Navigating Korean Construction Law: A Guide for Foreign Investors and Project Owners

In Korea, the rise in the number of foreign investors and their participation in construction projects, such as wind farms and data centres, has generated interest in the regulatory framework applicable to the construction sector. Once solely of concern to Korean companies undertaking domestic construction projects, these laws are now also relevant for foreign investors and project owners involved in construction projects in Korea. Foreign investors and project owners commonly express concerns regarding Korea’s distinctive legal environment and frequently inquire about the feasibility of using international standard contracts such as FIDIC contracts. This article aims to address these concerns by outlining the key regulations governing construction projects in Korea, offering insights into important considerations for foreign investors, project owners, and other international stakeholders.

Korea has a well-defined and distinct legal framework governing the construction industry, which includes the Building Act, the Certified Architects Act, the Framework Act on the Construction Industry, and the Fair Transactions in Subcontracting Act. Additionally, other laws, such as the Labour Standards Act, the Occupational Safety and Health Act and the recently enacted Serious Accidents Punishment Act, address different facets of the industry. All these laws are significant for the construction sector and operate under the jurisdiction of different governing authorities, resulting in a multifaceted and comprehensive regulatory environment.

Among these laws, the Framework Act on the Construction Industry (FACI) and the Fair Transactions in Subcontracting Act (FTSA) hold particular significance for foreign investors and project owners, as these legislations contemplate unique regulatory features and have a practical impact. These acts establish obligations rooted in principles of good faith, fairness, and justice, frequently found in Korean legislation based on a civil law system. Practitioners trained in common law jurisdictions and individuals unacquainted with these legislations may encounter challenges in comprehending the nature of these obligations.

The Framework Act on the Construction Industry sets out the fundamental principles for construction contracts in Korea, being the cornerstone of Korean construction law, administered by the Ministry of Land, Infrastructure and Transport of Korea.

As noted earlier, the FACI provisions are rooted in principles of good faith, fairness and justice. This is particularly evident in Article 22, which imposes on the parties a general duty of fair, equitable contract negotiation and conscientious performance of the contract in good faith, requiring the parties to “conclude a fair contract by agreement and on an equal footing” and to “conscientiously perform the contract in good faith”.

The specific application of these principles is also evident in other provisions. In particular, Article 22-2 (Guarantee of Payment of Contract Price) ensures that the project owners guarantee the payment of the contract price to the contractors or pay insurance premiums to the contractors to enable their purchase of an insurance policy. This guarantees that the contractors receive their payments and reassures them through an insurance safety net.

The FACI also protects the parties from unfair contractual terms. Article 22.5 of the FACI declares substantially unfair contractual terms ineffective in certain cases. These cases include:

The FACI also regulates the relationship between the contractors and their subcontractors and imposes certain restrictions on the subcontracting of construction projects. Article 35 of the FACI guarantees payments to subcontractors in cases where the main contractor is unable to make payments due to bankruptcy or any other obvious grounds such as the cancellation of the contractor’s business registration. Further, contractors are prohibited from subcontracting all or a substantial part of their works to a single subcontractor.

In conjunction with the FACI, the Fair Transactions in Subcontracting Act, administered by the Fair Trade Commission, is of vital importance for construction projects in Korea. This legislation prioritises the protection and fair treatment of subcontractors and prevents contractors from imposing unjust terms that jeopardise subcontractors’ welfare. As Article 1 of FTSA notes, its purpose is to “establish […] a fair order in subcontract transactions so that the prime contractor and subcontractor may complement each other and develop balance on equal terms”. This intent is manifest throughout the FTSA. For instance, Article 22 of the FTSA imposes on the parties a duty to conclude a fair subcontract and perform their contract conscientiously and in good faith. Similarly, the FTSA connects the payment of the contractor with the payment of the subcontractor by requiring the contractor to pay the full price of the subcontract to the subcontractor within 15 days of receiving the completion money or an equivalent progress payment if it has received a progress payment.

The FTSA also protects the subcontractors from unfair and unreasonable contract terms. Article 3-4 of the FTSA prohibits contractors from entering into “unfair special agreements” – the terms and conditions in contracts that unfairly violate or restrict the interests of subcontractors. Terms and conditions such as requiring subcontractors to bear expenses for works not initially prescribed or to bear expenses incurred in settlement of civil complaints or industrial accidents, or to require a subcontractor to perform works not specified in tender documents constitute unfair special agreements and are prohibited by FTSA. Finally, the FTSA provides subcontractors with protections similar to those set forth in Article 22.5 of the FACI.

Navigating construction law in Korea requires a bespoke approach that cannot be achieved by adopting international standard contracts such as FIDIC contracts. While FIDIC contracts provide a balanced approach to different contract conditions, they must be carefully aligned with Korean law and regulations through appropriate modifications.

Success in construction projects in Korea requires more than just awareness of the legal regime. A nuanced understanding of the underlying legal principles seamlessly woven into concrete provisions is paramount. It requires drafting contracts that are aligned with the unique attributes of Korean construction law. This comprehensive approach creates a robust foundation for projects, which is essential for navigating Korea’s dynamic and continuously evolving construction industry. Therefore, as the construction industry in Korea continues to attract global investors, discernment and adaptation to its unique legal framework remain pivotal for building successful construction ventures.