Even with High Credit Ratings, Construction Payment Guarantees... Fair Trade Commission Enhances Eul's Negotiation Power

Government Approves Amendment to Subcontracting Act Enforcement Decree
Reduced Burden on Principal Contractors... Effective 3 Months After Promulgation

The government has approved the "Amendment to the Enforcement Decree of the Subcontracting Act" at the Cabinet meeting to improve the unfavorable contract environment for subcontractors. Photo by Moon Honam munonam@

[Asia Economy Reporter Moon Chaeseok] From now on, primary contractors with high credit ratings will be required to pay subcontractors for construction work. Until now, the environment has been favorable to primary contractors with high credit ratings.

On the 31st, the Fair Trade Commission announced that the "Enforcement Decree of the Subcontracting Act Amendment" containing this provision was approved at the Cabinet meeting. The amendment will be promulgated after procedures such as presidential approval. It will take effect three months after the date of promulgation. It will apply to subcontracting contracts related to primary contracts concluded after the effective date.

The Subcontracting Act mandates that primary contractors guarantee payment of construction fees to subcontractors when commissioning construction work.

However, if the primary contractor's credit rating is above a certain level (corporate bond A0, commercial paper A2+) or if the ordering party agrees to pay the subcontracting fees directly to the subcontractor instead of the primary contractor (direct payment), the obligation to guarantee payment is exempted.

The problem is that even companies with high credit ratings continue to have disputes related to non-payment when their management condition deteriorates in the short term.

The Ministry of Land, Infrastructure and Transport has already abolished the "payment guarantee exemption clause for businesses with high corporate bond ratings" in the basic construction industry laws. The consistency between the two laws is therefore reduced.

Accordingly, the Fair Trade Commission deleted the clause "if the primary contractor receives a rating above the standard announced by the Fair Trade Commission in the credit evaluation" from the exemption reasons for the obligation to guarantee payment of construction fees in the amendment.

With the amendment to the enforcement decree, the Fair Trade Commission expects that the bargaining power of subcontractors will increase when disputes arise between primary contractors and subcontractors regarding subcontracting payments.

This is because subcontractors can claim guarantees from guarantee institutions not only in cases of primary contractors' bankruptcy or closure but also when the primary contractor fails to pay subcontracting fees more than twice.

Since the primary contractor's guarantee insurance premiums may increase if the subcontractor receives the guarantee money, they will be more proactive in negotiations. They may also be subject to subrogation claims, which can make them more active in negotiations.

Sung Kyungje, head of the Corporate Transaction Policy Division at the Fair Trade Commission, said, "We hope this will serve as an opportunity to prevent subcontractors from going bankrupt or becoming insolvent due to the primary contractor's bankruptcy or closure and to enhance the bargaining power of subcontractors."

This content was produced with the assistance of AI translation services.