KHP Must Keep Promise to Pay Settlement Funds

[Attorney Song Gi-chul, Shin Young Law Firm] The Korean Helicopter Program (KHP), initiated in 2006 with the goal of independently developing a utility helicopter, was carried out with the participation of numerous defense companies centered around three main development agencies: Korea Aerospace Industries (KAI), the Agency for Defense Development (ADD), and the Korea Aerospace Research Institute (KARI). After six years of trial and error, the "Surion" was developed. With this, Korea became the 11th country in the world to develop a helicopter and simultaneously became a nation that protects its airspace with domestically produced helicopters.

Like other large-scale weapon system research and development projects, the KHP project faced a severe shortage of budget. In May 2006, the Defense Acquisition Program Administration (DAPA) had to sign a compensation agreement (under which the government would fully reimburse the development investment costs to participating companies during mass production if the R&D succeeded) requiring participating companies to bear 20% of the R&D costs. Additionally, DAPA lacked the funds to pay 80% of the R&D costs and thus received support from the Ministry of Trade, Industry and Energy’s (then Ministry of Knowledge Economy) subsidy budget. Although contracts concluded using the Ministry’s subsidy budget were termed “agreements” at the Ministry’s request, the terms of these agreements were structured as rights and obligations based on thorough consideration of compensation, and the settlement of agreement payments followed exactly the same procedures and principles as contracts. The KHP contracts and agreements were signed in June 2006.

Subsequently, during the KHP R&D process, as it became clear through interim settlements that significant excess settlement payments had occurred for each contract and agreement, DAPA sought to secure funds to pay these excess settlements under the KHP agreements. However, additional funds were not secured. After development was completed in June 2012, post-cost settlements for the KHP contracts and agreements were conducted simultaneously.

DAPA’s cost department, through strict cost verification, confirmed the occurrence of excess settlement payments for each KHP contract and agreement and reported the post-cost settlement results to the DAPA Administrator. Of course, the KHP project team was also notified. However, unable to secure funds to pay the excess settlements, the DAPA KHP project team finally notified Korea Aerospace Industries (hereafter KAI) and the Korea Aerospace Research Institute (hereafter KARI) in December 2012 that it would not recognize settlement payments exceeding the agreement amounts.

In response, KAI and KARI each filed civil lawsuits claiming payment of excess settlement amounts amounting to hundreds of billions of won, and lower courts ruled in favor of the plaintiffs. However, in the preceding case involving KAI’s appeal, the Supreme Court overturned the lower court’s ruling and transferred the case to the Seoul Administrative Court, ruling that agreements concluded using subsidy budgets fall under public law relationships. Subsequently, the Seoul Administrative Court, emphasizing that the KHP agreements are public law contracts, dismissed KAI and KARI’s claims, differing from the civil court’s judgment. Currently, the KAI agreement case is pending before the Supreme Court, and the KARI agreement case is ongoing at the Seoul High Court.

Recently, upon reading media reports about the excess settlement lawsuits, I felt a sense of shame. The government made a clear promise to reimburse the actual costs incurred by participating companies in R&D, and despite strict government cost verification confirming excess costs, it is necessary to determine whether it is right not to pay these excess costs.

Having worked as a legal officer in charge of aviation projects at DAPA in 2009, 2012, and until 2013, and being familiar with the KHP settlement process at that time, I feel an unbearable discomfort and guilt. From the time the KHP contracts and agreements were signed in 2006 until the settlements in 2012, the DAPA legal office never judged or advised that the KHP agreements fell under public law relationships or that excess settlement payments confirmed through post-settlement did not have to be paid. On the contrary, the DAPA legal office consistently discussed that both KHP contracts and agreements were based on thorough compensation relationships and that rights and obligations should be formed accordingly. Only after lawsuits were filed did they begin to argue, as a last resort for litigation defense, that the agreements should be viewed differently because they fall under public law relationships.

At the time of the 2012 settlement, DAPA officials acknowledged the obligation to pay excess settlement amounts. However, they had no choice but to take the position that payment was impossible due to the lack of secured funds.

Furthermore, during the KHP agreement litigation process, three key officials who directly created the KHP contract and agreement terms in 2006 in consensus with development companies including KAI and KARI, and who performed agreement signing tasks in the aircraft contract team in 2006 and set the principles and standards for KHP settlement in the cost analysis team in 2012, testified in court.

All three consistently stated that “the KHP agreements, like contracts, promised to pay excess settlement amounts based on the results of post-cost settlements.” This aligns with what I knew. It is never easy for current or former public officials to testify against the government’s position. I believe they courageously spoke the truth hoping the Korean government would keep its promises.

It is not difficult to confirm through various official reports, meeting minutes, and interim settlement results that the parties to the KHP agreements had a consensus to finalize the agreement payments based on post-settlement results applying defense costs (meaning actual cost settlement). Also, the clause “limited to the project team’s approval” means that only R&D conducted with the project team’s approval is subject to settlement. Similar or identical clauses appear in KHP contracts and other weapon system R&D contracts.

Korea has a peculiar tendency to force sacrifices on companies as contracting parties in public law contracts. However, being a public law contract does not justify imposing unilateral sacrifices on companies. There are principles and standards regarding public law contracts that must not be overlooked.

First, even in public law contracts, the content of the parties’ consensus should take precedence unless it violates mandatory laws. Public law contracts are still contracts, and rights and obligations are formed based on the parties’ consensus. One cannot force companies to accept terms that were not agreed upon simply because it is a public law relationship. Otherwise, public law contracts would become symbols of unfair contracts.

Second, the trust of companies that entered contracts relying on government promises must be protected. Without such protection, the existence and maintenance of a democratic government would be meaningless. This is why promises made by the government must be upheld, especially in public law contracts.

I hope that through the judiciary’s just judgment on the KHP agreement development costs, the principles and standards of public law contracts will be newly established. If this happens, our defense companies will be able to trust the government and boldly invest and challenge themselves in weapon system R&D, thereby advancing the day when Korea achieves self-reliant national defense.