"Joint Liability in Public SW Projects Is Unfair," Complaints from Companies

8222 Contracts in 5 Years 6 Months
Only 8.5% Are Shared Performance
One Side Bears All Costs if the Other Goes Bankrupt
Risk Transfer Causes SME Bankruptcies
Discussions Stalled Amid COVID-19 Resurgence

[Asia Economy Reporter Jin-gyu Lee] Large corporation A and small-to-medium enterprise B formed a consortium last year to carry out a public software (SW) project. However, during the project, B went bankrupt, leaving A to bear full responsibility for the project's execution. This was due to the 'joint performance method,' where consortium participants bear joint liability. A suddenly had to cover all remaining project costs and also faced the need to file a civil lawsuit against B to recover damages. However, since B had gone bankrupt, it was unclear who to sue.

There is growing demand to eradicate the practice of consortium participants bearing joint liability in public SW projects. Under the National Contract Act, for public SW projects, the ordering agency can choose between the joint performance method, which imposes joint liability on consortium participants, and the divided performance method, which assigns responsibility to each company according to their share of the project. Until now, ordering agencies have habitually chosen the joint performance method for most public SW projects. The system integration (SI) industry argues that this joint performance method imposes significant burdens on both large and small companies, and that the divided performance method should be applied more evenly.

'Joint Liability Among Companies' Joint Performance Method Accounts for Over 90%

According to the SI industry and the Korea Software Industry Association (hereafter SW Industry Association) on the 4th, from 2015 to the first half of this year, out of a total of 8,222 public SW projects conducted through consortium joint contracts over five and a half years, 7,527 cases (91.5%) used the joint performance method, while only 695 cases (8.5%) used the divided performance method. In the divided performance method, companies bear responsibility proportional to their share of the project, whereas in the joint performance method, they bear joint liability. Consequently, if one consortium participant abandons the project midway under the joint performance method, the remaining companies must jointly bear all responsibility for project execution. For small companies with weak capital, bearing joint liability often leads to bankruptcy. An SI industry official criticized, "Forcing projects to be conducted only under the joint performance method restricts bidders' choice, and ordering agencies use joint liability as a risk avoidance measure, unfairly shifting their risks onto companies."

SI Industry: "Divided Performance Method Should Be Applied More Equally"

As criticism from the industry intensified, the SW Industry Association submitted a proposal to the Ministry of Economy and Finance last July, requesting that when public SW project bidding announcements allow joint contracts, both the divided performance method and joint performance method be permitted, allowing bidders to choose their preferred method. They urged revision of the Ministry’s government bidding and contract execution standards and joint contract operation guidelines to reflect industry demands in public institution bidding and contract execution. Originally, the Ministry planned to discuss this issue at the 'National Contract System Innovation TF' meeting at the end of last month, but the meeting was indefinitely postponed due to the resurgence of COVID-19, stalling discussions. Cho Young-hoon, head of industrial policy at the SW Industry Association, said, "Legally, ordering agencies can decide the responsibility division method, and there is no legal problem, but the habitual culture of choosing the joint performance method must now change. Since this is an issue raised across the industry?from large corporations to SMEs?it is necessary to apply the divided performance method in a balanced way."

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