Hello. I am Attorney Lee Young-kyung from the Law Firm Cheongchul.

Today, I will explain a case in which the Supreme Court judged a matter regarding the Fair Trade Commission’s correction orders and surcharge payment orders for violations of the Subcontracting Act in the subcontracting practices in the shipbuilding and marine plant industry.

I. Overview of the Case

The plaintiff is a shipbuilding and marine plant manufacturer who entrusts the manufacturing of component parts to multiple subcontractors. The Fair Trade Commission (defendant) imposed correction orders, publication orders, and surcharge payment orders on February 28, 2019, due to a series of violations of the Subcontracting Act by the plaintiff and decided to file a complaint.

The issues in question can be categorized into three main points.

The plaintiff: ① Did not issue contract documents containing the statutory requirements to subcontractors in advance during the main construction and additional modification works, ②-1 Required joint guarantees from the representatives of the subcontractors, and ②-2 Established a special provision that does not settle variations in construction payments within ±3% of the total contract amount, and ③ Set the subcontracting payment for the additional modification work at a significantly lower level than the main construction payment.

II. Judgment of the Lower Court

The lower court ruled as follows regarding each issue:

First, the request for cancellation of the complaint by the plaintiff was dismissed on the grounds that the complaint was merely a clue for investigation and did not fall under a disposition subject to appeal.

Second, regarding the violation of the obligation to issue documents, the court found the disposition regarding the main construction part to be lawful; however, it recognized a justifiable reason for the non-issue of documents related to the additional modification work, citing the necessity for prompt work progress due to the nature of shipbuilding tasks, and therefore canceled the related disposition.

Third, regarding the establishment of unfair special provisions, the disposition related to the joint guarantee agreement with the representative director was canceled, but the disposition concerning the non-settlement agreement within 3% was maintained.

Fourth, the disposition pertaining to the determination of unfair subcontracting payments was canceled.

III. Judgment of the Supreme Court

The Supreme Court dismissed both appeals from the plaintiff and defendant.

1.     Request for Cancellation of the Complaint

The Supreme Court upheld the judgment of the lower court, which found that the complaint, being merely a clue for investigation, did not constitute a disposition subject to appeal that impacts the rights or obligations of citizens.

2.     Violation of the Obligation to Issue Documents

1) Legal Theory

The Supreme Court first noted that the former Article 3(1) of the "Act on the Fairness of Subcontracting Transactions" (prior to amendments by Law No. 9971 on January 25, 2010) required the principal contractor to issue documents unless there were 'justifiable reasons'; however, the amended Article 3 of the former Subcontracting Act as of January 25, 2010 imposes the obligation to issue documents in principle regardless of the existence of justifiable reasons, and only exempts some obligations to provide certain details in the documents exceptionally.

In particular, the Supreme Court ruled that "considering the legislative intent of the former Subcontracting Act to protect subcontractors and establish a fair trading order, it cannot be said that the failure to issue a document in violation of Article 3(1) of the former Subcontracting Act can be excused under general principles of administrative law regarding justifiable reasons due to omissions in the details of the issued document that are stipulated specifically in Article 3(3) of the former Subcontracting Act, which should be held to stricter standards."

2) Specific Judgment

The Supreme Court determined that regarding the main construction, the plaintiff did not issue a contract document containing the statutory requirements set forth in the Subcontracting Act before subcontractors began work related to the entrusted task, and considering only the circumstances asserted by the plaintiff, it cannot be said that the legislative intent of the former Subcontracting Act to prevent the disadvantages faced by subcontractors and avoid future disputes between the parties is not compromised, thereby deciding that the correction order regarding the main construction part violated Article 3 of the former Subcontracting Act and upholding the judgment of the lower court was justified.

However, regarding the non-issuance of contract documents for additional modification work, it was ruled that ① even in the event of urgent restoration work due to accidents, the obligation to issue documents cannot be waived, and that merely the fact that additional modifications often occur and require prompt measures does not justify complete failure to issue documents, and ② simply because a subcontractor started work voluntarily does not constitute a justifiable reason for the principal contractor to violate the obligation to issue documents. Thus, it was ruled that there is no justifiable reason contrary to the lower court's decision; however, it was held that some of the additional modification works do not exist as a delegation of work, so the recognition of the obligation to issue documents on the part of the plaintiff was negated, ultimately confirming the judgment of the lower court.

3.     Unfair Establishment of Special Provisions

a. Joint Guarantee Agreement of the Representative Director

The Supreme Court held that the representation by the representative director does not impose additional obligations on the subcontractor beyond the liabilities arising from the subcontracting agreement with the plaintiff, and that in cases where the subcontractor is small or of limited scale, the joint guarantee of the representative director is necessary, and considering that there were no explicit prohibitive regulations under the Subcontracting Act at that time, the judgment of the lower court was upheld as justifiable when it concluded that it does not constitute unfair special provision.

b. Non-Settlement Agreement within 3%

The lower court held that the non-settlement agreement within 3% means that variations within 3% of the total contract amount will be considered included in the main contract and thus not settled. In cases of shipbuilding or marine plant construction, encountering modifications often results in significant deviations, and the prospect of a reduction from the total contracted construction payments is unlikely due to unforeseen circumstances. Therefore, it was concluded that this agreement infringes or restricts the interests of subcontractors unfairly, and the Supreme Court also deemed this judgment of the lower court proper.

4.     Determination of Unfair Subcontracting Payments

1) Legal Theory

Article 4(2)(5) of the Subcontracting Act defines a principal contractor's actions that constitute the determination of unfair subcontracting payments as 'the act of a principal contractor unilaterally determining the subcontracting payment at a low price, without agreement with the subcontractor.' This refers to acts whereby the principal contractor determines subcontracting payments unilaterally at a low price, leveraging their superior position in transactions, despite the lack of actual consent from the subcontractor. Here, whether the price is low should be assessed by comparing it to the generally paid compensation for similar goods or services. The level of 'generally paid compensation' can be recognized taking into account the contents of previous transactions among the parties involved in the disputed act, the compensation levels and their variances in other comparable transactions (hereafter referred to as 'comparison transactions'), the timing, method, scale, duration of comparison transactions, and the market conditions at the time, such as the status and scale of the businesses involved (see Supreme Court Decision 2017. 12. 7. 2016du35540, Supreme Court Decision 2018. 5. 15. 2015du38252, etc.).

2) Judgment

The Supreme Court ruled that the main and additional modification works vary significantly in terms of scale, scope, type, and complexity; the ratios of the main and additional modification works are different for each project and work type performed by subcontractors; and the efficiency differs among subcontractors, so it is inappropriate to simply compare the efficiency of the main and additional modification works to determine whether the subcontracting payments for additional modification works are lower than generally paid compensation. Therefore, it is difficult to equate the lower efficiency of additional modifications directly with the fact that the subcontracting payments for additional modifications were determined lower than the generally paid compensation based on the main work’s efficiency; thus, the conclusion reached by the lower court was justified.

III. Practical Implications

This ruling has practical significance in that it strictly interprets the exceptions to the obligation to issue documents under the Subcontracting Act while considering the specifics of the shipbuilding and marine plant industries, emphasizes that the unfairness of special provisions should be judged based on actual effects, and clarifies that the appropriateness of subcontracting payments should be assessed by comprehensively considering the concrete characteristics of transactions.

The Law Firm Cheongchul represents companies and the Fair Trade Commission in numerous administrative lawsuits and possesses expertise in fair trading cases. This expertise has been recognized by legal professional media, and Cheongchul entered Tier 3 of the 2024 Fair Trade League Table selected by Legal Times just two years after its establishment. If you have concerns about fair trade-related matters, please feel free to contact us.