A supply or services agreement may specify a fixed payment for delay, termination, or another breach. For an international business, the useful drafting question is what that payment covers and how it will interact with the rest of the contract if Korean law applies.

The English labels “liquidated damages” and “penalty” need to be used carefully. The Korean legal characterization depends on the substance of the arrangement, not simply the heading copied from a group template.

Agreed damages can be reduced

Article 398 of the Korean Civil Act permits parties to agree damages for non-performance in advance. It also allows a court to reduce an amount that is unduly excessive and presumes that an agreement for a breach payment is an agreement on damages. The Article separately preserves claims for performance and the right to terminate. Civil Act, Article 398.

For drafting purposes, identify the breach being covered. A daily delay amount, a payment for failing a performance test, and a termination payment may address different commercial risks. Putting them into one undifferentiated clause can make the intended allocation harder to explain.

The business team should also retain the calculation behind the figure: anticipated replacement costs, disruption, lost capacity, or other relevant consequences. A round percentage selected during negotiations may be difficult to justify later without that record.

A contractual penalty has a different legal analysis

Korean law also recognizes a contractual penalty, commonly described as wiyakbeol, intended to secure performance. The Supreme Court's July 21, 2022 en banc decision confirmed that Article 398(2)'s reduction rule is not applied by analogy to such a penalty. Exceptionally excessive penalties may nevertheless be wholly or partly invalid under the public policy rule in Article 103.

Characterization involves the agreement's terms, purpose, negotiating history, and relationship with other damages provisions. Calling a payment a penalty does not settle the issue. Supreme Court, 2018Da248855 and 2018Da248862.

The practical objective should be to express the intended remedy clearly and assess its enforceability, rather than select a label in the hope of preventing judicial scrutiny.

Five points to resolve before signing

1. Define the trigger. Identify the obligation, measurement method, relevant date, and any notice or cure process. For a performance test, specify how the result is recorded and who determines whether it has been met.

2. Explain the calculation. Decide whether the amount is fixed, accrues over time, or is capped. Check what happens if several milestones are missed.

3. State what losses it covers. Address the relationship with other damages claims, indemnities, service credits, and limitation-of-liability provisions. If additional recovery is intended, the drafting needs to be reviewed as a whole.

4. Coordinate the remedies. Explain how termination, return of payments, performance obligations, and the agreed breach payment fit together. Avoid creating overlapping payments for the same event without considering their purpose and legal effect.

5. Confirm governing law and dispute resolution. The chosen forum and governing law should be considered together. A Korean counterparty's location alone does not resolve which law governs every issue.

Keep the evidence after signature

During performance, retain acceptance records, delay notices, change requests, mitigation steps, and documents showing the commercial impact of the breach. Even with an agreed payment, those records can help establish the trigger and explain the commercial basis of the remedy.

Before sending a demand, review the entire remedies section and calculate the claim against the actual chronology. That is the point at which inconsistencies between the clause, the contract's other provisions, and the operational record become most consequential.

Related services: International Transactions and Disputes and Civil Litigation and Arbitration.

This article provides general information on Korean law as reviewed on September 29, 2026. Enforceability and available remedies depend on the contract and the facts.