Hello. I am Attorney Lee Yong-gyeong from Cheongchul Law Firm.
The Fair Trade Commission (hereinafter referred to as 'FTC') has recently decided to request the heads of relevant administrative agencies to impose restrictions on bidding qualifications for Coass Inc. (hereinafter referred to as 'Coass') due to the accumulation of penalty points exceeding 5 points for violating the Act on the Promotion of Fair Transactions in Subcontracting (hereinafter referred to as 'Subcontracting Act'). This measure serves as a demonstration of the FTC's commitment to strict law enforcement regarding violations of the Subcontracting Act, and it is expected to significantly impact the compliance of companies with the Subcontracting Act in the future.
This post is based on the FTC press release dated October 10, 2024, and please note that the specific details of the disposition may change as a result of administrative litigation and other outcomes.
[Question]
Please explain the bidding qualification restriction system of the Fair Trade Commission due to violations of the Subcontracting Act and actual application cases.
[Answer]
Penalty Points for Violating the Subcontracting Act and Bidding Qualification Restriction Requests
Current subcontracting regulations impose specific penalties for businesses violating the Subcontracting Act by the FTC, and if the 'accumulated score' exceeds 5 points, it is stipulated that a request for restrictions on bidding qualifications should be made to the heads of relevant administrative agencies. The penalty point system is as follows:
Type of Sanction | General Violation | Serious Violation* |
Warning | 0.5 point | - |
Correction Order | 2.0 points | - |
Fine | 2.5 points | 2.6 points |
Report | 3.0 points | 5.1 points |
*Serious Violation: Violation of the obligation to prohibit the reduction of subcontracting payment, improper use of technical data, and retaliatory actions.
Content of the Law |
Article 26 of the Subcontracting Act (Cooperation of Heads of Relevant Administrative Agencies) Paragraph 2 The Fair Trade Commission shall impose penalties determined by presidential decree on the original contractor or subcontractor who violates the provisions of Article 3, Paragraphs 1 through 4 and Paragraph 9, Article 3-4, Articles 4 through 12, Articles 12-2, 12-3, Articles 13, 13-2, Articles 14 through 16, Article 16-2, Paragraph 7, and Articles 17 through 20, considering the degree of violation and damage, and if the penalty points exceed the standards specified by presidential decree, shall request the head of the relevant administrative agency to restrict participation in bidding, suspend business under Article 82, Paragraph 1, Item 7 of the Framework Act on the Construction Industry, and take any other necessary measures to promote fair subcontracting transactions. |
Article 17 of the Enforcement Decree of the Subcontracting Act (Criteria for Imposing Penalties) Paragraph 2 The phrase 'exceeding the standards determined by presidential decree' in Article 26, Paragraph 2 of the Act means a case where the accumulated points exceed the points according to the division of the following items set forth in [Appendix 3], Item 1. 1. Request for restriction on bidding qualifications: 5 points |
Appendix 3 of the Enforcement Decree of the Subcontracting Act 1. Definition of Terms 'Accumulated Points' refer to the total points from all penalties received by a business over the past three years, minus all points reduced, plus all weighted points. |
2. Facts of Coass's Legal Violations
Coass is a company primarily engaged in furniture manufacturing and sales, with total assets of 70,446 million won, total equity of 10,847 million won, and sales of 73,746 million won as of December 31, 2023.
Coass has accumulated a total of 7.1 penalty points due to violations of the Subcontracting Act in the past three years based on the recent correction order:
Type of Violation | Related Legal Provisions | Violation Details | Date of Action, Details | Penalty Points |
Failure to Pay Delay Interest | Article 13, Paragraph 8 | Failure to pay subcontracting payments within 60 days from the date of receipt of the subject matter brings about the obligation to pay delay interest. | June 4, 2020: Warning | 0.5 point |
Failure to Issue Written Documents | Article 3, Paragraph 1 | Obligation to issue written documents when entrusting manufacturing, etc., to subcontractors. | May 18, 2021: Correction Order | 2.0 points |
Violation of Prohibition on Reduction | Article 11, Paragraph 1 | Prohibition of reduction of subcontracting payment without justifiable reason. | May 18, 2021: Fine | 2.6 points |
Violation of Obligation to Notify Inspections | Article 9, Paragraph 2 | Obligation to notify inspection results in writing within 10 days from the date of receiving the subject matter. | May 18, 2021: Correction Order | 2.0 points |
Coass, in response to the FTC's decision made on June 25, 2021, filed an administrative lawsuit. The case went through the first and second trials and reached the Supreme Court, where the Seoul High Court's ruling on November 26, 2023, concluded with the FTC's final victory.
The court acknowledged Coass's violations of the Subcontracting Act and determined that the FTC's disposition was lawful. The court especially emphasized the importance of compliance with the Subcontracting Act considering the superior position of the original contractor in subcontracting transactions. Accordingly, Coass's accumulated penalty points of 7.1 were ultimately confirmed, serving as the basis for the request for restriction on bidding qualifications.
3. Judgment of the Fair Trade Commission
The FTC decided to impose penalty points on Coass for its violations of the Subcontracting Act and, since the accumulated score of 7.1 points exceeds 5 points, decided to request the head of the relevant administrative agency to impose restrictions on bidding qualifications.
Coass submitted documents concerning the cash payment ratio, increase rate of subcontracting payments, and relief ratio for subcontractors to the FTC in an effort to reduce penalty points. According to the Enforcement Decree of the Subcontracting Act, penalty reduction is possible if the original contractor pays a certain proportion of subcontracting payments in cash, increases subcontracting payments, or voluntarily compensates the damages to subcontractors. However, the FTC concluded that Coass did not meet these reduction requirements after reviewing the submitted documents.
The specific details of the bidding qualifications restriction will be determined by the head of the relevant administrative agency. Generally, the restriction period is set between 3 months to 2 years, and the restriction on bidding qualifications applies to all public bids issued by the state, local governments, and public institutions.
4. Implications
This case shows that original contractors accumulating penalty points due to violations of the Subcontracting Act beyond a certain level may face practical disadvantages, including being restricted from participating in government bids for a certain period. This will serve as a strong reminder to original contractors wishing to participate in future government bids about the importance of complying with the Subcontracting Act.
The FTC announced that it plans to continuously monitor businesses with high penalty points for violations of the Subcontracting Act and strictly examine whether to request restrictions on bidding qualifications. This shows the FTC's strong will to impose strict sanctions to promote fairness in subcontracting transactions.
Additionally, considering that Coass's penalty reduction efforts were not accepted, it can be inferred that businesses should prioritize a proactive approach to thoroughly complying with the Subcontracting Act rather than relying on post-incident efforts to mitigate penalties.
In conclusion, this case is a significant example demonstrating the FTC's strict law enforcement regarding violations of the Subcontracting Act. Companies should take this as a lesson and pay more attention to compliance with the Subcontracting Act, making efforts to create a fair subcontracting transaction culture. At the same time, cooperation between the government and enterprises will be necessary to create a mutually beneficial subcontracting transaction environment.
Cheongchul Law Firm has extensive experience and expertise in cases related to the Subcontracting Act. If you are contemplating responding to penalties imposed by the Fair Trade Commission regarding violations of the Subcontracting Act and the resulting disqualification from bidding, please feel free to contact us.
Cheongchul Law Firm will be your reliable legal partner. If you need to consult with lawyers specializing in the Subcontracting Act and bidding, please get in touch now.
Related work cases that are good to see together
