Hello, I am Attorney Bae Ki-hyung of Cheongchul Law Firm.

When a prime contractor at a construction site falls into financial difficulty or bankruptcy, the damage cascades down to the multiple subcontractors working on the project. These subcontractors typically rush to demand direct payment of their unpaid subcontract amounts from the project owner (the obligor).

The problem is that the total amount of direct payment requests from subcontractors often far exceeds the remaining construction balance the owner owes to the prime contractor. When multiple parties compete over this limited pie, the most confusing question for readers is: "Who must legally be paid first, and how should the funds be allocated?"

Today, I will explain the priority rules and payment allocation standards that apply when multiple subcontractors compete by requesting direct payment from the project owner, focusing on the position adopted by Korean lower court precedents.

Priority Among Multiple Subcontractors' Direct Payment Requests — Time of Arrival Order

[Question] When multiple subcontractors request direct payment from the project owner, are all entitled to a pro-rata share according to their claim amounts (pro-rata distribution), or does the first requester take everything?

[Answer] To state the conclusion first, the majority of lower court rulings hold that, as a principle, priority is determined by "the chronological order in which the direct payment request notice arrives at the project owner." In other words, it is a "first-come, first-served" structure where the party that delivers its request first gains priority.

The current Fair Transactions in Subcontracting Act (Subcontracting Act) Article 14 (하도급법 제14조) does not contain any explicit provision determining priority or allocation methods among multiple subcontractors who simultaneously request direct payment. Because of this gap, two academic views have competed. One view holds that, in line with the Subcontracting Act's purpose of protecting subcontractors, all should be paid pro-rata according to their claim amounts under the general principle of creditor equality. The other view holds that because a direct payment request takes effect when the declaration of intent reaches the project owner, priority must be determined by the chronological order of arrival.

The lower court precedents currently driving practice (e.g., the April 9, 2010 judgment in case 2009 Ga-hap 13946) follow the latter view. The courts rely on the Subcontracting Act Enforcement Decree, which expressly states that "a direct payment request takes effect when the declaration of intent reaches the project owner." Accordingly, a subcontractor that delivers its certified direct payment request to the project owner even one minute earlier will be paid the full amount of its subcontract claim with priority. If the remaining progress payments are insufficient after deducting the earlier requester's amount, a later-arriving subcontractor may not recover its claim in full (see Seoul Central District Court judgment of July 7, 2010, case 2009 Ga-hap 37669).

However, the first-come rule is not absolute. There are exceptional circumstances in which "pro-rata distribution (allocation in proportion to claim amounts)" applies, and these must also be considered.

Exception 1. Identical Time of Arrival — Pro-Rata Distribution

When direct payment request mailings from multiple subcontractors arrive at the project owner on the same day and at the same time, making it impossible to discern the order of arrival, an exception applies whereby pro-rata distribution is made among those subcontractors in proportion to each one's claim amount.

Exception 2. Project Owner Files an Execution Deposit — Pro-Rata Distribution

When multiple subcontractors race to request direct payment and other general creditors of the prime contractor pile on with provisional attachments, the dispute can spiral. To avoid the risk of duplicate payment, the project owner may deposit the construction proceeds with the court under Civil Execution Act Article 248 Paragraph 1 (민사집행법 제248조 제1항). Once such an execution deposit is filed, the court treats all subcontractors who completed direct payment claims as of the deposit date as having equal rank and distributes the deposited funds pro-rata according to each subcontractor's construction proceeds claim amount.

Practical Takeaway — Even One Day Earlier Matters in Delivering Direct Payment Requests

Ultimately, from a practical standpoint, the moment a subcontractor detects signs of cash flow problems at the prime contractor, it is critically important to deliver a "certified direct payment request" to the project owner even a single day earlier than other subcontractors or creditors. A one- or two-day difference can determine whether a subcontractor recovers hundreds of millions of won in full or nothing at all.

Disputes over competing direct payment claims by multiple subcontractors involve complex factual issues — proving the time of arrival of certified mail, whether the project owner has filed a deposit, allocation proceedings for mixed deposits with other provisional attachment creditors, and more. Outcomes can vary significantly with the facts, so specific legal review is necessary from the earliest stage.

Drawing on a deep understanding of complex payment flows at construction sites and subcontracting law, Cheongchul Law Firm provides optimal solutions to secure our clients' rightful construction proceeds as the top priority. If you are facing competition among multiple subcontractors for direct payment or other issues involving unpaid subcontract amounts, please consult with the experts at Cheongchul Law Firm.

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Attorney Bae Ki-hyung previously served at the Defense Installations Agency and in the construction/real estate teams of major law firms, where he provided legal advice across the full lifecycle of large-scale construction projects — including public-procurement construction, defense facility projects, and SOC construction projects — and resolved related litigation. He brings extensive experience and capability to public-procurement construction, private construction, public procurement contracts, and matters involving state property, local government property, and other public assets. Please contact him whenever you need assistance.

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Cheongchul Law Firm is composed exclusively of attorneys from Korea's top 5 major law firms, the prosecution service, and corporate legal teams. Rather than relying on a single attorney, we assemble teams of specialists in fields relevant to each case. Cheongchul goes beyond resolving isolated legal issues to provide comprehensive solutions across the client's entire business — legal consulting focused on helping clients achieve what they ultimately want. If you need help reaching your goals, please do not hesitate to contact Cheongchul.