out the test as follows.

"Where work is interrupted and the last planned stage is not completed, the work is to be regarded as incomplete; but where the work has, on the face of it, reached the end of the last planned stage, the principal structural parts have been built as agreed, and the work is complete according to ordinary social understanding, and it is merely imperfect and in need of repair, the work is complete and the object simply has defects."

Whether that final stage has been finished is assessed objectively, and is not governed by the contractor's assertion or by whether the employer's completion inspection has been passed. The court weighs (i) the content and cost of the outstanding work, (ii) its proportion of the overall works, and (iii) whether the building can be used for its intended purpose.

The reason the point is fought so hard is the decisive difference in legal effect.

1. Whether a claim for the contract sum arises at all (the central difference)

Because a works contract under the Civil Act follows the principle of payment after performance, a contractor cannot claim the outstanding contract sum while the object remains incomplete — only the value of work done to the point of termination. Where the final stage has been finished, so that the works are complete but defective, the position is entirely different. Supreme Court Decision 2015Da214691, 214707 of 29 October 2015 held that "where the works are complete, the contractor's claim to the contract sum arises even in respect of the parts left unbuilt". The contractor is therefore entitled to claim the full outstanding sum, and the employer may only withhold or set off an amount equivalent to the cost of remedying the defects, by way of the defence of simultaneous performance.

2. Liquidated damages stop accruing

If the completion date passes while the works remain incomplete, liquidated damages accrue without limit until completion or termination. But where the final stage has been finished and the works are treated as complete, the Supreme Court holds that liquidated damages cease to accrue at that point, even though defects remain to be remedied (Supreme Court Decision 2015Da13447 of 9 July 2015).

3. Whether the contract can be terminated

While the works remain incomplete, the employer may under Article 673 of the Civil Act terminate at any time by compensating the contractor's loss. Once the building is complete, however, the proviso to Article 668 applies, and the employer may not in principle terminate the works contract even where the defects are so serious that the purpose of the contract cannot be achieved.

The key point: proving completion of the final stage with objective evidence

For a contractor, the priority is to avoid losing the contract sum unfairly by establishing — through site diaries, photographs and supervision reports — that the final stage on the programme (finishing works and the like) was objectively completed, and thereby securing a finding that the works are complete.

For an employer facing a claim for the outstanding sum, it is not enough to plead simply that "the work is defective". The employer should demonstrate in detail that principal structural elements or essential stages are missing, so that the building is not complete according to ordinary social understanding — thereby defeating the claim outright or continuing to levy liquidated damages.

The incompleteness/defect distinction sits at the intersection of the existence of a multi-billion-won claim, the method of valuing work done and the end point for liquidated damages, so specific legal review is needed from the moment work stops.

Drawing on detailed programme analysis and a deep understanding of works contract doctrine, Cheongchul Law Firm provides tailored solutions for recovering contract sums and defending unwarranted defect claims. If you are dealing with settlement after a work stoppage or a dispute over incompleteness and defects, please consult the specialists at Cheongchul Law Firm.

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Attorney Bae Gi-hyung has served at the Defense Installations Agency and in the construction and real estate teams of major law firms, advising across the full life cycle of government contracts and construction projects — large-scale construction, defence facility projects and SOC infrastructure — and resolving the related litigation. If you need assistance with government construction contracts, private construction projects, public procurement, or state, local and public property matters, please contact him at any time.

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Cheongchul Law Firm is composed exclusively of attorneys from Korea's five largest law firms, the prosecution service and the legal departments of major corporations, and responds with a team of specialists in the relevant fields rather than a single lawyer. Cheongchul goes beyond resolving isolated issues to provide comprehensive solutions across a client's business, focusing on achieving what the client ultimately wants. If you need help reaching your goals, please do not hesitate to contact us.