{"id":274,"date":"2025-10-11T07:18:48","date_gmt":"2025-10-11T07:18:48","guid":{"rendered":"https:\/\/atlaw.kr\/en-blog\/?p=274"},"modified":"2026-08-18T12:10:15","modified_gmt":"2026-08-18T12:10:15","slug":"how-to-set-liquidated-damages-in-contracts-in-south-korea-complete-guide-atlas-legal","status":"publish","type":"post","link":"https:\/\/atlaw.kr\/en-blog\/how-to-set-liquidated-damages-in-contracts-in-south-korea-complete-guide-atlas-legal\/","title":{"rendered":"How to Set Liquidated Damages in Contracts in South Korea? Complete Guide | Atlas Legal"},"content":{"rendered":"<p><!--  -->\n\n\n<!--  --><br \/>\n<!-- ATLAS_SEO_BLOCK_START --><br \/>\n<script type=\"application\/ld+json\">{\"@context\":\"https:\/\/schema.org\",\"@type\":\"Article\",\"headline\":\"How to Set Liquidated Damages in Contracts in South Korea? Complete Guide\",\"description\":\"Comprehensive guide to liquidated damages in Korean contracts: rates, caps, penalties vs. liquidated damages, and dispute prevention strategies\",\"author\":{\"@type\":\"Person\",\"@id\":\"https:\/\/atlaw.kr\/taejin-kim\/#person\",\"name\":\"\uae40\ud0dc\uc9c4\",\"alternateName\":\"Taejin Kim\",\"jobTitle\":\"\ub300\ud45c\ubcc0\ud638\uc0ac (Managing Partner)\",\"worksFor\":{\"@id\":\"https:\/\/atlaw.kr\/#legalservice\"}},\"publisher\":{\"@type\":\"LegalService\",\"@id\":\"https:\/\/atlaw.kr\/#legalservice\",\"name\":\"\ubc95\ubb34\ubc95\uc778 \uc544\ud2c0\ub77c\uc2a4\",\"url\":\"https:\/\/atlaw.kr\"},\"datePublished\":\"2025-10-11\",\"dateModified\":\"2026-05-03\",\"@id\":\"https:\/\/atlaw.kr\/en-blog\/how-to-set-liquidated-damages-in-contracts-in-south-korea-complete-guide-atlas-legal#article\",\"inLanguage\":\"en\",\"mainEntityOfPage\":{\"@type\":\"WebPage\",\"@id\":\"https:\/\/atlaw.kr\/en-blog\/how-to-set-liquidated-damages-in-contracts-in-south-korea-complete-guide-atlas-legal#webpage\"},\"about\":[\"Korean liquidated damages\",\"Korean Civil Act Article 398\",\"Penalty clause vs liquidated damages\",\"Reasonableness review by Korean courts\",\"Damage estimation in contracts\"]}<\/script><br \/>\n<script type=\"application\/ld+json\">{\"@context\":\"https:\/\/schema.org\",\"@type\":\"FAQPage\",\"@id\":\"https:\/\/atlaw.kr\/en-blog\/how-to-set-liquidated-damages-in-contracts-in-south-korea-complete-guide-atlas-legal#faqpage\",\"inLanguage\":\"en\",\"mainEntity\":[{\"@type\":\"Question\",\"name\":\"How are liquidated damages calculated in South Korea?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"Liquidated damages are calculated using the formula: Contract Amount \u00d7 Days of Delay \u00d7 Liquidated Damages Rate. For example, for a 10 million KRW contract with 15 days of delay at a 0.075% rate: 10,000,000 KRW \u00d7 15 days \u00d7 0.075% = 112,500 KRW.\"}},{\"@type\":\"Question\",\"name\":\"What liquidated damages rates are standard in South Korea?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"Under the Enforcement Rules of the Act on Contracts to Which the State is a Party (Article 75), standard rates are: Construction 0.05%, Manufacturing\/Purchasing 0.075%, Services 0.125%. These rates are widely accepted in private contracts as fair and reasonable standards.\"}},{\"@type\":\"Question\",\"name\":\"Should we set a cap on liquidated damages?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"Yes, it is strongly recommended. Without a cap, liquidated damages can exceed the contract amount in cases of long delays. The standard cap under Korean law is 30% of the contract amount, which provides a reasonable balance between protecting creditors and ensuring predictability for debtors.\"}},{\"@type\":\"Question\",\"name\":\"What is the difference between penalties and liquidated damages in South Korea?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"Under Article 398(2) of the Korean Civil Act, courts can reduce liquidated damages if they are deemed excessive. However, if the parties explicitly agree to designate them as a 'penalty', court reduction is not permitted. 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font-size: 14px; } .author-detail { clear: both; font-size: 13px; line-height: 1.55; margin-top: 8px; margin-bottom: 1px; } .author-detail ~ .author-detail { clear: none; margin-top: 2px; } .author-link { clear: both; display: block; font-size: 13px; margin-top: 8px; } p.closing { font-size: 14px; } }<\/style>\n<style>\/* ATLAS legacy-content classes (migrated old format) -- gray boxes on white *\/ .direct-answer{background:#f5f5f5;border:1px solid var(--rule);border-radius:8px;padding:20px 24px;margin:0 0 24px;font-weight:500;color:var(--text);line-height:1.8;} .story-hook{background:#f5f5f5;border:1px solid var(--rule);border-radius:8px;padding:18px 22px;margin:0 0 22px;} .story-hook p{font-size:17px;color:var(--text);line-height:1.75;margin:0;} .story-detail{background:#f5f5f5;border:1px solid var(--rule);border-radius:8px;padding:22px 24px;margin:24px 0;} .story-detail h3{margin-top:0;} .statute-box{background:#f5f5f5;border:1px solid var(--rule);border-radius:8px;padding:18px 22px;margin:18px 0 22px;font-size:16px;line-height:1.7;} .statute-box .statute-title{font-weight:700;color:var(--navy);font-size:16px;margin-bottom:8px;display:block;} .statute-box .statute-text{color:var(--text);font-size:16px;margin:0;line-height:1.7;white-space:pre-line;} .statute-box .statute-text + .statute-title{margin-top:12px;} .statute-box .statute-source-title{font-weight:700;color:var(--muted);font-size:14px;margin-top:14px;margin-bottom:4px;display:block;} .statute-box .statute-source-text{color:var(--muted);font-size:14px;margin:0;line-height:1.5;font-style:italic;} .disclaimer{font-size:15px;color:var(--muted);font-style:italic;margin-bottom:15px;} figure{margin:24px 0;}figure img{max-width:100%;height:auto;border-radius:8px;} figcaption{font-size:13.5px;color:var(--muted);text-align:center;margin-top:8px;} @media (max-width:640px){.story-hook p,.statute-box{font-size:14px;}}<\/style>\n<div class=\"content\">\n<div class=\"hero\">\n<div class=\"hero-title\">How to Set Liquidated Damages in Contracts in South Korea? Complete Guide | Atlas Legal<\/div>\n<div class=\"hero-meta\">\n<div class=\"hero-info\">\n      <strong>Taejin Kim<\/strong> \u00b7 Managing Partner, Atlas Legal\n    <\/div>\n<\/div>\n<\/div>\n<div class=\"toc-nav\">\n<p class=\"toc-label\">Contents<\/p>\n<ol>\n<li><a href=\"#section1\">1. What are liquidated damages and why are they necessary?<\/a><\/li>\n<li><a href=\"#section2\">2. How are liquidated damages calculated?<\/a><\/li>\n<li><a href=\"#section3\">3. What standards should be used to set liquidated damages rates?<\/a><\/li>\n<li><a href=\"#section4\">4. Why should we set a cap on liquidated damages?<\/a><\/li>\n<li><a href=\"#section5\">5. What is the difference between penalties and liquidated damages?<\/a><\/li>\n<li><a href=\"#section6\">6. How should liquidated damages be applied by industry?<\/a><\/li>\n<li><a href=\"#section7\">7. What should be reviewed when drafting contracts?<\/a><\/li>\n<li><a href=\"#section8\">8. How can liquidated damages disputes be prevented?<\/a><\/li>\n<li><a href=\"#section9\">9. FAQ<\/a><\/li>\n<\/ol><\/div>\n<div class=\"related-links\">\n<h3>Related Contents<\/h3>\n<ul>\n<li><a style=\"text-decoration:none\" href=\"https:\/\/atlaw.kr\/en-blog\/category\/corporate\/contract-review\/\">Contract Drafting Services &#8211; Atlas Legal<\/a><\/li>\n<li><a style=\"text-decoration:none\" href=\"https:\/\/atlaw.kr\/en-blog\/category\/corporate\/corporate-counseling\/\">Corporate Advisory Services in South Korea<\/a><\/li>\n<\/ul><\/div>\n<div class=\"lead-text\">\n<p><strong>\ud83d\udccc Real Case:<\/strong> An IT startup (Company A) in Songdo, Incheon, South Korea entered into a 100 million KRW e-commerce platform development contract with a development company (Company B). The contract included a liquidated damages clause but no cap. Company B delayed development for over a year, and the calculated liquidated damages reached 120 million KRW. Company B faced a situation where even after completing the development, they would have to pay an additional 20 million KRW to Company A. When they consulted Atlas Legal, it was already too late. How could this have been prevented?<\/p>\n<\/p><\/div>\n<div class=\"direct-answer\">\n            <strong>Key Answer:<\/strong> Liquidated damages are calculated as &#8216;Contract Amount \u00d7 Days of Delay \u00d7 Liquidated Damages Rate&#8217;. Under Article 75 of the Enforcement Rules of the Act on Contracts to Which the State is a Party in South Korea, standard rates are: Construction 0.05%, Manufacturing\/Purchasing 0.075%, Services 0.125%. To prevent excessive liquidated damages, it is common to set a cap of 30% of the contract amount. To prevent court reduction, parties can explicitly designate the clause as a &#8216;penalty&#8217; rather than liquidated damages. Atlas Legal has recently reviewed numerous contracts and prevented disputes by analyzing the appropriateness of liquidated damages clauses.\n        <\/div>\n<div class=\"story-detail\">\n<h3>Why did this happen?<\/h3>\n<p>Company A and Company B used a standard contract template found online without attorney review. The liquidated damages rate was set at 0.3%, but there was no provision regarding a cap. Company B initially progressed smoothly, but the schedule was repeatedly delayed due to the departure of key developers and repeated requirement changes. When Atlas Legal conducted a post-incident analysis, we found three critical flaws in the contract. First, the absence of a liquidated damages cap created unlimited liability. Second, there was no procedure for schedule adjustment in response to requirement changes. Third, the force majeure exemption clause was unclear. If they had consulted Atlas Legal before contract execution, we could have applied the standards from the Act on Contracts to Which the State is a Party (liquidated damages rate of 0.075%, cap of 30% or 30 million KRW), included automatic schedule adjustment clauses for requirement changes, and protected both parties. We will now explain everything about liquidated damages clauses in contracts based on our practical experience.<\/p>\n<\/p><\/div>\n<p><\/p>\n<h2 id=\"section1\">1. What are liquidated damages and why are they necessary?<\/h2>\n<h3>Legal Concept of Liquidated Damages<\/h3>\n<p>Liquidated damages are compensation paid by a debtor to a creditor when contractual obligations are not fulfilled within the agreed timeframe. Article 398 of the Korean Civil Act provides that &#8220;damages for nonperformance shall be limited to ordinary damages,&#8221; while allowing parties to predetermine the amount of damages. This is called &#8216;liquidated damages,&#8217; which represents predetermined compensation for delay in performance.<\/p>\n<h3>Why Liquidated Damages Clauses Are Essential<\/h3>\n<p>There are three main reasons why liquidated damages clauses are essential in practice. First, they solve the difficulty of proving damages. Under the Civil Act, to claim damages, the creditor must prove the occurrence and amount of damages. In reality, it is very difficult to accurately calculate and prove damages caused by contract delays. Second, they prevent disputes. Since the amount of damages payable in case of delay is clear, debtors become more careful about performing on time, and creditors can receive compensation without the burden of separate proof, reducing disputes. Third, they enhance contract predictability. Both parties can predict the costs that will arise in case of delay at the time of contract execution, facilitating risk management.<\/p>\n<h3>Atlas Legal&#8217;s Practical Experience<\/h3>\n<p>Atlas Legal has reconfirmed the importance of liquidated damages clauses while reviewing contracts for companies in the Songdo International Business District. One manufacturing company had no liquidated damages clause in their equipment supply contract and, despite a 6-month delay, could not receive even 1 KRW in compensation because they could not prove actual damages. In contrast, another company with an appropriate liquidated damages clause in a contract of the same amount received compensation immediately without any dispute. Based on this experience, Atlas Legal strongly recommends including liquidated damages clauses in all contracts.<\/p>\n<p><\/p>\n<h2 id=\"section2\">2. How are liquidated damages calculated?<\/h2>\n<h3>Liquidated Damages Calculation Formula<\/h3>\n<p>Liquidated damages are calculated using the following simple formula:<\/p>\n<div class=\"calculation-box\">\n            <strong>Liquidated Damages = Contract Amount \u00d7 Days of Delay \u00d7 Liquidated Damages Rate<\/strong>\n        <\/div>\n<p>Looking at each element of this formula, the contract amount refers to the total agreed price, and whether VAT is included depends on the contract. Days of delay are calculated from the day after the agreed performance date to the actual performance date, including both days. The liquidated damages rate is agreed upon by the parties and is generally expressed on a daily basis.<\/p>\n<h3>Specific Calculation Example<\/h3>\n<p>Let&#8217;s use the e-commerce platform development contract mentioned earlier as an example. If the contract amount is 10 million KRW and the liquidated damages rate is set at 0.075% (the standard under the Act on Contracts to Which the State is a Party), the calculation for a 15-day delay is as follows:<\/p>\n<div class=\"calculation-box\">\n<p><strong>Liquidated Damages Calculation Example<\/strong><\/p>\n<p>Contract Amount: 10,000,000 KRW<\/p>\n<p>Days of Delay: 15 days<\/p>\n<p>Liquidated Damages Rate: 0.075% (0.75 per thousand)<\/p>\n<p>Liquidated Damages = 10,000,000 KRW \u00d7 15 days \u00d7 0.075% = 112,500 KRW<\/p>\n<\/p><\/div>\n<p>If the delay period is 100 days, the liquidated damages become 750,000 KRW (10,000,000 KRW \u00d7 100 days \u00d7 0.075%), and if 400 days, they become 3,000,000 KRW. As the delay period lengthens, liquidated damages increase exponentially, which further highlights the importance of setting a cap.<\/p>\n<h3>Calculation Precautions<\/h3>\n<p>Common disputes in practice regarding liquidated damages calculation involve whether VAT is included and the starting point. Atlas Legal recommends clearly stating in contracts whether &#8220;the contract amount includes VAT&#8221; or &#8220;VAT is separate,&#8221; and clearly specifying the starting point for liquidated damages as &#8220;from the day following the performance date.&#8221; Whether to include holidays and weekends should also be specified to prevent disputes. Generally, the principle is to calculate based on calendar days including holidays and weekends.<\/p>\n<p><\/p>\n<h2 id=\"section3\">3. What standards should be used to set liquidated damages rates?<\/h2>\n<h3>Liquidated Damages Rate Standards under the Act on Contracts to Which the State is a Party<\/h3>\n<p>While liquidated damages rates can be freely determined by the parties, when an objective and reasonable standard is needed, it is common to use the standards from Article 75 of the Enforcement Rules of the Act on Contracts to Which the State is a Party (hereinafter &#8216;State Contracts Act&#8217;). These standards have been applied in public contracts for a long time and are recognized for their fairness and reasonableness, making them widely used in private contracts as well.<\/p>\n<table>\n<thead>\n<tr>\n<th>Contract Type<\/th>\n<th>Rate (per thousand)<\/th>\n<th>Actual Percentage<\/th>\n<th>Application Examples<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Construction<\/td>\n<td>0.5<\/td>\n<td>0.05%<\/td>\n<td>Building, facility construction<\/td>\n<\/tr>\n<tr>\n<td>Manufacturing\/Purchasing<\/td>\n<td>0.75<\/td>\n<td>0.075%<\/td>\n<td>Machinery manufacturing, goods purchase<\/td>\n<\/tr>\n<tr>\n<td>Repair\/Processing\/Rental, Services<\/td>\n<td>1.25<\/td>\n<td>0.125%<\/td>\n<td>Software development, consulting<\/td>\n<\/tr>\n<tr>\n<td>Military Food Products<\/td>\n<td>1.5<\/td>\n<td>0.15%<\/td>\n<td>Food supply<\/td>\n<\/tr>\n<tr>\n<td>Transportation\/Storage\/Grain Processing<\/td>\n<td>2.5<\/td>\n<td>0.25%<\/td>\n<td>Logistics, warehousing<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h3>Rationale for Differentiated Rates<\/h3>\n<p>The reason the State Contracts Act differentiates liquidated damages rates by contract type is that the nature of contracts and the magnitude of damages from delays differ. The Supreme Court of Korea&#8217;s judgment (2001Da53059, December 11, 2001) stated that &#8220;liquidated damages are predetermined compensation for ordinary damages arising from delay in performance,&#8221; recognizing that the magnitude of ordinary damages may differ depending on the nature of the contract. For construction, which generally takes a long time and where partial delays have limited impact on the overall project, the rate is relatively low. For services or repairs, which are scheduled for short-term completion and have greater impact when delayed, the liquidated damages rate is set higher.<\/p>\n<h3>Atlas Legal&#8217;s Negotiation Strategy<\/h3>\n<p>Atlas Legal actively utilizes State Contracts Act standards during contract review and negotiation. Most contracting parties recognize the fairness of these standards and reach agreement without much objection. However, adjustments may be necessary considering the specifics of the contract. For example, for projects with very high uncertainty like new technology development, we lower the liquidated damages rate while more clearly setting the cap. For urgent projects, we raise the liquidated damages rate but specifically enumerate force majeure exemptions to maintain balance. Atlas Legal recently negotiated an R&#038;D contract between a Songdo bio company and a research institution, reaching agreement at 0.08% (lower than the State Contracts Act standard of 0.125%) with a cap of 20%, providing both parties with satisfactory terms.<\/p>\n<p><\/p>\n<h2 id=\"section4\">4. Why should we set a cap on liquidated damages?<\/h2>\n<h3>Problems That Can Arise Without a Cap<\/h3>\n<p>Without a liquidated damages cap, theoretically liquidated damages can increase indefinitely. As seen in the earlier case, with a 0.3% rate and a 400-day delay, liquidated damages on a 100 million KRW contract reach 120 million KRW, creating the unreasonable situation where the debtor must pay money to the creditor even after fulfilling the contract. The Supreme Court of Korea&#8217;s judgment (91Da33858, April 28, 1992) stated that &#8220;when liquidated damages are unreasonably excessive, the court may reduce them,&#8221; but this remedy is only available through litigation. Considering litigation costs and time, setting a cap in advance is much more efficient.<\/p>\n<h3>Cap Standards under the State Contracts Act<\/h3>\n<p>Article 74 of the Enforcement Decree of the Act on Contracts to Which the State is a Party sets the liquidated damages cap at 30% of the contract amount. This standard is widely accepted in private contracts as well, and Atlas Legal has confirmed that most reviewed contracts follow this standard. The 30% cap is evaluated as a balance point that provides debtors with a predictable maximum loss while ensuring creditors receive substantial compensation.<\/p>\n<div class=\"highlight-box\">\n<p><strong>Practical Effects of Setting a Cap<\/strong><\/p>\n<ul>\n<li>Ensuring debtor predictability: Even in the worst case, does not exceed 30% of contract amount<\/li>\n<li>Preventing excessive liquidated damages disputes: Maintains reasonable level without litigation<\/li>\n<li>Facilitating contract negotiation: Can persuade both parties with objective standards<\/li>\n<li>Facilitating financial planning: Enables accurate calculation of maximum loss for risk management<\/li>\n<\/ul><\/div>\n<h3>Considerations When Setting Caps<\/h3>\n<p>While 30% is typical, adjustments may be necessary depending on contract characteristics. Atlas Legal recommends cap adjustments in the following cases. First, when contract performance critically affects the creditor&#8217;s business (e.g., e-commerce site development with a fixed opening date), the cap can be raised to 40-50%. Second, when technical uncertainty is very high (e.g., new technology development), lowering the cap to 20% or less is reasonable. Third, for very large contract amounts, consider setting the cap as an absolute amount rather than a percentage. For example, for a 1 billion KRW contract, if 30% equals 300 million KRW and this seems excessive, it can be set as &#8220;liquidated damages shall not exceed 100 million KRW.&#8221; Atlas Legal recently set a cap of 600 million KRW (20%) for a 3 billion KRW large-scale logistics center construction contract in Songdo, Incheon, reaching agreement between both parties.<\/p>\n<p><\/p>\n<h2 id=\"section5\">5. What is the difference between penalties and liquidated damages?<\/h2>\n<h3>Concept and Characteristics of Liquidated Damages<\/h3>\n<p>Article 398(2) of the Korean Civil Act provides that &#8220;even when the amount of damages has been predetermined, if the court deems such amount to be unreasonably excessive, it may reduce the amount.&#8221; If liquidated damages are specified in a contract but there is no separate designation as a &#8220;penalty,&#8221; they are presumed to be liquidated damages under the law. The Supreme Court of Korea&#8217;s judgment (2012Da13637, August 22, 2013) stated that &#8220;presuming them to be liquidated damages is the principle.&#8221; The key characteristic of liquidated damages is that courts can review their excessiveness and reduce them. When actual damages and the agreed liquidated damages amount are compared and found to be significantly imbalanced, courts can reduce them ex officio or based on the debtor&#8217;s claim.<\/p>\n<h3>Concept and Characteristics of Penalties<\/h3>\n<p>On the other hand, penalties exclude the application of Article 398(2) of the Civil Act, and courts cannot reduce them. The Supreme Court of Korea&#8217;s judgment (93Da24223, November 9, 1993) clearly stated that &#8220;when parties have agreed to a penalty, the reduction provision of Article 398(2) of the Civil Act does not apply.&#8221; To be recognized as a penalty, the contract must include explicit language such as &#8220;this provision shall be a penalty&#8221; or &#8220;has the nature of a penalty.&#8221; The simple title &#8220;liquidated damages&#8221; is not recognized as a penalty; the parties&#8217; intent must be clearly expressed.<\/p>\n<table>\n<thead>\n<tr>\n<th>Category<\/th>\n<th>Liquidated Damages<\/th>\n<th>Penalty<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Legal Basis<\/td>\n<td>Civil Act Article 398(1)<\/td>\n<td>Special agreement by parties<\/td>\n<\/tr>\n<tr>\n<td>Court Reduction<\/td>\n<td>Possible (Article 398(2))<\/td>\n<td>Not possible<\/td>\n<\/tr>\n<tr>\n<td>Proof of Damages<\/td>\n<td>Not required (presumed)<\/td>\n<td>Not required (irrelevant to damages)<\/td>\n<\/tr>\n<tr>\n<td>Application Principle<\/td>\n<td>Presumed without separate agreement<\/td>\n<td>Explicit agreement required<\/td>\n<\/tr>\n<tr>\n<td>Advantage to Creditor<\/td>\n<td>Medium<\/td>\n<td>High<\/td>\n<\/tr>\n<tr>\n<td>Advantage to Debtor<\/td>\n<td>High (possibility of reduction)<\/td>\n<td>Low<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h3>Selection Strategy in Practice<\/h3>\n<p>From the client&#8217;s (creditor&#8217;s) perspective, penalty agreements are advantageous. Without the possibility of court reduction, liquidated damages can be received with certainty, providing strong performance pressure on the debtor. Atlas Legal recommends penalty agreements when project success is critically dependent on delivery deadlines (e.g., online shopping malls that must open for a specific season, facilities that must be completed by a scheduled event date). However, the liquidated damages rate and cap must be set at reasonable levels to obtain the counterparty&#8217;s consent. From the contractor&#8217;s (debtor&#8217;s) perspective, liquidated damages are advantageous because they have room to request court reduction in case of unexpectedly long delays. The Supreme Court of Korea&#8217;s judgment (2001Da46216, August 23, 2002) significantly reduced liquidated damages in a case where actual damages were only about 30% of the liquidated damages. Atlas Legal advises contractors to avoid penalty agreements for projects with high technical uncertainty or heavily dependent on external factors, instead using liquidated damages with a clearly set cap. Atlas Legal recently mediated a system development contract between a Songdo AI startup and a financial institution, where the client wanted a penalty but the contractor insisted on liquidated damages, creating a standoff. We reached a compromise by using liquidated damages with a higher rate (0.15%) but a lower cap (20%). This case provided sufficient compensation to the client while offering extreme risk avoidance to the contractor.<\/p>\n<div class=\"warning-box\">\n<p><strong>\u26a0\ufe0f Precautions for Penalty Agreements<\/strong><\/p>\n<p>When agreeing to penalties, the liquidated damages rate and cap must be set very carefully, as court reduction is impossible. Excessive penalty agreements may cause the counterparty to refuse contract execution altogether, and even if executed, can become a source of relationship deterioration in the future. Atlas Legal recommends that penalty agreements must be within State Contracts Act standards, with caps set at 30% or less.<\/p>\n<\/p><\/div>\n<p><\/p>\n<h2 id=\"section6\">6. How should liquidated damages be applied by industry?<\/h2>\n<h3>IT and Software Development<\/h3>\n<p>IT projects can fall under &#8216;services&#8217; or &#8216;manufacturing&#8217; according to the State Contracts Act. Simple website creation or customization of existing software is typically classified as &#8216;services&#8217; (0.125%), while developing new software is classified as &#8216;manufacturing&#8217; (0.075%). While reviewing contracts for numerous IT companies in Songdo, Atlas Legal has confirmed that most apply 0.075% with a 30% cap. The characteristics of IT projects are high technical complexity and the possibility of requirement changes. Therefore, Atlas Legal recommends including the following clauses. First, an automatic schedule extension clause for requirement changes: &#8220;When additional work arises due to the client&#8217;s requirement changes, the parties shall negotiate and adjust the schedule, calculating liquidated damages based on the adjusted schedule.&#8221; Second, stage-by-stage inspection clause: &#8220;Complete inspection at each stage before proceeding to the next stage, and delays in inspection shall not be deemed the contractor&#8217;s fault.&#8221; Third, force majeure exemption clause: &#8220;Delays due to natural disasters, war, infectious diseases, insufficient client-provided materials, or third-party service failures shall be excluded from liquidated damages calculation.&#8221;<\/p>\n<h3>Construction<\/h3>\n<p>Construction projects typically apply 0.05%. Construction generally takes a long time and is heavily influenced by external factors such as weather, permits, and material supply, which is why a relatively low liquidated damages rate is applied. The Supreme Court of Korea&#8217;s judgment (2012Da86895, May 14, 2015) stated that &#8220;in construction contracts, delays due to force majeure circumstances such as natural disasters or delays in administrative actions by competent authorities are frequent, so reasonable liquidated damages rates considering these should be applied.&#8221; When reviewing construction contracts, Atlas Legal always checks the following. First, schedule extension clause based on weather conditions: &#8220;When work is impossible due to continuous rain for 3 days or more, or extreme cold or heat, the schedule shall be automatically extended by the corresponding number of days.&#8221; Second, permit delay exemption clause: &#8220;If permits the client agreed to obtain are delayed, that period shall be excluded from days of delay.&#8221; Third, schedule adjustment clause for design changes: &#8220;When additional construction arises due to the client&#8217;s design change requests, the parties shall negotiate and adjust the schedule.&#8221; Atlas Legal recently experienced a case where a small construction company in Songdo nearly bore the full liquidated damages when construction was delayed 6 months due to repeated client design changes, but there was no provision for this in the contract. Through our legal review applying Article 400 of the Civil Act (comparative negligence), we obtained a 70% reduction in liquidated damages.<\/p>\n<h3>Manufacturing<\/h3>\n<p>Manufacturing applies 0.075%. Contracts to manufacture and deliver machinery, equipment, parts, etc. fall under this category. The characteristic of manufacturing is being affected by raw material supply conditions and subcontractor delivery schedules. When reviewing manufacturing contracts, Atlas Legal recommends the following. First, raw material procurement delay exemption clause: &#8220;When raw material procurement is delayed due to circumstances beyond the contractor&#8217;s control such as natural disasters, war, strikes, or raw material production cessation, that period shall be excluded from days of delay.&#8221; Second, client inspection delay exemption clause: &#8220;When the contractor completes the product and requests inspection but inspection is delayed due to the client&#8217;s circumstances, the inspection request date shall be deemed the delivery date.&#8221; Third, linking with staged advance payment clause: &#8220;When the client&#8217;s advance payment is delayed, the delivery date shall be automatically extended by the corresponding period&#8221; to encourage the client to also comply with agreements.<\/p>\n<h3>Services and Consulting<\/h3>\n<p>Services and consulting typically apply 0.125%. This includes not only repair, processing, and rental of goods, but also knowledge-based services such as legal, accounting, and management consulting. The characteristic of services is that completion is scheduled within a relatively short period, and delays cause significant damage to clients. For example, if due diligence services for a company preparing for listing are delayed, the entire listing schedule can be disrupted, causing enormous damage. Atlas Legal considers the following in service contracts. First, client cooperation obligation clause: &#8220;The client must promptly provide materials and information requested by the contractor, and delays due to non-provision shall not be deemed the contractor&#8217;s fault.&#8221; Second, interim report and feedback clause: &#8220;The contractor shall regularly report interim results and receive the client&#8217;s feedback, and feedback delay periods shall be excluded from days of delay.&#8221; Atlas Legal recently handled a case where a due diligence contract between an accounting firm and a client was delayed by 3 weeks due to the client&#8217;s delay in providing materials, but because the contract had a clear provision, the accounting firm did not bear liquidated damages.<\/p>\n<p><\/p>\n<h2 id=\"section7\">7. What should be reviewed when drafting contracts?<\/h2>\n<h3>Liquidated Damages Clause Checklist<\/h3>\n<p>The following are the liquidated damages-related checkpoints that Atlas Legal always confirms when reviewing contracts:<\/p>\n<div class=\"highlight-box\">\n<p><strong>10 Essential Checkpoints<\/strong><\/p>\n<ol>\n<li><strong>Existence of liquidated damages clause:<\/strong> Immediately recommend revision for contracts without any liquidated damages provision<\/li>\n<li><strong>Specification of rate:<\/strong> Clear numerical specification such as &#8220;0.75 per thousand&#8221; or &#8220;0.075%&#8221;<\/li>\n<li><strong>Cap setting:<\/strong> Specify upper limit such as &#8220;capped at 30% of contract amount&#8221;<\/li>\n<li><strong>Calculation basis amount:<\/strong> Clarify whether VAT is included<\/li>\n<li><strong>Starting point:<\/strong> Clear starting time such as &#8220;from the day following the performance date&#8221;<\/li>\n<li><strong>Penalty vs. Liquidated Damages:<\/strong> Check for explicit language<\/li>\n<li><strong>Force majeure exemption clause:<\/strong> Enumerate specific circumstances such as natural disasters, war, infectious diseases<\/li>\n<li><strong>Client fault exemption:<\/strong> Specify material non-provision, inspection delays, etc.<\/li>\n<li><strong>Change and adjustment procedures:<\/strong> Methods for schedule adjustment when requirements change<\/li>\n<li><strong>Dispute resolution clause:<\/strong> Arbitration or court jurisdiction for liquidated damages disputes<\/li>\n<\/ol><\/div>\n<h3>Customized Clauses by Contract Type<\/h3>\n<p>Additional clauses should be included depending on the nature of the contract. Atlas Legal proposes the following customized clauses:<\/p>\n<p><strong>IT\/Software Development Contracts<\/strong><\/p>\n<ul>\n<li>Requirement change management: &#8220;Schedule adjustment after impact analysis when client makes written requirement changes&#8221;<\/li>\n<li>Stage-by-stage inspection: &#8220;Proceed to next stage after completing inspection at each milestone; exemption for inspection delays&#8221;<\/li>\n<li>Third-party service dependency: &#8220;Exemption for delays due to third-party service failures such as payment gateways, cloud services&#8221;<\/li>\n<\/ul>\n<p><strong>Construction Contracts<\/strong><\/p>\n<ul>\n<li>Weather conditions: &#8220;Automatic schedule extension for weather conditions making work impossible (heavy rain, heavy snow, extreme cold, extreme heat)&#8221;<\/li>\n<li>Permit delays: &#8220;Exemption for period when permits the client agreed to obtain are delayed&#8221;<\/li>\n<li>Design changes: &#8220;Negotiate additional schedule when client requests design changes&#8221;<\/li>\n<\/ul>\n<p><strong>Manufacturing Contracts<\/strong><\/p>\n<ul>\n<li>Raw material procurement: &#8220;Delivery adjustment when raw material supply is disrupted by force majeure&#8221;<\/li>\n<li>Advance payment linkage: &#8220;Automatic delivery extension when client fails to pay advance payment&#8221;<\/li>\n<li>Sample approval: &#8220;Sample production and approval period excluded from delivery period&#8221;<\/li>\n<\/ul>\n<h3>Documentation for Dispute Prevention<\/h3>\n<p>As important as the contract is documentation during performance. Atlas Legal recommends always documenting the following during contract performance. First, all requirement changes should be agreed upon in writing (including email). Oral agreements are difficult to prove later and are disadvantageous in disputes. Second, when requesting materials or information from the client, use methods with delivery confirmation (certified mail, email read receipt). Third, when force majeure circumstances arise, immediately notify the counterparty and collect supporting evidence (news articles, weather bureau data, government office documents). Fourth, exchange all inspection requests and approvals in writing. Many of the litigation cases handled by Atlas Legal involved parties unable to assert legitimate rights due to insufficient documentation. In particular, a Songdo manufacturing company had delivery delayed by one month due to the client&#8217;s advance payment delay but bore the full liquidated damages because they did not notify this in writing or document it.<\/p>\n<p><\/p>\n<h2 id=\"section8\">8. How can liquidated damages disputes be prevented?<\/h2>\n<h3>Advance Risk Assessment<\/h3>\n<p>It is important to thoroughly assess project risk factors before contract execution. Atlas Legal recommends the following risk assessment procedures. First, technical difficulty assessment. If new technology is involved or unverified methods must be used, the risk of schedule delays is high, so the liquidated damages rate should be lowered or the cap clearly set. Second, external dependency assessment. If there are many uncontrollable factors such as third-party cooperation, raw material supply, or permits, exemption clauses should be specifically enumerated. Third, client cooperation necessity assessment. If the client must provide many materials, information, or decisions, these should be specified in the contract with clear effects for non-performance. Atlas Legal recently negotiated a system integration project between a Songdo fintech startup and a bank, explicitly including the bank&#8217;s internal security review period (typically 1-2 months) in the contract schedule through advance risk assessment, preventing unnecessary liquidated damages disputes.<\/p>\n<h3>Balance Adjustment During Negotiation<\/h3>\n<p>If liquidated damages clauses are made unilaterally favorable only to the creditor, the counterparty may hesitate to execute the contract, or even if executed, the relationship may deteriorate. Atlas Legal proposes the following balance adjustment strategies. First, if a high liquidated damages rate is desired, set a low cap. For example, apply a high rate of 0.2% while lowering the cap to 20% to limit the contractor&#8217;s maximum risk. Second, if agreeing to a penalty, use rates at or below State Contracts Act standards. Since court reduction is impossible, lower the rate to maintain equity. Third, establish contractor protection mechanisms for client faults. While not as much as liquidated damages, specify effects (automatic schedule extension, additional cost claims, etc.) when the client fails to provide materials or delays inspection. Atlas Legal recently mediated contract negotiations between a major retailer and a logistics system developer, where the retailer wanted 0.15% and a penalty while the developer wanted 0.05% and liquidated damages. We reached a compromise at 0.1%, liquidated damages, 25% cap, and specified client inspection deadline (automatic approval deemed if not inspected within deadline).<\/p>\n<h3>Communication During Performance<\/h3>\n<p>Transparent and frequent communication during contract performance is key to dispute prevention. Atlas Legal recommends the following. First, regular progress reports. Report progress weekly or biweekly and share anticipated delay factors in advance. Second, early warning system. If schedule delay possibilities are detected, immediately notify the client and discuss causes and countermeasures. Notifying at the last moment leaves the client no time to prepare alternatives and deteriorates the relationship. Third, document changes. Document all requirement changes, schedule adjustments, additional work, etc. in meeting minutes or emails to eliminate room for future disputes. The most common problem Atlas Legal has observed while handling liquidated damages litigation is &#8220;said it verbally but have no documents.&#8221; In a recent case, the contractor claimed to have verbally requested materials from the client but had no evidence such as emails or meeting minutes, so the court did not recognize this and ultimately bore the full liquidated damages.<\/p>\n<h3>Response Strategy When Disputes Arise<\/h3>\n<p>When liquidated damages disputes arise, respond in the following steps. First, immediately consult with an attorney to identify legal issues. Review possibilities for liquidated damages reduction, client fault claims, and force majeure application. Second, collect evidence. Secure all emails, meeting minutes, work logs, and third-party documentation (weather bureau data, delivery proof, etc.). Third, attempt negotiation. Try to negotiate liquidated damages reduction or installment payments before litigation to save both parties&#8217; costs and time. Fourth, proceed with legal procedures if negotiation fails. For liquidated damages, apply for court reduction and dispute the liquidated damages themselves by asserting client fault or force majeure. Atlas Legal recently handled a case where a small Songdo manufacturing company was charged 30 million KRW in liquidated damages, proving the client&#8217;s advance payment delay (14 days) and design changes (2 times, total 20 days required) to reduce actual days of delay by 34 days and lower liquidated damages to 9 million KRW. Additionally, by arguing that liquidated damages were excessive, we obtained further court reduction (30%) to a final payment of only 6.3 million KRW.<\/p>\n<p><\/p>\n<h2 id=\"section9\">9. FAQ<\/h2>\n<div class=\"faq-block\">\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. How are liquidated damages calculated in South Korea?<\/p>\n<p>A. Liquidated damages are calculated using the formula: Contract Amount \u00d7 Days of Delay \u00d7 Liquidated Damages Rate. For example, for a 10 million KRW contract with 15 days of delay at a 0.075% rate: 10,000,000 KRW \u00d7 15 days \u00d7 0.075% = 112,500 KRW. Days of delay are calculated from the day following the performance date to the actual performance date, generally calculated as calendar days including holidays and weekends.<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. What standards should be used to set liquidated damages rates?<\/p>\n<p>A. Under Article 75 of the Enforcement Rules of the Act on Contracts to Which the State is a Party in South Korea, standard rates are: Construction 0.05%, Manufacturing\/Purchasing 0.075%, Services 0.125%. Parties can freely set rates by agreement, but these standards are recognized as fair and reasonable. Setting rates excessively high may lead to court reduction, while setting them too low may insufficiently protect creditors.<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. Should we set a cap on liquidated damages?<\/p>\n<p>A. While not legally mandatory, it is strongly recommended to set a cap. Without a cap, liquidated damages can exceed the contract amount in case of long delays. The standard under Korean law is 30% of the contract amount, which is a balance point that ensures debtor predictability while providing sufficient compensation to creditors. Without a cap, extreme cases can create the unreasonable situation where debtors must pay money even after fulfilling the contract.<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. What is the difference between penalties and liquidated damages?<\/p>\n<p>A. Liquidated damages can be reduced by courts if deemed excessive (Civil Act Article 398(2)), but penalties agreed upon by parties cannot be reduced by courts. Creditors prefer penalties for certain performance security, while debtors prefer liquidated damages to secure reduction possibilities. To be recognized as a penalty, the contract must include explicit language such as &#8220;this provision shall be a penalty,&#8221; and the simple title &#8220;liquidated damages&#8221; is insufficient.<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. What is an appropriate liquidated damages rate for IT projects in South Korea?<\/p>\n<p>A. IT and software development typically apply the &#8216;manufacturing&#8217; standard of 0.075% under the State Contracts Act. However, for projects with high technical complexity and uncertainty, it is important to review cap settings and force majeure exemption clauses together. Additionally, procedures for schedule adjustment due to requirement changes, stage-by-stage inspection clauses, and exemption clauses for delays in client-provided materials should be included to prevent disputes.<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. What happens if there is no liquidated damages clause?<\/p>\n<p>A. Even without a liquidated damages clause, damage claims are possible under Korean Civil Act, but the creditor bears the burden of proving actual damages. Because accurately calculating and proving damages from contract delays is very difficult, it is recommended in practice to always include a liquidated damages clause. With a liquidated damages clause, predetermined amounts can be claimed without proving damages, making dispute resolution much simpler and faster.<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. Are liquidated damages waived for delays due to force majeure?<\/p>\n<p>A. If the contract has a force majeure exemption clause, the delay actually falls under force majeure circumstances, and this can be proven, liquidated damages for that period are waived. However, you must notify the counterparty immediately when force majeure circumstances arise and secure objective supporting evidence (weather bureau data, government announcements, news articles, etc.). Claims made after the fact without notification or with insufficient evidence may not be recognized by courts.<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. Must liquidated damages be paid when delayed because the client did not provide materials?<\/p>\n<p>A. If the contract has a clause stating &#8220;delays due to the client&#8217;s failure to provide materials shall be excluded from days of delay&#8221; and the contractor has evidence (email, official letter, etc.) of requesting materials in writing, that period is excluded from liquidated damages calculation. Therefore, material requests must be made in writing with specified provision deadlines. Oral requests alone are difficult to prove later and may be disadvantageous.<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. Can liquidated damages clauses in already-executed contracts be changed?<\/p>\n<p>A. If both parties agree, contract terms can be changed at any time. However, change agreements must be made in writing and stored with the original contract. Claims of &#8220;oral agreement&#8221; are difficult to prove in disputes. The amendment contract (or amendment agreement) must clearly state which provisions of the original contract are changed and how, with signatures and seals from both parties. Especially when changing liquidated damages rates or caps, the reasons for change and application timing (whether retroactive) must be clearly specified.<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. How should I respond to liquidated damages disputes?<\/p>\n<p>A. You should immediately consult with an attorney to identify legal issues. Review possibilities for liquidated damages reduction (in case of liquidated damages), client fault claims, and force majeure application. Collect all evidence including emails, meeting minutes, work logs, and third-party documentation, and attempt negotiation to reduce liquidated damages or arrange installment payments before litigation to save costs and time. Atlas Legal has extensive experience resolving such disputes and provides optimal strategies tailored to clients&#8217; situations.<\/p>\n<\/p><\/div>\n<\/p><\/div>\n<p>Atlas Legal provides various corporate legal services in Songdo, Incheon, South Korea, including contract drafting, review, and dispute resolution. Liquidated damages clauses are a core mechanism for securing contract performance, and appropriate rates and caps can balance the interests of both parties. For complex or high-value contracts, it is important to consult with experts when designing liquidated damages clauses to prevent disputes and establish reasonable contractual relationships. Atlas Legal provides fair liquidated damages design based on State Contracts Act standards, along with all practically necessary clauses including force majeure exemptions, client fault exemptions, and change management to draft dispute-free contracts.<\/p>\n<div class=\"author-box\">\n<img decoding=\"async\" class=\"author-avatar\" src=\"https:\/\/atlaw.kr\/wp-content\/uploads\/2022\/12\/\uae40\ud0dc\uc9c4-1.png\" alt=\"Taejin Kim, Managing Partner \u2014 Atlas Legal\"><\/p>\n<div class=\"author-text\">\n<div class=\"author-section-label\">About the Author<\/div>\n<div class=\"author-name\">Taejin Kim | Managing Partner<\/div>\n<div class=\"author-detail\">Corporate Counseling, Corporate Disputes, White-Collar Crime<\/div>\n<div class=\"author-detail\">Former Public Prosecutor | Judicial Research and Training Institute, 33rd Class<\/div>\n<div class=\"author-detail\">Korea University LL.B. &amp; LL.M. (Criminal Law), University of California, Davis LL.M.<\/div>\n<div class=\"author-detail\">Atlas Legal | Incheon Songdo, South Korea<\/div>\n<p><a class=\"author-link\" href=\"https:\/\/atlaw.kr\" target=\"_blank\" rel=\"noopener noreferrer\">Visit Atlas Legal Homepage \u2192<\/a>\n<\/div>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Complete guide to setting liquidated damages rates (0.05%-0.25%) and caps (30%) in South Korean contracts. Learn the difference between penalties and liquidated damages under Korean law. Atlas Legal, Songdo Incheon, Korea &#8211; atlaw.kr<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_kad_post_transparent":"default","_kad_post_title":"default","_kad_post_layout":"default","_kad_post_sidebar_id":"","_kad_post_content_style":"default","_kad_post_vertical_padding":"default","_kad_post_feature":"","_kad_post_feature_position":"","_kad_post_header":false,"_kad_post_footer":false,"_kad_post_classname":"","footnotes":""},"categories":[219,223,15,229],"tags":[257,149,254,256,255],"class_list":["post-274","post","type-post","status-publish","format-standard","hentry","category-contract-review","category-corporate-disputes","category-corporate","category-unfair-competition","tag-atlas-legal","tag-contract-drafting","tag-liquidated-damages","tag-penalty-clause","tag-south-korea"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.5 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>How to Set Liquidated Damages in Contracts in South Korea? 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