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Korea Fair Trade Commission(KFTC)
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Subcontract Policy

Overview

Subcontracting Transaction

The term refers to a transaction in which an enterprise (prime contractor) entrusts some of its production activities, whereas the entrusted enterprise (subcontractor) produces entrusted products and supplies them to the entrusting enterprise (prime contractor).

Purpose of the Fair Transactions in Subcontracting Act

The purpose of the Fair Transactions in Subcontracting Act (hereinafter referred to as “the Subcontracting Act”) is to prevent prime contractors (mainly, large enterprises) from abusing their dominant positions in the course of subcontracting transactions, protecting interests of subcontractors that are in a financially weaker position (mainly, small and medium enterprises), and ultimately establish a fair order in subcontracting transactions.

Reasons why unfair subcontracting transactions are subject to regulation

As the scale of economies is growing larger and the structure of economy is becoming more complicated, enterprises promote activities of horizontal and vertical specialization in order to enhance the efficiency of manufacturing.

Large enterprises usually outsource parts of their production process to other firms and produce finished products with parts supplied by such firms, but small and medium suppliers, which are in a financially weaker position than large enterprises, are hardly able to express their opinions in regard to the conclusion of a contract and the determination of a unit price.

Therefore, it is necessary to correct unfair transactional practices of large enterprises in the course of transactions between large enterprises and small and medium enterprises and protect small and medium enterprises that are in a financially weaker position.

Details

Scope of application of the Act

Business operators subject to application
  • Prime Contractor : A large enterprise(a business entity other than small and medium entrepreneurs) or a small and medium entrepreneurs whose scale is greater than the scale of the subcontractor concerned, who entrusts tasks
  • Subcontractor : A small and medium entrepreneur that is the counterpart of the transaction concerned
Transactions subject to application

Four types of transactions - entrustment with manufacturing, entrustment with repair, entrustment with construction, and entrustment with service

  • The term “entrustment with manufacturing” means that a business entity engaged in a business of manufacturing, selling, or repairing goods or in a business of construction entrusts another business entity with manufacturing of goods.
  • The term “entrustment with repair” means that a business entity engaged in a business of repairing goods according to orders received or in a business of repairing goods for its own use fully or partially entrusts another business entity with such repair works.
  • The term “entrustment with construction” means that a constructor which meets specified prerequisites fully or partially entrusts another constructor with construction works within the scope of business.
  • The term “entrustment with service” means that a business entity engaged in a business of making products of knowledge or information or providing services fully or partially entrusts another service provider with the provision of services within the scope of business.

Major regulations under the Subcontracting Act

Major regulations under the Subcontracting Act are classified into four categories: (1) Duties of prime contractors; (2) Prohibited acts of the prime contractor; (3) Duties of the person placing an order; and (4) Duties of subcontractors.

Duties of prime contractors

  • Issuance and Retention of Documents

    Where a prime contractor entrusts any manufacturing, etc., to a subcontractor and where the prime contractor changes the content of the relevant agreement, the prime contractor shall issue the subcontractor a document specifying the relevant matters and retain the document concerning subcontract transactions. (Article 3 of the Subcontracting Act)

  • Payment of subcontract consideration, etc

    The prime contractor shall pay the subcontract consideration, payment in advance, and refund of customs duties, etc. to the subcontractor within 60 days from the date of receipt of subject matter, etc. or 15 days from the date the prime contractor received advance payment from the person placing an order. The prime contractor shall pay interest calculated by the late-payment interest rates where the payment is made after the deadline. (Article 6, 13, 15 of the Subcontracting Act)

  • Other duties

    Other duties of the prime contractor include: opening local letters of credit (Article 7 of the Subcontracting Act), inspection and notification of the result of inspection (Article 9 of the Subcontracting Act), performance guarantee for payment of the construction consideration (Article 13-2 of the Subcontracting Act), adjustment of subcontract consideration due to change in design, etc. (Article 16 of the Subcontracting Act), and adjustment of subcontract consideration due to fluctuation in supply costs (Article 16-2 of the Subcontracting Act).

Prohibited acts of the prime contractor

  • Prohibition against fixing unreasonable subcontract consideration

    The prime contractor shall not fix an unreasonable consideration for a subcontract at a price lower than the consideration ordinarily paid for the subject matter of the subcontract. (Article 4 of the Subcontracting Act)

  • Prohibition of unreasonable cancellation of entrustment, unreasonable return of goods, etc

    The prime contractor shall not arbitrarily cancel the entrustment and refuse the receipt of the subject matter, or return the subject matter to the subcontractor, unless any reason attributable to the subcontractor exists. (Article 8, 10 of the Subcontracting Act)

  • Prohibition against reduction of the subcontract consideration

    The prime contractor shall not reduce the subcontract consideration fixed at the time of the entrustment unless the prime contractor proves any just cause to do so. (Article 11 of the Subcontracting Act)

  • Prohibition against unreasonable payment in substitutes

    The prime contractor shall not make payment in kind as the consideration for any subcontract unless the prime contractor proves any just cause to do so. (Article 17 of the Subcontracting Act)

  • Prohibition of other practices

    Other prohibited acts of the prime contractor include: prohibition of compelling purchase of goods, etc. (Article 5 of the Subcontracting Act), prohibition of unfair requests for settlement of purchase price, etc. (Article 12 of the Subcontracting Act), prohibition of unfair requests for economic profits (Article 12-2 of the Subcontracting Act), prohibition, etc. of request to provide technical data (Article 12-3 of the Subcontracting Act), prohibition of unreasonable intervention in management (Article 18 of the Subcontracting Act), prohibition on retaliatory measures (Article 19 of the Subcontracting Act), and prohibition of evasion of the Act (Article 20 of the Subcontracting Act), etc.

Duties of the person placing an order

  • Duties of the person placing an order

    The person placing an order shall pay the subcontract consideration directly to the subcontractor where a ground falling under any of the following occurs (Article 14 of the Subcontracting Act)

    • When the subcontractor has requested direct payment of the subcontract consideration because the prime contractor has become unable to pay the consideration due to bankruptcy, revocation of permission or authorization, etc. relating to the business.
    • When agreement has been made among the person placing an order, prime contractor, and subcontractor that the person placing an order shall pay the subcontract consideration directly to the subcontractor.
    • When the subcontractor has requested direct payment of the subcontract consideration where the prime contractor has failed to pay to the relevant subcontractor two or more installments of the subcontract consideration to be paid by the prime contractor.
    • When the subcontractor has requested direct payment of the subcontract consideration where the prime contractor has failed to perform his/her obligation to guarantee the payment of subcontract consideration.
  • The subcontractor's duties

    The duties of the subcontractor include: retention of documents (Article 3 of the Subcontracting Act), performance guarantees for construction subcontracts (Article 13-2 of the Subcontracting Act), fulfillment of the details of the entrustment in good faith (Article 21 (1) of the Subcontracting Act), and refusal to cooperate with a prime contractor in any offense against the Act (Article 21 (2) of the Subcontracting Act)

Subcontract Dispute Mediation Councils

A Subcontract Dispute Mediation Council is established in Korea Fair Trade Mediation Agency, Korea Federation of SMEs, etc. in order to voluntarily and swiftly settle disputes between the prime contractor and the subcontractor occurring due to an unfair subcontract transaction through consultation between the parties.

Dispute Mediation Process 이미지 확대보기

Fair Transaction Agreement

Large enterprises and small and medium entrepreneurs, who are the parties of repetitive subcontracts, may enter into an agreement stipulating that they provide each other with mutual support and cooperation through timely payment of subcontract consideration, technical support, etc. in order to contribute to establishing order for fair subcontract transactions. To encourage fulfillment of such agreement, the KFTC may evaluate implementation of the agreement and provide incentives, such as exemption from an ex officio fact-finding investigation.

Technical Data Deposit System

Where a prime contractor requests any technical data from a subcontractor, the subcontractor deposits the requested technical data in a third party institution, which provides the prime contractor with the data only if the requirements specified by the subcontractor are met (e.g. in case of the subcontractor's bankruptcy).

Progressive Penalty Point System

The KFTC imposes penalty points on a violator of the Subcontracting Act, and requests the heads of relevant administrative agencies to place limitations on participation in bidding for public procurement or to suspend business operations of the violator, if the accumulated penalty points exceed the criteria prescribed in the Enforcement Decree of the Subcontracting Act.

Sanctions for Violation of the Act

Administrative Sanctions

Corrective measures

The KFTC may order a person placing an order or a prime contractor to pay subcontract consideration, etc., to stop the violation, or to take other measures necessary for rectifying such violation. (Article 25 of the Subcontracting Act)

Penalty surcharges

The KFTC may impose upon a person placing an order, prime contractor, and subcontractor a penalty surcharge not exceeding double the subcontract consideration entrusted by the person placing the order or prime contractor. (Article 25-3 of the Subcontracting Act)

Criminal Sanctions

  • A prime contractor who fails to fulfill his/her duties or commits prohibited acts of the prime contractor shall be punished by a fine not exceeding double the subcontract consideration entrusted to a subcontractor by the prime contractor.
  • A person who takes retaliatory measures against another person, in violation of Article 19 of the Subcontracting Act, shall be punished by a fine not exceeding 300 million won.
  • A person who fails to comply with an corrective measure issued under Article 25 of the Subcontracting Act, or who violates prohibition of unreasonable intervention in management or prohibition of evasion of the Subcontracting Act shall be punished by a fine not exceeding 150 million won.

Amendments to the Fair Transactions in Subcontracting Act

  • A subcontractor may request a prime contractor to adjust subcontract consideration where adjustment of such consideration is inevitable not only because the supply costs of subject matter, etc. have changed but also because additional costs are incurred in completing the subject matter, etc. for such reasons as extended construction period.
  • According to Article 16-2 of the Subcontracting Act, where adjustment of subcontract consideration is inevitable, a subcontractor may request a prime contractor to adjust subcontract consideration or request a small and medium enterprise cooperative (hereinafter referred to as "cooperative") to negotiate with the prime contractor to adjust subcontract consideration. The KFTC has expanded the scope of application of the provision through amendment and allowed subcontractors to request for adjustment on a broader basis in order to resolve issues surrounding subcontract consideration.
    Changes in the supply costs of subject matter : Prices of raw material + Minimum wage or labor cost etc + Changes in the management costs due to extended construction period or delayed delivery, etc 이미지 확대보기
    • After the amendment, subcontractors may request a prime contractor to adjust subcontract consideration* where not only the supply costs of subject matter, etc. have changed, but also the management costs have changed due to such reasons as extended construction period or delayed delivery.

      reference

      The prime contractor shall commence negotiations for the adjustment of subcontract consideration with the subcontractor within 10 days from the date of a request.

    • Also, in the aforementioned cases, a prime contractor shall increase subcontract consideration in accordance with the amount and rate of increase in the contract value he/she has newly concluded with the person placing an order. (These Articles entered into force in May 2020)
  • Meanwhile, subcontractors may request a cooperative to negotiate with the prime contractor to adjust subcontract consideration where it is inevitable due to fluctuation in the supply costs of subject matter, the minimum wage, labor costs, etc. above the standards prescribed by Presidential Decree. (This Article entered into force in July 2018)
  • Statutes of limitations for the KFTC’s documentary fact-finding investigation on subcontract transactions in violation of Article 23-3 of the Subcontracting Act has extended in order to provide subcontractors with enhanced protection for their technical data.
  • The KFTC has extended the statute of limitations for its documentary fact-finding investigation on subcontract transactions in violation of Article 23-3 of the Subcontracting Act from 3 years to 7 years, in order to provide subcontractors with enhanced protection for their technical data. Also, the KFTC has made several amendments to the Subcontracting Act by redefining the terms of technical data and its misuse, etc. (This Article entered into force in July 2018)
Prohibition, etc. of Request to Provide Technical Data - Before Amendment, After Amendment
Before Amendment After Amendment
Statute of limitations for documentary fact-finding investigation Subcontract transactions subject to the investigation shall be limited to those for which 3 years have not passed from the date the transaction was completed Provided, That in cases of any subcontract transaction which is in violation of Article 12-3 of the Fair Transactions in Subcontracting Act and is reported within 7 years from the date the transaction was completed, an investigation may be made.
Definition of misuse of technical data The term “misuse of technical data” means prime contractor's abuse of the acquired technical data for himself/herself or any third person. The term “misuse of technical data” means prime contractor's abuse of the acquired technical data for himself/herself or any third person, and his/her sharing of the data with any third person.
Definition of technical data The term “technical data” means data that are kept confidential with significant efforts of a subcontractor The term “technical data” means data that are kept confidential with reasonable efforts of a subcontractor
Maximum penalty surcharge KRW 500 million KRW 1 billion
  • The KFTC has contributed to increasing bargaining power of the subcontractor by prohibiting the prime contractor's unreasonable intervention in management such as compelling a subcontractor to trade exclusively with a prime contractor or requesting a subcontractor to provide management information, both without just cause.
  • The KFTC has explicitly banned a prime contractor's act of restraining a subcontractor to trade with him/her or business operators he/she designates without just cause.
  • Also, it has explicitly banned a prime contractor's act of requesting a subcontractor to provide management information, such as cost data, sales data, or management strategies, etc. without just cause. (This Article entered into force in January 2018)
  • The KFTC has ensured a guarantee for payment of the construction consideration in cases of entrustment with construction by requiring all prime contractors to provide a guarantee to subcontractors.
  • The KFTC has eliminated its previous criteria * for the prime contractors eligible for exemption from providing a guarantee for payment of the construction consideration and required all prime contractors to provide such guarantee for payment.

    reference

    Before amendment, a prime contractor’s credit rating had to be evaluated by a credit rating company as at least equivalent to the standard determined and publicly notified by the KFTC―(a) bonds that carry A0 or a higher credit rating or (b) commercial paper that carries A2+ or a higher credit rating.

    • According to Article 13-2 of the Subcontracting Act, in cases of entrustment with construction, a prime contractor shall provide a subcontractor with a guarantee for payment of the construction consideration within 30 days from the date the subcontract is concluded. Therefore, the obligation of the prime contractor to pay the subcontract consideration to the subcontract shall be deemed to have extinguished only if an agreement has been made among the person placing an order, prime contractor, and subcontractor within 30 days from the date the subcontract is concluded that the person placing an order shall pay the subcontract consideration directly to the subcontractor.
  • The KFTC has newly specified agreements to be deemed an unfair special agreement in order to prevent prime contractors from attaching terms and conditions that unfairly violate or restrict a subcontractor’s interests to a contract.
  • The KFTC has amended and newly specified agreements to be deemed an unfair special agreement, in addition to the ten prohibited agreements provided for in Article 3-4 of the Subcontracting Act and Article 6-2 of the enforcement decree of the Subcontracting Act. (These guidelines entered into force in June 2019)
Unfair special agreements newly specified in the Guidelines
Unfair special agreements newly specified in the Guidelines
An agreement that imposes any of the prime contractor's duties on the subcontractor 3 types including one that imposes any costs in relation to prevention of industrial accidents on the subcontractor
An agreement that imposes excessive liabilities on the subcontractor under the contract 6 types including one that imposes excessive liabilities such as liability for defects warranty or liability for damages on the subcontractor
An agreement that imposes any of the subcontractor's duties more excessively than those prescribed in the Subcontracting Act on the subcontractor 2 types including one that imposes a guarantee payment of more than 10/100 of the contract value on the subcontractor, without just cause
An agreement that unfairly restricts any of the subcontractor's rights on his/her technical data, etc. 2 types including one that gives the prime contractor any of the subcontractor's rights on information, material, goods etc. that the subcontractor has acquired, without just cause
An agreement that restricts any of the subcontractor's rights as prescribed in the Subcontracting Act 3 types including one that unfairly restricts the subcontractor's acts, such as restraining the subcontractor from reporting the prime contractor's violation of the Act