Court rejects HD Hyundai Heavy's appeal over security penalty in W7.8tr warship project

A Seoul appeals court has again rejected HD Hyundai Heavy Industries' bid to block the application of a security penalty that proved decisive in the selection of a contractor for the Korean next-generation destroyer, known as KDDX, detailed design and lead-ship construction project.

Seoul High Court's Civil Division 25-2, presided over by judges Hwang Byeong-ha, Han Chang-hun and Lee Gyun-yong, dismissed HD Hyundai Heavy Industries' appeal against the lower court's rejection of its injunction request on Tuesday.

The KDDX project — which calls for the construction of six 6,000-ton Aegis-class destroyers at a total cost of 7.8 trillion won ($5.81 billion) — has been a flashpoint between HD Hyundai Heavy Industries and Hanwha Ocean, two rivals in the naval vessel sector.

HD Hyundai Heavy Industries, which carried out the basic design, had pushed for a sole-source contract in line with industry practice, while Hanwha Ocean — which conducted the conceptual design under its former name Daewoo Shipbuilding & Marine Engineering — argued for competitive bidding. As tensions between the two companies escalated over the selection method, the Defense Acquisition Program Administration confirmed in March that it would use a "designated competitive contract" process, effectively siding with Hanwha Ocean.

Once the competitive bidding path was set, a security penalty against HD Hyundai Heavy Industries became a critical variable. Nine of the company's employees had been indicted in 2020 on charges of violating the Military Secrets Protection Act; eight were convicted in November 2022, while the remaining employee pursued an appeal and was convicted in December 2023.

DAPA had initially treated the two rulings as part of the same case and planned to apply the three-year security penalty from November 2022, meaning it would expire in November last year. It then abruptly conducted a legal review concluding the two rulings should be treated separately, and extended the penalty period through December this year — meaning the penalty window differed for employees tried together, depending solely on whether they had appealed.

HD Hyundai Heavy Industries rebuffed this interpretation, saying that when multiple people are involved in the same case or punished across multiple proceedings, the security penalty should run from the date the first conviction was finalized — November 2022 — regardless of how many final rulings follow. The company filed an injunction in May with the Seoul Central District Court seeking to block the extended penalty, arguing it lacked legal basis.

Seoul Central District Court's Civil Division 50, presided over by Judge Lee Sang-hun, rejected the injunction in June. HD Hyundai Heavy Industries then filed an appeal with the court on June 11.

Following the injunction's rejection, DAPA named Hanwha Ocean as the preferred negotiating partner for the KDDX detailed design and lead-ship construction in the same month. The score gap between the two companies was narrow, making the extended security penalty in effect the decisive factor in the outcome. HD Hyundai Heavy Industries filed an objection to Hanwha Ocean's selection, but DAPA rejected it.

Meanwhile, HD Hyundai Heavy Industries had also filed a separate injunction in March seeking to block partial disclosure of a request for proposals it said contained trade secrets related to the KDDX contractor selection process. Seoul Central District Court's Civil Division 60, presided over by Judge Kim Mi-gyeong, rejected that request in May.

HD Hyundai Heavy Industries appealed that ruling as well, and Seoul High Court's Civil Division 5-2, presided over by judges Kim Dae-hyeon, Gang Seong-hun and Song Hye-jeong, held a hearing on Aug. 20. HD Hyundai Heavy Industries filed a request on Aug. 26 to restrict access to the trial record in that case, which the court granted two days later. A ruling on whether to grant the appeal is expected soon.