Hello. I am Attorney Lee Young-gyeong from Cheongchul Law Firm.
The Fair Trade Commission (hereinafter referred to as 'FTC') has recently decided to issue a corrective order and impose a fine of 450 million won on HL D&I Halla Co., Ltd. (hereinafter referred to as 'Halla') for violations of the Act on the Fairness of Subcontracting Transactions (hereinafter referred to as 'the Subcontracting Law'). This measure is significant as it addresses the practices of unadjusted subcontract payments that have been commonly conducted in the construction industry, thereby raising awareness to prevent similar future actions. In this article, I would like to examine the facts of this case, the FTC's judgment, and the implications in detail.
[Question]
Please explain the contractor's obligation to adjust subcontract payments.
[Answer]
1. Facts
Halla violated its obligation to adjust subcontract payments while entrusting 19 construction projects, including temporary fence construction, to 18 subcontractors from January 31, 2021, to April 7, 2023. Despite having received adjustments to the contract amount from the client, Korea Land and Housing Corporation, due to price fluctuations on four occasions, Halla committed the following violations:
Violation Details | Relevant Legal Provisions | Detailed Status | |
Failure to Notify | Failure to notify the reasons and details for the increase | Article 16 Paragraph 2 | 18 subcontractors, 34 violations |
Delayed Adjustment | Delay in increasing subcontract payments | Article 16 Paragraph 1 and Paragraph 3 | 18 subcontractors, 363 million won, 34 violations, delays of 15 to 631 days |
Failure to Pay Interest | Failure to pay interest on delayed additional subcontract payments | Article 16 Paragraph 4 | 12 subcontractors, 26 violations, delays of 76 to 637 days, 18 million won unpaid |
These actions violate the obligations of the contractor as stipulated in the Subcontracting Law. According to the Subcontracting Law, if a contractor receives an increase in the contract amount from the client, they must notify the subcontractor of the reasons and details within 15 days, and increase the subcontract payment within 30 days. Additionally, if the payment of the additional amount exceeds 15 days, interest for delay must be paid.
The Subcontracting Law Article 16 (Adjustment of Subcontract Payment Due to Design Changes, etc.) ① A contractor who has entrusted production, etc., shall increase the subcontract payment according to the content and ratio of the increased contract amount received from the client when all of the following cases apply. However, if the contractor receives a decrease in the contract amount from the client, they may decrease the subcontract payment according to the content and ratio. 1. When the contract amount is increased due to changes in design, changes in the timing or economic conditions related to the delivery of the object, etc. 2. When additional costs are incurred for the completion of the object for the reasons stated in item 1. ② When increasing or decreasing subcontract payments pursuant to paragraph 1, the contractor shall notify the relevant subcontractor of the reasons and details for the increase or decrease received from the client within 15 days from the date of receipt. This does not apply if the client directly notifies the subcontractor of the reasons and details. ③ Any increase or decrease in subcontract payments according to paragraph 1 shall be made within 30 days from the date the contractor receives an increase or decrease in the contract amount from the client. ④ For interest on additional subcontract payments made after 15 days from the date the contractor receives the additional amount due to the increase in the contract amount pursuant to paragraph 1, paragraph 8 of Article 13 shall apply, and for any discount fees, commissions related to the payment of additional subcontract payments using notes or alternative means of payment, paragraphs 6, 7, 9, and 10 of Article 13 shall apply. In this case, "60 days from the receipt of the object" is deemed as "15 days from the date the additional amount is received." |
2. FTC's Judgment
The FTC determined that Halla's actions violated Article 16 of the Subcontracting Law. The specific violations are as presented in the table above. Accordingly, the FTC imposed a corrective order and a fine of 450 million won on Halla. It seems that the consideration was given to the fact that the violation period lasted over 2 years and affected multiple subcontractors.
The main content of the corrective order is a reoccurrence prevention order to prevent similar or identical actions from happening in the future.
3. Implications
This corrective measure provides significant implications such as:
Need for Improvement in the Construction Industry's Practices: This case emphasizes the need to improve unfair subcontracting practices that are prevalent in the construction industry, which is particularly significant in terms of protecting the rights of small and medium-sized construction firms.
Importance of Contractor's Compliance: Contractors must thoroughly fulfill their obligations to notify and adjust within the legal deadlines when there are changes in the contract amount.
Need for Strengthened Internal Management Systems: Companies need to strengthen their internal management systems to comply with the Subcontracting Law. For example, establishing a contract amount change management system that can monitor changes in contract amounts from clients in real-time, automatically notify subcontractors, and manage deadlines for subcontract payment adjustments.
Ongoing Surveillance by the FTC: The FTC plans to continue strict law enforcement against unfair subcontract transactions in the construction market moving forward. This is expected to promote changes in subcontracting practices across the construction industry.
In conclusion, this case serves as a reminder of the need for improvements in subcontracting practices within the construction industry. If the FTC's ongoing oversight is accompanied by the voluntary efforts of companies, a fairer and more transparent subcontracting culture is expected to take root. Construction companies should take this case as a lesson to strengthen their internal management systems and work harder to build cooperative relationships with subcontractors.
Cheongchul Law Firm has extensive experience and expertise in cases related to the Subcontracting Law. If you are facing issues regarding responses to FTC actions related to Subcontracting Law violations, please feel free to contact us.
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