Public Contracts

Under case law, public contracts share the same legal nature as private contracts, yet in practice they often differ in several respects.

Separate statutes such as the State Contracts Act and the Local Government Contracts Act apply, as special laws, in priority over the Civil Act and the Commercial Act, and the entire course of the contract, including the bidding method, the conclusion of the contract, the payment of consideration, and the rescission of the contract, is regulated in detail by statute.

Amendments to the relevant statutes, shifts in case law, and changes in authoritative interpretations also occur frequently, so there can be limits on how any given response is framed.

Legal issues involving public contracts are not confined to particular industries.

A public contract must be formed by the agreement of the parties on an equal footing, and it must be performed in accordance with the principle of good faith.

The public official in charge of the contract must not impose special terms or conditions that unfairly restrict the interests of the contracting party, and the parties must enter into an integrity contract, by which they undertake not to give or receive money, goods, or entertainment throughout the bidding, contracting, and performance process.

Public contracts are, as a rule, conducted by open competitive bidding.

That said, limited competitive bidding, designated competitive bidding, and private contracts are permitted depending on the purpose, nature, and scale of the contract.

The contract must set out its purpose, the contract amount, the performance period, the contract guarantee deposit, the allocation of risk, and liquidated damages for delay, and it becomes final when the public official in charge and the contractor affix their names and seals.

The consideration for the contract is paid after the inspection is completed or after the inspection report is prepared.

If performance is delayed without justifiable grounds, liquidated damages for delay are imposed and may accumulate up to a maximum of 30% of the contract amount.

By contrast, delay caused by the fault of the ordering agency or by force majeure is excluded from the count of delay days, so whenever performance is delayed, the cause must be examined carefully to determine which party it is attributable to.

Common examples include unfairness in the bidding procedure, the unlawfulness of a decision on the successful bidder, and dispositions that restrict eligibility to participate in bidding.

When a party objects to the bidding result, the conclusion of the contract itself is sometimes contested through an application for a provisional injunction.

The leading causes of disputes include adjustment of the contract amount due to design changes or price fluctuations, the unilateral suspension of works or refusal of delivery by the ordering agency, and conflicting views over how the contract conditions should be interpreted.

Delayed payment of consideration after completion or delivery, nonpayment of progress payments, and the imposition of excessive liquidated damages for delay are the kinds of dispute that arise most often in practice.

When a party receives a disposition imposing sanctions as an unfair business operator on grounds such as defective or improper conduct, collusion, or the forgery or alteration of documents while performing a contract, the result can be exclusion from the entire public procurement market.

Collusion in the bidding process and the offering of bribes to the public officials involved can lead to criminal punishment, and there are many cases in which administrative and civil disputes and a criminal investigation proceed at the same time.

Even where grounds for adjustment of the contract amount, such as a design change or price fluctuation, have arisen, a party that fails to apply before receiving the consideration for completion may find its right restricted or difficult to have recognized.

As soon as a ground for adjustment arises, the party should confirm whether the requirements are met.

Even when the contract conditions presented by a public institution include provisions that unfairly restrict the interests of the contracting party, those provisions are often simply accepted.

The lawfulness of the special terms should be examined before the contract is concluded.

Even where grounds for extending the contract period exist, such as a natural disaster or fault on the part of the ordering agency, the period cannot be excluded from the calculation of liquidated damages for delay unless the application is made in writing within the deadline.

To contest a disposition imposing sanctions as an unfair business operator, a party must file a request for administrative adjudication or an administrative lawsuit within 90 days from the date it became aware of the disposition.

Once this deadline passes, the disposition can no longer be contested.