[Invest&Law]Middle East War Classified as 'Force Majeure'... Will It Also Apply to the Russia-Ukraine War and Existing PF?

Extension of Construction Period Now Recognized for Overseas Wars

"Russia-Ukraine War Impact Is Significant... Interpretation Should Be Broadened"

The government has interpreted the disruption in the supply of raw materials caused by the Middle East war as a "force majeure"—a circumstance that is difficult for parties to control or avoid. Amid this, there are growing voices calling for a similar approach to be referenced in assessing force majeure in the context of the Russia-Ukraine war and existing project financing (PF) contracts.

"Ultimate risk is concentrated on the construction company"

According to the legal community on July 22, the Ministry of Land, Infrastructure and Transport and the Financial Services Commission interpreted the situation surrounding the Middle East war as a force majeure under the standard private construction contract as of April. This means that, at private construction sites where material procurement has been delayed due to supply imbalance or sharp price spikes, parties may negotiate extensions for the construction period and the deadline for completion. This is the first case in which a financial authority, through an authoritative interpretation, has recognized the reason for an extension of obligatory completion under the standard guidelines.

Obligatory completion-type PF structures involve the developer borrowing money from a syndicate of financial institutions, while the contractor undertaking the construction promises to complete the project within a specified period. If the deadline is breached, the contractor may have to assume the PF loan liabilities of the developer, meaning that a mere construction delay can result in massive financial liabilities.

Attorney Yoon Dogeun, a partner at Dongin Law Group, stated, "In the presale model, the occupants' designated move-in date coincides with the lenders’ loan recovery, so even a one- or two-month construction delay immediately leads to debt recovery issues. When a force majeure event occurs, there needs to be risk-sharing—such as postponing the move-in deadline for the buyers and allowing the syndicate to defer calling the loan due—but currently, the structure formally holds the contractor ultimately accountable once the date has passed."

However, the extension of the obligatory completion deadline resulting from this legal interpretation does not immediately apply to all sites. The pertinent standard guidelines only apply to PF loan contracts concluded after May 30, 2023. Contracts signed prior to that date are not subject to the direct application of the guidelines.

"IMF precedents from decades ago—limitations in applying them directly to overseas wars"

Courts have traditionally taken a strict approach when it comes to recognizing disruptions in raw material supply due to the Russia-Ukraine war or COVID-19 as a reason for exemption. A representative case is the dispute involving Woobang, the contractor of 'Suseong Lake Woobang IU Shell' in Daegu, and the syndicate of lenders including Kyongnam Bank and Shinhan Capital.

In 2024, Woobang appealed that the obligatory completion deadline had been exceeded by about a month due to the spread of COVID-19, a general strike by the Cargo Truckers Solidarity, and instability in raw material supply caused by the Russia-Ukraine war. When the syndicate demanded the assumption of loan liabilities totaling approximately 142.5 billion won, Woobang filed an injunction to suspend the effect of the obligation to assume such liabilities under the commitment to obligatory completion. However, the court ruled at the injunction stage that sufficient evidence for force majeure had not been provided.

Construction has been halted at an apartment construction site in Daegu. The photo is unrelated to the article content. Photo by Jinhyung Kang

Lower courts have continued to reference Supreme Court precedents in which neither the IMF financial crisis nor the resulting difficulty in procuring materials was recognized as grounds for exemption. However, some members of the legal sector are pointing out the limitations of applying decades-old economic crisis rulings directly to today’s global supply chain shocks. There is a tendency to interpret force majeure too narrowly, sometimes prioritizing precedent over a thorough examination of the causes and impacts of delays at individual construction sites.

Attorney Yoon added, "The Russia-Ukraine war has lasted longer and has had a much greater impact than the Middle East war. As construction companies are shouldering the ultimate risk in cases of breach of obligatory completion, a more proactive interpretation is needed."

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