[1] The legal nature of advance payment given and received under the construction contract / Where the contract is rescinded or terminated after the contract is paid, whether the unpaid amount of the contract amount corresponding to the period of advance payment is appropriated for the advance payment without a separate set-off declaration (affirmative in principle), and whether the contractor is obligated to return the remainder of the advance payment in case where the advance payment is appropriated for the unpaid contract amount (affirmative in principle)

[2] In a case where a written agreement is written by an agency awarding an order to pay labor cost separately to the counter-party in accordance with the “the system for the separate management and payment confirmation of labor cost” and “the pre-paid labor cost is excluded from advance payment,” whether it constitutes a basis for interpreting that the counter-party to the contract should be based on the “amount obtained by deducting labor cost from advance payment” and “amount obtained by deducting value-added tax on labor cost and labor cost from the subcontract contract amount” when settling advance payment received from the agency awarding the contract (negative)

[3] The legal nature of the application for provisional payment (=preliminary counterclaim) and in a case where the judgment of the court below is reversed on the merits, whether the part of the order for provisional payment is reversed as a matter of course (affirmative)

[1] Article 664 of the Civil Code / [2] Article 105 of the Civil Code / [3] Article 215 of the Civil Procedure Act

[1] Supreme Court Decision 2014Da11574, 11581 Decided January 12, 2017 (Gong2017Sang, 305) / [2] Supreme Court Decision 2016Da267432 Decided December 27, 2018 / [3] Supreme Court Decision 96Da5001 Decided May 10, 1996 (Gong196Ha, 1819)

Gyeongnam-do (Law Firm Dongnam-dong, Attorneys Han Hong-man et al., Counsel for defendant-appellant)

Construction Financial Cooperative (Law Firm & Person, Attorneys Han Don-ro et al., Counsel for the defendant-appellant)

Changwon District Court Decision 2018Na52928 decided January 24, 2019

The part of the lower judgment against the Defendant is reversed, and that part of the case is remanded to the Changwon District Court.

The grounds of appeal are examined.

1. The judgment of the court below

A. The lower court acknowledged the following facts based on the admitted evidence.

(1) On December 22, 2016, the Busan District Office of Education (hereinafter “Plaintiff”) awarded a contract for the instant construction in the Hanyang Integrated Construction Co., Ltd. (hereinafter “ Hanyang Integrated Construction”) with KRW 1,478,767,000.

(2) The Plaintiff and Hanyang Construction agreed to apply the criteria for tendering and contract execution to the instant construction contract by local governments, which are established by the Ministry of Government Administration and Home Affairs, and agreed to pay the instant construction contract for KRW 566,550,713 according to the “the system for classification and management of labor costs and payment confirmation,” and agreed to exclude labor costs from advance payment.

(3) On January 10, 2017, the Defendant issued to the Plaintiff an advance payment guarantee certificate with the guarantee creditor from January 11, 2017 to September 15, 2017, that the Plaintiff shall pay KRW 61% of the advance payment amount of KRW 500,00,000 to the Plaintiff for Hanyang Construction, and KRW 312,046,00,00, such as the parties to the agreement on the guarantee, etc., as the guarantee amount. The Defendant issued the guarantee period from January 11, 2017 to September 15, 2017 to the Plaintiff. The guarantee amount to be paid by the Defendant on the back of the guarantee agreement stated above shall be the advance payment amount to be returned to the Plaintiff within the limit of the guarantee amount, and if there is any unpaid payment for the construction performed by Hanyangyang General Construction, the unpaid amount shall be deducted.

(4) On January 16, 2017, the Hanyang General Construction received advance payment of KRW 500,000,000 from the Plaintiff, and waived the instant construction contract on July 4, 2017. Around that time, the Plaintiff agreed to terminate the instant construction contract by setting the settlement amount, including all construction cost, including labor cost, as KRW 308,90,00 (including direct labor cost of KRW 151,354,628) and having agreed to terminate the instant construction contract.

B. Based on the aforementioned factual basis, the lower court determined that, on the ground that, in the public announcement of the instant construction contract based on the foregoing facts, it was anticipated that the instant construction contract would be subject to the separate management of labor costs and the confirmation of payment, and that the Plaintiff and Hanyang Construction would have agreed to exclude labor costs from advance payment, as agreed on the separate management of labor costs and the confirmation of payment prior to the date of the instant guarantee contract, and that, according to the local government tender and the standards for contract execution applicable to the instant construction contract, labor costs should be paid more than 50% and less than 70% of the contract amount as advance payment of the instant construction contract, if the instant advance payment includes labor costs, it did not comply with the aforementioned mandatory payment rate, and further, it was reasonable to view that the Plaintiff and Hanyang Yangyang Construction concluded the agreement not to include labor costs in advance payment while concluding the instant construction contract and return of advance payment.

2. Judgment of the Supreme Court

However, the above determination by the court below is difficult to accept for the following reasons.

A. An advance payment received under a construction contract is not generally paid in relation to the specific period of work, but is part of the work cost paid in relation to the entire project. Thus, where a contractor cancels or terminates a contract after an advance payment, barring special circumstances, such as where an exceptional settlement agreement is made regarding the scope of appropriation for advance payment, the unpaid amount of the work cost corresponding to the period of appropriation up to that time is naturally appropriated for advance payment without a separate offset declaration, and where advance payment is appropriated for unpaid construction cost, the contractor is obligated to return the remaining advance payment (see Supreme Court Decision 2014Da11574, 11581, Jan. 12, 2017).

In addition, even if a written agreement prepared by an ordering agency to pay the price in addition to labor cost and labor cost separately from the other party to the contract in accordance with the “the system for the separate management and payment confirmation of labor cost,” it can only be seen as related to the implementation of the “the system for the separate management and payment confirmation of labor cost,” and it cannot be deemed a basis for interpreting that the other party to the contract should be the basis for deducting the value-added tax on labor cost and labor cost from the contract price when settling the advance payment received from the ordering agency (see Supreme Court Decision 2016Da267432, Dec. 27, 2018).

B. As above, an agreement between the ordering agency and the counter-party to the contract to exclude labor expenses from advance payment pursuant to the “the system of classification management and payment confirmation” cannot be deemed as an exceptional agreement for settlement of accounts regarding the scope of advance payment. The purport of such agreement is to exclude the amount equivalent to labor expenses to be paid separately from other contract expenses according to the “the system of classification management and payment confirmation” in calculating the ratio of advance payment. Thus, it cannot be deemed that the advance payment made by the Plaintiff for Hanyangyang Construction falls short of the ratio of advance payment stipulated in the “standards for Local Government Tender and Contract Execution”. Furthermore, according to the reasoning of the lower judgment and the record, the “standards for Local Government Tender and Contract Execution” incorporated into the instant construction contract provides that advance payment amount to be paid by the ordering agency shall be calculated by dividing the amount equivalent to the completed payment amount without any mentioning all the completed payment amount to the counter-party to the contract, and then multiplying the amount by the advance payment amount by the contract amount, and only the Plaintiff and Han Han Han Construction with the same content as the agreement on special terms and conditions.

C. Nevertheless, the judgment of the court below which held that the Plaintiff and Hanyang Construction agreed to exclude labor costs from advance payment pursuant to the “the labor cost classification management and payment confirmation system” was erroneous in the judgment below which affected the conclusion of the judgment by making a decision contrary to the precedents of the Supreme Court regarding the effect of the agreement on the classification management and payment confirmation of labor costs in accordance with the “the labor cost classification management and payment confirmation system” on the appropriation scope of advance payment. The Defendant’s ground of appeal pointing this out is with merit.

D. The Defendant also appealed on the part of the judgment of the court below regarding the order to return the provisional payment. The application for the return of the provisional payment is a kind of lawsuit which is a preliminary counterclaim. Thus, once the judgment of the court below is reversed on the merits, the part of the order to return the provisional payment cannot be reversed as a matter of course without any need to determine the legitimacy thereof (see Supreme Court Decision 96Da5001 delivered on May 10, 1996).

3. Conclusion

Therefore, the part of the lower judgment against the Defendant is reversed, and that part of the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Jong-hee (Presiding Justice)