[edit] Supreme Court Decision 99Da40418 delivered on June 15, 2001 [Damages]

【Main Issues】

[1] Whether, in a large-scale construction project performed through subcontracts, a construction subcontract is deemed to have been executed only when there is an agreement not only as to the construction cost but also as to other material matters such as the specific preliminary work for and the implementation method of the construction project and the general conditions pertaining to the payment method of the construction cost, etc.

[2] Where one party, during the preliminary stage of negotiations, causes the other party to reasonably expect or justifiably believe that the first party will most likely enter into a contract with the second party and the second party acts on such belief and reliance, yet the first party subsequently refuses to enter into a contract without any reasonable cause and thereby incurs damage to the second party, whether such refusal to execute a contract constitutes a tort (affirmative)

【Summary of Decision】

[1] In a large-scale subcontract construction project with the estimated construction costs amounting to tens of billions of won and the construction period expanding over a period of 14 months where a meeting of the minds to be bound by a contract, unless extraordinary circumstances exist, can be deemed to have been reached only when there exists an agreement not only as to the construction cost but also as to on other material matters such as the specific preliminary work for and the implementation method of the construction project and the general conditions pertaining to the payment method of the construction cost, the absence of an agreement thereto would normally negate the execution of a contract. In above situation, a construction subcontract shall not be deemed to have been executed by one party's submission to the other party, without further, of a statement of estimated construction cost, a letter of undertaking and a letter of guarantee for the performance of subcontract, etc. for the purpose of executing the subcontract.

[2] Where one party, during the preliminary stage of negotiations, caused the other party to reasonably expect or justifiably believe that the first party would definitely enter into a contract with the second party and the second party acted on such belief and reliance, yet the first party subsequently refused to enter into a contract without any reasonable cause thereby incurring damage to the second party, such refusal constitutes a tort as an unlawful act beyond the boundaries of the principle of freedom of contract, in light of the equitable principle of good faith.

【Reference Provisions】 [1] Articles 105 and 664 of the Civil Code / [2] Articles 2, 535 and 750 of the Civil Code

【Plaintiff-Appellant】 Lotte Engineering & Construction Co., Ltd. and 3 others (Law Firm Bae, Kim & Lee and 1 other, Counsel for plaintiffs- appellants).

【Defendant-Appellee】 DongKuk Industries Co., Ltd. (Attorney Lee Young-soo, Counsel for defendant-appellee).

【Court of First Instance】 Seoul District Court Judgment 96Gahap51993 delivered on December 3, 1997

【Court of Second Instance】 Seoul Hight Court Judgment 98Na 5908 delivered on June 23, 1999

【Disposition】 All appeals shall be dismissed. All costs of appeal shall be assessed against the plaintiff-appellant.

【Reasoning】 1. On the first ground for appeal

The court below, based on the evidence presented, acknowledged the facts disclosed in the trial, and, with respect to the plaintiffs' claim for damages for the defendant's failure to perform contractual obligations, has held that: in a large-scale government-initiated construction project with a high construction cost and an expansive construction period, all terms and conditions regarding the specific preliminary work for and the implementation of the construction project and the payment method for the construction cost as well as the amount of the construction cost are essential to the construction contract, a construction contract can be deemed to have been executed only when there exists an agreement on the specific conditions for the construction project as well as on the construction cost; therefore, a construction subcontract should not be deemed to have been executed solely based on the facts that defendant DongKuk Industries Co., Ltd.(hereinafter referred to as the "defendant company") provided the plaintiffs with the statement of estimated construction cost several times and that the plaintiffs subsequently participated in a bidding sponsored by the Office of Supply or drafted, signed and delivered to the defendant company an instrument purported to be a subcontract. From our examination of the records, we conclude that the court below properly made the findings of the foregoing facts and that there was no violation of the rules of evidence or an incomplete trial on the part of the court below.

Further, considering the facts properly admitted by the court below, we conclude that no contractual relationship should be deemed to have been formed between the plaintiffs and the defendant company merely based on the fact that the defendant company submitted documents such as the statement of estimated construction cost and the letter of undertaking, because, in a large-scale subcontract construction project with the estimated construction cost amounting to tens of billions of won and the construction period lasting for as many as 14 months, an interpretation true to the actual intentions of the parties hereto would be that a meeting of the minds to be bound by a contract may, unless extraordinary circumstances exist, be deemed to have been reached only when there exists an agreement not only as to the amount of the construction cost but also as to other material matters such as the specific preliminary work for and the implementation method of the construction project and the payment method for the construction cost, etc., the absence of which would normally make a contract invalid and unenforceable. The negotiating party's act of submitting a statement of estimated construction cost to the other party for the purpose of executing a subcontract may normally be viewed as a method of business activities employed to solicit a subcontract order from a potential contractor that can be understood as a preliminary negotiating activity or the inducement of an offer. The letter of undertaking submitted by the defendant company together with the statement of estimated construction cost in this case was, on its face, an expression of its intention to perform the construction work within the the amount of the construction cost indicated in its initial statement of estimated construction cost should the subcontract be signed. Likewise, the letter of guarantee for performance of the subcontract was submitted to the plaintiffs merely as part of its effort to win a subcontract as a means to induce an offer, to the effect that it would guarantee the performance of the subcontract under such letter of guarantee for the performance of the subcontract should it successfully win a subcontract award. Therefore, a construction subcontract cannot be deemed to have been formed between the plaintiffs and the defendant company merely because the defendant company submitted to the plaintiffs certain instruments including the statement of estimated construction cost and the letter of undertaking.

We conclude that the judgment of the court below on the same foregoing grounds is reasonable and justified and there is no reversible error in matters of law as to the formation of a subcontract. Therefore, the relevant part of the ground for appeal has no merit.

2. On the second, third, and forth grounds for appeal

A. With respect to the plaintiffs' claim for tort damages, the court below dismissed the evidence submitted by the plaintiffs purportedly to show that the plaintiffs first decided to forego bidding for the fourth section of the subject construction project yet the plaintiffs subsequently participated in the bidding upon receiving the statement of estimated construction cost from the defendant company by calculating the bidding price based on the defendant company's estimated construction cost, as no other evidence supports the plaintiffs' allegations as such while the admitted evidence shows the following facts: The plaintiffs, prior to the plaintiffs' receipt of the statement of estimated construction cost from the defendant company and specifically on December 2, 1994, obtained a statement of estimated costs for the steel-bridge construction and the foundation construction from non-party Hyundai Heavy Industries Co., Ltd., which indicated the estimated cost for steel-bridge construction to be 60,482,418,000 won and such amount is remarkably higher than the estimated amount of 25,200 million won initially quoted by the defendant company; the defendant company did not obtain any special specifications from the plaintiffs nor did the defendant closely review cost estimation data such as the construction drawings and the statement of descriptions of construction work due to time constraint and it made a wrong construction cost estimation in a rough and hasty manner within a day by arbitrarily determining the construction cost to be approximately 1.3 million won per ton; and, it would be unreasonable to believe that the plaintiffs participated in such a large-scale bidding solely relying on the defendant company's uncredulous statement of estimated cost, considering that the plaintiffs are large companies that had previously sought for potential subcontractors to perform the steel bridge construction such as Hyundai Heavy Industries Co., Ltd. and were thus in the position to sufficiently know that the estimated cost quoted by the defendant company was unrealistically low in order to perform the subcontract construction work. From our examination of the records, we conclude that the court below's findings and rulings above were properly made, and were free of errors of violating the rules of evidence or experience in finding the facts, or the lack of justifiable reasons, or violating the principles of reason as asserted as the ground for appeal. Accordingly, the relevant part of the ground for appeal has no merit.

B.Where one party, during the preliminary stage of negotiations, caused the other party to reasonably expect or justifiably believe that the first party would definitely enter into a contract with the second party, and the second party acted on such belief and reliance, yet the the first party refused to enter into a contract without any reasonable cause thereby incurring damage to the second party, such refusal constitutes a tort as a wrongful act beyond the boundaries of the principle of the freedom of contract in light of the equitable principle of good faith.

Pursuant to the facts acknowledged by the court below, it is admitted that the plaintiffs were provided by the defendant company a letter of undertaking and a letter of guarantee for performance of subcontract as well as the statement of estimated construction cost, immediately prior to the plaintiffs' participation in bidding. However, since submission of a statement of estimated construction cost merely represents the inducement for an offer for the contract and the letter of undertaking submitted by the defendant company at the request of the plaintiffs did not have any special legal meaning in its contents as discussed above, it would be unreasonable if the submission and receipt of these documents in and by itself caused the plaintiffs to reasonably expect or justifiably believe that the subcontract would be certainly executed. Further, according to the relevant court records, the plaintiffs were not in a position to rely solely on the information derived from the defendant company's statement of estimated construction cost when it participated in bidding, because the plaintiffs were big companies specializing large-scale construction projects and, as such, possessed a sufficient level of information on the descriptions and the estimated costs of the target construction project; the plaintiffs were also able to make comparison among multiple statements of estimated construction cost submitted by various other potential subcontractors; and the plaintiffs were further in a position to obtain, without difficulty, any information on the estimated construction costs for other sections of the construction project. In addition, pursuant to Article 22, Paragraph 3 of the former Construction Business Act(amended in its entirety and renamed on December 30, 1996 as the Framework Act on the Construction Industry effective on July 1, 1997), any primary contractor who desires to subcontract part of the construction work under the main contract to other general or specialist constructors was required to obtain a written consent from its client and should be subject to a suspension of business or imposition of penalty surcharge(pursuant to Article 50, Paragraph 2 of the same Act) or criminal punishment(pursuant to Article 62, Paragraph 3 of the same Act) should it breach these consent requirements. Under the main contract between the plaintiffs and the client in this case, it has been admitted that, in order for the plaintiffs to obtain such written consent, the plaintiffs were to ensure that a potential subcontractor should be subject to and pass an on-site inspection for the construction capacity assessment conducted by the board of supervisors. Under the totality of the foregoing facts and circumstances, the plaintiffs who intended to participate in the bidding for a large-scale construction project the cost of which amounted to tens of billions of won may reasonably be assumed to have participated in the bidding by deciding the bidding price based upon a business judgment for their own profit through the calculation of possible profit and loss, the plaintiffs may have been able to pursue and execute another subcontract with those with a construction capacity superior to that of the defendant company and offering a lower construction cost after the plaintiffs won the bidding, and the plaintiffs may reasonably be assumed to have sufficiently expected to search for other potential subcontractors or to directly perform if necessary the construction project without subcontractors should the defendant company fail to obtain the approval from the plaintiffs' client due to its deficient construction capacity. Based on the foregoing, it cannot be deemed that the plaintiffs acted on a reasonable and justifiable expectation or belief that a subcontract would certainly be executed by and between the plaintiffs and the defendant company when the plaintiffs participated in the bidding for the subject construction project

Furthermore, according to the relevant court records, although the negotiation for the subject subcontract lasted for a period of approximately 11 months commencing on December 7, 1994 when the plaintiffs received a statement of estimated construction cost from the defendant company, through approximately November of 1995 when the negotiation practically came to a rupture, the actual negotiation started around May of 1995, yet the date for the ground-breaking for the steel bridge construction that was a subject matter of the subcontract was indicated in the main contract to be April 29 of the same year while the team of supervisors conducted on-site due diligence on the defendant company's factory twice during the negotiation period respectively on May 10 and June 10 of the same year. Besides, as the above steel-bridge construction project was of a large scale and the methods of manufacturing and installing the steel bridge were specified in the main contract, the defendant company and the plaintiffs would have needed to reach an agreement on a variety of special conditions for the execution of a subcontract, and it is admitted that, during such negotiation, the defendant company and the plaintiffs failed to reach an agreement since the defendant company could not guarantee the profitability of the subcontract construction if it were to accept the construction cost and the conditions suggested by the plaintiffs. Therefore, the defendant company's refusal to conclude a subcontract may not be deemed to have been without justifiable ground, nor does the negotiation period as indicated above appear to be unreasonably long in light of the foregoing facts and circumstances. Moreover, even if the defendant company failed to inform at the beginning of the negotiation the plaintiffs that it would be factually impossible to perform the construction work at the cost quoted by the defendant company in its statement of estimated construction cost initially submitted to the plaintiffs, the defendant company would have been able to increase the estimated construction cost in the course of further negotiation process or conclude a subcontract with other more favorable conditions. Based on the foregoing, the defendant company's refusal to execute a subcontract may not be deemed as wrongful or unlawful.

Although the court below does not satisfactorily state the rationale for its judgment to the full extent, we conclude that its judgment is justified in rejecting the plaintiffs' assertions on the grounds that the defendant company may not be deemed to have caused or fostered the plaintiffs to reasonably expect or justifiably believe that the subcontract would certainly be executed and that the defendant company's refusal to execute a subcontract with the conditions as requested by the plaintiff may not constitute a tort. Therefore, the relevant point of the ground for appeal has no merit.

C. The court below rejected the relevant part of the ground for appeal because the facts that would constitute the alleged tort cause of action could not be properly acknowledged. Such ruling by the court below was not a dismissal of the plaintiffs' claim due to the lack of proof on the amount of damages arising out of the detrimental reliance as the amount of tort damages for the alleged tort cause of action was limited to the compensation for the benefit from such reliance notwithstanding the acknowledged and proven facts constituting the alleged tort. Thus, as this part of the ground for appeal was based on the incorrect premise, the court below erred in misinterpreting the principles of law pertaining to the amount of damages, in incompletely reviewing and in failing to exercise the court's right to explain. Accordingly, the asserted amount of damages and the proof thereof are groundless.

3. In light of the foregoing, all appeals shall be dismissed and all costs of appeal shall be assessed against the losing party. This decision is delivered with the assent of all Justices who reviewed the appeal. It is so ordered per Disposition.

Justices Son Ji-yol(Presiding Justice)

Song Jin-hun

Yoon Jae-sik(Justice in charge)

Lee Kyu-hong

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