New Model Agreement Reflecting the New Variable Subcontract Price System

On September 11, 2023, the Korea Fair Trade Commission (the “KFTC”) and the Ministry of SMEs and Startups (the “MSS”) met with companies that have voluntarily adopted the new variable subcontract price system (also referred to as the “variable supply price system”) in advance of the new system taking effect in October 2023. At the meeting, the KFTC and MSS distributed a model subcontract agreement incorporating the new system, including a separate version for parties that agree not to adjust the subcontract price based on the change in key material prices, and a guidebook on how to implement the new model agreement in practice (the “Guidebook”).

The new model subcontract agreement includes provisions for specifying: (i) a base index for raw material prices, which should serve as the basis for raw material price fluctuations and the decision as to whether subcontract price should be updated, (ii) a list of key raw materials, the significant changes in the cost of which would trigger the automatic adjustment of the subcontract price, (iii) conditions triggering adjustment of subcontracting prices and method of adjustment (e.g., formula for automatic adjustment for subcontracting prices), (iv) procedures for price adjustment, (v) procedures for adjusting the prices of materials that are not subject to the price update requirement, and (vi) prohibition of unlawful practices (in connection with implementing the subcontract price adjustment system).

As noted above, the KFTC and MSS also distributed a separate version of the model agreement for use by the parties that agree not to adjust the subcontract price based on change in the prices of certain key materials. This version includes provisions for specifying: (i) a list of key raw materials that would not result in an automatic adjustment of subcontracting prices, (ii) a summary of the parties’ agreement not to adjust subcontracting prices, including the date, method, names and position of the relevant personnel who participated in the agreement, (iii) reasons for agreeing not to subject the key materials to automatic price adjustment, and (iv) prohibition of unlawful practices, such as abusing superior bargaining power by coercing a counterparty to agree not to adjust subcontract prices.

The Guidebook, meanwhile, contains explanations on terminologies and detailed instructions and examples (e.g., on how to prepare charts regarding changes in prices) of the new standard agreement. Notably, the Guidebook also offers precautions for cases where transactional parties agree not to adjust subcontract prices based on changes in the prices of raw materials, and specific guidelines for drafting subcontract agreements for that purpose.

The KFTC and MSS also announced a system for providing incentives to companies that voluntarily decide to early adopt the new system. In particular, for companies that adopt the new system by October 31, 2023, and are later deemed exemplary (i.e., in terms of the number of participating affiliates and number of subcontract agreements executed that comply with the new system), the KFTC and MSS plan to exempt such companies from mandatory surveys on the status of subcontracting transactions for a year in 2024. That said, companies that have had sanctions imposed based on the surveys conducted in 2023 as well as those with pending cases will not be eligible for such exemption.

Cabinet Passes Amendments to Enforcement Decrees to the FSTA and the Mutual Growth Act

As covered in our previous newsletter (Link), the amendments to the Enforcement Decrees to the Fair Subcontract Transactions Act (the “FSTA”) and the Act on Promotion of Mutual Growth and Cooperation between Large Enterprises and SMEs (“Mutual Growth Act”) were passed at the Cabinet Meeting held on September 19, 2023. The amendments came into effect on October 4, following presidential promulgation.

The amendments include provisions relating to: (i) the requirement to set forth in written agreements, matters relating to automatic adjustment of supply prices, (ii) criteria for exceptions to the foregoing requirement (i.e., when the contract term is 90 days or shorter or the contract amount is KRW 100 million or less), (iii) criteria for imposing penalties, and (iv) criteria for imposing fines.

Meanwhile, both the KFTC and MSS have announced plans to implement a grace period until December 31, 2023. During this period, they reportedly do not plan to conduct ex officio investigations related to the new system, and will instead encourage voluntary corrections, as a means to facilitate the establishment of the new system.

Thus, as from October 4, 2023, the adoption of the new system is required under the FSTA and the Mutual Growth Act, it would be advisable for any companies newly entering into, or amending an existing agreement with a subcontractor after October 4, 2023, to discuss the implementation of the new system.

[Korean Version]