Construction and projects in South Korea: overview

A Q&A guide to construction and projects law in South Korea.

The Q&A gives a high level overview of the main trends and significant deals; procurement arrangements; transaction structures and corporate vehicles; financing projects; security and contractual protections that funders require; standard forms of contracts; risk allocation; excluding liability, including caps and force majeure; contractual provisions covering material delays and variations; appointing and paying contractors; subcontractors; licences and consents; projects insurance; labour laws; health and safety; environmental issues; corrupt business practices and bribery; bankruptcy/insolvency; public private partnerships (PPPs); dispute resolution; tax and mitigating tax liability; the main construction organisations; and proposals for reform.

To compare answers across multiple jurisdictions, visit the construction and projects Country Q&A tool.

This Q&A is part of the global guide to construction and projects law. For a full list of jurisdictional Q&As visit www.practicallaw.com/construction-guide.

Young Seok Lee, Ju Bong Park, Sae Youn Kim and Kyung Jun Lee, Yulchon LLC
Contents

Overview of the construction and projects sector

1. What are the main trends in the local construction and projects market? What are the most significant deals?

Main trends

The main legal observations are the following:

  • Government contracts. In the past, claims for upward adjustments of the contract price due to extensions of the construction period were rare in practice because contractors rarely raised them. Recently, however, contractors are raising these claims and the courts have given supportive judgments. As a result, we've seen a significant increase of such claims in government contracts.

  • Public-private partnerships (PPPs). The fall of interest rates in the market has triggered criticism of the high profit rates of concessionaires. As a result, many existing PPPs are being restructured through refinancing or elimination (or threshold reduction) of minimum revenue guarantees (MRGs).

The main commercial observations are the following:

  • Due to the global economic slowdown, many large-scale projects have been suspended or are otherwise facing difficulties due to financing problems. For example, the Yongsan International Business District development project has been terminated and is now undergoing litigation for the return of land. Likewise, large-scale urban housing projects such as redevelopment and new town construction projects have been cancelled.

  • Due to power shortages in South Korea (Korea), construction of power plants (particularly private combined cycle power plants (CCPPs)) has increased. Korean construction companies building these plants have also expanded their businesses to operating such plants, to increase profits.

Various highway and stadium construction projects are ongoing in preparation for the 2018 Pyungchang Winter Olympics. Other social overhead capital (SOC) construction projects, including for roads and railways, are also ongoing or being planned nationwide.

Major projects

These include:

  • Various nuclear power plant and CCPP construction projects.

  • The Honam high-speed railway construction project, as well as several subway double-tracking projects.

  • Construction project of Lotte World Tower, the highest building in Korea, which is in its final stages.

  • Innocity (or Innovation City) Development Project, a city development project aimed at transferring public institutions located in densely populated metropolitan cities to less populated provinces, which is nearing completion.

  • Construction projects for facilities to be used in connection with the 2014 Incheon Asian Games and the 2018 Pyungchang Winter Olympics

 

Procurement arrangements

2. Which are the most common procurement arrangements if the main parties are local? Are these arrangements different if some or all of the main parties are international contractors or consultants?

Traditionally, in medium or small-sized contracts, build-only projects were common in both the public and private sectors. In large-scale public construction projects, design and build contracts are used more often, with the contractors being responsible for the design of the whole project or at least a part of it.

In construction contracts, the cost plus fee method is rarely used. The fixed fee method is used far more often. Unlike private contracts, public contracts generally allow for escalation clauses and extension of time clauses.

These methods of deciding work scope and arrangement of fees are used for both:

  • Projects carried out in Korea involving only Korean parties (local projects).

  • Projects carried out in Korea including foreign constructors or consultants (international projects).

 

Transaction structures

3. What transaction structures and corporate vehicles are most commonly used in both local and international projects?

Local projects

For development projects, special purpose vehicles (SPVs) are often used to limit the liability of contracting parties and additional tax burdens.

With respect to transaction structures, it is common for one construction company to be the contractor in a private construction contract, and a consortium made up of multiple construction companies to be the contractor in a public construction contract.

International projects

SPVs are generally used for international projects as well. In most cases, however, international parties participate as one of the shareholders, not the sole shareholder, of the SPV.

Although the public procurement sector is open to foreign parties, we rarely see foreign construction companies participate in pure construction. They are usually involved when special technologies are needed.

 

Finance

4. How are projects financed? How do arrangements differ for major international projects?

Private contracts

Prior to the global financial crisis in 2008, projects were usually financed through loans guaranteed by contractors. Due to recent government regulations, however, projects are no longer commonly financed in this manner. It appears that projects are now mostly financed based on capital flow and are supplemented by project loans or mortgages. When SPVs are used, projects may also be financed through stock capitalisation or bonds. Other methods of financing include asset-backed financing techniques such as the issue of asset-backed securities (ABS) or asset-backed commercial paper (ABCP).

Public contracts

Project financing mostly depends on the budget of the employer. Such projects usually take place through long-term continuous contracts, where the employer concludes separate yearly contracts according to the size of the budget allocated for the corresponding year, and proceeds with construction over multiple years.

These financing methods apply to both local and international projects.

 

Security and contractual protections

5. What forms of security and contractual protections do funders typically require to protect their investments?

Security

Development projects. A commonly used protection is to put the land planned for development in a trust and have the trustee obtain title to the land and manage gains from the development. Through this method, an investor can reclaim its investment from the trust. Other methods used include the provision of assets as separate collateral, on the investment of an investor.

Construction projects. A commonly used protection is a performance guarantee, by which an employer can request the guarantor to compensate for damages resulting from breaches of the contractors. As performance guarantees provided in local projects are not independent bank guarantees, the guarantor can raise a defence based on the issues arising from the underlying construction contract.

It appears that the same security protections are used for international projects. In practice, however, international parties may face difficulties in obtaining a performance guarantee from a guarantor company in Korea, and may be asked to provide collateral in Korea.

Contractual

For development projects, a common protection is for investors/creditors to enter into an agreement with the project parties, whereby the investor/creditor can, if certain conditions in the project agreement are met, complete the project by either:

  • Acquiring the land planned for development themselves.

  • Selling the land to a third party, and allowing the third party to succeed to the relevant permits and authorisations.

This is why investors or creditors generally require that land used for development be put in a trust.

 

Standard forms of contracts

6. What standard forms of contracts are used for both local and international projects? Which organisations publish them?

Local projects

Standard contracts are published by the Ministry of Land, Infrastructure and Transport (MOLIT) and the Korean Fair Trade Commission (KFTC).

For government projects, the General Terms and Conditions of Construction Contracts (GTCCC) published by the Ministry of Strategy and Finance (MSF) serve as the general terms and conditions, while special terms may be added based on the relevant project.

For local government projects, the General Terms and Conditions of Technical Services Contracts of Local Governments published by the Ministry of Safety and Public Administration (MOSPA) are commonly used as the general terms and conditions.

For private projects, there are no standardised forms of contract. The GTCCC are not mandatory but have been widely used.

International projects

For large-scale international projects, parties separately negotiate and agree the terms of the contract. Usually, the terms agreed are closer to international contract forms such as FIDIC forms than the GTCCC.

 

Contractual issues

Contractors' risks

7. What risks are typically allocated to the contractor? How are these risks offset or managed?

Risks related to site conditions, including those related to soil conditions, hazardous materials, and buried cultural property, fall under the contractor's scope of risks, unless they are expressly allocated to the employer under the construction contract.

In fixed fee contracts, contractors also bear risks related to:

  • Construction delays resulting from local civil petitions against the construction.

  • Increase in labour and material costs.

  • Procurement of construction equipment.

  • Personal injury resulting from an accident during construction.

For international projects, if contractors obtain payment in Korean won, they typically bear the additional risk of exchange rate fluctuations if the contract is silent on this issue.

Certain risks can be avoided by agreeing to categorise them as force majeure events. Parties can also acquire insurance to offset the allocated risks. The most common types of insurance subscribed by the parties during the construction period are:

  • Industrial accident compensation insurance (mandatory by law).

  • Employer's liability insurance.

  • Contractor's all-risk insurance.

Excluding liability

8. How can liability be excluded or restricted under local law?

The general law on damages provides for compensation of two types of damages in case of a contractor's breach:

  • Ordinary damages have reasonable causal relationship with the breach, and a contractor is liable for these damages.

  • Special damages do not have reasonable causal relationship with the breach, and a contractor is only liable for these damages if the contractor was aware of the special circumstances that gave rise to such damages.

Both damages include direct and indirect damage. In most cases, consequential damages fall under indirect and special damages. Loss of business or profits may fall under direct or indirect special damages, depending on how such loss is incurred.

If parties agree to exclude compensation of incidental or consequential damages or loss of business/profits under a construction contract, the agreement is valid and enforceable. These types of exclusions are more often seen in international projects.

Caps on liability

9. Do the parties usually agree a cap on liability? If yes, how is this usually fixed? What liabilities, if any, are typically not capped?

In practice, caps on liability are not generally used in local construction projects. However, contracting parties can agree to limit the liquidated damages of the contractor at a certain percentage of the contract price. Such caps are often adopted in international projects at the request of the contractor.

Liability is not typically capped for damages resulting from personal injury to a third party.

Force majeure

10. Are force majeure exclusions available and enforceable?

Force majeure exclusions are available and enforceable. The general conditions of what constitutes a force majeure event and its effect on the parties' rights and obligations are commonly included in contracts.

Even without a force majeure provision, the Korean Supreme Court has held that, where there are construction delays due to acts of god or other comparable events, the contractor will not be liable for damages resulting from the delay.

The Civil Code provides that, where a party cannot be expected to perform its obligations under a contract in light of industrial practice and social experience, such party will be excused from liability for its non-performance. For example, if a party cannot perform its obligations under a construction contract because there is a delay in the supply of materials caused by a force majeure event, and the party cannot obtain the same materials from other sources, it is deemed that the party cannot be expected to perform its obligations under the contract, and therefore will be excused from liability for its non-performance.

 

Material delays

11. What contractual provisions are typically negotiated to cover material delays to the project?

Contracts commonly include provisions on liquidated damages and allow the employer to terminate the contract in case of material delay. As such, parties typically negotiate the percentage of the contract price that will constitute liquidated damages. The usual percentage agreed in local contracts is 1/1,000 of the contract price per day.

Material variations

12. What contractual provisions are typically negotiated to cover variations to the works?

Variations have to take place according to the variation provisions in the contract.

Public projects

The permissible scope of variations and method of adjusting the contract price are provided for in the contract in a detailed way, for each of the reasons for variation.

Private projects

There are no set rules and the parties must negotiate. For contract price adjustments, the parties typically negotiate the method of adjusting the unit price.

Other negotiated provisions

13. What other contractual provisions are usually heavily negotiated by the parties?

Other heavily negotiated provisions include:

  • Causes for contract termination.

  • Causes and process for suspension of construction.

  • Inspection of construction.

  • Extension of the construction period.

  • Repair of defects.

  • Subcontracting.

  • Party responsible for obtaining insurance.

For international projects, negotiation is also necessary with respect to:

  • The inspection authority.

  • Method of payment for construction works (party responsible for loss on foreign currency transactions).

  • Dispute resolution method and governing law.

 

Architects, engineers and construction professionals

14. How are construction professionals usually selected? Following selection, how are they then formally appointed?

Public projects

Construction professionals are selected through competitive bidding.

Private projects

Construction professionals are either hand-picked by the employer or selected through competitive bidding.

However, there are cases where the law mandates that construction supervisors be selected by the competent government authority, even in private projects.

 
15. What provisions of construction professionals' appointments are most heavily negotiated? Are liabilities routinely limited or capped in construction professionals' appointments?

As construction professionals' appointments take place through service agreements, the most heavily negotiated provisions involve the time and amount of payment.

In practice, liability caps are not generally used in the appointment of construction professionals. However, parties may agree to limit liquidated damages with respect to the professional.

 

Payment for construction work

16. What are the usual methods of payment for construction work? Are there ways for the contractor and consultants to secure payment or mitigate risks of non-payment under local law?

Methods of payment

There are no statutory or other legal procedures for paying contractors. As such, issues such as methods of payment and order of payment between multiple parties are typically decided by contract. In the case of subcontracts, the payment method and order are regulated by law.

The cost plus fee method is rarely used and fixed fee method is common for domestic contracts (see Question 2).

The most common payment method is to make an advance payment, then paying the remainder as regular milestone payments, usually at one-to-two month intervals. The method of paying the remainder is generally decided by agreement of the parties, or through review by construction supervisors.

Securing payment

Construction projects. Under the Civil Code, a contractor can stop performing works (so long as the contractor is not prohibited by contract) if the contractor has not received payment and cannot receive payment in the future for works to be performed. The contractor can also take a lien over the employer's land or improvements to it, and refuse to hand over the property to the employer, provided that certain conditions are met. Further, if the employer asks the contractor to provide a performance guarantee, the contractor may in turn request the employer to provide a payment guarantee.

Development projects. A common method is to have a funds management agreement in place, whereby profits from the development are managed by a trust and distributed to the project's investors and creditors if certain pre-agreed circumstances arise. After the investors and creditors are paid, contractors will be next in line to receive payment for works. This method has the benefit of preventing the employer from arbitrarily collecting development profits for himself, thereby securing payment for works performed by the contractor.

 

Subcontractors

17. How do the parties typically manage their relationships with subcontractors?

Parties can negotiate and determine, in the construction contract, matters for which subcontracting is prohibited. Where subcontracting is allowed, parties can agree to hold the contractor liable for acts of the subcontractor.

Even if the contractor enters into a subcontract, there is no contractual relationship between the employer and the subcontractor. Therefore, if a subcontractor fails to perform works under the subcontract, the employer can only bring contractual claims against the contractor or tort claims against the subcontractor.

On the other hand, the Fair Transactions in Subcontracting Act and Framework Act on the Construction Industry provide for the obligation of the employer to pay subcontractors directly, if the subcontractor makes a request for direct payment to the employer under any of the following circumstances:

  • The contractor cannot pay the subcontractor due to the contractor's default, bankruptcy, or cancellation of its business registration as a contractor.

  • The contractor has failed to pay two or more instalments of the subcontract price to the subcontractor.

  • The contractor has failed to perform its obligations under a payment guarantee.

The employer is also obliged to pay subcontractors directly where both:

  • The employer, contractor, and subcontractor have agreed that the employer will pay the subcontractor directly.

  • The subcontractor has obtained a final judgment in its favour, ordering payment for the works performed by the subcontractor in a lawsuit against the contractor.

There are cases where standard contracts include the above legal obligations of the employer to pay subcontractors directly.

 

Licensing

18. What licences and other consents must contractors and construction professionals have to carry out local construction work? Are there any specific licensing requirements for international contractors and construction professionals?

Operating construction business

A company that intends to operate a construction business must register the business with MOLIT (according to their area of work) and meet prescribed requirements regarding technical capacity, capital, facilities and equipment.

The same requirements apply for foreign companies, but there are additional requirements if the person or company that satisfies the technical capacity requirement is not Korean:

  • In the case of a natural person, the foreigner must be eligible for a working visa, and the value of his assets must meet a certain threshold.

  • In the case of a company, the foreign company must establish and register an office in Korea, and the capital of the company's principal office must exceed a certain threshold. With respect to the technical capacity requirement, a foreign company's experience outside Korea may also be considered by MOLIT.

Operating as an architect

A foreign-certified architect can only perform design or construction supervision services if the services are provided jointly with a person who has established a certified architect office in Korea. A foreign-certified architect must obtain a Korean architect licence if he wishes to provide such services independently.

 
19. What licences and other consents must a project obtain?

Before

Prior to starting construction works, the parties must obtain permits and consents prescribed by law that apply to the relevant project. In general, the employer is responsible by contract for obtaining approval of the business plan and other relevant consents.

During

When constructing buildings of a certain use, scale or structure, the parties must designate a licensed architect or construction engineering consultant (depending on the nature of the project) as the construction supervisor to supervise and inspect the project.

On completion

If the employer seeks to use a building after construction is complete, he must submit a supervision completion report by the construction supervisor, as well as a construction completion report to the relevant local governmental authority and obtain a permit for use.

 

Projects insurance

20. What types of insurance must be maintained by law? Are other non-compulsory types of insurance maintained under contract?

Compulsory insurance

Generally, a contractor must maintain the following during the construction period:

  • Employment insurance.

  • National pension insurance.

  • Health insurance.

  • Long-term care insurance.

  • Industrial accident compensation insurance. This covers damages incurred from personal injury or death suffered by contractor's employees during the construction period.

For public projects, the contractor must also obtain insurance for construction loss in certain types of construction works, if the project exceeds a certain threshold.

Non-compulsory insurance

Though not mandated by law, contractors generally take out employer's liability insurance and contractor's all-risk insurance during the construction period:

  • Employer's liability insurance provides coverage for employee-related risks that are not covered by the mandatory industrial accident compensation insurance.

  • Contractor's all-risk insurance provides coverage for all risks related to damaged buildings or property, compensation to third parties, and damages incurred by construction delays.

 

Labour laws

21. Are there any labour law requirements for hiring (local and foreign) workers?

Local workers

There are no labour law restrictions for hiring local workers.

Foreign workers

Under the Immigration Control Act, any foreign worker seeking employment in Korea must obtain a relevant working visa. Details on the relevant visa requirements can be found on the webpage of Hi Korea, the government portal for foreigners (www.hikorea.go.kr). With respect to the construction industry, certain employers are allowed to hire foreign workers who have entered into Korea with a working visit (H-2) visa and have the intention to be hired in Korea.

In addition, under the Act of the Employment, Etc. of Foreign Workers, an employer who seeks to employ a foreign worker must use the standard form employment contract prescribed by the Ordinance of the Ministry of Employment and Labour (MOEL). Once the foreign worker is employed, the employer must obtain insurance or a trust deed for the foreign worker, so that he can receive retirement benefits after leaving Korea.

 
22. Which labour laws are relevant to projects?

The applicable labour laws are:

  • Labour Standards Act. This provides the minimum standards for employment regarding wage, working hours, and compensation for accidents.

  • Act on Employment Improvement, Etc. of Construction Workers. This requires employers to establish a mutual-aid association and pay retirement benefits to construction workers, if the employer meets a certain threshold.

  • Act on Collection of Insurance Premiums for Employment Insurance and Industrial Accident Compensation Insurance. This regulates the payment and collection of insurance premiums for these two types of mandatory insurances.

  • Minimum Wage Act. This guarantees payment of the minimum wage to employees.

  • Wage Claim Guarantee Act. This provides measures to guarantee the payment of overdue wages and so on to employees.

 
23. Must an employer pay statutory redundancy or other payments at the end of a project? Are all employees eligible?

There are no statutory regulations on this issue.

 

Health and safety

24. Which health and safety laws apply to projects?

The Occupational Safety and Health Act applies to health and safety in projects.

Under this act:

  • An employer must take measures necessary to prevent hazards and health problems, and workers must abide by such measures.

  • If a contractor determines that there is a high risk that an industrial accident will take place while undertaking construction works, the contractor can obtain an expert opinion and request the employer to change the project design (provided that the contractor was not contracted to provide the project design in the first place).

  • If an employer determines that there is an imminent risk that an industrial accident or an otherwise serious accident may occur, he must immediately suspend all works and evacuate workers from the construction site, or take other similar health and safety measures before recommencing works.

  • The employer must provide regular training to workers regarding health and safety, as prescribed by MOEL.

  • Where a portion of works are harmful or dangerous to health and safety, the employer cannot separate such works and assign them to a contractor (or subcontractor) without first obtaining authorisation from MOEL.

 

Environmental issues

25. Which local laws regulate projects' effects on the environment?

Air

The Clean Air Conservation Act prescribes permissible levels for emission of pollutants.

The Noise and Vibration Control Act provides that, if noise and vibration emitted from a construction site exceeds a certain threshold, the competent local government can order the party producing such noise/vibration to take measures necessary to control it, such as adjusting working hours or installing soundproofing equipment.

Water

The Water Quality and Ecosystem Conservation Act provides that any urban development project, industrial complex development project or other similar project that produces pollutants exceeding a certain threshold must be reported to the Ministry of Environment (MOE). The MOE can designate the development or construction site as a control area (subject to additional regulations) if storm water runoff resulting from the project may seriously impede the use of rivers and streams in the area, or harm the health, property or natural environment of area residents.

The Sewerage Act provides that, where discharge of sewerage is allowed in an area, the owner or caretaker of land (or of facilities on the land) in the area must discharge sewerage produced from the area into the public sewerage system, and install draining systems for this purpose. If the new establishment or extension of a facility results in sewerage discharge that exceeds prescribed levels, the local government in charge of managing the public sewerage system can order the owner of the facility (or the employer, in case of construction works) to bear all or part of the costs that will be incurred to install a new public sewerage system.

Waste

The Waste Control Act regulates the processing of waste.

The Construction Waste Recycling Promotion Act provides guidelines on the processing of waste for persons who discharge, collect, transport and store construction waste and other intermediary operators.

Environmental impact assessments (EIAs)

The Environmental Impact Assessment Act provides that EIAs are required for:

  • Projects involving urban development.

  • Development of industrial sites and complexes.

  • Energy development.

  • Construction of roads, rail, ports and airports.

  • Water resources development.

  • Development of special areas.

  • Installation of waste disposal facilities.

An employer who must obtain permits or other consents regarding implementation or execution plans that have an environmental impact must prepare a draft assessment report and request the approving authority to designate the items that must be covered in the EIA. Where the project does not have to obtain such permits/consents, the employer must prepare a draft assessment report and determine terms of the EIA through deliberation with the Committee on Assessment Plans of Environmental Impacts (a committee organised by MOE). The employer must also gather opinions of local area residents and so on regarding the draft report, and include these opinions in the EIA.

Sustainable development

There are no overriding requirements to use sustainable construction practices. The Construction Waste Recycling Promotion Act, however, designates certain projects as construction works subject to use of recycled aggregate, for which the use of recycled construction waste is mandatory. Under this act, any person who places an order for such construction works must have the contractor use recycled construction waste that meet the standards prescribed by presidential decree.

 
26. Do new buildings need to meet carbon emissions or climate change targets?

Under the Framework Act on Low Carbon, Green Growth (an Act enacted to meet targets set under the UN Framework on Climate Change) and the related Act on Creation of Green Buildings, MOLIT can prescribe a cap on total energy use for both new and existing buildings, for the purpose of reducing greenhouse gas emissions. However, MOLIT has not yet published such a cap.

 

Prohibiting corrupt practices

27. Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or criminal penalties?

Rules

Bribes to public officials. A public official who receives, demands or promises to accept a bribe (whether for himself or a third party) is subject to criminal punishment under the Criminal Code. The same applies to a person who promises, gives, or shows the intent to give a bribe to a public official. Here, the term public official also includes officials of certain public institutions including the Korea Land and Housing Corporation, the Korean Highway Corporation, and the Korean Rail Network Authority.

Where the amount of a bribe exceeds a certain threshold, the sanction applicable to the bribe can be increased under the Act of Aggravated Punishment, Etc. of Specific Crimes.

Bribes to private parties. Under the Framework Act on the Construction Industry, an employer, contractor, subcontractor, or other interested person cannot acquire or provide profits in property or anything of value for making an unlawful request in connection with the conclusion or execution of a construction contract. Any person who violates this rule will be subject to criminal punishment. A construction company may also be subject to administrative sanctions, such as business suspensions or the termination of its business registration for violating this rule.

Penalties

The following penalties apply:

  • A public official who received and so on a bribe under the Criminal Act: imprisonment up to five years, or suspension of qualifications up to ten years. If the public official committed an unlawful act after receiving the bribe, he is liable to imprisonment of up to one year.

  • A person who provided a bribe to a public official under the Criminal Act: imprisonment up to five years or a fine up to KRW20 million.

  • If the Act of Aggravated Punishment, Etc. of Specific Crimes applies: imprisonment up to five years or ten years, depending on the amount of the bribe.

  • A person who provided or received a bribe to another under the Framework Act of the Construction Industry: imprisonment up to five years or a fine up to KRW50 million.

 

Bankruptcy/insolvency

28. What rights do the client and funder have on the contractor's bankruptcy or insolvency?

If the contractor becomes bankrupt or insolvent before construction is complete and cannot perform his obligations, the employer can terminate the contract (according to the contract if there is such a provision, or under the Civil Code if there is not) and seek compensation of damages resulting from the contractor's non-performance.

If the contractor is declared bankrupt or has entered rehabilitation proceedings under the Debtor Rehabilitation and Bankruptcy Act, the trustee/court receiver can terminate the contract, or otherwise have the contractor continue performance of the contract and ask the employer to do the same. The employer can provide the trustee/court receiver a fixed period of time to determine whether to terminate the contract after the bankruptcy/rehabilitation proceedings begin. If there is no definite response from the trustee/court receiver, the contract will be deemed terminated in case of bankruptcy, and the court receiver will be deemed to have waived the right to terminate the contract in case of rehabilitation.

If the contract is terminated, the employer/funder can claim damages as a bankruptcy or rehabilitation creditor.

 

PPPs

29. Are public private partnerships (PPPs) common in local construction projects? If so, which sectors commonly use PPPs?

PPPs are widely used in local construction projects. In fact, surveys show that as of 2013, about KRW98.5 trillion has been invested in PPP projects. PPPs are generally used in the transport sector for highway, tunnel, light rail, subway, port and other transport-related projects. PPPs are also increasingly seen in projects for sports facilities in schools and military barracks.

 
30. What local laws apply to PPPs?

The Act on Public Private Partnerships in Infrastructure applies to PPPs. If a project involves a facility that falls under any of the 49 items defined as infrastructure under the Act, it may be conducted as a PPP. Currently, in large-scale PPPs that include a contractor from the US, EU, Chile or Peru (parties to free trade agreements with Korea), the contractor will receive the same treatment as a local contractor.

In addition to the build-transfer-operate (BTO), build-transfer-lease (BTL), build-operate-transfer (BOT), and build-own-operate (BOO) procurement schemes, the Act allows for other PPP schemes proposed by private parties and approved by public authorities.

 
31. What is the typical procurement/tender process in a PPP transaction? Does the government or another body publish standard forms of PPP project agreement and related contracts?

Public authorities must establish and publicly announce the basic plan for infrastructure projects that require private investment. Interested private entities will submit a business plan that has been prepared based on the basic plan. After review and assessment of the submitted business plans, the relevant public authority will designate private entities to negotiate the terms and conditions of the project, then chose a concessionaire and conclude a concession agreement with them.

Private entities can also propose projects to public authorities, and if a project is accepted, the proposing entity will be in a favourable position to be designated as the concessionaire.

The Public and Private Infrastructure Investment Management Center (PIMAC), an organisation established to provide support in PPPs, has published a model clause PPP agreement, which may be used with amended terms, depending on the nature of the project.

 

Dispute resolution

32. Which are the most common formal dispute resolution methods used? Which courts and arbitration organisations deal with construction disputes?

Formal dispute resolution methods

Construction disputes are typically resolved by court litigation or court mediation. Although arbitration is becoming more popular, it is still less used for domestic projects. Private mediation is rarely used.

In court litigation, the same procedures are followed for both local and international projects. In arbitration, however, there are some differences as the Korean Commercial Arbitration Board (KCAB) uses different rules for domestic and international arbitration proceedings.

Courts and arbitration organisations

Courts. There are no separate courts for construction disputes. Such disputes are resolved by general civil court proceedings. Seoul Central District Court and Seoul High Court, the two largest courts at first and second instance level, have specialised panels that hear mostly construction cases.

Arbitration institutions. For local projects, parties have increasingly opted for arbitration governed by the KCAB rules. Where foreign parties are involved, the International Chamber of Commerce (ICC) Rules have been most popular so far.

 
33. What are the most commonly used alternative dispute resolution (ADR) methods?

While court mediation and arbitration have been used to resolve construction disputes, other ADR systems such as the Construction Dispute Mediation Committee's mediation are not commonly used.

The Public Private Partnership Dispute Conciliation Committee was established in 2012 under the Ministry of Strategy and Finance, to resolve disputes between public and private parties. However, dispute resolution through this Committee is neither mandatory nor are its results binding, and is not widely used in practice.

 

Tax

34. What are the main tax issues arising on projects?

Acquisition tax

A person who acquires real estate must pay acquisition tax. The tax base of acquisition tax is generally considered the acquisition price. However, when buildings are built or improved, the increase in the acquisition price that results from the works will be the tax base.

In addition, where the acquisition price is not reported, or where the acquisition price is lower than the standard market price prescribed by presidential decree, the standard market price is the tax base.

The acquisition tax for real estate is levied by applying the prescribed standard tax rate on the tax base. For the acquisition of new real estate, the standard tax rate is 4%. However, the rate will be much higher when a company acquires real estate in an overpopulation control district as a headquarters office or other purpose stipulated in law. The competent local government may also reduce or increase the standard tax rate by up to 50%.

Property tax

A person who owns real estate must pay property tax. The tax base for ownership of land and buildings is decided within a range of percentages of the average market price, depending on the status of the real estate market and local fiscal conditions.

Disposal tax

Any gains resulting from the disposal (transfer) of real estate are subject to income tax (for individuals) or corporate tax (for corporations).

VAT

For the supply of goods or services, VAT is levied at a rate of 10% on the total value of goods and services supplied during a relevant tax period.

Free economic zones (FEZ) and tax incentives

Where an employer implements a development project in a FEZ, the employer may benefit from a reduction in corporate tax, income tax, customs duties, acquisition tax, registration tax or property tax.

Quasi-taxes on excess gains and contributions for infrastructure funding

Increases in land value following completion of a construction project are not taxable. However, excess gains resulting from housing reconstruction projects that meet the requirements prescribed by the Restitution of Development Gains Act are redeemed by MOLIT as a quasi-tax.

Contributions may be levied on employers to fund local infrastructure. For example, employers undertaking development projects in large cities or large-scale construction projects must pay contributions to fund the construction or improvement of regional transport facilities.

 
35. Are any methods commonly used to mitigate tax liability on projects? Are there any tax incentives to carry out regeneration projects?

One such method is the reduction of tax by special acts. For example, under the Restriction of Special Taxation Act, a real estate acquisition that takes place by 31 December 2014 and falls under any of the following categories is subject to a 30% income or corporate tax reduction (or 50% reduction, in the case of point three below):

  • Real estate acquired by a real estate investment company, as defined by the Real Estate Investment Company Act.

  • Real estate acquired as collective investment property by a real estate collective investment scheme, as defined by the Financial Investment Services and Capital Markets Act.

  • Real estate acquired by a project financing vehicle.

 

Other requirements for international contractors

36. Are there any specific requirements that international contractors or construction professionals must comply with?

There are no specific requirements other than for licensing (see Question 18) and labour laws (see Question 21).

 

Reform and trends

37. Are there any proposals to reform construction and projects law? Are there any new legal or regulatory trends affecting projects?

Reform proposals

We have not seen any proposals that would substantively reform construction and projects law.

Trends

Currently, there are no new legal or regulatory trends that may affect projects. However, it appears that the government is looking to introduce policy aimed at promoting real estate development businesses, as part of a larger effort to promote the domestic economy.

 

Main construction organisations

Construction Association of Korea

Main activities. Implementation of government-commissioned projects (registration of general construction businesses and assessment of construction capacity), research on laws/regulations regarding the construction industry, research on construction technologies, and surveys on the construction industry.

W www.cak.or.kr

Korea Engineering and Consulting Association

Main activities. Implementation of government-commissioned projects (reporting of construction business), research on laws/regulations regarding the engineering industry, and surveys on the engineering industry.

W www.kenca.or.kr

Korea Specialty Contractors Association

Main activities. Implementation of government-commissioned projects (registration of professional construction businesses, assessment of construction capacity), promotion of policy improvement regarding the construction industry, and improvement of professional construction techniques.

W www.kosca.or.kr

Korea Construction Engineers Association

Main activities. Issuance and maintenance of construction technology certificates and maintenance of construction engineers.

W www.kocea.or.kr

Public and Private Infrastructure Investment Management Center

Main activities. Review and assessment of PPP plans, support in activities related to designation of concessionaires (including support in conclusion of concession agreements), and research on public investment-related policies.

W http://pimac.kdi.re.kr ( www.practicallaw.com/0-585-0905)



Online resources

Ministry of Government Legislation, South Korea (English version)

W www.moleg.go.kr/english/korLawEng

Description. English version of website managed by MOLEG (for guidance only).

Korea Legislation Research Institute

W http://elaw.klri.re.kr/eng_service/main.do ( www.practicallaw.com/3-522-0279)

Description. English law service managed by the Korea Legislation Research Institute (for guidance only).


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