The Korea Federation of SMEs Also Participates in Subcontract Adjustment Talks... "Activation of Compensation Lawsuits"

Fair Trade Commission Announces Legislative Notice for Subcontracting Act Amendment
"Strengthening Negotiation Power and Damage Relief for Subcontractors"
Expansion of Rights to Request Subcontract Payment Adjustment Negotiations and Application Grounds
Introduction of Court's Data Submission Order System, etc.

The photo shows Moon Jong-suk, head of the Technology Misappropriation Monitoring Team at the Korea Fair Trade Commission, briefing on the sanctions against Hyundai Heavy Industries for misappropriating technology from a piston domestic production company at the Government Sejong Complex on the 24th of last month. Amid increasing regulatory measures by the Fair Trade Commission regarding controversies over subcontractors' abuse of power such as technology misappropriation, the "Subcontracting Act Amendment" was announced. (Photo by Yonhap News)

[Asia Economy Reporter Moon Chaeseok] From now on, the Korea Federation of Small and Medium Business (KSMB) will also participate in subcontract adjustment consultations. The grounds for application will be expanded to enhance the bargaining power of subcontractors and to activate damage compensation lawsuits. A court order system for document submission will be introduced to prevent the principal contractor from withholding materials on the grounds of trade secrets.

The Fair Trade Commission (FTC) announced on the 24th that it will publicly announce the amendment to the "Act on the Fairness of Subcontract Transactions (Subcontract Act)" from the 24th until October 5th. This is to enhance the rights of subcontractors and activate damage compensation lawsuits.

First, the right to negotiate subcontract payment adjustments and the scope of application reasons will be expanded. The KSMB will be included as a negotiation party.

Under the current law, subcontractors can negotiate payment adjustments with the principal contractor through small and medium enterprise cooperatives. However, the average number of employees in these cooperatives is only 3.1, resulting in a significant bargaining power gap with the principal contractors.

According to the FTC's subcontract written survey last year, only 0.9% of subcontractors applied for payment adjustments through cooperatives.

The FTC judged that the KSMB has expertise in payment adjustment consultations as it conducts research and surveys related to SMEs and operates a Standard Cost Center.

The amendment includes as grounds for application the ability to apply for adjustment even if the supply cost does not decrease due to unexpected circumstances such as changes in delivery volume, after concluding an agreement to gradually reduce unit prices based on cost reduction.

Current regulations allow application for payment adjustment only when supply costs or management expenses increase. In cases where agreements to gradually lower unit prices based on cost reduction are used, such as in the automobile industry, it is difficult to utilize the right to apply for adjustment.

Source=Korea Fair Trade Commission

A court order for document submission and confidentiality order will be introduced. In damage compensation lawsuits, when it is essential to prove damages and the amount of damages, the business operator will not be allowed to refuse the court's order for document submission.

From the business operator's perspective, complaints about maintaining trade secrets can be raised. Currently, even if a business operator refuses to submit documents citing trade secrets, there are not significant disadvantages, but the binding force will be strengthened going forward.

In particular, if a business operator refuses to submit materials without justifiable reasons, even if special circumstances are recognized, the court can accept as true the facts that the subcontractor tries to prove through the materials, such as cancellation of orders by the principal contractor.

Even if it is extremely difficult to specifically argue about the content of the materials, and it is difficult to expect proof of facts by other evidence, this opens a way to regulate the business operator.

However, provisions and related procedures for the court's confidentiality order will be prepared to minimize the leakage of business operators' trade secrets during litigation. If the confidentiality order is violated, a maximum penalty of 2 years imprisonment or a fine of 20 million KRW will be imposed.

Explanation of cases where the subcontractor's bargaining power is weakened because the original contractor does not provide materials due to trade secrets, etc. (Data from the Fair Trade Commission)

The threshold for SMEs to pay fines in installments will be eased from "exceeding 1 billion KRW" to "exceeding 500 million KRW." To this end, a legal basis for installment payment of fines will be newly established, and specific requirements will be delegated to enforcement ordinances.

The 1 billion KRW threshold was considered too high, potentially causing significant difficulties in financing for SMEs due to fines.

Jung Changwook, Director of Corporate Transaction Policy at the FTC, said, "Once this amendment is finalized and implemented, subcontract payment adjustment consultations will be activated, increasing the bargaining power of subcontractors, and by supplementing damage compensation systems, affected companies will be able to more easily seek remedies."

The FTC plans to collect opinions from related ministries and stakeholders during the public announcement period, undergo review by the Ministry of Government Legislation, and then submit the amendment to the National Assembly.

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