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

When a prime contractor faces a cash crunch at a construction site, the project quickly becomes a battlefield of creditors. Subcontractors rush to the project owner with a 'request for direct payment' of subcontract proceeds, while banks, material suppliers and other creditors who lent money to the prime contractor race to attach or provisionally seize the prime contractor's receivable against the owner.

If the owner then tells the subcontractor, "Another creditor's seizure arrived first, so we cannot pay you directly," the subcontractor is left in limbo—and with hundreds of millions of won at stake, an intense legal fight follows.

Today I will explain, with Supreme Court precedents, who prevails when a subcontractor's 'right to direct payment' under the Subcontract Act collides with a 'provisional seizure (or seizure)' obtained by a third-party creditor of the prime contractor.

Direct Payment Right vs. Provisional Seizure — The Supreme Court's Priority Test

Between a subcontract direct payment claim and another creditor's provisional seizure, who actually gets paid first?

The bottom line: priority is determined solely by the order in which the documents or notices arrive at the project owner. Whoever reaches the owner even one minute earlier wins.

Article 14(2) of the Fair Transactions in Subcontracting Act (하도급법, the "Subcontract Act") provides that, once the subcontractor's direct payment request reaches the owner, the owner's payment obligation to the prime contractor is extinguished within that scope. However, the Supreme Court holds that there is no separate provision in the Subcontract Act that overrides compulsory execution or preservation measures that took effect before the direct payment ground arose.

On that basis, the Supreme Court has laid down the following clear rules based on the time of arrival.

Where Provisional Seizure Reaches the Owner 'Before' the Direct Payment Request (Seizure Prevails)

Supreme Court Decision dated 5 September 2003, Case No. 2001Da64769 ruled that "where, before the direct payment ground arises, a third-party creditor of the prime contractor has secured execution against the prime contractor's receivable from the owner by way of seizure or provisional seizure, that secured receivable is not extinguished, notwithstanding the subsequent ground for direct payment of subcontract proceeds." In other words, if a bank or another material supplier's provisional seizure notice reaches the owner before the subcontractor's certified direct payment request, the right to direct payment simply does not arise within the amount already tied up by the seizure. The subcontractor is therefore unable to receive that portion directly from the owner.

Where the Direct Payment Request (or Tripartite Agreement) Reaches the Owner 'Before' the Seizure (Direct Payment Prevails)

Conversely, if the subcontractor's direct payment notice reaches the owner first, or a tripartite direct payment agreement is reached first, the subcontractor's right to direct payment arises at that moment and the prime contractor's receivable against the owner is immediately extinguished. Any provisional seizure that another creditor obtains thereafter attaches to a 'non-existent receivable' and is therefore void, and the subcontractor can safely collect the proceeds (Supreme Court Decision dated 29 June 2023, Case No. 2023Da221830).

An Exception to Watch For: Your Own Seizure May Block Your Own Direct Payment Claim

The single most fatal mistake subcontractors make in practice is this: in an effort to secure their own proceeds, the subcontractor itself first obtains a 'provisional seizure' against the prime contractor's receivable from the owner. Yet Supreme Court Decision dated 24 December 2014, Case No. 2012Da85267 held that even where the provisional seizure was obtained solely on the subcontractor's own application, so long as the seizure has not been cancelled or released, the right to direct payment does not arise within the amount tied up by that seizure, even if a direct payment request is made later. In other words, your own seizure can paradoxically block your own direct payment claim—so the order of legal steps must be planned strategically.

Practical Takeaway — Whoever Delivers Notice to the Owner Faster Wins

In practice, once warning signs of a prime contractor's cash crunch appear, 'who moves first' is the threshold question.

For subcontractors, if a direct payment ground under Article 14 of the Subcontract Act has arisen (such as the prime contractor's failure to pay), the answer is not to wait passively or rashly file for a provisional seizure. Instead, once the requirements are met, you should immediately deliver a certified 'direct payment request' to the owner and carve out your portion of the receivable first—that is the surest way to protect hundreds of millions of won in construction proceeds.

Conflicts between subcontract direct payment and provisional seizure involve a tangled mix of issues—proving the time of arrival, the owner's mixed deposit (혼합공탁), the relationship with assignment of receivables—so the outcome can vary sharply depending on the facts, making early, specific legal review essential.

Drawing on a deep understanding of complex cash flows on construction sites and the practice of preservation measures (provisional seizure and provisional disposition), Cheongchul Law Firm delivers tailored solutions that prioritize securing the construction proceeds rightfully owed to your company. If you are facing difficulties involving provisional seizure and subcontract direct payment, please consult the specialists at Cheongchul Law Firm.

------

Attorney Gi-hyung Bae served at the Defense Installations Agency and the construction & real estate team of a major law firm, providing legal advice on the full lifecycle of large-scale construction projects (including government-procured projects, defense installation projects and SOC projects) and government contracts, and resolving related litigation. If you need assistance with government-procured projects, private construction projects, public procurement contracts, or matters involving national, regional or other public property, please contact him at any time.

* * *

Cheongchul Law Firm is composed exclusively of attorneys from Korea's top five law firms, the Prosecutors' Office and major corporate legal teams. Rather than relying on a single lawyer, we form teams of specialists tailored to the issues of each case. Going beyond resolving a single dispute, Cheongchul provides comprehensive solutions across the entire business and legal consulting focused on achieving the client's ultimate goals. If you need help reaching your goals, please do not hesitate to contact Cheongchul.