The Supreme Court has ruled that interest on late-delivery penalties imposed on Hanwha by the Defense Acquisition Program Administration must be recalculated, after a 2019 explosion at Hanwha's (000880) Daejeon plant delayed deliveries of military supplies.
According to the legal community Wednesday, the third division of the Supreme Court (presiding Justice Roh Kyung-pil) recently overturned part of a lower court ruling that had partially favored Hanwha Aerospace (012450.KS) in a goods payment lawsuit against the state, and sent the case back to the Seoul High Court.
From December 2017 to December 2018, Hanwha signed military supply purchase contracts worth more than 1.12 trillion won with the Defense Acquisition Program Administration over five occasions. After three workers died in the February 2019 explosion at the Daejeon plant, the Daejeon Regional Employment and Labor Office issued a work suspension order for the entire site for about six months, from February to August that year. As deliveries of military equipment including guided missiles were consequently delayed, the Defense Acquisition Program Administration paid the supply price after deducting about 9.87 billion won in late-delivery penalties (compensation for delivery delays). Hanwha then filed a lawsuit, arguing that "the delivery was delayed due to the government's work suspension order, so the late-delivery penalty must be sharply reduced." The lawsuit Hanwha initially filed was succeeded by Hanwha Aerospace through the process of splitting off and merging its defense division.
The courts of first and second instance found that placing full responsibility for the delivery delay caused by the work suspension order on Hanwha Aerospace was inequitable. The first and second instance courts ruled that the state should deduct only 80% of the late-delivery penalty, and pay Hanwha Aerospace the remaining 20%, amounting to about 1.97 billion won, along with delay interest based on the statutory interest rate. The first and second instance courts explained that "although shortcomings such as inadequate safety measures were pointed out during the special inspection following the accident, most appeared to have been correctable without a work suspension or with only a temporary work stoppage."
The Supreme Court found the lower court's judgment reducing the late-delivery penalty by 20% to be valid. However, it judged that the delay interest rate should apply the average loan rate of financial institutions, in accordance with the agreement between Hanwha and the Defense Acquisition Program Administration, rather than the statutory interest rate.
The Supreme Court said, "Compensation for damages from non-performance of a monetary obligation is, absent special circumstances, money calculated at the statutory interest rate set by the Civil Act or the Commercial Act, but where there is a different interest rate agreement or an agreement on the delay damages rate, compensation according to the separate agreement can be recognized." It added, "In this case, there is an agreement on the delay damages rate, so the 'average loan rate of financial institutions' rather than the statutory interest rate must be applied to the delay in goods payment."
The Supreme Court said, "The lower court's judgment that the 6% annual rate set by the Commercial Act should apply contains errors that misunderstand the legal principles regarding the interpretation of the delay damages agreement and the delay damages rate to be applied after default," and remanded the case with the intent that the final repayment amount be recalculated.
