1. Public Contract Laws
Currently, essential laws related to public contracts of Korea include 「Act on Contracts to Which the State is a Party」(hereafter State Contract Act), 「Act on Contracts to Which a Local Government is a Party」(hereafter Local Government Contract Act), 「Government Procurement Act」, 「Defense Acquisition Program Act」, and 「Act on the Management of Public Agencies」. The State Contract Act and the Local Government Contract Act contain key contents about construction contracts ordered by public, but they do not separately regulate subcontracting.
The State Contract Act is the law enacted in 1995 with the need to set global bidding standards and dispute conciliation organizations with Korea’s joining in WTO GPA. Major details include the scope of international bidding constructions, prohibition of limiting foreigner bid, application of general bid and lowest bid system rules, and installation of an international contract dispute conciliation committee. The Local Government Contract Act is the law enacted in 2005 to regulate the territorial restraint system in order to protect characteristics of local governments and local small and medium companies. Major details include clarification of private contract, contract supervision system under participation of residents, application of a simple contracting system for disaster restoration, and installation
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of a contract deliberation committee.
As mentioned earlier, regulations on subcontracting are not stated in the laws related to public contracts such as the State Contract Act and the Local Government Contract Act.
However, administrative rulings established by the Ministry of Strategy and Finance (MOSF) and the Ministry of Public Administration and Security (MOPAS) are including information about subcontracting. In details, subcontracts ordered by the state are regulated in General Conditions of Construction Contract (MOSF Contract Rulings 2200.04-No.104-27) Article 42 and Article431 and subcontracts ordered by the local governments are regulated in Local Government General Conditions of Construction Contract (MOPAS Contract Rulings No.138) Article 29 and Article 50.
The above rulings are regulating that the primary contractor shall follow the relevant laws such as Framework Act on the Construction Industry in relation to approval of subcontracting of the constructions ordered by public organizations and the public employers shall evaluate adequacy of subcontract price in accordance with the construction subcontracting evaluation criteria set by the Minister of Land, Transport and Maritime Affairs. It also regulates that if the primary contractor undergoes bankruptcy or suspension, or does not submit subcontract price guarantee then the ordering person directly pays the subcontract price.
2. Subcontracting Transactions Act
Subcontracting of all contracts such as construction, goods, and service is regulated in
「Fair Transactions in Subcontracting Act2」(hereafter Subcontracting Act) enacted in 1984.
The purpose of the Subcontracting Act is to contribute to sound development of national
1 Refer to Appendix 1 in Korean for detailed provisions
2 An English version of the Subcontracting Act is included in Appendix 2
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economy through balanced development of the primary contractor and the subcontractor under an equal position by establishing fair subcontracting order (Subcontracting Act, Article 1).
The Subcontracting Act basically regulates subcontracting transitions occurring in all contracts. Subcontracting of construction contracts is additionally regulated in 「Framework Act on the Construction Industry」, which will be explained later. This is to regulate subcontracting issues occurring from construction works as most of those issues are from construction. According to the Subcontracting Act Article 343, however, subcontracting of construction contracts is separately regulated within the framework of the Subcontracting Act because if the contents of the Subcontracting Act and the Framework Act on the Construction Industry contradict then the Subcontracting Act precedes over the Framework Act on the Construction Industry.
The Subcontracting Act recommends the primary contractor to use standard subcontracting form for fair subcontracting transactions and it regulates methods and time for fair inspection of goods and payment. It also strictly prohibits unfair payment of the subcontract price of the primary contractor, unreasonable demands such as using specific goods, rescission or return without proper reason, and management intervention and countervailing measures. The ordering person can directly pay the subcontract price according to the Subcontracting Act Article 14 if overdue is expected, and the subcontractor can request adjustment of the subcontract price to the primary contractor if the price of raw materials changes. Lastly, violation of the Subcontracting Act can be reported to Fair Trade Commission and penalty regulations are included.
3 Where any provision of the Framework Act on the Construction Industry is contrary to this Act, such provision shall be governed by this Act. (Fair Transaction in Subcontracting Act)
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3. Construction Subcontracting Laws
As stated above, subcontracting occurring from construction is separately regulated in
「Framework Act on the Construction Industry 4」 Chapter 3 Contract and Subcontract Agreements (Article 22~Article 38) that was enacted in 1996. It regulates principles of contract and subcontract that the contracting party of construction (including subcontracting) shall sign a contract fairly based on agreement and perform a contract according to principle of good faith (Framework Act on the Construction Industry, Article 22).
According to the Framework Act on the Construction Industry Article 29, the primary contractor shall not subcontract the whole or most of the main parts that he or she had taken subcontracting to other constructors. Subcontracting is only acceptable to the construction companies registered as the relevant construction business type. Subcontracting to general constructors applying to the same industry is not allowed. The primary contractor shall manage the subcontracted companies to prevent re-subcontracting.
According to Article 31 of the same law, the ordering person can evaluate adequacy of the contract signed by the primary contractor and the subcontractor if the subcontractor is judged to be unsuitable to execute construction work or the subcontract price is less than 82% of the total amount. However, if the ordering person is public then it is mandatory to evaluate adequacy of the subcontracting. The constructor that won a construction contract shall submit a subcontracting plan including details of subcontracting construction and selection method to the ordering person. The primary contractor shall pay the subcontract price within 15 days from receiving completion money or construction amount of the construction work. It also regulates as in the State Contract Act and the Subcontracting Act that the subcontract price can be directly paid to the subcontractor if the ordering person is set. If the construction cost
4 Framework Act on the Construction Industry, Chapter 3 is included in Appendix 3
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that the primary contractor has received is adjusted, the subcontract price shall be also adjusted considering contents and ratio of the construction and the ordering person shall notify reason and details of construction amount adjustment to the subcontractor within 15 days.
4. Chapter Summary
Laws related to subcontracting are divided into the State Contract Act, administrative rulings according to the Local Government Contract Act, the Subcontracting Act, and the Framework Act on the Construction Industry. Collision between laws and insufficient regulations related to public construction contracts can be pointed out as systematical problems according to such divided laws. Although the Subcontracting Act comprehensively regulates construction, goods, and service contract and the Framework Act on the Construction Industry specially regulates construction contract, there is limit to the regulatory scope of Framework Act on the Construction Industry as the Subcontracting Act predominates when they contract. Japan also separately regulates subcontracting in 「Act on Prevention of Delay in Payment under Government Contracts, etc. 」 and 「Construction Business Act」 in this regard, but subcontracting of construction works is unified and regulated into Construction Business Act.
Contracts ordered by public basically have the characteristic of private contracts and therefore liberty of contract is applied, but publicity must be emphasized than private construction contracts since public organizations are inserting public finances to build public facilities. However, the state and local government contract laws are handling subcontracting with administrative rulings rather than legislations. In case of the Framework Act on the Construction Industry, public construction has no difference from a private contract except
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forcing evaluation of adequacy of subcontracting and making the primary contractor to submit a subcontracting plan. It might be important to raise transparency and fairness of subcontract ordered by the state by establishing subcontracting details into a separate law as in Japan.