[Yang Nak-gyu's Defence Club] Daewoo Shipbuilding & Marine Engineering, Will the Highest Ever Liquidated Damages Be Imposed?

[Image source=Yonhap News]

[Asia Economy Yang Nak-gyu, Military Specialist Reporter] Daewoo Shipbuilding & Marine Engineering (DSME) is expected to be imposed with the largest delay penalty ever on a single company. Delay penalties are a type of compensation imposed when the contracting company delays delivery.

According to government officials on the 1st, DSME is constructing the first 3,000-ton class submarine (Dosan Ahn Changho). The launching ceremony was held in September 2018 at the Okpo Shipyard in Geoje, Gyeongnam Province, attended by President Moon Jae-in and the First Lady, and the commissioning ceremony was scheduled for last April.

However, delivery to the Navy has been delayed due to problems with the domestically developed torpedo decoy launcher. Considering the number of delayed days so far, the delay penalty as of the 1st is expected to exceed 90 billion KRW. The highest delay penalty imposed on a defense company to date was 186.5 billion KRW, imposed by the Defense Acquisition Program Administration (DAPA) in 2011 on Korea Aerospace Industries (KAI) for delays in the maritime patrol aircraft (P-3CK) upgrade project. However, DSME is being charged more than 40 million KRW per day, raising concerns that if the Dosan Ahn Changho is not delivered to the Navy within this month, the highest delay penalty could be imposed.

In addition, DSME was previously fined 24 billion KRW in delay penalties for the delayed delivery of the Daegu-class frigate. The 2,800-ton Daegu-class frigate was the first lead ship among the next-generation frigates to be commissioned. The contract amount was approximately 322.6 billion KRW. DSME built and delivered the Daegu-class frigate to the Navy in 2018, but DAPA imposed delay penalties, claiming the delivery deadline was not met. DSME has filed a civil lawsuit with the Seoul District Court.

Furthermore, DSME was fined 34.7 billion KRW in delay penalties due to the late delivery of the Jangbogo II-class 6th ship, the ‘Yu Gwan-sun.’ The delivery was delayed by about 180 days beyond the scheduled deadline.

An industry official said, “Since the Sewol ferry disaster, the military refuses delivery if even a slight defect is found in the ship,” adding, “If delivery is refused, the delivery date inevitably gets delayed, and the company has to bear the damages and legal costs.”

Meanwhile, it has been reported that Korea Shipbuilding & Offshore Engineering, the shipbuilding holding company of Hyundai Heavy Industries Group, and the Korea Development Bank have extended the deadline for the acquisition contract of DSME by three months. Due to delays in the corporate merger review from three entities including the European Union (EU) related to the DSME acquisition and merger (M&A), the deadline for the capital contribution and investment contract was extended from the 30th of last month to September 30th.

This content was produced with the assistance of AI translation services.