Penalty Fee of 5.1 Billion Won for Breaching Agreement? Court Rules "Excessive"

More Than Half of the 10.2 Billion Won Construction Cost

"Excessive Amount"… Only 1 Billion Recognized

The court has ruled that a party cannot be subjected to an excessively high penalty fee simply for breaching a mutual agreement in a construction contract.

According to the legal community on September 16, the Seoul Central District Court's Civil Settlement Division 36 (Presiding Judge Kwon Taegwan) partially ruled in favor of Hyundai Engineering & Construction in its penalty fee lawsuit against partner company A. The court ordered A to pay Hyundai Engineering & Construction 1 billion won. This amount is less than one-fifth of the 5.1 billion won originally claimed by Hyundai Engineering & Construction.

The court building in Seocho-dong, Seoul. Photo by Yonhap News.

The dispute arose during negotiations over increasing the insulation construction costs for the Hyundai Chemical HPC (Heavy Oil & Naphtha Cracking Facility) at the Daesan plant. Subcontractor A, which had signed a contract with Hyundai Engineering & Construction, requested additional construction costs resulting from design changes. When the parties failed to reach an agreement, A abandoned the remainder of the project in October 2021. Subsequently, A reported to the Fair Trade Commission that Hyundai Engineering & Construction had forced the company to relinquish the remaining work to another contractor and withheld payment for the construction already completed.

It appeared the dispute would be resolved in February 2022. At that time, the two parties agreed to finalize the settlement amount at 2,557.55 million won and not to initiate any additional lawsuits relating to the project. They also agreed that, if the agreement was breached, a penalty equal to twice the settlement amount would be paid. The same agreement was formalized by the Korea Fair Trade Mediation Agency. However, A filed a separate lawsuit against Company B, which took over the follow-up work, for payment for the nitrile rubber (NBR) materials A had provided for the project but had not been compensated for. In response, Hyundai Engineering & Construction filed the current lawsuit claiming that A had violated the non-litigation agreement and demanded a penalty fee of 5.1 billion won.

The court found that A had indeed violated the non-litigation agreement and that the penalty stipulated in the agreement constituted a predetermined amount of damages. However, the court judged that it would be excessive to require A to pay the full 5.1 billion won. The court stated, "The purpose of setting a predetermined amount for damages is not only to prevent disputes in advance and simplify legal relations, but also to serve as a psychological warning to the debtor, thereby securing fulfillment of obligations." The court also pointed out that "the penalty in this case is 5.1 billion won, which exceeds half the 10.2 billion won A had received as construction costs from Hyundai Engineering & Construction, and is a significant amount compared to the original contract value of 7.6 billion won."

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