A Procurement Contract and Redemption of the Profit from any Unfair Procurement Practice
Authors:   Institute of Legal Myungji Uiversity, Kim Young-doo 
Published: February 2024

For fairness of procurement the other party to the procurement contract is obligated not to falsely submit bidding-related documents, to directly produce, to indicate the country of origin, to comply with contract standards, and to keep the contract price equal to or lower than the market transaction price. Violations of these obligations are called unfair procurement practices. In case of unfair procurement practices, the other party may be subject to sanctions such as prohibition of participating in bidding. However, it is necessary for Public Procurement Service(‘PPS’) to redeem the profits obtained from the procurement contract, because it is not reasonable to allow the other party to hold the profits from the procurement contract despite unfair procurement practices.
The PPS's special terms for the procurement contract include provisions that require profits to be redeemed if unfair procurement practices are recognized. Since the special terms are the contents of the procurement contract, the state and the other party have eventually made an agreement to return the profits obtained from the procurement contract in the event of unfair procurement practices. In accordance with these profit redemption clause, PPS has recovered the other party’s profits in cases of unfair procurement practices. However, as the court interpreted the profit redemption clause as damages for a breach of contract, it was difficult for PPS to redeem the profits if it fails to provide sufficient evidence to prove damages caused by unfair procurement practices.
The legal nature of the redemption of profits due to unfair procurement practices should not be regarded as restitution for unjust enrichment or damages for a breach of contract under civil law. If the redemption of profits is the restitution of unjust enrichment under civil law or the damages for a breach of contract, the parties to a contract do not need to make an agreement for the redemption of profits, because even if there is no clause for redemption clause, it is possible to claim the restitution of unjust enrichment or damages for a breach of contract under the civil law. A penalty clause is made when it is difficult to prove or calculate the damages caused by the breach of contract. Although it is clear that the other party to the procurement contract benefits from unfair procurement practices, it is difficult to prove the damages caused by unfair procurement practices. A redemption clause should be regarded as a penalty clause for the difficulty of proving damages. If the redemption clause is regarded as the restitution of unjust enrichment or damages for the breach of contract, PPS is unable to redeem the profits because the profits of the other party does not correspond to damages of the state. In that case the other party is able to hold the profits of the procurement contract despite unfair procurement practices. In order to prevent these results, the legal nature of the redemption clause should be recognized as a penalty clause.
Recently, “Government Procurement Act” has established a basis for the redemption of profits, and the PPS also claims the redemption clause as a penalty clause, and the court recognizes the right to claim the return of profits. Special terms for the procurement contract no longer use the expression of unjust enrichment and specify that the other party is required to pay the amount based on the calculation clause of penalties in the case of unfair procurement practices.
It is now possible to claim that the legal nature of the redemption clause is a penalty clause through the revision of the Government Procurement Act and special terms for procurement contract, and changes in precedents. From now on the focus needs to be on the category of unfair procurement practices and an elaborate calculation of the profits of the other party who has caused unfair procurement practices.