Hello, this is attorney Bae Ki-hyung of Cheongchul Law Firm.

On construction sites, the prime contractor (principal contractor) often selects subcontractors through competitive bidding. Amid fierce competition to win work, subcontractors tend to minimize their margins and submit so-called "lowest-price" bids.

In practice, however, an unfair situation frequently arises. Even though a company has submitted the lowest bid, the prime contractor declines to select a winner on the grounds that "the desired unit price was not reached" or that the bid "exceeded the internal budget," voids the bid, and immediately conducts a "re-bidding." In the end, subcontractors, desperate to win the project, reluctantly submit an even lower amount than their original lowest bid and conclude the contract.

Today, I will explain whether it is legally valid to force a re-bidding without justifiable grounds after a lowest-price bid in order to cut subcontract payments, along with the clear provisions of the Subcontract Act and the standards applied in the case law.

Illegality of Cutting Subcontract Payments Through Re-bidding - Article 4(2)7 of the Subcontract Act (하도급법 제4조 제2항 제7호)

[Question] Is it legally permissible to conduct a re-bidding even when a lowest-price bidder exists, and conclude the contract at an amount lower than the original lowest bid?

[Answer] This clearly violates the Subcontract Act and constitutes an "unfair determination of subcontract payment," making it illegal.

The current Fair Transactions in Subcontracting Act (Subcontract Act / 하도급거래 공정화에 관한 법률, 하도급법) Article 4(2)7 expressly prohibits the act of "determining a subcontract payment at an amount lower than the lowest bid amount, without justifiable grounds, when concluding a subcontract agreement through competitive bidding."

On this point, the Supreme Court and the Fair Trade Commission have held that selecting a winner at an amount lower than the original lowest bid by conducting a re-bidding immediately, even though a lowest-price bidder exists, is, absent special circumstances, carried out for the purpose of lowering the subcontract payment and therefore violates the Subcontract Act (Supreme Court Decision 2011Du23337, Feb. 23, 2012 / 대법원 2012. 2. 23. 선고 2011두23337 판결).

However, if the prime contractor objectively proves "justifiable grounds" showing that it had no choice but to conduct the re-bidding, it may exceptionally escape liability. The standard for "justifiable grounds" recognized by the courts is very strict.

1. Standard for Determining Justifiable Grounds:

Justifiable grounds must be objective and reasonable, and mere internal circumstances of the prime contractor, such as exceeding its internal budget or falling short of a target unit price, do not amount to justifiable grounds. The burden of proving whether the grounds are justifiable also lies entirely with the prime contractor (principal contractor).

2. Fulfillment of the Prior-Notice Duty:

A particularly important practical point is the existence of a "reserve price." The prime contractor may have its own reserve price and may have set a standard that, if a bid exceeds that reserve price, the bid will be voided and a re-bidding conducted. In that case, however, the prime contractor must have clearly notified the bidding companies, with objective materials, that such a standard (the reserve price and re-bidding conditions) existed before they participated in the bidding; only then can it be recognized as justifiable grounds. If the prime contractor belatedly invokes a standard it never disclosed in advance and forces a re-bidding, it will be difficult to avoid a violation of the Subcontract Act (see Supreme Court Decision 2012Du13924, Nov. 15, 2012 / 대법원 2012. 11. 15. 선고 2012두13924 판결).

Practical Key Points - Securing Bidding Records and a Punitive Damages Strategy

In practice, when a subcontractor is unfairly forced into a re-bidding and has its payment cut, it is critically important, as a preliminary step, to thoroughly preserve objective materials such as the initial bid announcement, the original bid breakdown statement, and the re-bidding notice email or official document.

The mere existence of legal provisions does not easily correct practices that exploit the prime contractor's superior position. If it is proven that the prime contractor determined a subcontract payment at a low amount through re-bidding without justifiable grounds, this becomes subject to a corrective order or penalty surcharge by the Fair Trade Commission, and there further arises room to seek even punitive damages for the unfairly reduced payment.

Disputes over the determination of subcontract payments through re-bidding involve complex facts, such as whether "justifiable grounds" exist and the legality of the prior-notice procedure, so the conclusion can vary greatly depending on the case, and a specific review is required.

Based on a deep understanding of unfair subcontracting practices on construction sites and of the Subcontract Act, Cheongchul Law Firm provides the optimal legal solutions to protect the legitimate rights and interests of subcontractors. If you are facing difficulties due to unfair re-bidding or the cutting of subcontract payments, we encourage you to consult with the experts at Cheongchul Law Firm.

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Attorney Bae Ki-hyung worked at the Defense Installations Agency and at the construction/real estate team of a major law firm, providing legal advice on the entire process of government contracts and construction projects-including large-scale construction works such as government-funded projects, national defense facility projects, and SOC construction projects-and has abundant experience and expertise in resolving related litigation. If you need assistance regarding government construction works, private construction works, public procurement contracts, state property, local property, or public property, please feel free to contact him at any time.

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Cheongchul Law Firm is composed solely of attorneys from Korea's top five major law firms, the prosecution service, and the legal teams of large corporations, and rather than a single attorney, a team of specialist attorneys in the relevant fields responds to each case. Going beyond resolving only specific issues, Cheongchul provides comprehensive solutions for the business as a whole, offering legal consulting focused on ultimately achieving what the client wants. If you need help reaching your goals, please do not hesitate to contact Cheongchul.