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Scope of Debtor’s Damages Due to Creditor’s Delay in Receipt and Settlement Payment Pursuant to General Approximation Contract under the Defense Acquisition Program Act


A creditor’s delay in receipt of payment may result in damages to a debtor, including (i) delay damages for payment that would have been received if there was no delay in receipt; (ii) storage fees required to store the object because of the delay in receipt; and (iii) any losses incurred as a result of being prevented from using the funds, which should have been received, for other purposes.

Under the Defense Acquisition Program Act, a legitimate settlement payment can be requested even in the case an amended contract is signed within a general approximation contract1 subject to objections.  A uniform reduction in accordance to the discount rate cannot be accepted unless such reduction is specified in the contract.

Daewoo Shipbuilding & Marine Engineering Co., Ltd. (“DSME”) signed a contract with the Republic of Korea (competent authority is the Defense Acquisition Program Administration) to build Tongyeong Ship.  The Korean government imposed a delay penalty on DSME for failing to deliver the ship within the delivery date. 

In response, DSME filed a lawsuit against the Republic of Korea, alleging that delay damages were not applicable, and the court acknowledged that DSME delivered the ship within the delivery date.  DSME then filed a claim against the Republic of Korea for an additional settlement payment and damages for the delay in receiving its payment.

  • Request for additional settlement payment: There were disputes as to whether additional payment can be made since an amended contract had been concluded and to whether payment for the uniformly reduced amount could be claimed by applying the discount rate to the settlement cost.
    Regarding the above, the court ruled that the plaintiff could seek payment of the additional settlement amount for the portion on the ground that the amended contract had been signed on the condition that a final settlement agreement had not been reached regarding the portion the plaintiff did not accept.

  • Denial of uniform reduction based on discount rate: The court reaffirmed the Supreme Court precedent (Supreme Court Decision 2017Da289521, April 11, 2019) and ruled that a general approximation contract should be adjusted on a case by case basis by reviewing the adequacy of data submitted by the company and that it is not possible to uniformly reduce the amount in accordance with the discount rate.

  • Scope of damages caused by refusal of receipt: DSME argued that it deserves the following: (i) delay damages for the amount that DSME would have received had it not been for Korea’s unreasonable refusal or delay in receipt; (ii) storage fees (damage) spent to store Tongyeong Ship; and (iii) any operating losses that were incurred as a result of being prevented from using the money, which DSME should have received, for other purposes.  The court determined that all of the above damages were within the scope of damages caused by the unreasonable refusal of receipt by the Republic of Korea.

In this case, the court held that a creditor who refuses to accept normal delivery shall compensate the following damages: (i) delay damages for the amount that the debtor should have received; (ii) storage charges incurred by the debtor for storing the object until delivery; and (iii) any operating losses that were caused by being unable to use the money, which it should have received, elsewhere.  The above ruling is a precedent regarding the specific scope of damages suffered by a debtor due to a creditor’s delay in receipt.

In addition, the above decision affirmed the following: (i) under the Defense Acquisition Program Act, an additional legitimate settlement payment may be claimed if an amended contract is concluded subject to objections to a general approximation contract, and (ii) a uniform reduction according to the discount rate is unreasonable.

1 A general approximation contract refers to a contract where the contract amount is to be determined after the execution of contract as there is no cost data to determine contract amount at the time of conclusion of contract (Article 61 (1) of the Enforcement Decree of the Defense Acquisition Program Act).