In a case where the other party to a contract to which the State is a party or a public corporation subject to the Act on the Management of Public Institutions becomes a party fails to express his/her intent to wish to adjust the contract price by the method of adjusting the contract price according to price fluctuation, whether the contract price shall be adjusted by the method of adjusting the item (affirmative)

The Act on Contracts to Which the State is a Party (hereinafter “State Contracts Act”) was enacted for the purpose of facilitating the smooth performance of contractual affairs by prescribing basic matters concerning contracts to which the State is a Party or a public corporation subject to the Act on the Management of Public Institutions (hereinafter “public contracts”) (hereinafter “public contracts”) (Article 1). The basic provisions concerning the basic contents of public contracts are prescribed to ensure the fair and efficient conclusion and enforcement of public contracts.

Article 19 (Adjustment of Contract Amount according to Price Fluctuation, etc.) of the State Contracts Act provides that the contract amount shall be adjusted in accordance with the Presidential Decree, when it is necessary to adjust the contract amount due to price fluctuation, etc. after concluding a contract for a construction project, manufacturing contract, or service contract, or any other contract that imposes a burden on the National Treasury. Article 64 (Enforcement Decree of the Act on Contracts to Which the State is a Party (hereinafter “Enforcement Decree of the State Contracts Act”) upon delegation by the head of each central government agency or the public official in charge of contracts shall adjust the contract amount after the lapse of 90 days from the date on which the contract was concluded, and the rate of item adjustment or index adjustment calculated as prescribed by Ordinance of the Ministry of Strategy and Finance as of the bidding date is increased or decreased by 3/100 or more (paragraph (1)), but the same contract amount shall be adjusted by one method among the item adjustment rate or index adjustment rate, and the contract amount shall be clearly stated in the contract amount adjustment rate, except where the other party to the contract wishes to adjust the index (paragraph

Article 64 of the Enforcement Decree of the State Contracts Act provides that the contract amount shall be adjusted when the product adjustment rate or index adjustment rate has increased or decreased by not less than 5/100 as of the date of original contract formation (Paragraph 1), but the contract amount adjustment method has been modified as above in the amendment by Presidential Decree No. 19035 on September 8, 2005 (amended by Presidential Decree No. 19035 on September 8, 2005). This would relieve the standards for the adjustment of the contract amount according to price fluctuation and relieve the other party’s burden on the date of bidding. In addition, with respect to the method of the adjustment of the contract amount, the obligation and authority for the consultation and determination granted to the head of each central government agency or the public official in charge of contracts originally and the other party expressed its intent to want the index adjustment rate method, and if there is no such declaration of intention, the other party has the right to choose the original method of the contract amount, but the right to choose the index adjustment method through the amendment was guaranteed.

In full view of the language and content before and after the amendment of Article 19 of the State Contracts Act and Article 64 of the Enforcement Decree thereof, the nature of public contracts, and the structure, purpose, etc. of the State Contracts Act, the contracting party may choose the index adjustment method by the contract price adjustment method at the time of concluding the contract. However, if the contracting party did not express its intent to want the index adjustment method even though there is no obstacle to the exercise of such right, the contract amount shall be adjusted by the

Articles 1 and 19 of the Act on Contracts to Which the State is a Party; Article 64(1) and (2) of the Enforcement Decree of the Act on Contracts to which the State is a Party; Article 64(1) and (2) of the former Enforcement Decree of the Act on Contracts to which the State is a Party (amended by Presidential Decree No. 19035 of September 8, 2005)

Han-il Railroad Co., Ltd. and one other (Law Firm Lee & Lee, Attorneys Song-jin et al., Counsel for the plaintiff-appellant)

Korea Railroad Corporation (Law Firm Barun, Attorneys Yu Jong-Un et al., Counsel for defendant-appellant)

Seoul High Court Decision 2016Na2048967 decided January 17, 2017

All appeals are dismissed. The costs of appeal are assessed against the plaintiffs.

The grounds of appeal are examined.

1. Method of adjusting the contract amount according to price fluctuation in a public contract;

The Act on Contracts to Which the State is a Party (hereinafter “State Contracts Act”) was enacted for the purpose of facilitating the smooth performance of contractual affairs by prescribing basic matters concerning contracts to which the State is a Party or a public corporation subject to the Act on the Management of Public Institutions (hereinafter “public contracts”) (hereinafter “public contracts”) (Article 1). The basic provisions concerning the basic contents of public contracts are prescribed to ensure the fair and efficient conclusion and enforcement of public contracts.

Article 19 (Adjustment of Contract Amount according to Price Fluctuation, etc.) of the State Contracts Act provides that the contract amount shall be adjusted in accordance with the Presidential Decree, when it is necessary to adjust the contract amount due to price fluctuation, etc. after concluding a contract for a construction project, manufacturing contract, or service contract, or any other contract that imposes a burden on the National Treasury. Article 64 (Enforcement Decree of the Act on Contracts to Which the State is a Party (hereinafter “Enforcement Decree of the State Contracts Act”) upon delegation by the head of each central government agency or the public official in charge of contracts shall adjust the contract amount after the lapse of 90 days from the date on which the contract was concluded, and the rate of item adjustment or index adjustment calculated as prescribed by Ordinance of the Ministry of Strategy and Finance as of the bidding date is increased or decreased by 3/100 or more (paragraph (1)), but the same contract amount shall be adjusted by one method among the item adjustment rate or index adjustment rate, and the contract amount shall be clearly stated in the contract amount adjustment rate, except where the other party to the contract wishes to adjust the index (paragraph

Article 64 of the Enforcement Decree of the State Contracts Act provides that the contract amount shall be adjusted when the product adjustment rate or index adjustment rate has increased or decreased by not less than 5/100 as of the date of original contract formation (Paragraph 1), but the contract amount adjustment method has been modified as above in the amendment by Presidential Decree No. 19035 on September 8, 2005 (amended by Presidential Decree No. 19035 on September 8, 2005). This would relieve the standards for the adjustment of the contract amount according to price fluctuation and relieve the other party’s burden on the date of bidding. In addition, with respect to the method of the adjustment of the contract amount, the obligation and authority for the consultation and determination granted to the head of each central government agency or the public official in charge of contracts originally and the other party expressed its intent to want the index adjustment rate method, and if there is no such declaration of intention, the other party has the right to choose the original method of the contract amount, but the right to choose the index adjustment method through the amendment was guaranteed.

In full view of the language and content before and after the amendment of Article 19 of the State Contracts Act and Article 64 of the Enforcement Decree thereof, the nature of public contracts, and the structure, purpose, etc. of the State Contracts Act, the contracting party may choose the index adjustment method by the contract price adjustment method at the time of concluding the contract. However, if the contracting party did not express its intent to want the index adjustment method even though there is no obstacle to the exercise of such right, the contract amount shall be adjusted by the

2. Consolidatedness of the lower judgment

A. The lower court rejected the Plaintiffs’ assertion that the Plaintiffs are obligated to adjust the contract amount by applying the index adjustment rate selected by the Plaintiffs, since the method of adjusting the contract amount was not specified in the contract. The reasons are as follows.

In light of the general terms and conditions of the contract, the content of Article 64(2) of the Enforcement Decree of the State Contracts Act, and the amendment process of the above Enforcement Decree, etc., the method of adjusting the contract amount, in principle, shall be based on the item adjustment rate, and exceptionally, it shall be deemed that it follows only when the other party to the contract wants the index adjustment rate at the time of conclusion of the contract. The Plaintiffs did not express such intent even though they knew that the index adjustment rate may be reflected in the contents of the contract at the time of conclusion of the contract. In short,

B. The lower court’s determination that the contract amount adjustment method was determined by the item adjustment rate is justifiable in light of the legal doctrine as seen earlier, since the Plaintiffs were able to choose the index adjustment method at the time of entering into a contract pursuant to Article 64(2) of the Enforcement Decree of the State Contracts Act. In so doing, the lower court did not err by misapprehending the legal doctrine on the interpretation of statutes or legal acts, as otherwise stated in the

3. Conclusion

The plaintiffs' appeal is dismissed in entirety as it is without merit, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices.

Justices Lee Dong-won (Presiding Justice)