Liquidated Damages and Scope Changes in Korean Government Contracts

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1 Liquidated Damages and Scope Changes in Korean Government Contracts

2 INTRODUCTION Liquidated Damages Treatment of LDs under Korean Act on Contracts to which the Government is a Party ( ACGP ) Distinctions between Korean and common law approaches to LDs Changes / Variations Treatment of scope changes under ACGP Recent developments in Korean law 2

3 Liquidated Damages Under Korean Government Contracts Contractor must pay liquidated damages for unexcused delay Act on Contract to which Government is a Party ( ACGP ), Article 26(1) Amount of liquidated damages (ACGP Presidential Decree Article 74) # days delay contract price prescribed rate (set by Ministry of Strategy and Finance) Rates (ACGP Enforcement Regulation Article 75) Construction: 1/1000 (0.10%) Purchase: 1.5/1000 (0.15%) Service: 2.5/1000 (0.25%) 3

4 Liquidated Damages in Korean Law: General Principles Article 398 of the Korean Civil Code Parties free to agree amounts payable for non-performance of obligation Liquidated damages need not be genuine pre-estimate of loss Penalties as well as liquidated damages are enforceable Amount can be reduced by court if deemed excessive Court will not invalidate excessive LD clause; will reduce damages to appropriate level Court does not have discretion to reduce penalty Agreed LD amount (unless reduced by court) is conclusive and binding Obligee need not prove actual loss Obligee cannot claim more if actual damages are greater than LDs Obligor must pay agreed LDs even if actual damage is less 4

5 Liquidated Damages in Korean Law: General Principles Court s broad discretion to reduce amount of liquidated damages P-3CK Performance Improvement Project (Seoul High Court, 2012Na53095) Contract for upgrading military patrol aircraft Contractor s works differed from government s design; curing resulted in delayed completion Original LD = KRW billion = 38% of total contract price Defense Acquisition Program Administration (DAPA) reduced LD to KRW 89.2 billion Courts reduced LD to KRW 35.6 billion Original amount, based on prescribed rate under ACGP, was too high Delay partly due to subcontractor; LDs under subcontract capped at 10% of subcontract price Contractor s contribution to the Korean Defense industry over years 6

6 Liquidated Damages in Korean Law: General Principles Court s broad discretion to reduce amount of LDs Mine Disposal Vehicle Development Project (Seoul Central District Court, 2013Gahap500072) Army requested additional vibration/impact test, resulting in delay, but contractor did not request EOT until completion of project Original LD = KRW 2 billion = total contract price DAPA reduced to KRW 1 billion Court reduced to KRW 200 million equal to down payment amount 7

7 Liquidated Damages in Korean Government Contracts General Conditions of Construction Contract ( GCCC ) Article 25(3) Delay caused by any of the following is excusable, not subject to liquidated damages Force majeure [defined in GCCC Article 32] Delay in supply of irreplaceable government-procured materials Delay or suspension caused by Employer Contractor unable to perform (e.g. due to bankruptcy), and guarantor retains alternative contractor to complete remaining works Design change [under GCCC Article 19] which prevents the contractor from completing work by original completion date Other causes of delay not due to contractor 8

8 Liquidated Damages in Korean Government Contracts No statutory or regulatory cap on LDs Courts have discretion to reduce LDs mitigates contractors risk Mitigates contractors risk of exposure to excessive damages Non-Korean contractors: ACGP and regulations give government agencies discretion to cap liquidated damages To track global practice in relevant industry Competitive bids: no cap on LDs (same treatment as domestic contractors) Private contract, no bid: LDs typically capped at 10% Extension of Contract Term No specific statutory or regulatory provision for extension of contract term GCCC Article 26: contractor may request extension before end of original contract term; if approved, no LDs can be assessed for the extended period 9

9 Changes Under Korean Government Contracts Default provision ACGP Article 19 When price, design, or other changes so require, responsible official shall modify contract price Other changes may include any change not attributable to contractor e.g. changes in construction period or distance of delivery No strict requirements regarding form or timing of request for additional payment Courts focus on totality of circumstances and parties actual conduct to decide whether fairness dictates allowing additional cost 10

10 Changes Under Korean Government Contracts Seoul High Court, 2005Na58351, 23 February 2006 Employer requested significant changes; contractor complied No formal contract amendment separate agreement; on that basis, Employer refused request for additional payment Court found implied agreement, ordered Employer to make additional payment a. Employer requested changes b. cost of changes not insignificant; thus unreasonable to assume Contractor intended to do the extra work for free c. Employer was aware of that since it had regularly monitored the Contractor s work for the changes 11

11 Changes Under Korean Government Contracts GCCC Article 20 Modification of Contract Price Due to Changes in Design When design changes result in change in amount of construction work (such as method of construction or materials used), contracting official must modify the contract price Contract price must be modified within 30 days after request is submitted by contractor (period can be extended upon consultation with contractor) If contractor s request is determined to be unreasonable, responsible official must immediately take necessary measures such as requesting supplementary information Contractor must request modification of contract price before receiving completion payment 12

12 Changes Under Korean Government Contracts Scope of compensation for change Under U.S. Federal Acquisition Regulation, Contractor may be entitled to equitable adjustment includes direct costs as well as reasonable profit and overheads Under ACGP, no formal concept of equitable adjustment but similar result: allows compensation of direct and indirect costs, and reasonable profit E.g., for design change, AGCP subordinate regulations allow all direct costs, plus indirect costs and profits at prescribed rates: General management costs: 6% Profit: 15% 13

13 Recent Developments Recent trend: greater protection for contractors Supreme Court of Korea, 27 Dec 2012, 2012Da15695 Under ACGP LD rate for purchase of goods is 1.5/1000 (0.15%) of contract price per day In government contact for purchase of fertilizer, parties agreed delay LD of 3% of contract price per day 20 times higher than statutory rate ACGP Presidential Decree Article 4 provides that contracting official shall not enter into a special term or agreement that unjustly limits contractor s rights and interests under ACGP Supreme Court Special terms and conditions in purchase contract invalid if they unjustly limit contractor s profit depends on market practice and specific circumstances Lower court must decide whether particular terms and conditions unjustly limit contractor s profits, and decide validity on that basis 14

14 Recent Developments Recent amendment to Framework Act on Construction Industry FACI Article 25 (Principle in construction contracts) (1) The parties to a contract (or a subcontract) on construction must enter into the contract on equal footing, under mutual agreement and in fair terms. The parties must perform their duties under the contract in good faith. (5) When any term of a construction contract is so unfair to one of the parties so as to constitute one of the situations listed in the following clauses, that term, but not the entire contract, will be void. <added on > 1. When refusing without just cause to admit modification of contract price resulting from design change or change in the economic situation, or passing the burden on to the other party. 2. When refusing without just cause to admit modification of contract period resulting from change in the content of the construction, or passing the burden on to the other party. 3. Passing the burden on to the other party regarding details which, under the totality of circumstances (such as the form of the contract or the content of the construction), are not reasonably foreseeable at the time of the agreement. 4. Infringing upon the other party s just profit by unilaterally deciding on the content of the contract that is not specified in the contract or where disagreement exists between the parties. 5.. Infringing upon the other party s just profit by unreasonably heightening or alleviating a party s liability of compensation for failure to perform. 6. Excluding or limiting without just cause the other party s rights recognized by the Civil Act or other related laws and regulations. 15

15 CONCLUSION Spirit of ACGP is to promote fairness in government contracts and guarantee fair treatment to the parties Achieve fairness by promoting harmonization and reasonableness May be distinguished from typical common law approach, which seeks to promote fairness and reasonableness by specification and details But basic objective is the same Some practices may still be inconsistent with international practice, but room for negotiation for foreign contractors 16