Even if a construction start is delayed for years due to the client's fault and causes losses, the client does not need to pay compensation related to "construction suspension" under the contract, the Supreme Court has ruled.
According to the legal community on the 20th, the first division of the Supreme Court (presiding Justice Seo Kyung-hwan) upheld a lower court ruling that dismissed a lawsuit filed by two construction companies, including Company A, against Korea Land and Housing Corporation (LH) seeking construction payments and other compensation.
In 2009, LH awarded a project to build an underpass on National Highway No. 43 in Bongdam, Hwaseong, Gyeonggi Province, to a joint venture consisting of two construction companies. The companies filed a construction commencement report in December of that year, but the start was delayed for a long period as LH's procedures to secure the project site were delayed.
Construction began only after LH requested the companies to start work in 2015, and the project was completed in June 2021. LH paid all construction fees under the contract, but the construction companies filed an additional claim of about 10.4 billion won, including delay compensation, arguing that the period during which the start was delayed constituted a "construction suspension period." The companies based their claim on a provision stating that "if a construction suspension period attributable to LH's responsibility exceeds 60 days, an amount calculated based on the remaining contract amount for the excess period and the average loan interest rate of financial institutions must be paid."
The issue was the interpretation of "construction suspension." The first-instance court recognized LH's liability for delay compensation and ordered the construction companies to be paid about 4.9 billion won. LH appealed, and the second-instance court overturned the part of the first ruling in which LH lost, stating that "a delayed construction start differs from a construction suspension under the contract."
The Supreme Court sided with LH. The court reasoned that the provision constitutes a kind of "liquidated damages" agreement to compensate for losses incurred by the contractor when construction is suspended due to the ordering agency's responsibility, and that since it imposes significant financial liability, the requirements for its application need to be strictly interpreted. The Supreme Court judged that "this provision requires a cause attributable to the orderer (LH) and a suspension order from the site supervisor," and "it applies only when construction is suspended 'after commencement,' and does not apply to 'cases where the commencement itself is delayed.'" It found that the very expressions "construction suspension" and "remaining contract amount" mentioned in the contract presuppose a situation in which construction has already begun and progressed to some extent.
The Supreme Court judged that "the contractor (construction companies) can apply for an extension of the contract period and an adjustment of the contract amount on the grounds of a delayed start," and "it is difficult to conclude that failing to apply the delay compensation provision unilaterally leads to a disadvantageous result for the contractor."
