Hello. I am Attorney Shin Jun-seon from Cheongchul Law Firm.

Article 27-2 of the National Contracts Act and Article 31-2 of the Local Contracts Act stipulated that the qualification restriction for bidders who are unqualified suppliers could be replaced with a penalty; however, the Act on the Management of Public Institutions (hereinafter referred to as "Public Institutions Management Act") lacks a provision stating that this can be replaced with a penalty, aside from the stipulation that qualification for bidding can be restricted until early 2024 for violations of contract order.

As a result, there has been criticism of the imbalance where the level of sanctions varies according to the nature of the issuing agency, such as national agencies, local governments, and public institutions; many small and medium-sized enterprises (SMEs) participating in public procurement projects have often faced situations where they could not avoid having their bidding qualifications restricted when a violation of contract order was judged to have occurred, leading to numerous instances where those companies faced serious management difficulties.

[Question]

Are unqualified suppliers who participated in bidding for public institution projects necessarily subject to bidding qualification restrictions?

[Answer]

1. Key Points

In 2024, Paragraph 2 of Article 39 of the Public Institutions Management Act was revised to introduce a 'penalty' system similar to the penalty system under the National Contracts Act, and alongside this, the Subordinate Regulations for Contract Affairs of Public Enterprises and Quasi-Governmental Institutions (hereinafter referred to as "Regulations") Article 15 was also amended to establish new requirements and procedures for imposing penalties. Accordingly, starting from the effective date of September 27, 2024, public institutions can refrain from restricting the bidding qualifications of unqualified suppliers if they pay a certain amount as a penalty.

The penalty system is substantially similar to the existing penalty system under the National Contracts Act and Local Contracts Act, except that public institutions are not granted the power to impose penalties, which is why this is defined in the form of a penalty.

The penalty applies in two cases. First, it applies if the violation of contract order by the unqualified supplier is due to changes in economic conditions that are clearly unforeseeable, implying that the responsibility for the violation is minor; this is in accordance with the subordinate regulations and allows the payment of a penalty not exceeding 10% of the contract amount.

Secondly, if it is expected that there will be less than two bidders when the qualification for bidding is restricted, which would impede effective competition, penalties may be paid within a range not exceeding 30% of the contract amount, and the Regulations apply the types of violations as defined in the National Contracts Act as the basis for the payment amount.

Moreover, to impose a penalty, the issuing agency is required to notify in writing the contents of the contract order violation, the payment amount, and the fact that the supplier may not be subject to qualification restriction if they make the payment. The unqualified supplier must pay the penalty within 60 days from the receipt of the notification, and in unavoidable circumstances such as natural disasters, they may make the payment within 30 days after the reasons have been resolved.

2. Practical Significance

Restrictions on bidding qualifications can be a strong sanction that directly impacts a company’s survival. Particularly for SMEs that rely heavily on public procurement, restrictions may cause serious operational difficulties during that period. Furthermore, from the perspective of the issuing agency, there were concerns that excluding companies with high technology or expertise from bidding in specific fields could disrupt business execution.

In this context, being able to replace sanction measures with penalties even when a violation of contract order occurs in public projects is quite significant. From the company's perspective, paying penalties may be a more realistic alternative than restrictions that threaten business survival, and thus it is necessary to actively request that public institutions classify minor violations of contract order and replace the restriction on bidding qualifications with penalty imposition.

Additionally, from the perspective of the issuing agency, if there are concerns about diminished competition due to a reduced number of bidders, utilizing the penalty system helps secure the effectiveness of bidding, thereby creating grounds for accepting companies' requests.

The amended Public Institutions Management Act and Regulations will apply from the date of enforcement, September 27, 2024, for any cause that leads to restrictions on bidding qualifications occurring after that date. Therefore, companies receiving prior notification of restrictions on bidding qualifications from public institutions post-enforcement should examine immediately whether they can substitute the relevant decision with a penalty measure and present this to the public institution, while also conducting a meticulous analysis of the criteria for determining the penalty to ascertain the expected level of penalties, as well as seeking management risk management strategies through continued participation in bidding.

Public procurement laws are complex and frequently amended, and a wide variety of practical precedents and interpretations have accumulated. In particular, for significant changes in the system, such as the implementation of the penalty system under the Public Institutions Management Act, which can directly affect corporate survival, companies subject to the application must proactively manage the risks of sanction measures through careful legal review from the outset of the law's implementation.

Cheongchul Law Firm comprises top lawyers from leading law firms and large corporations and has extensive experience in providing legal consultation and litigation in the field of public procurement. In particular, Cheongchul Law Firm adheres to the principle of offering comprehensive legal solutions linked to clients' long-term business strategies rather than isolated resolutions to individual issues. If you require specialized legal consultation regarding bidding qualification restrictions or penalty imposition, please feel free to contact us at any time.