Hello, I am Attorney Bae Gi-hyung from the Law Firm Cheongchul.

Public contracts stipulate that the qualification to participate in bidding may be restricted in cases of 'not performing the contract without justifiable reasons.' Article 76, Paragraph 2, Item 2(a) of the Act on Contracts to which the State is a Party (hereinafter referred to as the 'State Contract Act') defines as ‘those who do not enter into or perform a contract without justifiable reasons or who violate the main terms of the contract explicitly stated in the bid announcement and contract,’ while Paragraph 2, Item 2(a) of the Enforcement Decree of the Act on Contracts to which Local Governments are a Party (hereinafter referred to as the 'Local Contract Act') also states that “those who do not enter into a contract after being awarded or those who do not perform after entering into the contract or who violate the conditions of the contract” are subject to restrictions on qualification to participate in bidding.

Typically, the reason of ‘non-performance of the contract’ applies in cases where the construction, supply of goods, or services targeted for bidding are not performed from the beginning or are not continued due to circumstances arising midway.

Then, in cases where the obligation to repair defects that are problematic after completing all construction is not fulfilled, can it still be seen as ‘non-performance of the contract’ thereby restricting the qualification to participate in bidding?

[Question]

Could the failure to perform the repair of defects also be a reason for restriction of qualification to participate in bidding?

[Answer]

The Supreme Court judged regarding the restriction of qualification to participate in bidding under the Local Contract Act that “it is reasonable to see that the phrase in the Enforcement Decree Article 92, Paragraph 1, Item 6, and the Enforcement Rule Article 76, Paragraph 1 [Appendix 2] Item 8(a) ‘a person who has not performed the contract after entering into it’ also includes a contractor who has not fulfilled the obligation to repair defects.” (Supreme Court ruling 2012. 2. 23. case 2011Du16117).

The above ruling concerns a case where Company A won the bid for the artificial turf field project ordered by the local education office and completed the construction, but after a defect was confirmed whereby the turf was uneven, the local education office demanded that Company A repair the defect. Company A argued that the defect did not arise from its cause, resulting in a year-long delay in fulfilling the repair obligation, after which the local education office imposed a 6-month restriction on qualification to bid, leading to Company A filing a lawsuit claiming that the failure to perform the repair obligation is not a reason for restriction of qualification to participate in bidding.

Both the first and second trials ruled that the reason for restriction on qualification to participate in bidding is not explicitly specified in the Local Contract Act for non-performance of repair obligations, thus determining that the restriction is not possible.

However, the Supreme Court stated that although the meaning of the term ‘a person who does not perform the contract’ is not clear, restrictions on qualification to bid can be applied even when the joint guarantor of the construction contract has not performed the repair, and the performance guarantee for the contract includes the fulfillment of the obligation to repair defects. The enforcement rules of the State Contract Act explicitly state that the performance of a contract includes the fulfillment of the obligation to repair defects, which must all be considered together, leading to the conclusion that restrictions can be applied in cases of non-performance of repair obligations.

Currently, the enforcement rules of the State Contract Act [Appendix 2] explicitly state that for the restriction on qualifications to participate in bidding, 'those who have not entered into or performed a contract (including the fulfillment of the obligation to repair defects)' are included, thus confirming that the failure to perform the obligation to repair defects is subject to restrictions on qualifications for bidding. In contrast, the enforcement rules of the Local Contract Act [Appendix 2] do not explicitly state whether the failure to perform the obligation to repair defects constitutes non-performance of the contract as 'those who have not entered into a contract without justifiable reasons or those who have not performed after entering into a contract’; however, following the Supreme Court ruling, it has become clear that, in the case of local contracts, the failure to perform the obligation to repair defects is also a subject for restriction on qualifications for bidding.

In cases where the restriction on qualification to participate in bidding arises in public contracts, the Supreme Court sometimes takes the position that the nature or content of the restriction may differ depending on the contracting entity (especially the difference between public institutions and the state), while at other times, it maintains that the fundamental intent and interpretation of the restriction on qualification for bidding do not change regardless of the contracting entity.

Especially in cases where there is no precedent, you should carefully analyze how the positions of various Supreme Court rulings that may seem somewhat contradictory differ from one another and how they can be utilized as favorable arguments in the particular situation, while also keeping in mind that logically utilizing these points can influence the outcome.

Attorney Bae Gi-hyung has experience working with the Defense Infrastructure Agency and large law firms’ construction/real estate teams, specializing in tasks related to state-owned properties, including bidding and usage permission, lease contracts, and damage compensation. They have a wealth of experience and skills resolved many disputes, representing both the state and the affected party. Should you require assistance related to state-owned, local government, or public properties, please feel free to contact us at any time.

The Law Firm Cheongchul is composed only of attorneys from Korea's top four large law firms, including Kim & Chang, Gwangjang, Taepyungyang, and Sejong. Instead of relying on a single attorney, a team of specialized attorneys in various fields related to the case collaborates to respond. Cheongchul provides comprehensive solutions that go beyond just resolving specific issues, focusing on ultimately achieving what the client desires. If you need assistance in achieving your goals, please do not hesitate to contact Cheongchul.