Hello, this is Attorney Bae Gi-hyung from Cheongchul Law Firm.

In construction sites, it is common for two or more companies to form a Joint Venture and carry out construction together. In a joint venture, the representative company generally pays all necessary costs upfront and then later bills the constituent members according to their share ratios.

The expenses incurred by the joint venture, including subcontracting fees, material costs, labor costs, and other expenses, are referred to as 'joint costs'. Due to the urgency of construction, it is common for the representative company to make payments without the consent of all members, leading to instances where members refuse to pay a portion of the construction costs. Recently, as the construction market has worsened and members who were not paying construction costs enter rehabilitation proceedings, the issues have become even more complicated.

From the standpoint of the joint venture representative seeking to claim joint costs, they wish to secure the maximum joint cost contribution even in rehabilitation proceedings, hoping that the joint cost contribution claims will be classified as 'public claims'.

In relation to this, in rehabilitation proceedings for 'mutual non-performance bilateral contracts', if the management of the rehabilitative debtor chooses to perform the contract, the claims held by the other party are treated as 'public claims'. Therefore, if the management chooses to execute the construction subcontracting agreement, it raises the question of whether the joint cost contribution claims can be treated as 'public claims'.

[Question]

Is it possible to consider the joint subcontracting agreement as a bilateral contract and treat the joint cost contribution claims as public claims?

[Answer]

The Supreme Court's ruling on April 11, 2000, in case 99Da60559 explicitly states, "The joint subcontracting agreement, in which the representative company finances and pays for the construction funds, and the member company reimburses its share, does not fall under the bilateral contract as defined in Article 103(1) of the Corporate Reorganization Act (current Debtor Rehabilitation and Bankruptcy Act)."

Recent lower court judgments following this ruling also explicitly assert, "The joint subcontracting agreement is a contract to determine the internal legal relations among the members of the joint venture, and it is difficult to view the debts that the defendant, as the representative company of the joint venture, bears in relation to financing construction funds and the common cost contribution debt borne by the plaintiff as mutually interrelated. Thus, it cannot be recognized as a mutual non-performance bilateral contract" (Seoul High Court, ruling on October 11, 2017, case 2017Na2011504).

The above ruling clarifies that while the contents of the joint subcontracting agreement supplement the construction agreement at issue, the joint subcontracting agreement and the construction agreement are ultimately separate contracts. Therefore, even if the construction contract, which is a mutual non-performance bilateral contract, is chosen for performance under Article 119(1) of the Debtor Rehabilitation Act, it is also difficult to interpret that the joint subcontracting agreement, which is not originally a mutual non-performance bilateral contract, has also been chosen for performance according to the provisions of this Act.

However, while the joint cost contribution claims against the members of the joint venture prior to the commencement of rehabilitation proceedings will be treated as rehabilitation claims, those against the management after the commencement of rehabilitation proceedings may become public claims.

As the construction market deteriorates, situations where some members of the joint venture go bankrupt can occur at any time, necessitating other members to be aware of the legal relations and countermeasures related to such bankruptcy situations in advance.

In particular, as mentioned above, since joint cost contribution claims are treated as rehabilitation claims, if a member enters rehabilitation proceedings, it is important to report the rehabilitation claims within the reporting period to ensure that the claims do not lapse.

Attorney Bae Gi-hyung works in the construction/real estate team of the Defense Acquisition Program Administration and a large law firm, specializing in matters related to public property including bidding, usage permits, lease contracts, and compensation dispositions. He possesses extensive experience and skills in representing both the state and the parties involved in various disputes including administrative appeals and litigation, so feel free to contact him if you need assistance with issues related to public property, local property, and public assets.

Cheongchul Law Firm consists solely of attorneys from Korea's top five law firms, including Kim & Chang, Bae, Kim & Lee, Lee & Ko, Shin & Kim, and Yulchon, as well as in-house counsel from large corporations. A team of specialized attorneys in relevant fields, rather than a single attorney, is formed to address each case. Cheongchul provides comprehensive solutions for overall business issues beyond resolving specific disputes, ultimately focusing on achieving the client's goals. If you need assistance in achieving your objectives, do not hesitate to reach out to Cheongchul.