Hello, I am lawyer Park Jong-han from Cheongchul Law Firm.

In participating in the bidding, even if the company has not yet been decided as the winning bidder or the contract has not been executed, a company selected as a qualified candidate can expect the proceedings to follow. In such cases, if the company selected as a qualified candidate has entered into a guarantee agreement for the payment of the contract deposit or has purchased raw materials and auxiliary materials necessary for the execution of the contract in advance, and later is not decided as the winning bidder, the company will find itself in a difficult situation.

Therefore, it is necessary to examine whether it is possible to claim damages for the losses incurred by companies that expected to execute contracts when the bidding process is canceled during the qualification screening stage.

[Question]

The possibility of claiming damages if the bidding process is canceled during the qualification screening stage

[Answer]

If a party has betrayed justifiable trust that a contract would be concluded and has refused to conclude the contract without just cause, thereby causing damage, it constitutes an unlawful act beyond the limits of the principle of freedom of contract as per the principle of good faith. Likewise, if one party induces reasonable expectations or trust that a contract will certainly be concluded during the negotiation stage and the other party acts according to that trust, yet refuses to conclude the contract without sufficient reason and causes damage, it constitutes an unlawful act exceeding the limits of the principle of freedom of contract, as viewed in light of the principle of good faith (see Supreme Court Decision 2001. 6. 15. 99Da40418).

The same legal principles apply in national contracts. If the relevant authorities cancel the bidding process, and if the actions of the relevant authority have caused the contracting party to have special trust that a contract will be concluded, it should be deemed necessary to compensate for the damages incurred by the contracting party as a result of the cancellation of the bidding process.

If an unjust mid-course termination of contract negotiations constitutes an unlawful act, the damages arising from that unlawful act are limited to the reliance damages suffered by the other party, who trusted in the conclusion of the contract as a result of one party's breach of faith without sufficient reason to terminate negotiations. Such reliance damages would include the costs incurred in preparing for the contract that would not have been incurred had it not been for that trust; expenses that were incurred before a firm trust in the contract conclusion was established and that one party thought were necessary in case the conclusion of the contract was to fail, such as proposal and estimation preparation costs for participating in competitive bidding, do not fall under this category (see Supreme Court Decision 2003. 4. 11. 2001Da53059).

As a reference, if the type of infringement and the type of harmed legal interest recognizes that an unlawful act due to the breakdown of contract negotiations causes mental suffering to the other party, compensation for such mental suffering may be demanded separately.

Regarding the qualified candidates, if a company has only been notified as a qualified candidate in the bidding process and has spent costs without any agreement with the relevant authority, the damage will likely be denied as simply due to the fault of the contracting party, and causation with the trust that a contract would be concluded cannot be recognized. In other words, there must be proof that the ordering party had specially required preparations for contract execution or led the contracting party to trust that a contract would be concluded for any claims for damages to be possible.

Regarding the implementation design qualified candidates, an exceptional circumstance must also be proven wherein the actions of the ordering party allowed the other party to have trustworthy expectations that a contract would be concluded; there is a case where a lower court acknowledged damages for the cost of implementation design services (See Seoul High Court Decision 2016. 7. 15. 2015Na2025493).

We briefly examined the possibility of claiming damages when the bidding process is canceled during the qualification screening stage. Disputes related to national contracts and public procurement can be very complex and subject to frequent amendments of the relevant laws; thus, knowledge and experience are necessary. It is also essential to be well-versed in the court's rulings as well as administrative interpretations and examples of dispositions. Therefore, it is recommended to seek assistance from a lawyer with expertise in national contract laws and experience in resolving disputes related to national contracts and procurement.

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