Decoding Damages: English and Korean Approaches to Liquidated Damages in Construction Contracts

Liquidated damages, often abbreviated as LDs, now feature in almost all construction contracts, and are subject to meticulous negotiation between the parties involved. Under English law, LDs are seen as predetermined damages – ie, a type that does not need to be proved. In Korea, which is a civil law-based jurisdiction, LDs are quite often categorised and even termed as a penalty and this would be perfectly effective under Korean law. In fact, the underlying purpose for setting a predetermined amount in Korean construction contracts would be to serve as a deterrent against contractor breach, which is a legally permissible principle under Korean law (whereas it would not be recognised as such under English law). Korean law also takes a different approach to the question of what happens to LDs after contract termination.

Before turning to how this issue is handled by the Korean courts, we note that there are three different approaches the English courts have taken on this issue:

While the law continues to evolve, the current English law recognises Case 2 as the latest authority on this issue, which is also considered an “orthodox” approach as evidenced in the recent case decided by the UK Supreme Court in Triple Point Technology v. PTT Public Co. [2021] UKSC 29 UKSC 2019/0074 (“Triple Point”). In Triple Point, the Supreme Court held that the liquidated damages provided in the contract should be preserved as accrued rights that should survive even after termination, and following termination, the aggrieved party can still seek general damages. The Supreme Court in Triple Point actually overturned the previous Court of Appeal decision, which took the position of Case 1 by invalidating the LD clause that provided for liquidated damages “up to the date [the employer] accepts such work [completed by the contractor]”, which is the typical wording found in most construction contracts, and by further holding that as the contract was terminated there cannot be any acceptance made by the employer, thereby reaching the conclusion that the LD provision was untriggered or inapplicable.

On the other hand, the position of the Korean courts on this issue is Case 3 and it is now considered settled law in Korea. The Supreme Court of Korea held in 1989 that the purpose of a construction contract is completing the works and the agreement on delay LDs must be viewed as the agreement for predetermined damages of a case where the contractor delays the works and unless there are special circumstances, this case will also include a circumstance where the contract is terminated with the subsequent works performed by a replaced contractor.

The Supreme Court of Korea further held that in determining the actual number of delay days for the purpose of calculating LDs, the counting can be deemed to start from the day after the scheduled completion date and continue after the date of the contract termination (being the date the employer should have been entitled to terminate, not necessarily the actual date of termination) and that the counting would continue up until the time the third-party replaced contractor completes the concerned works (discounting any number of days wasted by the employer in delaying the contract termination if the employer did not terminate the contract on the day that they should have been entitled to terminate).

Another difference is that Korean courts have more discretion to adjust the final amount of the LDs than the English courts do. After the leading precedents in Dunlop Pneumatic Tyre Co. v. New Garange Motoro[1915] UKHL 1 and further in Cavendish Square Holdings v. Talal El Makdessi[2015] UKSC 67, it is generally understood that the English courts do not like to intervene and make discretionary decisions to alter or modify the LDs. This is not the case in Korea. The Civil Act of Korea expressly provides for LDs and there is an express provision in the Act that specifically empowers the court to step in and reduce the amount if the LDs are determined to be excessive. Given this background, while the courts in Korea have taken the position of Case 3, one can expect that the final damages amount due by the first contractor will be based on the LDs calculated up to the time of the works completed by the second contractor but may be reduced if the court further finds the amount to be excessive.

It appears unlikely that the courts in Korea will change their position from Case 3 in the near future, given their consistent adherence to this position in subsequent cases following the precedent set in 1989. So, what does this mean for foreign employers engaging in construction projects in Korea? For one thing, where a contract has to be terminated due to the contractor’s delay, there will be more clarity when it comes to determining the amount of damages since the parties do not have to resort to general damages. When it comes to contract drafting, the parties could, of course, negotiate to specifically provide for remedies in case of termination, and attempt to deviate from the Case 3 route if they should prefer Case 1 or Case 2. However, this scenario is less likely, as parties generally find greater reassurance in the Case 3 approach.