Building law and regulation in South Korea during Covid-19

The Korean government has not yet enacted any construction-specific COVID-19 regulation. However, the Ministry of Economy and Finance issued a “Guidelines for Handling Public Contracts to Respond to COVID-19” on 12 February 2020 which is also applicable to public procurement and public construction projects (the details of which are further explained in section 2 below). In addition, the Ministry of Employment and Labor published on 30 January 2020 its “Response Guidance for Businesses to prevent and control the spread of COVID-19” setting out recommendations on how businesses should act during the COVID-19 outbreak. This guidance has been updated seven times since its first publication and the 8th edition, which is the latest version (as of 9 April 2020), was published on 7 April 2020.

The Guidelines of the Ministry of Economy and Finance allow for construction works to be temporarily suspended and relieve contractors from liquidated delay damages in the event of an ‘inevitable delay’. They also allow for adjustment of the contract price should continuing construction works become difficult on site due to the spread of COVID-19. However, such exemption of liability or the possibility of adjusting the contract price are limited in the Guidelines to circumstances where the construction works are considered to be ‘remarkably difficult’ or if the construction has been delayed ‘inevitably’ without specifying the precise meaning of this term. In addition, since the Guidelines of the Ministry of Economy and Finance only apply to public construction contracts, it is currently unclear whether the Guidelines, as an administrative measure, would also apply to private construction contracts.

According to the Response Guidance of the Ministry of Employment and Labor, if the government orders a workplace to be shut down due to a confirmed or suspected case of COVID-19, the affected employer will be excused from his/her obligation to pay any wages to the employees. Even if the workplace itself is not shut down, if an employee is unable to work due to being quarantined as a confirmed or suspected carrier of COVID-19, the employer is not legally required to pay wages for the period during which the employee cannot work. Employers can also apply for a government subsidy of up to KRW 130,000 (about US$ 100) per day (per employee) to offer paid leave to those confirmed or suspected employees.

It is necessary to first consider whether the effects of the epidemic constitute a force majeure event according to contractual provisions. In this regard, it is worth noting that the Standard Form Construction Contracts for Private Construction Works (promulgated by the Ministry of Land, Infrastructure and Transportation) expressly sets out in clause 17(1)2 ‘epidemics’ as one of the many force majeure events. The Korean Ministry of Land, Infrastructure and Transportation issued a public release on 28 February 2020 stating that circumstances arising from responding to the COVID-19 outbreak may qualify as ‘epidemics’ under a force majeure clause in such standard form contract. Therefore, contractors who conduct construction works under a contract incorporating these standard terms will likely be able to establish that the COVID-19 situation constitutes a contractual force majeure event. 

In the absence of an express force majeure clause in the contract or in case the definition is unclear or vague, whether COVID-19 is a force majeure event will be determined by general Korean law principles on force majeure.

The Korean Supreme Court has construed a force majeure event as an event beyond one’s control that could not have been foreseen and prevented despite the exercise of commercially reasonable efforts or means (see for instance Supreme Court Decision 2001Da48057 dated 23 October 2003). In other words, it required a force majeure event to be (i) unforeseeable and (ii) unavoidable despite the full exercise of commercially reasonable efforts or means. A contractor who succeeds to establish that such force majeure event occurred and that it was prevented from proceeding with the works due to such event (i.e., causation) will be released under Korean law from performing his or her contractual obligations or paying damages, including liquidated delay damages, to the employer. 

In the past, Korean courts have been quite cautious about admitting circumstances as amounting to force majeure and the threshold set by the Korean courts for a force majeure event was high. For instance, force majeure was denied where the IMF (International Monetary Fund) crisis and its resulting disruptions in the supply chain caused a contractor’s delay in performance (see Supreme Court Decision 2001Da1386 dated 4 September 2002). There are also no reported court cases in which the SARS (Severe Acute Respiratory Syndrome) or the MERS (Middle East Respiratory Syndrome) outbreak was considered a force majeure event.

However, the COVID-19 epidemic could be distinguished from previous outbreaks due to its widespread nature and the severity of the remedial measures taken all over the world. The chances are higher than before that the Korean courts will consider this situation as an ‘unforeseeable’ and ‘unavoidable’ force majeure event, which however needs to be further tested. 

In the absence of an express contractual clause under which an occurrence of a force majeure event (including ‘epidemics’) could be relied on as a ground for termination, one needs to consider the general principles under Korean law regarding the termination of contracts. 

The Korean courts, in principle, recognize the right to terminate a contract due to a change of circumstances (the so-called rebus sic stantibus jurisprudence) for the contracting party if the following conditions are satisfied: (i) a significant change of circumstances has occurred, (ii) such change of circumstances was unforeseeable by the parties at the time of signing of the contract, and (iii) a serious imbalance between the parties would arise or the purpose of the contract could not be achieved if the parties remain bound to the terms of the contract (see Supreme Court Decision 2016Da249557 dated 8 June 2017).

However, there is no court precedent to date in which the Supreme Court has allowed a contracting party to terminate the contract solely on the basis of a change of circumstances. Even the global financial crisis generated by Lehman Brothers which lead to unforeseen circumstances such as a sharp increase in the exchange rate did not suffice to give rise to an entitlement for termination (see Supreme Court Decision 2013Da26746 dated 26 September 2013).

Therefore, it will be difficult under Korean law to terminate a contract based on the fact that the underlying circumstances of a contract have changed, including the outbreak of the COVID-19 situation, unless there is an express termination clause in the contract that a party can invoke. 

Whether the measures currently being taken amount to a “change in law” must be primarily determined by how “change in law” is defined in the relevant contract. 

It is likely that the COVID-19 situation alone absent any governmental measure would not suffice to amount to a “change in law” unless the definition of this term would be exceptionally broad. 

With respect to the construction industry, since the Korean government has only issued so far guidelines or guidance notes (and not ordinances or decrees, let alone special laws), it is considered unlikely that these will be deemed a “change of law” as typically defined under international standard form contracts (for instance, as in Sub-Clause 13.6 of the FIDIC Silver Book 2017 or Sub-Clause 13.6 of the FIDIC Emerald Book 2017). 

The potential impacts of the COVID-19 outbreak on the construction industry are unprecedented and unpredictable. Although the construction industry in Korea has not been officially shut down by the government, there will certainly be impacts on ongoing projects. Repercussions may include project suspensions, delays, government or medically ordered quarantines, governmental actions such as stay-at-home orders, supply/material shortages, equipment shortages, labour shortages and lost productivity. Determining which party is ultimately responsible for future construction delays and resulting costs will become complex. In this regard, there are a few issues relevant to COVID-19 the construction industry should be aware of.

As Korea is a civil law country in which damages due to a breach of contract require the breaching party to be at ‘fault’ to be awarded, a contractor should consider the possibility of claiming an exemption of liability for liquidated delay damages if the delay to the completion of the project was due to a cause not attributable to the contractor, such as the COVID-19 outbreak.

Alternatively, article 398(2) of the Korean Civil Act states that “[w]here the amount of damages determined in advance is unduly excessive, the court may reduce the amount to a more reasonable and appropriate sum”. In Korean court practice, the threshold of “unduly excessive” is relatively low. Hence, there is a fair possibility that a contractor may be granted a reduction of the total amount of liquidated delay damages levied by the employer if it can establish that the delay was caused partly due to the COVID-19 situation. As the court (or the arbitral tribunal) has full discretion to exercise its power to reduce the amount of liquidated damages under said clause, a contractor should make sure that it has mitigated any delays to the project to the extent practically possible. 

As mentioned above, Korean law requires a force majeure event to be unforeseeable and unavoidable. Thus, to avoid the risk that a similar epidemic that may arise in the future is deemed foreseeable, the contract parties should make sure that such risk is properly addressed in a reasonably drafted contractual force majeure clause.