Construction Law 2023 Comparisons

The principal laws governing the construction industry in (South) Korea include the following.

• The Civil Act: This is a comprehensive law that governs the legal relationships between private parties. It sets out general rules of contract law, including the rights and obligations of the parties to a contract and compensation for damages. In particular, Articles 664–674 address the rights and obligations of both the employer and the contractor.
• The Framework Act on the Construction Industry: This law sets out the basic framework for the construction industry in Korea and aims to promote the sound and sustainable development of the industry. It establishes the roles and responsibilities of the government, industry associations and construction companies.
• The Building Act: This law regulates the construction, repair and demolition of buildings in Korea. It sets out the standards for building design, construction and safety, and requires that all buildings meet these standards.
• The Certified Architects Act: This law governs the practice of architecture in Korea. It establishes the qualifications and standards for architects, and requires that all architects be licensed by the government.
• The Construction Technology Promotion Act: This law aims to promote the development and dissemination of new construction technologies in Korea. It provides for the establishment of research and development centres, and encourages collaboration between the government, industry, and academia in the development of new technologies.
• The Engineering Industry Promotion Act: This law promotes the development of the engineering industry in Korea. It establishes the roles and responsibilities of the government, industry associations, and engineering companies, and provides for the training and education of engineers.
• The Fair Transactions in Subcontracting Act: This law aims to protect subcontractors from unfair business practices by their contractors. It sets out the rights and obligations of both parties, and requires that contractors pay their subcontractors in a timely and fair manner.

There are other laws that regulate different aspects of construction and engineering projects and the construction industry in general, such as regarding labour relations, health and safety, government procurement and environmental protection. The various laws governing the aforementioned aspects of construction and engineering projects are as follows.

Labour relations:

• The Labour Standards Act;
• The Minimum Wage Act;
• The Trade Union and Labour Relations Adjustment Act; and
• The Act on the Employment Improvement, etc of Construction Workers.

Health and safety:

• The Occupational Safety and Health Act;
• The Housing Act;
• The Building Act;
• The Framework Act on the Construction Industry; and
• The Serious Accident Punishment Act.

Government procurement:

• The Government Procurement Act;
• The Act on Contracts to Which the State is a Party;
• The Act on Contracts to Which a Local Government is a Party; and
• The Act on the Management of Public Institutions.

Environmental protection:

• The Environmental Impact Assessment Act;
• The Clean Air Conservation Act;
• The Noise and Vibration Control Act;
• The Water Quality and Ecosystem Conservation Act;
• The Green Buildings Construction Support Act;
• The Construction Waste Recycling Promotion Act;
• The Sewerage Act; and
• The Waste Control Act.

(For the text of these laws, please visit https://www.law.go.kr/LSW//main.html)

In domestic projects, it is common for parties to refer to standard contract forms promulgated by the government. For example, for contracts involving the Korean Central Government, Appendix 7 of the Enforcement Decree of the Act on Contracts to Which the State is a Party specifies the standard form contract to be used. Similarly, for contracts with local governments or their organs, the Act on Contracts to Which a Local Government is a Party applies.

Concerning overseas projects, there is no equivalent standard contract form imposed on or recommended to the parties. However, it is common that FIDIC standard forms (with deviations where necessary) are used for overseas projects. Currently, the FIDIC Red Book and Yellow Book are often referred to by Korean contractors. It is important to note that certain provisions within the general conditions of FIDIC contracts may not align with Korean law and, as a result, may need to be modified through a special provision in the particular conditions to ensure compliance with mandatory Korean legal requirements.

Currently, NEC3 or NEC4 is not often used by Korean contractors.

In Korea, employers in construction projects include a wide range of entities, such as public and private sector organisations or power companies (eg, KEPCO). In recent years, Korean conglomerates have become increasingly more involved in overseas construction projects as employers or as shareholders.

Generally, an employer in a construction contract has the right to receive the completed project as per the specifications. In return, they are obligated to make payment to the contractor according to the agreed terms. They are also commonly obligated through the contract to obtain necessary permits and approvals and to provide site access to the contractor.

The relationship between an employer, contractor, subcontractors and financiers may vary depending on the specific project. Typically:

• a contractor is responsible for the overall construction;
• subcontractors may handle specific parts or aspects of the project; and
• financiers may provide funding and/or financial guarantees.

In private construction projects, it is common for one construction company to be the contractor. Contractually, for public construction projects, a consortium or a joint venture made up of multiple construction companies often becomes the contractor.

The rights and obligations of a contractor under a construction contract typically include:

• performing the work in accordance with the contract documents and relevant laws and regulations;
• providing labour, equipment, materials and supervision necessary for completing the work;
• complying with the agreed-upon schedule and budget;
• ensuring the quality of the work;
• obtaining required permits and approvals;
• maintaining a safe working environment;
• making payments to subcontractors and suppliers;
• providing warranties and guarantees for the completed work; and
• remedying any defects or issues that arise during the construction process.

Subcontractors in a Korean construction project can be specialty contractors who work on specific parts of the project or general contractors who manage multiple parts of the project.

In general, a subcontractor has the right to receive payment for the work they have undertaken and to suspend work if payment is not received. Because of this statutory right to suspend work in the case of non-payment, there is less of a need to adopt and enact statutory adjudication for progress payment. A subcontractor is also typically obligated to:

• complete the work according to the terms of the contract;
• perform the work with due care; and
• comply with applicable laws and regulations.

Article 44(1) of the Labour Standards Act states that, in a project involving multiple layers of contracts, where a subcontractor fails to pay wages to its employees due to reasons attributable to the immediate upper tier contractor, the immediate upper tier contractor will be held jointly and severally liable for the unpaid wages. The provision also states that, where the immediate upper tier contractor’s failure is caused by the actions of its own upper tier contractor, the upper tier contractor will be jointly and severally liable. This provision aims to ensure that workers in a contractual chain receive timely and fair payment for their work. This provision is considered to be a mandatory provision.

Additionally, under Article 14(1) of the Fair Transactions in Subcontracting Act, the employer is required to pay “the subcontract consideration corresponding to the completed portion of manufacturing, repair, construction or service performance” where the main contractor has failed to make such payment.

In Korea, the financiers of construction projects typically include banks, investment firms, governmental institutions and funds, and other financial institutions.

The rights and obligations of a financier in a Korean construction project will depend on the terms of the financing agreement. Generally, a financier is entitled to receive repayment of the funds provided and is obligated to disburse funds in accordance with the terms of the financing agreement and the applicable laws and regulations.

Project financing is usually based on the employer’s budget and often involves long-term continuous contracts. In many cases, special purpose vehicles (SPVs) are used to limit liability and manage financing risks. This approach is common in both domestic and international projects.

The scope of works in a construction contract is typically determined by the contract documents, which may include the programme of requirements, specifications and drawings.

• Programme of requirements: This sets out the client’s (ie, employer’s) needs and expectations in terms of the use and function of the building or structure and serves as the basis for the design and construction of the project.
• Specifications: These provide detailed technical requirements and standards for materials, workmanship, performance and quality, and are used to ensure that the finished work meets the required standards and specifications.
• Drawings: These typically include plans, elevations, sections and details, and provide a visual representation of the project’s design and construction requirements.

In some cases, the scope of works may also be determined by reference to industry standards, codes of practice, or other relevant regulations and requirements. Where there is a dispute regarding the scope of the contract between the parties, the contract may be invalidated, in its entirety or in part, under Article 22.5 of the Framework Act on the Construction Industry if one party unilaterally determines the scope of the contract and infringes upon the legitimate interests of the other party.

Variation Request by the Employer

If an employer has requested a variation, the scope and price would typically be determined by mutual agreement between the employer and the contractor, based on the provisions of the construction contract, or, in the absence of such provisions, on any relevant laws and regulations. In Korea, construction contracts usually contain clauses that specify the procedure for requesting and approving variations, as well as the conditions under which the contractor is entitled to additional compensation for such variations.

Variation Request by the Contractor

If a contractor has requested a variation, the scope and price would also be determined by mutual agreement between the employer and the contractor, based on the provisions of the construction contract, or, in the absence of such provisions, on any relevant laws and regulations. The increased contract price following a variation would typically be determined based on the actual cost incurred by the contractor for the various works plus a reasonable profit margin as agreed between the parties. However, it is also possible to set out in the contract that the increased contract price for a variation be “value-based” (not cost-based). In either case, the contractor’s entitlement to additional money for a variation may be subject to certain limitations or require the contractor to adhere to a procedure, such as providing timely notice to the employer and obtaining their approval before carrying out the variation works.

Time-Related Costs

Time-related costs are typically dealt with by including provisions in the construction contract that address the contractor’s entitlement to additional time and compensation for delays that are due to the employer. For delays where neither the contractor nor the employer is responsible, it is common that the contractor is granted permission to seek an extension of time only (but no additional costs).

It is common to have delay liquidated damages provisions in the event of a delay, which are calculated based on the number of delays after the agreed date for completion. According to the Korean Supreme Court, any liquidated damages for dates during which the employer is responsible for the delays may be deducted from the total liquidated damages amount. The construction contract may specify the procedure for seeking an extension of time and/or additional costs, as well as the conditions under which the contractor is entitled to such relief.

Unfair Contract Terms

If one party to the contract refuses to approve the request for modifying the contract amount due to design changes or changes in economic conditions, or refuses to approve the request for modifying the contract period due to changes in the scope of work, the terms of the contract may be considered significantly unfair to one of the parties. In such a case, according to Article 22.5 of the Framework Act on the Construction Industry, the contract or the relevant provision may be invalidated.

In general, the responsibilities regarding the design process are allocated between the employer, the designer, the contractor and other parties in accordance with the terms of the construction contract. The division of work can vary depending on the type of construction project and the parties involved. In general, there are three possible divisions of work.

• Design and build (DB) method: The contractor is responsible for both the design and the construction of the project.
• Design-bid-build (DBB) method: The employer is responsible for the design and hires a separate contractor to carry out the construction.
• Construction management (CM) method: The employer hires a construction manager to oversee the entire construction process, including the design and the construction phases. The construction manager may hire separate contractors to carry out the design and construction work.

It is important to note that the specific allocation of responsibilities may vary depending on the project and the contractual arrangements between the parties. For example, in some cases the designer may also be responsible for overseeing the construction process to ensure that it is carried out in accordance with the design, while in other cases the contractor may take on a greater role in the design process.

In general, the responsibilities regarding the design process are allocated between the employer, designer and contractor, although other parties may also be involved depending on the specific project. While the allocation of work can vary depending on the type of construction project and the parties involved, there are a few common ways that the division of work is structured.

• Turnkey or EPC (Engineering, procurement and construction) contracts: Under these types of contracts, the contractor is responsible for the entire project, from design to construction to commissioning. The employer typically only provides the project requirements and pays the contractor for the completed work.
• Construction management (CM) contracts: In this type of contract, the employer is responsible for managing the construction project, while the contractor provides construction services. The contractor is usually responsible for providing labour, materials and equipment, while the employer oversees the construction work.
• Design-bid-build (DBB) contracts: In this type of contract, the contractor is responsible for the construction work, and the employer oversees the project.
• Design-build (DB) contracts: In this type of contract, the employer contracts a single entity to provide both design and construction services. The contractor is responsible for completing the project in accordance with the employer’s requirements and specifications.
• Joint venture (JV) contracts: In this type of contract, two or more companies form a partnership to complete the construction project. Each partner is responsible for their respective portion of the work, and they share the risks and rewards of the project.

In addition to these common structures, there may be variations and combinations of such structures depending on the specific project and parties involved. The allocation of work is usually specified in the construction contract, which outlines the roles and responsibilities of each party involved in the project.

The responsibility for the status of the construction site regarding pollution, underground obstacles, geotechnical conditions, archaeological finds and other related matters would depend on the terms agreed upon in the construction contract.

Under Korean law, there are several regulations that govern site conditions, including:

• the Soil Environment Conservation Act – this regulates the investigation, management and remediation of contaminated soil and groundwater; and
• the Cultural Heritage Protection Act – this regulates the discovery, excavation and preservation of cultural heritage artifacts.

In construction contracts, the allocation of risk for site conditions is typically addressed in the site investigation clause, which specifies the scope and level of investigation required to assess site conditions. The allocation of risk can also be addressed in other clauses, such as the indemnification clause or force majeure clause.

In Korea, when undertaking a construction project, there are various permits to consider. These include building permits, construction permits, environmental permits and other licenses, which may differ based on the project’s nature and location. The responsibility for obtaining these permits rests either with the employer or the contractor, depending on the terms of the construction contract. It is common, however, to agree in a contract that the employer is responsible for obtaining various governmental permits.

According to the Korean Building Act, individuals undertaking the construction of a new building or significant repairs to an existing one must obtain permission from the relevant municipal authority. However, there is an exception for certain small-scale buildings, where submitting a notice to the authorities instead of obtaining permission is sufficient for proceeding with construction or repairs. Furthermore, once the construction is completed, the employer must apply for a separate “approval for use” from the municipal authority to legally occupy and utilise the building. Notably, the general provisions of the Building Act are complemented by municipal regulations that outline specific building codes in detail.

The responsibility for maintenance of the works is generally agreed upon between the parties in the construction contract. The contractor is usually responsible for maintaining the works until the end of the defects liability period, during which time the contractor is required to repair any defects that arise. After the defects liability period, the responsibility for maintenance may be transferred to the employer or a third-party maintenance contractor. However, the lapse of the defects liability period does not mean that the contractor is exempt from liability for damages for defective works that were discovered during the statutory limitations period.

Maintenance works in general entail actions taken to keep the works in good condition and repair. These may include cleaning, repair or replacement of equipment, systems or components, and general upkeep. The details of maintenance works are typically outlined in the construction contract; for instance, in provisions for ongoing maintenance and inspections during the defects liability period and beyond. The parties may also agree upon separate maintenance contracts to cover specific aspects of the works or ongoing maintenance needs.

While it is possible, it is not common in Korea for the employer to instruct the contractor to undertake functions such as operation, finance or transfer in the construction process.

It is, however, standard practice for an employer to instruct a third-party vendor to carry out operation works following completion of the building or plant.

The typical tests for completion of the works may include visual inspection, functional tests and performance tests, depending on the nature of the project.

The testing process starts with the contractor notifying the employer of the completion of the works. The employer then inspects the works to verify whether the works have been completed in accordance with the contract and the applicable laws and regulations. If the works meet the requirements, the employer issues a certificate of completion to the contractor.

After the issuance of the certificate of completion, the parties may conduct additional tests to ensure that the works are fully functional and meet the applicable standards. For example, in the case of a building project, the parties may conduct tests on the building’s fire safety system, its elevator operation, and the air conditioning system.

The party bearing responsibility for the testing process is typically agreed upon in the construction contract between the employer and the contractor. The contract should (and normally will) specify the types of tests required and the party responsible for conducting each test.

The process of completion and takeover of a construction project are closely related and often occur simultaneously.

• Completion: This refers to the physical completion of the works, which means that the construction has been substantially finished. At this point, the contractor typically notifies the employer that the works are complete, and the employer will inspect the works to confirm their completion.
• Takeover: This refers to the transfer of risk and responsibility from the contractor to the employer. This involves a formal handover of the works, as well as any documentation and information related thereto. The parties will typically sign a takeover certificate to confirm the transfer of responsibility.
• Delivery: This refers to the transfer of possession of movable goods from the subcontractor to the contractor. Per Article 188(1) of the Korean Civil Act, the delivery element is considered a mandatory requirement for a title transfer of movable goods which cannot be wholly dispensed with.

The procedures and requirements for completion and takeover are typically set out in the construction contract and must be followed by the parties involved.

Contractor Liability Period

In Korea, the Civil Act provides for the contractor’s liability for defects in construction works. According to Articles 667 and 671 of the Civil Act, the employer can demand repair of the works by the contractor or seek payment of damages in lieu of a repair claim. This warranty claim can be exercised by the employer within five years or ten years from the completion of the construction works, depending on the type of materials used in the construction.

Remedies for Defects

If defects occur in the construction or its design, the employer has the option to either invoke the defects liability clauses in their contract or seek damages for non-compliance under the relevant contract law. The employer is entitled to demand specific performance from the contractor to repair defects in the ordered works, except when the relevant defect is minor and the cost of repair would be excessive.

However, the employer cannot use the statutory defect liability clauses to claim indirect or consequential damages from the contractor, even if the contractor could have foreseen these damages. To seek these kinds of damages, the employer has to claim damages in parallel under Article 390 of the Civil Act, demonstrating that:

• the damages resulted from the contractor’s failure to perform;
• this failure was the contractor’s fault; and
• the contractor knew or could have foreseen the circumstances leading to these damages.

Notification Period and Legal Consequences

Article 671(2) of the Civil Act provides that the employer must notify the contractor within one year from the day the destruction or the damage took place.

In Korea, the contract price for construction contracts is typically determined through various methods such as lump sum, unit price, cost plus and target cost. The contract price normally includes the cost of labour, materials, equipment and other expenses incurred by the contractor. In some cases, the contract price may also include a contingency amount for unforeseen circumstances.

• Lump sum: The most used method is the lump sum contract, which involves a fixed price for the entire construction project.
• Unit price: This method is used when the quantities of certain items are uncertain.
• Cost plus: This method is used when the contractor is reimbursed for actual costs plus a fee.
• Target cost: This method is used when the parties agree on a target cost, and the contractor is incentivised to complete the project within the agreed cost.
• Milestone payments: These are also commonly used in construction contracts in Korea, where payments are made at specific stages of project completion. For instance, payments can be made based on:
1. the percentage of work completed;
2. achieving specific project milestones; or
3. the delivery of specific products.

In Korea, construction contracts typically include provisions to manage late or non-payment. These provisions may include clauses specifying the amount and timing of payments, interest rates for late payments, and remedies for non-payment, such as the right to suspend work or terminate the contract.

Advanced payments, delayed payments and interim payments may all be used in construction contracts in Korea.

Advanced payments may be made to cover upfront costs such as costs for materials or equipment, while delayed payments may be used to incentivise timely completion of the project. Interim payments are typically made at certain milestones or stages of the project and may be tied to the completion of specific tasks or deliverables. The specific payment structure and schedule will depend on the terms negotiated between the parties in the contract.

Invoicing in construction contracts in Korea is typically performed on a monthly basis or upon reaching certain milestones as agreed upon in the contract. Invoices often include detailed descriptions of the work performed, materials used and expenses incurred during the billing period.

In Korea, the planning process in construction contracts is typically agreed upon between the employer and the contractor. The employer usually provides the contractor with a scope of work and design documents, and the contractor is responsible for developing the construction schedule and method of execution. The contractor may also provide suggestions for alternative methods or materials to improve the project’s efficiency and cost-effectiveness.

To safeguard the planning process, milestones, milestone payments and certificates are commonly used in Korean construction contracts.

In the event of delays, the parties generally use the dispute resolution mechanism set out in the contract. Generally, the contractor must notify the employer of any delay event promptly, and the parties must work together to mitigate the delay and determine whether an extension of time is necessary. The contract will usually provide for specific procedures and timelines for notifying and assessing delays, which the parties must follow. Where the contractor causes a delay, it may be liable for damages (in particular, delay liquidated damages).

Time-related costs are typically dealt with in the contract through the inclusion of provisions on liquidated damages or extension of time. Liquidated damages are a predetermined amount of damages that the contractor will be liable to pay the employer in the event of a delay beyond the agreed completion date. Extension of time clauses, on the other hand, provide for an extension of the agreed completion date in the event of a delay caused by factors outside the contractor’s control. The contract will typically set out the procedures for applying for an extension of time or for assessing liquidated damages.

Concurrent delays are generally treated as an apportionment of responsibilities between the parties for the delay. The parties’ rights and obligations in relation to concurrent delays will depend on the specific terms of the contract. It is common for contracts to provide for an apportionment of responsibility for concurrent delays, with the contractor only being liable for the portion of the delay that is attributable to their actions or omissions. In the absence of such express provision, concurrent delays are often treated as a matter of apportioning causation.

In the event of delays caused by the contractor, the employer may seek various remedies to address the situation. The most common remedy is liquidated damages, which are pre-agreed monetary amounts set out in the contract for each day or week of delay.

Notably, under Article 398(2) of the Civil Act, the court has the authority to reduce the amount of the liquidated damages to a more reasonable and appropriate level if the amount is unreasonably excessive.

In addition to liquidated damages, the employer may also be entitled to other remedies, such as:

• the right to terminate the contract;
• the right to take over the works; and
• the right to claim damages for any losses suffered as a result of the delay.

The typical process for requesting an extension of time involves submitting a written notice to the employer detailing the circumstances that have caused the delay and the expected duration of the delay. The notice should also include the proposed new completion date.

The grounds for granting an extension of time are generally set out in the construction contract and may include factors such as:

• unforeseeable events – these are events that the contractor could not have reasonably anticipated, such as natural disasters, changes in laws or regulations, or strikes;
• employer delay – where the employer is responsible for causing the delay, the contractor may be entitled to an extension of time;
• variations – where the employer requests variations to the original construction work, this may result in an extension of time if the variations affect the construction timeline; and
• force majeure – for a force majeure event, the contractor may be entitled to an extension of time.

The specific procedures for requesting an extension of time and the grounds for granting it may vary depending on the terms of the contract and the specific circumstances of the project.

Force Majeure Under Korean Law

Force majeure is a recognised concept in Korea. However, although the term “force majeure” is used in various laws such as the Civil Act and the Commercial Act, no specific definition is provided. Therefore, to understand it and the circumstances under which it can be recognised, it is necessary to refer to the relevant case law. The Supreme Court has described force majeure as an event caused by factors beyond the debtor’s control and impossible to anticipate or prevent by ordinary means.

Additionally, since Korean law allows parties to freely determine the meaning and scope of a force majeure clause, the content of the agreed-upon clause is crucial in defining force majeure and its application.

Limitations on Force Majeure

As mentioned above, contracting parties have the freedom to define force majeure clauses, which can include limitations or exclude specific circumstances. This can be achieved by clearly and specifically stating the circumstances considered as force majeure in the contract. However, any such limitations or exclusions must be reasonable and not violate public policy or mandatory laws.

Contractual Consequences of Force Majeure

The legal and contractual consequences of force majeure under Korean law depend on the specific terms of the contract and the event’s circumstances. Generally, force majeure can:

• excuse the affected party from fulfilling its contractual obligations;
• provide a right to delay or extend performance; or
• in certain cases, even allow for contract termination and claims for compensation.

The treatment of unforeseen circumstances in construction contracts is primarily determined by the parties’ agreement in the contract. It is common for construction contracts to include clauses related to unforeseen circumstances, such as force majeure events, changes in law or unforeseeable site conditions.

In addition to the parties’ contractual terms, the Civil Act also provides that, if the performance of an obligation becomes impossible due to an unforeseeable event beyond the control of the debtor, the obligation is extinguished.

Disruption is generally acknowledged as a legal and/or contractual ground for extension of time and/or compensation. Disruption can be caused by a variety of factors, such as delays in delivery of materials, changes in design, or weather conditions.

To establish disruption, the contractor must prove that the event was unforeseeable and beyond their control. The disruption must also be shown to have caused delay or to have imposed additional costs on the project.

Disruption may be measured or proven through various methods, such as schedule analysis, productivity analysis or cost analysis. The parties may need to engage experts or consultants to assess the impact of the disruption on the project schedule and costs.

Proving disruption can be a complex process, and it is important for contractors to keep detailed records and documentation throughout the project to support any claims for extension of time or compensation.

There are several liabilities that cannot be contractually excluded pursuant to mandatory law provisions. These include:

• statutory liability for defects – under the Civil Act, a contractor is liable for defects in the construction work for up to ten years after completion, regardless of any limitations agreed upon in the contract;
• liability for personal injury or death – it is not possible to contractually exclude liability for personal injury or death resulting from the contractor’s negligence or breach of duty;
• liability for intentional misconduct – liability for intentional misconduct, such as fraud or intentional misrepresentation, cannot be contractually excluded; and
• liability for environmental damage – under the Environmental Liability Act, a contractor can be held liable for environmental damage caused by their activities.

Wilful misconduct and gross negligence are recognised in Korea. Under Korean law, a “grossly negligent act” refers to an easily foreseeable and avoidable action that is conducted without exercising even a minimal level of care. Exclusion clauses are generally deemed unenforceable for liability arising out of a wilful misconduct or grossly negligent act.

The Serious Accidents Punishment Act, enacted in 2022, holds business owners, managing officers, public officials and corporations accountable for “severe accidents” resulting from a breach of safety and health obligations. It imposes criminal liability and introduces punitive damages of up to five times the amount of actual damages for cases involving wilful misconduct or gross negligence. The Act covers a range of incidents, including accidents at industrial sites and public disasters caused by product defects or inadequate management. It targets those who fail to ensure the safety of business operations or who neglect their supervisory duties.

Under Korean law, parties are generally free to agree to limit or exclude their liability through contractual provisions. Consequential loss exclusion clauses are commonly seen in Korean construction contracts.

However, the scope and extent of such limitations may be subject to limitations imposed by mandatory provisions of the law. For example, if one party to a contract unreasonably decreases or increases its liability for damages resulting from a breach of contract, thereby infringing upon the legitimate interests of the other party, the contract may be invalidated under Article 22.5 of the Framework Act on the Construction Industry.

Indemnities are generally used in Korean construction contracts to allocate risk between the contracting parties. While the subjects for which indemnities may be used can vary, the most common subjects for which one party could indemnify another include:

• personal injury and property damage claims arising from the construction work;
• claims for breach of warranty or for defect in materials or workmanship;
• claims arising from the contractor’s failure to obtain necessary permits or comply with applicable laws and regulations;
• claims arising from the contractor’s failure to complete the work on time or within budget; and
• claims arising from the contractor’s breach of confidentiality or intellectual property rights.

Guarantees commonly used to limit risk for parties in Korea include performance guarantees, payment guarantees and retention guarantees. Generally, the contractor provides performance guarantees, and the employer provides payment guarantees and retention guarantees.

• Performance guarantees: These typically ensure that the contractor will complete the project in accordance with the contract requirements and specifications. These are often in the form of letters of credit or surety bonds issued by a bank or other financial institution.
• Payment guarantees: These ensure that the contractor will be paid for work completed in accordance with the contract terms. These can be in the form of advance payment bonds or payment guarantees issued by a bank or other financial institution.
• Retention guarantees: These are designed to protect the employer from potential losses arising from defects or delays in the completion of the project. These are often provided in the form of a deposit or other security held by the employer until the end of the construction project.
• Subcontractor’s payment guarantees: According to the Framework Act on the Construction Industry, payment guarantees for subcontractors are intended to ensure that subcontractors receive payment where a contractor is unable to pay due to insolvency or other reasons.

The scope of guarantees used can vary depending on the specific provisions of the construction contract.

In Korea, construction contracts typically require the parties to take out various types of insurance policies to manage risks that may arise during the project. Insurance requirements are not only contractually agreed upon but also governed by mandatory or regulatory laws. For example, the Industrial Accident Compensation Insurance Act mandates that parties obtain industrial accident compensation insurance.

Some other insurances that parties will typically take out include:

• construction all risk (CAR) insurance – this insurance covers loss or damage to the construction project during the construction period, including damage to the building or structure, construction equipment, and materials;
• professional indemnity (PI) insurance – this insurance provides coverage for negligence, errors or omissions by design professionals, such as architects or engineers;
• third-party liability insurance – this insurance covers damage or loss to third parties caused by the construction activities;
• workers’ compensation insurance – this insurance provides benefits to workers in the case of injury or death during the construction project; and
• performance bond insurance – this insurance provides financial compensation to the employer in the event that the contractor fails to complete the project or fails to meet the contractual obligations.

The scope and coverage of these insurances may vary depending on the specific terms of the contract and the project’s nature.

In general, provisions addressing the consequences of insolvency of a party to a construction contract typically address two key aspects. First, they address the potential impact on the project itself. Second, they outline the rights and obligations of the other parties involved in the contract. Such provisions may include:

• requirements for the insolvent party to provide notification to the other parties;
• the appointment of a receiver or trustee; and
• provisions for the potential termination or suspension of the contract.

While Korean law does not explicitly declare “ipso facto termination clauses” as illegal or invalid, the Korean Supreme Court has ruled that ipso facto clauses are either invalid or unenforceable until the relevant insolvency proceedings are concluded. Article 119(1) of the Debtor Rehabilitation and Bankruptcy Act states that “[w]hen the debtor and the other party to a bilateral contract have yet to complete performance of the contract at the time rehabilitation procedures commence, any custodian may cancel or terminate such bilateral contract and request the debtor to meet his/her obligations and require the other party to fulfil his/her obligations…” Consequently, the custodian has the discretion to choose whether to terminate the contract or to enforce its performance. Thus, using an ipso facto clause to terminate the contract would undermine the intended purpose of this Article, which grants the custodian the statutory right to choose the appropriate course of action.

Sharing responsibility for certain risks is a common practice in the Korean construction industry. Risks that may be shared between the parties include, but are not limited to, risks related to unforeseen ground conditions, changes in law or regulation, labour disputes and force majeure events.

In Korea, construction contracts typically arrange for risk sharing through provisions such as the following:

• indemnification clauses – these clauses can be used to allocate responsibility for losses or damages caused by certain risks to one or more parties;
• force majeure clauses – these clauses can provide relief for parties in the event of unforeseen circumstances beyond their control; and
• change order provisions – these provisions can be used to address changes in scope or circumstances that affect the allocation of risks among the parties.

Construction contracts typically include contractual provisions regarding personnel involved in the construction project. These provisions aim to ensure the appropriate staffing and management of personnel to facilitate the smooth execution of the project. While the specific provisions may vary depending on the nature and complexity of the project, some general contractual provisions regarding personnel in construction contracts may include:

• qualifications and experience – the contract may require that personnel employed by the contractor possess the necessary qualifications, certifications and experience relevant to their assigned roles;
• subcontracting and assignment – the contract may specify whether the contractor is allowed to subcontract or assign certain aspects of the work to other parties;
• key personnel – the contract may identify key personnel who are essential to the successful completion of the project;
• staffing levels – the contract may specify the minimum staffing levels required for different stages of the project; and
• non-compete and confidentiality – construction contracts may include provisions that restrict personnel from engaging in competitive activities or disclosing confidential information during and after the project.

Subcontracting is a common practice in the Korean construction industry and construction contracts typically include provisions regarding subcontracting. However, this is subject to certain limitations and conditions.

The Framework Act on the Construction Industry (FACI) establishes various prohibitions and regulations to ensure fair and balanced subcontracting practices.

• Under Article 29(1) of the FACI, contractors are prohibited from subcontracting their entire work or a significant portion of it to a single subcontractor. The Enforcement Decree of the Act, Article 31, defines the criteria for determining what constitutes a significant portion in such cases.
• Article 29(2) of the FACI restricts contractors from subcontracting work to subcontractors who are registered to conduct the same business, unless the employer provides written consent.
• Furthermore, Article 29(3) of the FACI prohibits subcontractors from further subcontracting their work, unless it falls within limited exceptions outlined in the Article. These exceptions include specialised work or efforts to improve the quality and efficiency of the construction, with prior approval from the contractor.

In addition to the FACI, the Fair Transactions in Subcontracting Act aims to protect subcontractors, particularly smaller enterprises, from unfair contractual terms imposed by contractors. This Act addresses issues such as:

• unfair pricing;
• unreasonable contract terms;
• unjustified refusals to accept delivery; and
• unwarranted payment delays.

In Korea, intellectual property (IP) provisions are commonly included in construction contracts to govern the ownership, use and protection of IP rights within the project.

While contractual provisions regarding IP can vary depending on the project’s nature and the parties’ negotiation, some key elements are typically addressed.

• Ownership: Generally, the contract determines the ownership of IP rights resulting from the project, specifying whether they belong to the contractor, employer or both. This clarification helps define the rights to utilise, exploit and transfer the IP.
• Usage Rights: Licensing and usage rights are often outlined in the contract, stipulating how the IP can be used, whether sublicensing is allowed, and any associated limitations or restrictions.
• Confidentiality: Confidentiality and non-disclosure provisions are also common, safeguarding sensitive information and trade secrets related to the IP.
• Indemnification: Contracts may allocate responsibilities for IP infringement or misuse, establishing indemnification clauses to determine which party bears legal and financial consequences in such cases.

Under Korean law, in the event of a breach of a construction contract, several remedies are available to the parties involved. Depending on the breach and the entitled party, available remedies include the following:

• termination of contract (all parties);
• damages (all parties);
• specific performance (employer);
• mechanics’ lien (contractor, subcontractor);
• suspension of work (contractor, subcontractor); and
• payment claims (contractor, subcontractor).

It is common practice to include clauses in contracts that limit or exclude the liability of a party, including liquidated damages provisions, indemnities and warranties. Korean contract law respects party autonomy, allowing parties to agree upon their own contractual terms as long as they are not contrary to public order and good morals.

The Korean Commercial Act permits parties to limit or exclude their liability for damages. This is, however, subject to certain restrictions, especially in cases where the damage is caused by gross negligence or intentional misconduct.

For construction contracts, parties can choose to deviate from the provisions of statutory defect liability under the Civil Act, which are not mandatory. They can agree to shorten or lengthen the stipulated defect liability period, or agree on a different start date for the statutory defect liability period.

However, while parties are generally free to contractually limit remedies, the Korean courts still exercise their discretion to review such clauses and may render them invalid if they are considered excessively unfair or if they violate considerations of fairness and balance of interests. However, in practice this discretion is exercised with utmost caution and only comes into play in exceptional cases.

Contractual sole remedy clauses are often observed in construction contracts to limit the available remedies for breach of contract. These clauses specify that the remedies explicitly mentioned in the contract are the sole remedies available to the parties, excluding other legal remedies that may be available under the law.

Enforcement of sole remedy clauses is generally governed by the terms of the contract. If the clause is clear and unambiguous, and the parties have freely and voluntarily agreed to its terms, the courts are likely to enforce it. However, it is important to note that the enforceability of contractual sole remedy clauses may be subject to limitations under Korean law. For instance, if the clause is found to be unconscionable, unfair or contrary to public policy, it may be deemed unenforceable.

It is worth noting that even where a sole remedy clause is enforceable, it may not completely limit the remedies available to a party in certain circumstances. For example, if a breach of contract is accompanied by a tort or a criminal act, the aggrieved party may still have other remedies available to them under Korean law.

In construction contracts, parties commonly include clauses that exclude or limit certain forms of damages. While the enforceability of such exclusions is subject to the specific circumstances, applicable laws, and the interpretation of the contract by the courts, there are certain types of damages that are typically excluded or limited in construction contracts.

• Consequential or indirect damages: Parties frequently attempt to exclude or restrict liability for consequential or indirect damages. The enforceability of these exclusions will rely on the language and clarity of the contract, as well as on the reasonableness of the exclusion given the specific circumstances. It is important to note that the term “consequential loss” is not used in the Civil Act. The closest term is “special losses”, which refers to losses that are more remote than ordinary (or direct) loss or damage. Recovery of such losses is only possible if they were reasonably foreseeable at the time of the contract breach.
• Punitive damages: Punitive damages, which are intended to punish the breaching party rather than compensate the non-breaching party, are generally not recognised under Korean law. Parties typically exclude punitive damages from liability as they are not available as a form of relief.
• Liquidated damages: Construction contracts often include provisions for liquidated damages. These provisions are generally enforceable unless they are deemed excessive, unreasonable or punitive in nature. For example, Article 398(2) of the Civil Act states that if the predetermined amount of damages is unreasonably excessive, the court has the authority to reduce it to a more reasonable and appropriate level.

Retention and suspension rights are not generally contractually excluded in Korea. In fact, these rights are recognised and widely used in the construction industry to protect the interests of both the employer and the contractor.

In particular, the delivery of works by a contractor is generally deemed to be an obligation that must be performed simultaneously with an employer’s obligation to make payment to the contractor (see Article 536 of the Civil Act). This means that if an employer expresses its intent not to pay the contractor, the contractor has a statutory right not to deliver the relevant works without being held in breach of the contract.

The termination provisions in a construction contract usually provide the grounds for termination, the process to be followed, and the consequences of termination. The consequences may include compensation, damages or penalties, depending on the circumstances of the termination.

Under Korean law, a construction contract can be terminated for various reasons, including but not limited to the following.

• Termination for breach: In the case of termination due to breach of contract, the non-breaching party may seek damages or other relief as provided for in the contract.
• Termination for bankruptcy: Where the contractor becomes bankrupt or insolvent before completing the construction project, the employer has the right to terminate the contract and seek compensation for damages under the contractual provisions or, if absent, the relevant mandatory laws.
• Termination for impossibility: Article 537 of the Civil Act stipulates that if one party’s obligation in a bilateral contract becomes unenforceable through no fault of the other party, the debtor is not entitled to demand performance from the other party. Hence, if a contract solely comprises obligations that have become unenforceable due to circumstances beyond the control of the parties, rendering it unreasonable to expect either party to fulfil their contractual obligations, the contractual relationship may be deemed dissolved.

Termination for Change of Circumstances

Under Korean law, although there is no explicit provision regarding the doctrine of change of circumstances (the so-called rebus sic stantibus jurisprudence), the courts recognise the termination of a contract based on the principle of good faith stated in Article 2 of the Civil Act. This recognition serves as an exception to the principle of strict adherence to the contract. Termination may occur when “a significant change of circumstances has occurred that the parties could not have anticipated at the time of contract formation, and such change is not attributable to the party seeking termination. Enforcing the contract as written would result in a significant violation of the principle of good faith.” However, in practice, claims or defences based on the principle of change of circumstances are rarely accepted in Korea.

Termination of Contract After Completion

Similar to subclause 6.1 of the FIDIC Red, Yellow and Silver Books, Article 668 of the Civil Act grants the party who commissioned the work the right to terminate the contract if the final outcome of the work contains defects that render the contract’s purpose unachievable. However, it is important to note that this provision does not apply to buildings or structures on land. Consequently, once a building or structure has been completed, a construction contract for that specific project cannot be terminated or withdrawn, as specified in the proviso of this Article. This provision is regarded as a mandatory requirement under Korean law.

The legal system in Korea follows a three-tier trial structure, consisting of the District Courts of the first instance, followed by the Appellate Courts where factual issues may be reviewed, and finally, the Supreme Court, which exclusively addresses legal issues. The Supreme Court serves as the ultimate appellate authority for all cases, except those falling under the purview of the Constitutional Court.

While there is no dedicated court specifically designated for handling construction disputes, the District Courts and the Appellate Courts have specialised divisions dedicated to construction matters. The Seoul Central District Court and Seoul High Court are frequently chosen for construction cases.

In Korea, alternative dispute resolution methods are also frequently used and recognised as effective ways to achieve efficient and confidential resolutions in construction disputes.

• Arbitration: The Korean courts are considered to be very arbitration-friendly. In Korea, arbitration is regulated by the Korean Arbitration Act, which is based on the UNCITRAL Model Law 2006. Increasing numbers of local parties use arbitration, which is often administered by the Korean Commercial Arbitration Board (KCAB).
• Mediation: The Framework Act on the Construction Industry, specifically Article 69, establishes the Construction Dispute Mediation Committee as a platform for resolving construction and engineering disputes through mediation. Additionally, parties have the option to pursue court-administered mediation to address their disputes.