Strengthening Negotiation Power for Subcontractor Payment Adjustments... Korea Federation of SMEs Also Included as Negotiation Party

"'Subcontracting Act Amendment' Passed at Cabinet Meeting"

Introduction of Court Orders for Submission of Materials and Confidentiality... Up to 2 Years Imprisonment or 20 Million KRW Fine for Violations
Criteria for Installment Payment of Fines for SMEs Changed from 1 Billion KRW to 500 Million KRW

Overview of the Subcontract Payment Adjustment Negotiation Procedure.

[Sejong=Asia Economy Reporter Joo Sang-don] The amendment to the Subcontracting Act, which includes strengthening the negotiation power of subcontractors by including the Korea Federation of SMEs as a party authorized to negotiate subcontract payment adjustments, passed the Cabinet meeting on the 26th.

The current law allows subcontractors to apply for subcontract payment adjustments to the original contractor through small and medium enterprise cooperatives. However, due to the negotiation power gap between the SME cooperatives and the original contractors, payment adjustments through SME cooperatives have not been activated. In fact, according to the 2019 subcontracting written survey, 34.6% of subcontractors applied for payment adjustments, but only 0.9% utilized SME cooperatives.

Also, the current regulations allow subcontract payment adjustment applications only when supply costs or management expenses increase, making it difficult to use the right to apply for payment adjustments for agreements that gradually reduce unit prices based on cost reduction.

Accordingly, the amendment includes ▲ including the Korea Federation of SMEs as a party authorized to negotiate subcontract payment adjustments ▲ including cases where, after concluding agreements to gradually reduce unit prices based on cost reduction, the supply costs do not decrease due to reasons not attributable to the subcontractor, such as changes in delivery volume, as grounds for adjustment application.

The amendment also introduces court orders for submission of materials and confidentiality orders. In current damage compensation lawsuits due to violations of the Subcontracting Act, the injured companies rely on the civil procedure law’s document submission orders to secure evidence necessary to prove damages or the amount of damages. However, business operators can refuse document submission orders citing trade secrets, and since there are few disadvantages for not submitting documents, injured companies have faced difficulties in securing necessary evidence to prove damages and their amounts.

Therefore, the amendment introduces a court order system for submission of materials, stipulating that business operators cannot refuse court orders for submission of materials on the grounds of trade secrets when it is essential to prove damages and their amounts.

Additionally, to minimize leakage of trade secrets during litigation, the amendment establishes provisions and related procedures for court confidentiality orders. When trade secrets are included in preparatory documents or evidence, the court can prohibit the use of materials for purposes other than litigation or disclosure to parties other than the litigants by court order. If such confidentiality orders are violated, penalties of up to 2 years imprisonment or fines up to 20 million KRW can be imposed.

The scope for installment payment of fines for SMEs will be expanded. Currently, installment payment of fines is possible only when the fine imposed for violating the Subcontracting Act exceeds 1 billion KRW. However, considering that SMEs may face significant financial difficulties if they pay fines of 1 billion KRW or less in a lump sum, the criteria for installment payment of fines for SMEs will be set at 'exceeding 500 million KRW.'

An official from the Fair Trade Commission said, "With this amendment to the Subcontracting Act, subcontract payment adjustment negotiations will be activated, increasing the negotiation power of subcontractors, and through the supplementation of the damage compensation system, subcontractors will be able to receive relief from damages more easily. Also, the burden on SMEs will be eased so that they do not face significant financial difficulties due to lump-sum payment of fines."

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