On December 4, 2024, the Korea Fair Trade Commission (the “KFTC”) issued an advance notice regarding the new Guidelines on the Operation of the Subcontract Price Linkage System (the “Guidelines”), starting a 21-day public comment period that will end on December 24, 2024. The Guidelines aim to provide detailed criteria that businesses can refer to when implementing the subcontract price linkage system.
The Price Linkage System requires automatic adjustments to the subcontract price agreed upon between a contractor and a subcontractor in the event of changes in the cost of a “key raw material” that accounts for at least 10% of the total subcontract price. The adjustment should reflect the changes in the key raw material cost (thereby “linking” the material cost to the overall subcontract price).
The KFTC has previously distributed explanatory materials on the topic in the form of guidebooks and a list of frequently asked questions. The new Guidelines aim to further clarify details and establish them as administrative rules to encourage the implementation of the Price Linkage System and prevent violations of the Fair Transactions in Subcontracting Act (the “FTSA”).
The key points of the proposed Guidelines are as follows:
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Clarification of the Criteria for the Price Linkage System |
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The Guidelines provide specific criteria and examples for determining “key raw materials” that would be “linked” to the total subcontract price. For example, the contractor and subcontractor should engage in good faith discussions to determine the key raw material based on objective criteria/data. Moreover, the Guidelines stipulate that the parties may choose to apply the Price Linkage System to raw materials even if the cost of such materials comprises less than 10% of the total subcontract price.
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The Guidelines provide step-by-step explanations of the processes involved in implementing the Price Linkage System, including a list of essential terms and conditions that should be included in a subcontracting agreement (e.g., key raw material, price adjustment date), as well as detailed procedures for adjusting subcontract prices.
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Examples of Unlawful Conduct |
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To prevent violations of the FTSA, the Guidelines provide examples of unlawful conduct, including:
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Coercing counterparties to refrain from applying the Price Linkage System by imposing disadvantages on them when they seek to apply the system. |
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Avoiding the application of the Price Linkage System by “splitting” subcontract prices into amounts less than KRW 100 million or dividing the duration of subcontract arrangements into periods of 90 days or less. |
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Preventing a material from being designated as a “key raw material” by separating and listing it as multiple, distinct items (thus creating the appearance that the cost of each such separate material constitutes less than 10% of the total subcontract price). |
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Clarification of the Relationship Between the Price Linkage System and Other Provisions of the FTSA |
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The Guidelines also provide examples of conduct related to the Price Linkage System that may constitute a violation of other provisions of the FTSA. For example, Article 11 of the FTSA prohibits reducing subcontract prices without justifiable reasons. The Guidelines state that a contractor’s failure to pay subcontractors, despite automatic price adjustment being triggered under the Price Linkage System, may constitute a violation of Article 11 of the FTSA.
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Similarly, the Guidelines provide examples of conduct that could constitute violations of other provisions in the FTSA: Article 4 (prohibition against unfairly determining subcontract prices), Article 13 (provisions relating to payment of subcontracting fees) and Article 18 (prohibition against unfairly interfering with a counterparty’s business management). |
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The Guidelines further clarify that implementation of the Price Linkage System does not preclude the application of other provisions of the FTSA that provide grounds for price adjustment: (i) Article 16 of the FTSA, which requires adjusting subcontract prices in the event of fundamental changes affecting the subcontracting arrangement (e.g., design of the building or product, project deadline), and (ii) Article 16-2 of the FTSA, which allows subcontractors to request adjustment of subcontract prices in the event of changes in the cost of supplying its services/products. As such, subcontractors may seek to adjust the total subcontract price on the basis of the Price Linkage System and to the extent applicable, other provisions in the FTSA.
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The Guidelines contain measures to prevent overlaps in payment adjustments (e.g., where prices are adjusted on the grounds of Article 16 of the FTSA, the parties may consult, compare the obligations under the Price Linkage System and Article 16 of the FTSA, and agree upon the details of the adjustment). |
