Construction Law International homepage  »  June 2020

 

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In the case of defects arising in construction works, employers usually have several options to remedy the defects or seek damages. Employers can seek to have defects remedied pursuant to defects liability provisions in their construction contracts or they can seek damages for non-conformance under the applicable contract law. Each method has its pros and cons.

Some laws will also provide for other avenues to seek compensation or remedy for defects. For example, many jurisdictions recognise the concept of decennial liability, which imposes a mandatory liability on contractors or architects (or both) for latent defects in constructed works. For instance, under the laws of Qatar, a contractor is liable to remedy any latent structural defects for ten years after the completion and handover of a building. This obligation is mandatory in nature, such that it cannot be ousted or overridden by contractual terms to the contrary or by choosing a governing law other than Qatar.

The Korean Civil Act has 11 clauses for ‘contracts for work’ (comparable to the Werkvertrag under German law), six of which concern the contractor’s liability for defects (Articles 667–672 of the Civil Act). Unlike decennial liability, these provisions are not mandatory.

According to these provisions, in principle, the employer is entitled to demand repair of the works by a contractor or seek payment of damages in lieu of a repair claim (Article 667). This warranty claim can be, again in principle, exercised by the employer within five years or ten years, as the case may be, from the completion of the construction works (Article 671).¹

This paper discusses the applicability and scope of these statutory defect liability provisions, including the following questions:

• How does statutory defect liability under Korean law differ from contractual liability for non-performance?

• Do the statutory defect liability provisions under Korean law still apply in cases where there already exist contractual provisions on defect liability?

• Do these provisions apply if the governing law of a contract is not Korean law, but the subject construction works take place in Korea?²

Statutory defect liability under the Korean Civil Act

The basis for the statutory defect liability regime under the Civil Act is contained in its Articles 667 and 671. These provisions state as follows:

‘Article 667 (Contractor’s Liability for Warranty)

(1) Where any defect is found in the completed subject-matter of a work or in a certain part of the subject-matter of a work which has been finished before the completion of all the work, the person who ordered the work may demand the contractor to repair and rectify such defect within a specified period: provided that this shall not apply if excessive costs are required for correcting a minor defect.

(2) The person who has ordered the work may claim compensation in lieu of, or together with, correction of the defect.

(3) Article 536 shall apply mutatis mutandis to paragraph (2).’

‘Article 671 (Contractor’s Liability for Warranty Special Rules Applicable to Land, Building, etc.)

(1) A contractor for work with respect to land, a building or any other structure shall be liable for any defects in the subject-matter of the work or in its foundations for a period of five years after delivery: provided that this period shall be ten years where the subject-matter of the work is made of stone, limestone, brick, metal or any other similar material.

(2) If the subject-matter is destroyed or damaged by reason of such defects mentioned in paragraph (1), the person who ordered the work shall exercise the rights mentioned in Article 667 within one year from the day that such destruction or damage took place.’

Under Article 667(1), statutory defect liability under Korean law not only applies to completed works but also to parts of the works that were finished before the completion of the entire works. As set out in Article 671, the defect liability period differs depending on the type of works under consideration. In the case of works related to land, buildings or any other structure, the statutory defect liability period extends for five years from the date of completion. However, where the subject matter of the work is made of stone, limestone, brick, metal or any other similar material, the period is ten years (Article 671(1)).

According to the Supreme Court,³ absent any special definition agreed by the parties, the term ‘defect’ under these provisions must be construed holistically. In this regard, a defect not only refers to noncompliance with contractual requirements, but also to situations where the completed works do not have the qualities ordinarily expected of such works in light of business norms and relevant regulations.

During this statutory defect liability period – five or ten years as the case may be – the employer is entitled to demand specific performance from the contractor to repair defects in the ordered works, except in such cases where the relevant defect is minor and the cost of repair would be excessive.

How statutory defect liability under Korean law differs from contractual liability for non-performance

The Civil Act includes the provisions on statutory defect liability in the section on contracts for works, which falls under the chapter on contracts. As such, the provisions on statutory defect liability are a part of Korean contract law as it relates specifically to contracts for works.

However, Korean contract law also contains some provisions that apply to all types of contracts. Article 390 of the Act forms part of these broader principles and states as follows:

‘Article 390 (Non-performance of Obligations and Compensation for Damages)

If an obligor fails to effect performance in accordance with the tenor and purport of the obligation, the obligee may claim damages: provided that this shall not apply to where performance has become impossible and where this is not due to the obligor’s intention or negligence [ie, fault].’

The Supreme Court has ruled that statutory defect liability provisions cannot be relied on by the employer to seek indirect or consequential damages

Similarly, pursuant to Article 389, a contractual obligor can be compelled to specifically perform his obligations under a contract:

‘Article 389 (Compulsory Performance of Obligation)

(1) If an obligor does not perform his obligation voluntarily, the obligee may apply to a court for compulsory performance thereof: provided that this shall not apply to where the nature of an obligation does not so permit.’

The question then arises as to how the provisions on statutory defect liability differ from a claim for damages due to a breach of contract.

The principal difference has to do with the standard applicable to establishing breach by reason of non-performance. Under Articles 389 and 390, the failure to perform must be ‘voluntary’ (Article 389(1)) or it must be due to the ‘obligor’s intention or negligence [ie, fault]’ (Article 390). This effectively means that in order to establish a failure to perform for the purpose of these provisions, the employer would need to establish fault by the contractor (as is the case in many civil law jurisdictions). However, statutory defect liability under Articles 667 and 671 of the Civil Act imposes a strict liability obligation on the contractor in that the employer does not need to establish the contractor’s fault to make a claim. It would be up to the contractor to establish that the employer is not entitled to a repair claim because the defect occurred due to material supplied by the employer or due to an instruction given by the employer (Article 669). Even in cases where the contractor can establish this, the defence will not apply if the contractor, knowing the impropriety of the materials or instructions, has failed to notify the person who ordered the work (proviso to Article 669).

However, since statutory defects liability only relates to the repair of defects and the recovery of direct damages in lieu of such repair, the Supreme Court has ruled that statutory defect liability provisions cannot be relied on by the employer to seek indirect or consequential damages (or ‘special damages’ if using Korean law terminology) against the contractor, even where the circumstances leading to such indirect damages were foreseeable by the contractor.⁴ To recover its special damages, the employer would need to make a claim under Article 390 of the Civil Act by establishing that the damages arose due to a failure of performance that was attributable to the contractor’s fault and, further, that the special circumstances giving rise to these damages were foreseeable by the contractor (Article 393(2) of the Civil Act).

Since the causes of action for a statutory defects liability claim and a claim for failure of performance are considered to be separate under Korean law, both claims can be pursued concurrently. This also means that claims for non-performance (ie, breach of contract) will not be subject to the periods applicable to statutory defect liability claims; instead they will be subject to the limitation period for contract claims in general (ten years) or the limitation period for claims relating to commercial matters (five years).

Statutory defect liability provisions in cases where there already exist contractual provisions on defect liability

The provisions on statutory defect liability under the Civil Act are deemed non-mandatory under Korean law. This means that the parties may agree to opt out or deviate from Articles 667 to 672 of the Civil Act. Thus, the parties to a contract may agree to shorten the stipulated defect liability period. It is also likely that it would be possible to prolong the period of statutory defect liability.⁵ Parties may also agree in the contract on a different start date for the statutory defect liability period. Indeed, it is common industry practice in Korea that the parties agree for the statutory defect liability period to start from the date of governmental approval of the completed building (which can only be obtained following physical completion of the building) instead of the date of actual completion of the building.

There are, however, some circumstances where deviating from the statutory defect liability provisions might be considered to be invalid. Most pertinently, even if parties contractually agree to relieve a contractor of the obligations under the statutory defects liability provisions in the Civil Act, the contractor will still remain liable for defects that it failed to highlight at the time of completion despite being aware of them (Article 672 of the Civil Act).⁶ According to the Supreme Court, this provision also applies to cases where statutory defects liability period has not been waived but only shortened.⁷

In addition, there are provisions in certain other laws that can potentially result in invalidating an agreement to completely remove any type of statutory defects liability. For example, Article 22(5) of the Framework Act on the Construction Industry (‘Framework Act’) provides that where the terms of a contract are remarkably unfair to either party to the contract, such terms shall be deemed ineffective. In listing instances of such unfair terms, the provisions cite the situation

‘where either party to the contract excludes or limits the right of other party to the contract acknowledged by related acts and subordinate statutes, such as the Civil Act, without good cause’.⁸

The effect of this provision with respect to the ouster of statutory defects liability is untested in the courts. However, parties should be cautious in removing a statutory defects obligation altogether from the contract.

Finally, while it is open to debate whether and when the Act on the Regulation of Terms and Conditions (‘Terms and Conditions Act’) applies to standard form construction contracts, to the extent that it might, Article 7(3) of the Terms and Conditions Act states that where such a contract, without substantial reason, excludes or limits the warranty liability of a business person, the relevant provision shall be null and void. It should be noted, however, that contractual provisions that are individually negotiated and agreed will not be subject to Article 7 of the Terms and Conditions Act.

All in all, there are a number of circumstances under Korean law in which a contractual defect liability provision that extensively deviates from the provisions on statutory defects liability might be rendered ineffective or limited in scope.

Applicability of the statutory defect liability provisions in the Civil Act if the governing law of a contract is not Korean law but the subject construction works take place in Korea

The question of whether or not statutory defect liability provisions apply to projects that are not governed by Korean law, but are still situated in Korea, depends on whether these provisions are considered mandatory under Korean law. Article 7 of the Act on Private International Law states that

‘irrespective of the applicable laws, the mandatory provisions of the Republic of Korea shall govern the corresponding legal relations even if foreign laws are designated as applicable laws thereof under this act’.

Parties should be cautious in removing a statutory defects obligation altogether from the contract

According to this provision (also known as the public policy (ordre public) exception), a mandatory public policy provision under Korean law would still apply to a contract even if the contract itself is not governed by Korean law.

However, since the statutory defect liability provisions in the Civil Act are not mandatory in nature, they are unlikely to qualify as mandatory public policy provision within the meaning of Article 7 of the Act on Private International Law. Therefore, these provisions are only likely to apply in cases where the governing law of a contract is Korean law.

Concluding remarks

Statutory defect liability provisions under Korean law, while seemingly similar to decennial liability on the one hand or contractual warranties on the other, are actually distinct from contractual or mandatory defects liability. Their main advantage comes from the strict liability that they impose on contractors, in a jurisdiction where contractual breach is fault-based in general.

While Korean statutory defects liability provisions are not mandatory in nature, removing their effect entirely, as opposed to amending their duration or scope, may be invalid under Korean law, though this has yet to be tested before the courts.

 

Notes

* The authors wish to thank Yona Yoon (at Peter & Kim) for his contribution to this article.

1 For contracts of work that are not with respect to land, a building or any other structure, the time period is set under Art 670(1) as one year. Its relevance to construction contracts is, however, limited.

2 Under Art 28 of the Framework Act on the Construction Industry, a similar but not identical statutory defect liability regime is provided for contractors that are registered with the Korean government as construction companies under that act. While the details of that regime are not addressed in this article, it is worth noting that certain aspects of those provisions (such as their strict liability and non-mandatory nature) remain the same as Arts 667 and 671 of the Civil Code.

3 Korean Supreme Court Case No 2008Da16851 dated 9 December 2010.

4 Korean Supreme Court Case No 2001Da70337 dated 20 August 2004.

5 Though there is no express provision or court precedent recognising that the parties may extend the period, a leading commentary notes that very old versions of the Civil Act specifically allowed prolonging the period. When the modern Civil Act was adopted, that provision was removed on the understanding that the right was self-evident; see Yong-Dam Kim (editor-in-chief), Commentary to Civil Act (Law on Obligations, Particular Provisions IV) (4th ed, Korean Association for Private Law, 2016), pp 366–368.

6 Art 672 of the Civil Act states as follows:

‘Article 672 (Special Agreement Releasing Warranty Liabilities)

Even where there was a special agreement between the parties that the contractor shall not be bound by warranty liabilities mentioned in Articles 667 and 668, he may not be relieved of liabilities with respect to the defects in workmanship or materials of which he was aware and nevertheless failed to give notice.’

7 Korean Supreme Court Case No 99Da19032 dated 21 September 1999.

8 Art 22(5), s 6 of the Framework Act.

 

Mino Han is a partner at Peter & Kim in Seoul. He can be contacted at minohan@peterandkim.com. Umaer Khalil is a foreign attorney at Peter & Kim in Seoul. He can be contacted at umaerkhalil@peterandkim.com.

 

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