The Korea Fair Trade Commission (“KFTC”) announced a proposed amendment to the Notification on Unfair Special Agreements (“Proposed Amendment”), which defines the types of unfair agreements prohibited by the Fair Transactions in Subcontracting Act (“Subcontracting Act”). The KFTC is canvassing opinions on the Proposed Amendment from the public from January 9, 2025 to January 31, 2025.
According to the Proposed Amendment, a transaction term allowing the prime contractor to withhold payment to its subcontractor may be interpreted as an unfair provision in violation of the Subcontracting Act. Therefore, prime contractors are advised to check whether their agreements with subcontractors do not violate the Subcontracting Act following the Proposed Amendment.
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Background of the Proposed Amendment
A constant concern raised in the construction industry was that an excessive payment withholding term that goes beyond a reasonable justification or scope can be detrimental to the financial health of subcontractors, which may lead to subcontractors becoming unable to pay their suppliers and workers, leading to the bankruptcy of construction companies. The purpose of the Proposed Amendment is to address the practice of prime contractors withholding a portion of the subcontracting payment from subcontractors under the pretext of a performance guarantee or other reasons.
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Content of the Proposed Amendment
A payment withholding term may constitute a contractual term that unfairly infringes upon or restricts the rights of subcontractors. However, relying solely on such general provision has resulted in a lack of predictability in enforcement. In response, the Proposed Amendment explicitly categorizes payment withholding term as an agreement that restricts the rights of subcontractors. Please see below for specific details regarding the Proposed Amendment.
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Current Notification on Unfair Special Agreements
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Proposed Amendment to the Notification on Unfair Special Agreements
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II. Types of Unfair Special Agreements
1. Cases that restrict the rights of subcontractors as stipulated under law
D. (Newly established)
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II. Types of Unfair Special Agreements
1. (same as left)
D. An agreement to withhold a part of advance payments or completion payment, etc., which restricts the subcontractor’s right to receive subcontract payments and other payments in accordance with Articles 6, 13, 15, and 16 of the Act.
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3.
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Related Development
Not all payment withholding terms constitute an unfair special agreement, and such agreements may be lawful if there are justifiable reasons and the scope and duration are reasonable. To that end, the KFTC is also in the process of amending the Guidelines for Reviewing Unfair Special Agreements to clarify the types of unfair special agreements and the criteria for determining their illegality, taking into account factors such as the responsibility of the subcontracting party and the percentage and duration of the withheld payments. Therefore, it is advisable to monitor updates regarding the KFTC’s amendment of the Guidelines for Reviewing Unfair Special Agreements.
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[Korean Version]
