On August 12, 2022, a draft bill (the "Amendment Bill") for partial amendment to the Fair Subcontracting Transactions Act (the "Subcontracting Act") was proposed by a group of National Assembly members, including Jungho Kim of the opposition Democratic Party, who is the bill's representative sponsor and is also a member of the National Assembly's Trade, Industry, Energy, SMEs and Startups Committee. One key change included in the Amendment Bill is the provision that enables extraterritorial application of the Subcontracting Act, which was previously absent.
New provision on extraterritorial application
In practice, the Subcontracting Act, along with the Fair Franchise Transactions Act and the Fair Distributor Transactions Act, all of which are special laws for regulating abuse of superior bargaining position in their relevant, specific fields, have been so far only enforced on transactions between Korean companies, and did not include explicit provisions on their extraterritorial application. Adding to the confusion, there have also been no court precedents on this issue to date, although the Korea Fair Trade Commission ("KFTC") in closing a case without further probe notably concluded that the Subcontracting Act cannot be applied extraterritorially to a foreign company in a past case, where a local subcontractor claimed that the final contractor, an overseas headquarters of a global company, violated the Subcontracting Act in delegating the manufacture of certain raw materials for sportswear products to the subcontractor.
According to the Amendment Bill, the new provision on extraterritorial application has been proposed so that "the Subcontracting Act can also be applied to a conduct carried out overseas when such conduct affects the domestic market." It further notes that "while there are cases where transnational or foreign companies subcontract work to Korean companies and give them direct orders relating to the subcontract work through local agents, the KFTC has in the past expressed a position that the Subcontracting Act cannot be applied to such transnational or foreign companies due to lack of legal grounds in the current Subcontracting Act."
Anticipated issues and need for monitoring
Going forward, the National Assembly will gather additional opinions on and review the Amendment Bill (e.g., regarding whether the Subcontracting Act can be directly applied to foreign companies, and if so, what would be the specific scope of application), and if passed into law, it will be necessary to identify how the KFTC will enforce the extraterritorial application of the Subcontracting Act in practice.
Currently, extraterritorial application of the Monopoly Regulation and Fair Trade Law ("FTL") is widely recognized under the so-called "effects test" theory, whereby Article 3 of FTL expressly stipulates that the FTL also applies to "a conduct carried out overseas, when such conduct has an effect in the domestic market," and the Supreme Court, in issuing its decision on a case concerning unfair concerted conduct by 26 air cargo transportation companies, concluded that the FTL applies to foreign conduct "when the foreign conduct in question had a direct, significant and reasonably foreseeable effect on the domestic market" (Decision No. 2021Du5466 issued on May 6, 2014).
However, considering how other jurisdictions in general do not have regulations similar to the Subcontracting Act, it is unclear whether its extraterritorial application will be interpreted based on the same criteria used for the FTL. For instance, further details are expected to be made available in the coming days on (i) whether a foreign conduct will be recognized to have had an effect on the domestic market only when a foreign company engages in a direct transaction with a Korean SME from overseas, (ii) whether the "effects test" theory can apply to cases where products made as a result of transactions between a foreign conglomerate and SME are imported into Korea, and (iii) what specific circumstances will make it possible to extraterritorially apply the Subcontracting Act when a foreign company engages in a transaction with a Korean SME indirectly through a Korean conglomerate.
If the Amendment Bill passes into law, it is expected to have a direct and significant impact on the business models and transaction relationships of foreign companies that are directly or indirectly conducting business with Korean SMEs. Going forward, therefore, it would be necessary to continuously monitor and respond to the National Assembly's discussion process on this new legislative movement.
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