Supreme Court: "20% Reduction of Hanwha's Delay Penalty for Plant Explosion Justified"...Interest Rate Issue Remanded

DAPA Deducts 9.9 Billion Won in Delay Penalties
Lower Courts: "20% Reduction Due to Excessive Suspension"
Supreme Court: "Reduction Justified, Average Lending Rate Must Apply"

Hanwha Aerospace will be partially refunded for the delay penalty of approximately 9.9 billion won that it was required to pay to the Defense Acquisition Program Administration (DAPA) after late delivery of military supplies due to a work suspension order issued following an explosion at its Daejeon plant in 2019. However, the Supreme Court ruled that the interest (delay damages) on the amount the state must return should be recalculated based on the average lending rate agreed upon by the parties, rather than the statutory rate under the Commercial Act.

Supreme Court, Seocho-gu, Seoul. Photo by Yonhap News

According to the legal community on June 8, the Supreme Court (Presiding Justice Noh Kyung-pil) recently overturned part of the lower court's ruling regarding the claim for delay damages in the appeal filed by Hanwha Aerospace against the government, and remanded the case to the Seoul High Court.

From December 2017 to December 2018, Hanwha signed a contract with DAPA to supply guided missiles and other military goods worth a total of 1.1223 trillion won. However, in February 2019, an explosion occurred at the Daejeon plant, resulting in the deaths of three workers. The Daejeon Regional Employment and Labor Office deemed this a serious industrial accident and ordered a total suspension of operations at the plant for about 181 days.

As a result, the delivery of weapons was delayed, and DAPA deducted about 9.9 billion won in delay penalties from the payment. In response, Hanwha argued that the delay was caused by the work suspension order from the Labor Office and filed a lawsuit against the government.

The courts of first and second instance recognized Hanwha's responsibility for the delivery delay but reduced the delay penalty by 20%, ordering the state to return about 1.97529 billion won. The courts reasoned that the issue could have been resolved without a full suspension or with only a temporary suspension, and that the late delivery did not significantly disrupt the defense operations. However, for the delay damages on the amount to be refunded, the statutory annual interest rate of 6% under the Commercial Act was applied.

The Supreme Court also found it appropriate that the lower court reduced the delay penalty by 20%. It stated that, given the circumstances and duration leading to the work suspension order, the reduction rate adopted by the lower court was not clearly unreasonable in light of the principle of equity, and thus dismissed the related appeal.

However, the Supreme Court pointed out that it was wrong for the lower court to apply the 6% annual interest rate for the delay damages. Under the special terms of the contract between Hanwha and DAPA, in the event of delayed payment, interest should be calculated by multiplying the average lending rate for financial institutions as published in the Bank of Korea's Monthly Statistical Bulletin, in accordance with the Enforcement Decree of the Act on Contracts to Which the State is a Party.

The court stated, "The lower court erred in law by applying the statutory 6% rate under the Commercial Act, misunderstanding the interpretation of the agreement on delay damages and the rate to be applied after default, which affected the outcome of the judgment." Accordingly, the Supreme Court overturned this part of the ruling and remanded the case to the Seoul High Court.

This content was produced with the assistance of AI translation services.