South Korea is a civil law jurisdiction. As such, it is based on codified laws, and the principal laws governing the construction market in South Korea are as follows (all accessible at www.law.go.kr).

• Various statutes that regulate different aspects of construction and engineering projects, as well as the industry in general.
• The Framework Act on the Construction Industry, the Framework Act on Building, the Construction Technology Promotion Act and the Certified Architects Act,  along with certain other statutes, establish standards that participants in the construction industry, such as employers, contractors, construction managers, and architectural design firms, must adhere to in order to operate within the industry. In addition, other acts set standards for specific sectors within the construction industry, including the Electric Construction Business Act, the Fire-Fighting System Installation Business Act, the Engineering Industry Promotion Act and the Information and Communications Construction Business Act.
• The Building Act establishes the requirements for building construction. Local and municipal regulations supplement its provisions by outlining detailed building costs.
• The Housing Act regulates construction, supply, management and transactions in the housing sector. Relatedly, the Housing Site Development Promotion Act specifies special cases for acquiring, developing, supplying and managing housing sites essential for housing construction. In addition, the Act on the Improvement of Urban Areas and Residential Environments focuses on enhancing urban areas and residential environments through improvement projects.
• The Overseas Construction Promotion Act covers matters concerning Korean construction companies’ overseas construction business.
• The Fair Transactions in Subcontracting Act, together with the aforementioned Framework Act on the Construction Industry, governs subcontractor relationships within construction projects. This legislation prioritises the protection and fair treatment of subcontractors, and prevents contractors from imposing unjust terms that jeopardise subcontractors’ welfare.

• The Serious Accidents Punishment Act came into effect on 27 January 2022 and imposes extensive health and safety obligations on corporations with 50 or more employees and construction works exceeding KRW5 billion in construction costs.
• The Civil Act outlines the general principles on contract and commercial transactions, and includes sections that govern the relationship between the employer and the contractor. The Commercial Act provides principles on commercial transactions and general principles on corporate matters, including different forms of corporate entities and corporate governance.

In South Korea, various standard forms of contracts are utilised for construction projects. Construction contracts involving the government are governed by the Act on Contracts to Which the State is a Party, and a standard form contract specified in the enforcement rules issued in accordance with the Act is commonly used. In cases where using the standard form is deemed impractical, the government entity has the option to choose a different contract form. Similarly, a set of standard terms is available for local governments, as outlined in the enforcement rules of the Act on Contracts to Which the Local Government is a Party.

The Ministry of Land, Infrastructure and Transport releases a standard form contract tailored to construction projects involving private sector parties. The Korea Fair Trade Commission also offers a standard form contract for subcontracting within the construction industry.

For larger projects, parties have the flexibility to modify these standard form contracts or to opt for amended versions of internationally recognised contracting forms, such as the FIDIC suite of contracts.

Typically, the employer serves as the primary sponsor and ultimate owner of the project. Employers may be private entities or governmental bodies, including public companies or special purpose companies established for a specific project.

In a typical construction contract, the employer is entitled to receive the finished project in accordance with the specified requirements. In exchange, the employer is responsible for compensating the contractor based on the agreed terms. In addition, the employer is often contractually obliged to secure essential permits and approvals, and to grant site access to the contractor.

The relationships between employer, contractor, subcontractors and financiers are as follows.

• Employers often engage a general contractor to carry out the project. In most cases, a contractor will subcontract some portion of its work to subcontractors or suppliers.
• Private owners typically finance their projects by securing funding from lenders. Depending on the financing arrangement, these lenders may maintain involvement throughout the construction and operation phases of the project to safeguard their investment and ensure the project's successful progression.
• Employers may also engage a construction management firm that will serve only to manage the construction works, without actually carrying out any of the work itself.
• The employer, the contractor or both (depending on the project delivery method) may hire architectural and engineering firms to provide the design for a project.

In public construction projects, a contractor often takes the form of a joint venture or a consortium, comprising multiple construction companies, whereas in private construction projects, a contractor typically consists of a single construction company. In Korea, there are many internationally recognised construction companies that are also active in the domestic market as contractors. The Korean government strives to provide opportunities for medium-sized construction companies to undertake large-scale projects and other significant ventures, including housing projects.

In a typical construction contract, a contractor is obliged to perform the works in accordance with the contract documents and the relevant laws and regulations, and has the right to receive payment for the works.

Furthermore, as explained in 2.1 The Employer, a contractor may delegate some portion of its works to a subcontractor.

In South Korea, various types of companies can act as subcontractors in a construction project, including specialised construction firms, electrical and mechanical contractors, architectural firms, suppliers of construction materials, and service providers such as landscaping or interior design companies.

The rights and obligations of subcontractors under a construction contract in South Korea typically include:

• performing the assigned work in compliance with the subcontract specifications, laws and regulations;
• providing labour, materials, equipment and necessary supervision for the completion of their designated tasks;
• adhering to the project schedule and budget agreed upon in the contract;
• ensuring the quality of their workmanship;
• obtaining the required permits and approvals for their scope of work;
• maintaining a safe working environment for their employees;
• co-operating with other project stakeholders and resolving any issues that may arise during the construction process; and
• following the terms and conditions outlined in the subcontract agreement, including payment terms and dispute resolution procedures.

In general, the relationship between subcontractors, the employer, the contractor and the financiers in South Korea is structured as follows.

• Subcontractors work under the direction of the main contractor (or subcontractor if applicable) and are responsible for completing specific portions of the project as outlined in their subcontract agreements.
• The employer retains ultimate ownership and oversight of the project, setting the project requirements and specifications to which subcontractors must adhere.
• The contractor acts as the intermediary between the employer and subcontractors, overseeing the overall project management and co-ordination of subcontracted work.
• Financiers may provide funding for the project and may have a vested interest in ensuring that the project progresses smoothly and meets financial milestones to protect their investment. Subcontractors are typically not directly involved in financial arrangements but are impacted by the project's financial stability and progress.

In South Korea, various types of companies and institutions can act as financiers in a construction project, including commercial banks, investment banks, private equity firms, government financial institutions, insurance companies and pension funds. These financiers provide funding for construction projects in the form of loans, investments or other financial instruments, subject to the relevant regulations.

Since the promulgation of an act in 1994 aimed at facilitating infrastructure funding through private project financing, the utilisation of project financing has been on the rise in Korea. While large corporations typically opt for bank loans, smaller companies often turn to mutual aid associations established in accordance with the Framework Act on the Construction Industry. These associations provide a range of guarantees and loans essential for the operation of construction companies.

The rights and obligations of financiers under a construction contract in South Korea typically include:

• providing funding for the project as agreed upon in the financial arrangement;
• ensuring that the project progresses according to the agreed schedule and budget, to protect their investment;
• receiving repayment of the funds provided, including any interest or returns as specified in the financial agreement; and
• enforcing any security interests or guarantees to protect their investment in case of default.

In general, the relationship between financiers, subcontractors, the employer and the contractor in South Korea is structured as follows.

• Financiers provide the necessary funding for the project and have a financial interest in its successful completion and profitability.
• Subcontractors perform specific tasks within the project and are typically not directly involved in financial arrangements with the financiers.
• The employer oversees the project and sets the project requirements and specifications to which subcontractors and contractors must adhere.
• The contractor manages the overall construction project and co-ordinates the work of subcontractors, ensuring that the project is completed according to the agreed terms and schedule. The contractor may interact with financiers to provide project updates and financial information as required.

In South Korea, various types of companies and institutions can act as designers in a construction project, including architectural firms, engineering firms, design consulting firms and individual design professionals. These designers are responsible for creating the plans, drawings and specifications that guide the construction process and ensure that the project meets the desired aesthetic and functional requirements.

The rights and obligations of designers under a construction contract in South Korea typically include:

• developing detailed design plans and specifications that meet the project requirements and comply with relevant laws and regulations;
• providing accurate and timely design documentation to the employer and contractor for construction purposes;
• collaborating with the employer and contractor to address design-related issues and modifications during the construction process;
• ensuring that the design meets quality and safety standards, and that any changes to the design are properly documented and communicated to all parties; and
• complying with the agreed-upon design schedule and budget.

In general, the relationship between the designer, the employer and the contractor in South Korea is structured as follows.

• The designer works closely with the employer to understand their vision and requirements for the project, and to develop design solutions that meet these needs.
• The designer collaborates with the contractor to ensure that the design is accurately interpreted and implemented during the construction phase.
• The employer relies on the designer to provide design expertise and guidance throughout the project to achieve the desired outcome.
• The contractor follows the design plans and specifications provided by the designer to carry out the construction work according to the agreed-upon design. The contractor may consult with the designer on design-related issues that arise during construction.

In a construction contract in South Korea, the scope of work is typically established through a comprehensive description of the project requirements, specifications and deliverables. The scope of work may also be defined, expressly or implicitly, by industry standards, codes of practice or other pertinent regulations and requirements to ensure alignment with established norms and quality benchmarks.

In South Korea, the determination and limitation of the scope and price for variations in a construction contract – whether requested by the employer or the contractor – are typically governed by the terms and conditions outlined in the contract or by a mutual agreement between the parties. Such terms and conditions are usually not exhaustive as compared to internationally used standard forms of contract, and general principles of the Korean law may apply.

In a typical construction contract in South Korea, the responsibilities regarding the design process are divided among the employer, the designer, the contractor and other parties involved in the project. The specific allocation of responsibilities varies depending on the project and the contractual terms agreed between the parties.

In general, the responsibilities related to the design process are divided among the employer, designer and contractor, with the potential involvement of additional parties based on the project's specific requirements. While the distribution of tasks may vary depending on the type of the construction project and the parties involved, several typical approaches are employed to delineate the division of responsibilities.

• Turnkey or EPC (engineering, procurement and construction) contracts – in these contract types, the contractor assumes full project responsibility, encompassing design, construction and commissioning. The employer typically furnishes project requirements and compensates the contractor upon project completion.

• Construction management (CM) contracts – within CM contracts, the employer oversees project management while the contractor delivers construction services. The contractor typically manages labour, materials and equipment, with the employer supervising construction activities.

• Design-bid-build (DBB) contracts – DBB contracts entail the contractor's responsibility for construction work, with project oversight by the employer.

• Design-build (DB) contracts – under DB contracts, a single entity is contracted to provide both design and construction services. The contractor ensures project completion in alignment with the employer's requirements and specifications.

• Joint venture (JV) contracts – JV contracts involve collaboration between multiple companies to execute the construction project. Each partner assumes responsibility for their designated work, sharing project risks and rewards.

• Variation/hybrid contracts – besides the above-listed conventional structures, variations and hybrids may exist based on project specifics and the parties involved.

The responsibility for overseeing the condition of the construction site, including pollution, underground obstacles, geotechnical conditions, archaeological finds and related matters, varies depending on the terms agreed in the construction contract.

Under Korean law, certain regulations govern site conditions, such as:

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

Within construction contracts, the allocation of risk concerning site conditions is typically outlined in the site investigation clause, defining the extent and depth of investigation necessary to evaluate site conditions.

In South Korea, various permits must be obtained for different stages and aspects of construction projects, including building permits, approval of construction plans, and use permits. Non-compliance with the relevant regulations can lead to fines and the possibility of imprisonment.

For instance, in the context of building construction, building permits must be secured from the appropriate administrative district prior to commencement, in accordance with Article 11 of the Building Act. Certain exceptions may apply for specific types of construction, as outlined in Article 14 of the Building Act, which includes extensions, repairs and constructions of limited sizes, as well as buildings below a certain size in designated zones.

Upon receiving a building permit, project sponsors are obliged to fulfil various reporting and inspection requirements as construction commences and progresses.

Following completion, a use permit or temporary use permit is necessary to utilise a building as per Article 22 of the Building Act. Any alterations in design or intended use may necessitate reporting the change or obtaining a permit, depending on the extent of the modification, as stipulated in Article 19 of the Building Act.

Generally, the division of responsibility for maintaining the works varies depending on the terms agreed in the contract. Typically, the contractor is tasked with maintaining the works until the expiry of the defect liability period (DLP), during which time the contractor is obliged to rectify any defects that arise.

Subsequent to the DLP, maintenance responsibility is transferred to the employer or a designated third-party maintenance contractor. Nonetheless, the expiry of the DLP does not absolve the contractor of liability for damages resulting from defective works discovered within the statutory limitations periods, which differ depending on the nature of the works.

Maintenance generally encompasses measures undertaken to preserve the works in optimal condition and address repairs. These actions may involve cleaning, repairing or replacing equipment, systems or components, as well as overall upkeep. The specifics of maintenance works are typically agreed in the construction contract – eg, under provisions for ongoing maintenance and inspections throughout and beyond the DLP.

In South Korea, functions beyond the core construction activities, such as operation, finance and transfer, may be instructed by the employer to the contractor or third parties, depending on the specific terms and requirements outlined in the contract.

Typically, the standard tests for verifying the completion of works may involve visual inspections, functional assessments and performance evaluations, which are tailored to the specific characteristics of the project. A typical sequence of testing is as follows:

• the testing procedure commences with the contractor notifying the employer upon completion of the works;
• subsequently, the employer conducts an inspection to validate whether the works align with the contract terms and relevant laws;
• upon confirmation of compliance, the employer issues a certificate of completion to the contractor; and
• following the issuance of the certificate, additional tests may be conducted to ensure the works' functionality and adherence to standards.

The party responsible for overseeing the testing process is typically determined in the construction contract between the employer and contractor.

The processes of completion and handover of a construction project are closely interlinked and often occur concurrently. The procedures and criteria for completion and handover are usually stipulated in the construction contract. Typically, the completion, takeover and delivery will involve the following:

• Completion: this denotes the physical conclusion of the works, signifying that the construction has reached a substantial completion stage. Upon reaching this point, the contractor commonly informs the employer of the works' completion, prompting the employer to conduct an inspection to validate the completion of works.

• Takeover: this signifies the transition of risk and accountability from the contractor to the employer. It entails a formal transfer of the completed works along with the associated documentation and information. Typically, the parties execute a takeover certificate to formalise the transfer of responsibility.

• Delivery: this involves the transfer of the possession of movable assets from the subcontractor to the contractor. Pursuant to Article 188(1) of the Korean Civil Act, the delivery is deemed a mandatory condition for the title transfer of movable goods.

Contractual Remedies for Defects

When defects arise in the construction or design, employers have the option to invoke the DLP clauses in their contract or to pursue damages for non-compliance under the relevant contract law.

Statutory Remedies for Defects

Under Articles 667 and 671 of the Civil Act, employers have the right to demand that contractors repair defects in the work or seek damages instead of repairs. This warranty claim can be made by the employer within five or ten years from the completion of the construction project, depending on the materials used. A contractor for work with respect to land, a building or any other structure shall be liable for any defects in the building or in its foundations for a period of ten years after delivery where the work is made of stone, limestone, brick, metal or any other similar material.

Pursuant to Article 671(2) of the Civil Act, employers must inform contractors of any destruction or damage within one year of its occurrence.

Employers cannot use statutory DLP clauses to claim indirect or consequential damages from contractors, even if contractors could have foreseen such damages. To claim these damages, employers must seek damages separately under Article 390 of the Civil Act, demonstrating that:

• the damages resulted from the contractor's failure to perform;
• the contractor is at fault for the failure; and
• the contractor knew or could have foreseen the circumstances leading to the damages.

In South Korea, the following pricing structures are commonly utilised in construction projects.

• Lump sum: the predominant method is the lump sum contract, entailing a fixed price for the entirety of the construction project. However, the price may be subject to change if there are alterations to the design or if unexpected circumstances arise during the project.

• Unit price: this is often used when quantities of certain items are uncertain.

• Cost plus: this is used when the contractor is reimbursed for actual costs plus a fee, but is not common in Korea.

• Target cost: this is used when parties establish a target cost, motivating the contractor to complete the project within the agreed budget.

• Milestone payments: these are commonly seen in construction contracts in Korea, where payments are made at specific project completion stages. These payments can be based on:

1. the percentage of work completed;
2. the achievement of specific project milestones; or
3. the delivery of designated products.

In construction contracts in South Korea, the indexation of prices is not used as commonly as in some other countries. Instead, parties typically address the risk of large price fluctuations through mechanisms such as:

• fixed price contracts;
• price escalation clauses;
• cost plus contracts;
• target cost contracts; or
• negotiation and risk allocation.

Overall, while the indexation of prices is not as prevalent in construction contracts in South Korea, parties manage the risk of large price fluctuations through various contractual mechanisms, negotiation and risk allocation strategies to ensure cost predictability and project viability.

In construction contracts in South Korea, measures to manage late or non-payment, such as additional interest, are typically included to ensure timely and fair compensation for the parties involved. Advanced payments, delayed payments and interim payments are commonly used in construction contracts to facilitate the financial aspects of the project.

It is noteworthy that the Framework Act on the Construction Industry and the Fair Transactions in Subcontracting Act stipulate certain mandatory provisions in relation to the timing of payments.

Construction contracts in South Korea typically involve monthly or milestone-based invoicing. Invoices usually contain detailed descriptions of the work completed, materials used and expenses incurred during the billing period. In commercial and public projects, contractors often use payment applications for invoicing.

In construction contracts in South Korea, planning is typically organised with input from the employer, contractor and other parties. The employer outlines the project requirements and expectations, while the contractor develops detailed construction plans and schedules. Other parties may provide input or oversight to ensure the project aligns with regulations and standards.

The role of the employer includes setting project objectives, providing necessary information and approving plans. Contractors are responsible for creating detailed construction plans and schedules, and for ensuring work is completed as per specifications. Other parties may contribute expertise to the planning process, such as architects or engineers.

Planning is safeguarded through milestones, milestone payments and certificates. Milestones are key project stages that mark progress, and milestone payments are made upon reaching these stages. Certificates may be issued to verify the completion of milestones or quality standards, providing assurance to all parties involved in the project.

In South Korea, parties typically follow a process outlined in the contract to address any delays in construction contracts. The parties involved are expected to notify each other promptly of any delays and work together to mitigate the impact on the project schedule. The contract usually specifies the obligations of each party in the event of delays, such as providing notice, documenting the delay and taking the necessary actions to minimise the delay's effects.

Time-related costs resulting from delays are often addressed in the contract through provisions for liquidated damages or extensions of time. Liquidated damages are predetermined amounts that the party responsible for the delay must pay as compensation for the delay's impact. Extensions of time allow the contractor additional time to complete the project without facing penalties for delays beyond their control.

Legal and contractual arrangements on concurrent delays address situations where multiple factors contribute to a delay. In such cases, parties may need to assess the impact of each delay factor and determine the appropriate course of action based on the contract terms. Resolving concurrent delays requires careful analysis of the circumstances and adherence to the contract provisions to ensure fair and equitable outcomes for all parties involved.

In South Korea, construction contracts usually include liquidated delay damages provisions, which usually fix the rate of damages that would accrue for each day that the completion of the project or a milestone is delayed.

Although the courts generally accept the validity of such provisions, they can reduce the amount of liquidated damages agreed by the parties. Under Article 398(2) of the Civil Act, the court may reduce the amount of liquidated damages agreed by the parties to a more reasonable and appropriate sum if it finds that the amount is “unduly excessive”. In practice, the Korean courts often do exercise such power to reduce the amount of liquidated damages.

There is no specific test for determining when agreed liquidated damages may be considered “unreasonably excessive”; the court has discretion and will consider the overall fairness of the contractually stipulated amount of liquidated damages having regard to factors such as:

• the status of the parties;
• the purpose and contents of the contract;
• the reason for pre-determining liquidated damages;
• the ratio of the pre-determined liquidated damages to the contract price; and
• the amount of estimated damages.

As South Korea is a civil law jurisdiction, delay in completion does not, in principle, result in strict liability for failing to meet the required completion date; liability for delay damages will only arise when the delay in completion has been caused by the fault of the contractor. In practice, however, the burden of proving that the contractor was not at fault lies with the contractor and is not readily shifted. As a result, employers do not have to prove fault when raising claims. While parties may in principle agree to impose strict liability obligations in a contract (ie, obligations whose breach does not have to arise out of fault in order to result in liability), the Korean courts will only read such an intention in the parties’ contract when it is stated in clear and unequivocal terms, and in such cases are likely to interpret the relevant provisions strictly.

Korean law also recognises the parties’ agreement as to penalties for failing to meet contractual obligations. These are generally distinguished from agreed liquidated damages on the basis that they are intended to secure performance of the contract, as opposed to providing a pre-agreed estimate of compensation due in case of a breach of contract.

Penalty provisions may be invalidated (either in full or in part) as being contrary to public policy by the courts if the amount of the penalty is considered to be excessively burdensome compared to the claimant’s interest in compelling performance.

Where a penalty provision is upheld, payment of the penalty will be in addition to any compensation for damages, liquidated or otherwise.

Where it is unclear whether certain pre-agreed sums are intended to operate as a penalty or as liquidated damages, the courts will presume that the parties intended the sums to operate as liquidated damages.

In South Korea, a contractor typically requests an extension of time in a formal written notice to the employer. The request includes detailed information about the reasons for the delay and the impact on the project schedule, and any supporting documentation or evidence.

Extensions of time are awarded based on valid grounds specified in the contract, such as unforeseen site conditions, changes in the scope of work, delays caused by the employer or other parties, or force majeure events. The contractor must demonstrate that the delay falls within the acceptable grounds for an extension of time as outlined in the contract.

The extension of time is usually established, measured and proven through a thorough analysis of the delay events, their impact on the project schedule, and supporting documentation such as progress reports, correspondence, site records and any other relevant evidence. The contract may outline specific procedures for measuring the extension of time, including the process for submitting and evaluating extension requests and the criteria for granting extensions based on the delay's impact on the project timeline. It is essential for the contractor to provide clear and compelling evidence to support their request for an extension of time.

Force majeure events in construction contracts in South Korea typically include unforeseeable circumstances that are beyond the control of the parties and prevent or delay the fulfilment of contractual obligations. Common examples of force majeure events include natural disasters, war, strikes, government actions and epidemics.

In South Korea, it is possible to contractually limit or exclude certain circumstances from being regarded as force majeure events by clearly defining the force majeure event in the contract. Parties can specify the exact events that will be considered as a force majeure event and may exclude events that are within their control or foreseeable at the time of contract formation.

The legal and contractual consequences of force majeure in South Korea may vary depending on the specific terms of the contract. Typically, when a force majeure event occurs, the affected party is excused from performance or may be entitled to an extension of time to fulfil their obligations. In some cases, force majeure may also entitle the parties to terminate the contract without liability for damages resulting from the event. It is important for parties to carefully review and understand the force majeure clause in the contract to determine their rights and obligations in the event of a force majeure event.

In construction contracts in South Korea, the treatment of unforeseen circumstances is typically addressed through a combination of mandatory or regulatory laws and contractually agreed-upon terms between the parties. Mandatory or regulatory laws may provide general guidelines or principles regarding unforeseen circumstances, while specific provisions related to unforeseen events are often contractually agreed upon by the parties in the contract.

Contractual agreements between the parties play a significant role in determining how unforeseen circumstances are addressed in construction contracts in South Korea. Parties have the flexibility to define the scope of unforeseen circumstances, establish procedures for addressing such events, and allocate risks associated with unforeseen events through contractual provisions such as force majeure clauses, change order provisions and dispute resolution mechanisms.

The contract may include provisions that outline the process for identifying, notifying and responding to unforeseen circumstances, as well as mechanisms for adjusting the contract terms, schedule and costs in response to such events.

Moreover, the Civil Act stipulates that if an unforeseeable event beyond the obligator's control renders the performance of an obligation impossible, the obligation is considered extinguished.

In South Korea, disruption is commonly recognised as a valid legal and contractual ground for seeking an extension of time and/or compensation in construction contracts. Disruption refers to events or circumstances that impede the progress of work, leading to delays or increased costs beyond what was originally anticipated. Parties may be entitled to compensation for additional time and costs incurred due to disruptions that impact the project schedule or productivity.

Disruption is typically established, measured and proven through a detailed analysis of the impact on the project. This may involve documenting the specific causes of disruption, quantifying the resulting delays or inefficiencies, and providing evidence to support the claim for an extension of time or compensation. Documentation such as daily reports, progress records, correspondence and expert assessments may be used to demonstrate the effects of disruption on the project.

Parties may need to show a causal link between the disruption events and the resulting delays or costs to substantiate their claim. By effectively establishing and proving disruption, parties can seek appropriate remedies in accordance with the contract terms and applicable laws to address the impact of unforeseen events on the construction project.

In principle, parties to a contract may exclude or limit their liability under contract or tort, provided that doing so is not contrary to any laws or public policy. By way of example, in the case of liability in tort, parties cannot agree to limit or exclude liability arising from intentional breach, wilful misconduct or gross negligence, as such agreement will be deemed contrary to public policy.

The concepts of wilful misconduct and gross negligence exist in South Korea. Under Korean law, a “grossly negligent act” (Junggwasil) refers to an easily foreseeable and avoidable action that is conducted without exercising even a minimal level of care. These concepts are recognised and governed by the legal framework in South Korea.

In principle, parties to a contract may exclude or limit their liability under contract or tort, provided that doing so is not contrary to any laws or public policy.

In South Korea, indemnities are commonly used in construction contracts to limit risk and allocate responsibilities between the parties involved in the project. Indemnities serve as a contractual protection mechanism where one party agrees to compensate the other party for specific losses, damages or liabilities that may arise during the course of the construction project.

Typical subjects for which one party would indemnify another in a construction contract in South Korea may include the following.

• Third-party claims: one party may indemnify the other against any claims or lawsuits brought by third parties, such as subcontractors, suppliers or other stakeholders, arising from the construction activities.
• Bodily injury or property damage: the indemnifying party may agree to indemnify the other party for any bodily injury or property damage caused by the indemnifying party's actions or negligence during the construction project.
• Non-compliance with laws and regulations: one party may indemnify the other for any losses or penalties resulting from non-compliance with applicable laws, regulations or building codes during the construction process.
• Design defects or errors: the indemnifying party may agree to indemnify the other party for any losses or damages caused by design defects, errors or omissions in the construction plans or specifications.
• Delay or disruption claims: indemnities may cover claims related to project delays, disruptions or additional costs incurred due to causes within the control of one party.

By including indemnity provisions in construction contracts, parties can allocate risks more effectively and ensure that they are protected against potential liabilities that may arise during construction projects in South Korea.

Korean construction projects will usually involve the employer requiring several types of security from contractors, usually in the form of on-demand bonds. These include the following.

• Bid bonds guaranteeing that a successful bidder will enter a contract with the employer. These usually expire once the contract for the project is executed.
• Performance bonds guaranteeing that the contractor will fulfil its obligation to progress and complete the construction. These usually expire after the completion of the project. In some cases, they may be extended in part to cover any punch-list items or defect liability periods.
• Advance payment bonds issued by the contractor to the employer, to secure any cash payments made by the employer to the contractor as mobilisation advance. These bonds are amortised to reflect the repayment of the advance through deductions from progress payments due to the contractor.
• Maintenance bonds against guarantees that the contractor will repair any defects in the works after completion. Their duration often reflects the contractual defect liability period or the statutory liability periods.
• Subcontractor’s payment bonds that secure payments due to subcontractors in cases where a contractor cannot pay due to insolvency or other causes (Article 34(2) of the Framework Act on the Construction Industry).

In South Korea, parties are required to take out Industrial Accident Compensation Insurance under the Industrial Accident Compensation Insurance Act. In most cases, employers will also hold liability insurance to cover compensation liabilities exceeding the amount coverable by the Industrial Accident Compensation Insurance.

Parties will typically obtain the following other types of insurance:

• construction all risks insurance, which insures against physical damage to the works or materials;
• cargo insurance, which insures against risks such as damage to materials during transportation from overseas;
• professional indemnity insurance, which insures against claims related to the design of the project;
• Workmen’s Compensation Insurance, which compensates death or injury caused to workers to the extent not covered by the Industrial Accident Compensation Insurance;
• Package Insurance, which covers any potential business interruption risk; and
• commercial general liability insurance, which covers damages to third parties.

In a construction contract in South Korea, contractual provisions regarding the consequences of the insolvency of a party to the contract play a crucial role in managing risks and ensuring the continuity of the project in case of financial difficulties. These provisions typically address the following aspects.

• Termination rights: the contract may specify the rights of the non-insolvent party to terminate the agreement in the event of the other party's insolvency. Termination clauses may outline the procedures and consequences of termination due to insolvency. However, if rehabilitation or bankruptcy proceedings have been commenced, the exercise and recognition of these termination rights are subject to the provisions of the Debtor Rehabilitation and Bankruptcy Act.
• Continuation of work: provisions may address how the work will continue in the event of a party's insolvency. This could involve appointing a new contractor to complete the work or restructuring the project to ensure its completion.
• Payment and performance bonds: the contract may require the insolvent party to provide payment and performance bonds to secure payments to subcontractors and suppliers, and to ensure the completion of the project despite the insolvency.
• Assignment of rights and obligations: the contract may include provisions allowing for the assignment of rights and obligations to a third party in the event of insolvency, to ensure the project's continuity.
• Resolution of disputes: provisions may detail the process for resolving disputes related to the insolvency of a party, including mechanisms for arbitration or mediation.

These provisions may vary depending on the parties involved in the construction contract. For example, the consequences of insolvency may differ for the main contractor, subcontractors, suppliers or other stakeholders based on their roles and responsibilities in the project. Each party's rights and obligations in case of insolvency are typically outlined in the contract to ensure clarity and mitigate risks associated with financial instability.

In South Korea, the sharing of responsibility for certain risks is a common practice in construction contracts to allocate risks among the parties involved in the project. Risk sharing helps to distribute potential liabilities and uncertainties in a fair and balanced manner.

Construction contracts in South Korea arrange for risk sharing through various mechanisms, including the following.

• Indemnification clauses: parties may agree to indemnify each other for specific risks or liabilities that may arise during the project.
• Insurance requirements: contracts may stipulate insurance requirements to cover certain risks, with the cost of insurance premiums shared between the parties.
• Change order procedures: contracts may outline procedures for addressing changes in the scope of work, design modifications or unforeseen conditions, with the associated risks shared accordingly.
• Dispute resolution mechanisms: contracts may include provisions for resolving disputes related to shared risks through negotiation, mediation or arbitration.

Shared risks in construction contracts are generally priced based on factors such as the likelihood and impact of the risk, the cost of mitigation measures, insurance premiums and industry standards. Pricing for shared risks may involve allocating costs proportionally based on the parties' responsibilities or negotiating specific terms for risk sharing and cost allocation.

By clearly defining shared risks, responsibilities and pricing mechanisms in construction contracts, parties can effectively manage uncertainties, promote collaboration and ensure the successful completion of construction projects in South Korea.

Construction contracts commonly contain contractual provisions related to the personnel involved in the construction project. These provisions are designed to ensure proper staffing and personnel management to facilitate the successful completion of the project. The specific details of these provisions may vary based on the project's characteristics and intricacies.

Subcontracting is a prevalent practice in the South Korean construction sector, and construction contracts commonly incorporate clauses related to subcontracting. Nonetheless, this practice is bound by specific restrictions and requirements. Notably, the Framework Act on the Construction Industry establishes a set of prohibitions and guidelines to promote equitable and transparent subcontracting practices.

In South Korea, construction contracts frequently incorporate clauses related to intellectual property to regulate the ownership, utilisation and safeguarding of IP rights within the project.

In South Korea, various remedies are available for the different parties involved in a construction contract in the event of a breach. Common remedies for the key parties include the following.

• For the employer:
1. termination of contract;
2. claim for damages; and
3. specific performance.
• For the contractor/designer:

1. termination of contract;
2. claim for payments/damages; and
3. suspension of works.

In South Korea, it is common practice to contractually limit the remedies available to a party. Parties often include provisions in the contract that specify the extent to which remedies can be limited in case of a breach. Common limitation/exclusion provisions include the following.

• Limitation of liability:
1. parties may agree to limit the liability of one party in case of breach or non-performance – this limitation can cap the amount of damages that can be claimed by the non-breaching party; and
2. the limitation of liability clause typically specifies the maximum amount that can be recovered in case of a breach, which helps to manage the financial risk for both parties.
• Exclusion of certain remedies:

1. construction contracts may exclude certain remedies that would otherwise be available under the law – eg, parties may agree to exclude punitive damages or specific performance as remedies for breach; and
2. by excluding certain remedies, parties can streamline the dispute resolution process and avoid prolonged litigation over specific types of remedies.
• Time limits for seeking remedies:

1. contracts may include provisions that set time limits for parties to seek remedies in case of a breach – failure to adhere to these time limits may result in the loss of the right to pursue certain remedies; and
2. time limits provide clarity and certainty regarding the timeframe within which parties must act to enforce their rights under the contract.
• Mandatory dispute resolution mechanisms:

1. construction contracts often include mandatory dispute resolution mechanisms, such as arbitration or mediation, which can limit the remedies available to parties; and
2. parties may agree to resolve disputes through these alternative mechanisms, which may restrict the types of remedies that can be sought compared to traditional litigation.

Overall, the extent to which remedies can be contractually limited in construction contracts in South Korea depends on the specific terms negotiated by the parties. It is essential for parties to carefully review and understand the limitations on remedies outlined in the contract to ensure clarity and fairness in the event of a breach.

Contractual sole remedy clauses are commonly used in construction contracts in South Korea, and their enforcement requires clear drafting, mutual agreement, compliance with legal requirements, and potential judicial enforcement in case of a dispute.

In South Korea, construction contracts may exclude certain forms of damages from liability through contractual provisions. Common forms of damages that are typically excluded from liability in construction contracts include:

• consequential damages;
• punitive damages; and
• incidental damages.

In South Korea, retention and suspension rights are generally not contractually excluded in construction contracts.

In South Korea, parties have the freedom to negotiate and define the terms of termination in their contracts. The level of specificity in outlining the grounds for termination may vary depending on the circumstances of each case. Courts generally uphold termination provisions that are fair and do not violate public policy. Consequently, parties can typically include provisions that allow the employer to terminate the contract for convenience or permit either party to terminate in cases of prolonged force majeure events.

In addition to the agreed-upon termination terms, the Civil Act sets out specific situations in which a party may terminate a contract. Generally, if there is a delay in fulfilling a contractual obligation that remains unremedied or cannot be remedied, the non-breaching party may terminate the contract.

In the context of a construction contract involving a completed building or structure, defects in the work do not automatically grant the right to termination. In such instances, the contractor is responsible solely for damages resulting from the defects.

Furthermore, according to the Civil Act, if circumstances beyond the control of the parties make it impossible for the contractor to fulfil their obligations, the contractor will not be held liable for non-performance, and the employer will be released from the obligation to pay for incomplete work. In this scenario, the contractor is not liable for damages resulting from the inability to perform. However, under Korean law, such impossibility does not necessarily grant the right to terminate the contract. Therefore, it is advisable for parties to explicitly agree on the right to terminate in cases of prolonged force majeure events where desired, considering the distinctions between situations of impossibility and those that qualify as conventional force majeure events.

In South Korea, a significant number of domestic construction and engineering disputes are typically resolved through court litigation. Some district courts and high courts have specialised divisions dedicated to handling construction and engineering disputes.

Korean courts are known for efficiently processing construction and engineering disputes. With specialised court divisions focusing on construction and engineering matters, disputes in the construction industry are managed with a high level of expertise and effectiveness. Generally, a construction and engineering litigation case at the first instance court may take around 12 to 18 months, although in certain instances the process may extend to approximately two years.

In addition to court litigation, various laws provide for alternative dispute resolution methods to address construction disputes. For example, Article 69 of the Framework Act on the Construction Industry establishes the Construction Dispute Mediation Committee for resolving construction and engineering disputes through mediation. Parties also have the option to pursue court-administered mediation.

Arbitration is increasingly favoured by local parties as a preferred method of dispute resolution. The Korean Commercial Arbitration Board frequently handles a substantial number of construction and engineering disputes through arbitration each year.

Korean construction companies engaged in international projects are well versed in utilising arbitration for resolving construction disputes, particularly those of an international nature. Arbitration is often the preferred choice for resolving disputes in cross-border construction projects due to its efficiency and effectiveness in providing a neutral and enforceable resolution.