Will a New Arbitration Body Reduce Construction Cost Disputes? Construction Industry Fears Slowdown in Redevelopment Projects

Creation of Arbitration Body Granting Final Ruling Effect

Aims to Prevent Prolonged Construction Cost Disputes and Accelerate Projects

Contractors Say, "Business Feasibility Will Be Reviewed Conservatively from the Bidding Stage"

With the government planning to establish a specialized arbitration body for maintenance projects within the Ministry of Land, Infrastructure and Transport that has the same effect as a final court decision, there is growing attention on whether sites embroiled in construction cost disputes will be able to accelerate their projects. The government aims to address the limitations of the previous dispute mediation system, which lacked legal enforceability. However, within the construction industry, there are concerns that granting binding force to contracts between private entities could inadvertently lead to a contraction in maintenance project activity.

According to the Ministry of Land, Infrastructure and Transport on August 20, the government plans to propose an amendment to the Urban and Residential Environment Improvement Act by December in order to establish a maintenance project-focused arbitration body under the ministry.

The specialized arbitration body will handle disputes such as construction cost disagreements, differences in permissions and approvals between project unions and local governments, and quarrels related to management and disposal plans. The Ministry has decided that arbitration decisions issued by this body will have the same legal effect as final rulings. Once a final decision is rendered, the same lawsuit cannot be retried. An official from the Ministry noted, "The current Urban Maintenance Act does not furnish regulations granting the authority to arbitrate disputes between involved parties. Amendment of the law is necessary to give arbitration decisions the effect of final court rulings."

The government’s move to establish a specialized arbitration organization has been prompted by a surge in construction cost disputes in recent years, largely due to sharp increases in material prices in the aftermath of the COVID-19 pandemic. For instance, last June, the contractor for Maple Xi in Seocho District, which began occupancy at that time, requested a total increase of 491.6 billion won in construction costs, leading to conflict. The dispute was eventually resolved after arbitration by the Seoul Metropolitan Government, with both parties agreeing on an increase of only 78.8 billion won. At Jamsil Raemian I’Park, friction arose as the contractor and the project union agreed to verify only the additional 50 billion won in increased costs, not the entire construction cost, resulting in disputes with the residents' association.

Currently, mechanisms for construction cost verification and dispute adjustment are in place through organizations such as Korea Real Estate Board and Seoul Housing & Communities Corporation (SH). Nevertheless, because these processes lack legal binding force, if it is determined that costs are excessive but the contractor proceeds with the increase, the union has no choice but to comply. Similarly, the Construction Project Coordinator System in Seoul, which helped resolve disputes in Noryangjin District 6 and Daejo District 1, also lacks enforceability, meaning if the parties do not accept the mediation proposal, disputes are difficult to conclude.

There are projections that the introduction of binding arbitration will give project unions a stronger negotiating position than before. Since prolonged legal battles typically lead to increased financial costs for the unions, they previously had little choice but to accept compromise proposals within reasonable bounds.

On the other hand, some in the construction industry express concerns that legally binding arbitration could shrink the overall maintenance project market. Given that arbitration decisions would now be as binding as final court decisions, contractors might take a more conservative approach when assessing business feasibility at the bidding stage, or may avoid bidding altogether on projects where major disagreements exist.

An official from a major construction company stated, "If arbitration decisions carry the same weight as final court rulings, it will take more time to review projects." He added, "In particular, at sites where differences over price fluctuation or application of new item prices are not clearly resolved, contractors will be reluctant to submit bids." Another official commented, "Three levels of legal proceedings exist to allow for improvement along the way and to minimize misunderstandings before a decision is made. If a final decision must be made in a limited period for the sake of expediency, the burden on the contractor will only increase."

Some also argue that, since construction cost disputes are largely inevitable due to variables such as increases in material costs or design changes during project implementation, the government should not overly intervene in negotiations between private parties. An industry insider remarked, "Negotiations between project unions and contractors over how much to recoup increased costs due to design changes or external variables squarely belong in the realm of private contracts. If compulsory measures are imposed, it could actually freeze the project advancement."

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