Act on Contracts to Which the State Is a Party

The Act on Contracts to Which the State Is a Party covers contracts to which the State is a party in general, including government procurement contracts under international bidding.

Construction placed by a local government is governed by a separate Local Contract Act, but its substantive structure and the way it imposes sanctions are nearly identical to those of the Act on Contracts to Which the State Is a Party.

Any construction company that has taken part in public works even once already falls under this law.

When a company breaches an obligation under the Act on Contracts to Which the State Is a Party, it faces dispositions such as a restriction on its qualification to participate in bidding.

The difficulty here is that once one agency imposes a restriction disposition, that fact is reported at once to every central government agency, which in practice shuts the company out of the entire public procurement market for a set period.

A violation of the law can therefore decide the survival of a construction company that draws a substantial part of its revenue from public works.

A construction contract is, as a rule, carried out through open competitive bidding, and the contract must clearly state the following matters.

Matters Required to Be Stated When Preparing a Contract

In the following cases, however, the parties may omit the preparation of a contract.

When the contract is concluded, the parties must also conclude an integrity contract.

This is an agreement not to give or receive money, valuables, or entertainment throughout the entire process of bidding, awarding, concluding, and performing the contract, and a violation of it constitutes grounds for cancellation of the bid or award or for rescission or termination of the contract.

The construction must be completed within the completion deadline set in the contract, and any subcontracting must obtain the approval of the ordering agency.

Subcontracting without approval, or changing a subcontract so that it differs from the approved conditions, is in itself subject to sanctions.

Performing a contract in a defective, shoddy, or improper manner during construction, along with causing loss to the State by fraud or other improper means, also draws severe sanctions.

The payment for the construction is made after the completion inspection or the preparation of the inspection report.

Even after completion, the agency may review compliance with the integrity contract, and if the contract is rescinded or terminated, an obligation arises to repay any unsettled balance of the advance payment together with interest.

The most direct sanction is a restriction on the qualification to participate in bidding for a period of not less than one month and not more than two years.

As soon as the disposition is issued, it is reported to every central government agency and results in exclusion from the entire public procurement market, which, for a construction company that depends heavily on public works, amounts in practice to a near-suspension of business.

If the company exceeds the completion deadline without justifiable reason, liquidated damages for delay are imposed according to the formula below.

Liquidated damages for delay = Contract amount × 0.001 (rate of liquidated damages for delay) × Number of days of delay

Liquidated damages for delay may run up to 30% of the contract amount.

For a construction project worth 10 billion won, that comes to as much as 3 billion won.

However, periods of delay caused by reasons not attributable to the contractor, such as typhoons, floods, war, or infectious disease, and periods of delay caused by reasons attributable to the ordering agency are excluded from the number of days of delay.

Where unavoidable circumstances exist, the company needs to confirm whether the requirements are met.

Where the liquidated damages for delay reach an amount equal to the contract guarantee deposit, or where performance of the contract is deemed impossible for reasons attributable to the contractor, the contract is rescinded or terminated and the contract guarantee deposit reverts to the National Treasury.

In that case, if any unsettled balance remains from the advance payment already received, the contractor must return it with interest added.

Although subcontracting conditions commonly shift with on-site circumstances, changing them without the approval of the ordering agency can in itself trigger sanctions.

Even where grounds for an extension exist, such as a natural disaster or reasons attributable to the ordering agency, a failure to file a written application with a revised process schedule attached within the deadline means those days cannot be excluded from the calculation of the number of days of delay.

Although practice often treats it lightly, any consultation regarding the bid price or awarded volume can give rise to a collusion problem.

Even where the content is minor, correcting or supplementing documents related to a contract may be found to be forgery or alteration.