Guide to Construction Payment and Defect Disputes under Contracts for Work

Based on 74 consultation cases · Updated October 4, 2026 · Translated from the Korean original.

In disputes under contracts for work, it is important to determine whether construction was completed, what the contract and any agreements provide, and when a claim was exercised. Construction costs, contract termination, rights of retention, liability for defects, and delay damages each have different requirements and effects, so the facts and contract documents must be considered together.

People in the dispute → Owner → Contractor → Subcontractor → Construction payment or defect dispute → Does a direct payment agreement or claim assignment support the claim? → Yes → A claim or defense may be available if its specific requirements are met → No → Was the contract terminated during construction? → Is the contractor in possession of the building? → No automatic entitlement; a claim may fail or be limited → Check contract terms, fixed-price rules, and any payment agreement or assignment → Check the contract and the legal relationship between the parties → Check work completed and costs to finish → Compare actual completed-work costs with the cost to complete the remaining work → Check defects, delay, and possession → Check defect periods and Civil Act Articles 671 and 672, repair-cost defenses, delay reasons, and possession

Key points

If construction of a building has reached the final scheduled stage and is complete in the ordinary sense, the contract generally cannot be terminated if the remaining issues are merely defects. If the construction is incomplete, the requirements for termination must be considered (Case 1).
If the contract is terminated during construction, the costs attributable to the work completed may be settled. The percentage of work completed is calculated based on the actual cost of the completed portion and the cost that would be required to complete the unperformed portion (Cases 1 and 22).
Even if the contractor has not been paid for the construction work, the contractor must be in possession of the building to exercise a right of retention. The contractor may refuse to deliver the building to a purchaser at auction by exercising that right, but cannot claim the construction costs themselves from the purchaser (Cases 2 and 10).
The contractor’s duty to repair defects and the owner’s duty to pay construction costs may be subject to simultaneous performance. However, the scope of the defense may be limited depending on the circumstances—for example, where the unpaid construction costs are markedly greater than the repair costs or the defense appears to be a means of avoiding performance (Cases 13 and 23).
The period of liability for defects in a building may vary depending on the type of subject matter and when it was delivered. The cases address periods of five or ten years after delivery for buildings and other property. A contractor may remain liable for defects it knew about but did not disclose, even where the parties agreed to limit liability (Civil Act, Articles 671 and 672 (민법 제671조·제672조); Cases 9 and 18).
Under a fixed-price contract, it is difficult to claim an increase in the construction price solely because actual construction or material costs exceeded expectations. Whether an increase is available must be determined according to the contract terms (Case 15).
Delay damages for late construction must be assessed in light of the contract terms and the reasons for the delay. Ordinary rain or difficulty obtaining materials is generally unlikely to be considered grounds for exemption. However, the agreement on delay damages may be limited if the owner required a shortened construction period that was physically impossible or effectively forced the contractor to perform defective work (Cases 12 and 20).
Whether a subcontractor may claim construction costs directly from the owner depends on the specific legal relationship, such as a direct payment agreement or an assignment of the claim. The fact that the contractor and owner reached an agreement does not, by itself, always allow a direct claim (Cases 8 and 14).

Frequently asked questions

Q. If a construction contract is terminated midway through the work, can I be paid for the work already done?

If construction has progressed substantially when the contract is terminated, the construction costs attributable to the work completed may be settled. The percentage of work completed is calculated by considering both the costs of the portion already completed and the costs required to complete the remaining work.

Case 1, Case 22

Q. If I have not been paid for the construction work, can I refuse to hand over the keys to the building?

If the contractor is in possession of the building and the claim for construction costs relating to that building is due, the contractor may assert a right of retention and refuse to hand over the building. However, it is necessary to check whether ownership of the building belongs to the owner and whether the contractor is actually in possession of it.

Case 2, Case 10

Q. If I have a right of retention, can I demand payment of construction costs directly from someone who bought the building at auction?

According to the court decision described in the case, a person exercising a right of retention cannot demand payment of construction costs from a purchaser at auction. However, that person may refuse to deliver the property retained until the secured claim is paid.

Case 2

Q. If defects are discovered, can I refuse to pay the construction costs?

A claim for repair of defects or for damages in lieu of repair may be subject to simultaneous performance with the claim for construction costs. A defense may be available even if the payment for the defective portion has already been made, but its scope may be limited in light of the cost of repairing the defects and the purpose of the defense.

Case 13, Case 23

Q. If the period for liability for defects specified in the contract has expired, can I no longer make a claim?

The fact that the period has elapsed does not necessarily mean that a claim can no longer be made. The period of liability for defects in a building and when that period begins may be at issue. A contractor may also remain liable for facts it knew about but did not disclose, even if the parties agreed to limit liability.

Case 9, Case 18, Case 19

Q. If material and labor costs have risen, can I ask for the agreed construction price to be increased?

If the construction price is a fixed lump sum, it is difficult to claim an increase solely because actual costs have risen. The contract terms, including any agreement to adjust the price due to a change in design or economic conditions, should be checked.

Case 15, Case 16

Q. If I agreed to a request to shorten the construction period but completed the work late, do I have to pay delay damages?

The answer depends on the agreed construction period and the reasons for the delay. If, at the owner’s unilateral request, it was physically impossible to complete the work within the shortened period, or the request effectively forced the contractor to perform defective work, the full amount of delay damages calculated on the basis of that period may not be awarded.

Case 20

Q. Can a subcontractor claim construction costs directly from the owner?

As a rule, whether a subcontractor may claim payment from the owner depends on the contract and the relationships among the claims. A direct payment agreement among the owner, contractor, and subcontractor may allow a direct claim if it is construed as an assignment of the claim and the owner’s consent to that assignment. The amount payable may also be limited when the system for direct payment of subcontracting fees applies.

Case 4, Case 8, Case 14

Q. If we end a contract for work by mutual agreement, can I separately claim damages?

If the parties made no special agreement on damages or reserved a right to claim damages when they mutually agreed to terminate the contract for work, it is generally difficult to claim damages for breach of contract. The party asserting that such an agreement or reservation existed must prove it.

Case 11, Case 22

Relevant laws

Civil Act, Article 320(1) (민법 제320조 제1항)
Civil Act, Article 321 (민법 제321조)
Civil Act, Article 396 (민법 제396조)
Civil Act, Article 398(2) (민법 제398조 제2항)
Civil Act, Article 450 (민법 제450조)
Civil Act, Article 536 (민법 제536조)
Civil Act, Article 548(2) (민법 제548조 제2항)
Civil Act, Article 667 (민법 제667조)
Civil Act, Article 668 (민법 제668조)
Civil Act, Article 670 (민법 제670조)
Civil Act, Article 671 (민법 제671조)
Civil Act, Article 672 (민법 제672조)
Civil Act, Article 448 (민법 제448조)
Civil Execution Act, Article 56(3) and (4) (민사집행법 제56조 제3호·제4호)
Civil Execution Act, Article 91(5) (민사집행법 제91조 제5항)

Watch out for

It is necessary to distinguish between work that is incomplete and work where the final scheduled stage has been completed but defects remain. The availability of contract termination may differ depending on this distinction.
The period of liability for defects may vary depending on the subject matter and when it was delivered. In a case involving conversion to a sale after a lease, the period was calculated from the initial delivery, not from the date of conversion to a sale.
Possession of the property is important to a right of retention. If possession was transferred after the seizure arising from a decision to commence auction proceedings took effect, the right of retention may not be enforceable against others.
The terms of the contract and the agreements between the parties should be checked in detail regarding direct payment agreements, reservations of claims for damages, extensions or reductions of the construction period, and settlement of advance payments.

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Source cases

This guide was compiled by AI from the following Korea Legal Aid Corporation consultation cases (in Korean).

This guide is general legal information about Korean law, not legal advice for your situation. For a specific case, consult a lawyer or the Korea Legal Aid Corporation (call 132 in Korea).