In light of the growing concerns with the 2019 novel coronavirus outbreak, the Korean Government has instituted special measures to alleviate the burden of companies doing business in Korea.
Due to the continued spread of the coronavirus, contractors may face difficulties in performing their contracts with government authorities and/or public agencies (e.g., Defense Acquisition Program Administration, "DAPA") within the agreed contractual timelines.
The Ministry of Economy and Finance (the “MOEF”), the government authority charged with enforcing the Government Contract Act (the “GCA”), has issued the Public Contract Management Guideline for Coronavirus (the “Guideline”).
The Guideline provides that, when administering public contracts, government authorities or public agencies must:
1. Issue stop work orders on construction or service provided at sites where work is deemed substantially impaired due to confirmed or presumptive positive cases of coronavirus and extend the deadline for performance as necessary and increase the contract price so as to cover additional costs incurred by the contractor(s) (e.g., prolongation cost);
2. Where stop work orders are not issued, exempt contractors from liquidated damages for delays due to unavoidable impairment in work or supply in connection with the coronavirus and make adjustments to the contract price in accordance with requirements for adjustment.
Since DAPA is also a government authority subject to the Guideline, DAPA is expected to check whether such LD exemption would apply to its contracts. However, as the Guideline is based on the standard terms and conditions applicable to domestic contracts that the government agencies are party to, it is questionable whether DAPA would immediately apply such measures to international contracts. However, we understand that DAPA will give due consideration to the Guideline when deciding whether to impose liquidated damages for delays related to international contracts.
Notwithstanding whether the Guideline is directly applicable to international contracts, foreign contractors that are facing performance delays under contract with DAPA due to the coronavirus outbreak may potentially rely on the force majeure clause in the contract with DAPA to avoid liquidated damages.
A typical force majeure clause in DAPA’s standard terms and conditions for foreign procurement contracts reads as follows:
a. The Contractor shall not be responsible for any delay of Delivery of Commodity which may arise from causes beyond the Contractor's reasonable control such as acts of God, fires, explosions, riots, civil commotions, mobilizations, threat or existence of war, blockades, embargoes, requisition of vessels, epidemics, changes in the relevant laws and regulations made after this Contract became effective (the “Force Majeure Event”).
Given that “epidemics” is already a type of event that may qualify as a Force Majeure event and the MOEF’s intentions to lessen the burden on companies impacted by the coronavirus outbreak, a foreign contractor’s request to invoke the Force Majeure clause could be reviewed by DAPA more favorably now than before.