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

In construction subcontracting practice, prime contractors (principal contractors) still frequently impose unreasonable special conditions on subcontractors under the pretext of contract performance.

Typical examples include clauses such as "the subcontractor shall fully bear all costs for removing on-site safety hazards" in preparation for industrial accidents, or demands for "joint guarantees by a third party or the representative director personally" even when the subcontractor has already provided a contract performance bond. As a result, subcontractors who unfairly shoulder tens of millions of won in safety management costs often face serious financial difficulties during settlement.

Today, I will explain the illegality of safety cost transfer and joint guarantee clauses commonly forced upon subcontractors, and how subcontractors can respond, with clear references to statutes and guidelines.

Illegality of Unfair Clauses on Safety Costs and Joint Guarantees - KFTC Notices, Review Guidelines, and Case Law

[Question] Are clauses requiring subcontractors to bear all on-site safety management and accident prevention costs, or demands for excessive joint guarantees, legally valid?

[Answer] In conclusion, under the Fair Transactions in Subcontracting Act (Subcontracting Act) Article 3-4 and related Korea Fair Trade Commission (KFTC) guidelines, such clauses fall under the typical category of "unfair clauses" that unjustly infringe upon the interests of subcontractors and are therefore illegal.

The specific grounds for this conclusion are as follows.

1. Illegality of Transferring Safety Management Costs

Under the Occupational Safety and Health Act (산업안전보건법), the industrial safety and health management costs (safety management costs) for preventing industrial accidents must, in principle, be included in the contract amount, and the primary responsibility lies with the prime contractor. Nevertheless, the KFTC's "Review Guidelines on Unfair Clauses" expressly prohibit "clauses imposing on subcontractors the costs of safety measures, health measures, or other industrial accident prevention that the prime contractor should bear" as unfair clauses. Furthermore, deducting a fixed amount of safety management costs uniformly from the subcontract price through a separate safety agreement at the time of contract conclusion is also highly likely to violate the Subcontracting Act as an unfair cost transfer (see Seoul High Court Decision 2023Na2039268, 2023Na2039275 dated October 2, 2024).

2. Illegality of Demanding Excessive Joint Guarantees

In practice, subcontractors typically issue a "contract performance bond" to the prime contractor through entities such as the Korea Specialty Construction Mutual Aid Association. However, the KFTC's "Review Guidelines on Unfair Clauses" clearly stipulate, as a representative example of unfair clauses, agreements requiring a third party to provide a joint guarantee for all of the subcontractor's debts even when the subcontractor has already provided a contract performance bond. Even if the contract does not directly stipulate a joint guarantee in favor of the prime contractor as the principal debtor, such joint guarantees that unjustly restrict the subcontractor's rights and impose excessive liability may be deemed illegal unfair clauses.

Practical Key Point - The Need for KFTC Reporting and Damages Strategy to Bypass the Limits of Regulatory Provisions

However, as I explained in a previous post, under the current structure of the Subcontracting Act and the Local Contract Act, a violation of these unfair-clause prohibitions does not automatically render the contractual provision fully void in civil litigation.

In practice, when a subcontractor has unfairly been forced to bear safety management costs, simply arguing in civil court that "the clause is void as an unfair clause" may face litigation limits. Therefore, a multi-track strategy is needed: reporting the prime contractor to the Korea Fair Trade Commission for a violation of the Subcontracting Act (setting unfair clauses) to obtain administrative sanctions such as corrective orders or penalty surcharges, while simultaneously claiming damages based on the Subcontracting Act violation itself.

Disputes involving unfair clauses involve subtle interpretation of contracts and on-site briefing documents, along with complex regulations including the Occupational Safety and Health Act and KFTC notices/guidelines, so the outcome can vary greatly depending on the case, making detailed legal review necessary.

Cheongchul Law Firm offers optimal legal solutions to protect the legitimate interests of subcontractors, based on deep understanding of unfair subcontracting practices and dispute resolution in the construction industry. If you are facing difficulties due to unfair cost transfer or unfair special clauses, please consult with the experts at Cheongchul Law Firm.

Attorney Bae Ki-hyung worked at the Defense Installations Agency and the construction/real estate teams of major law firms, providing legal advice on the entire process of national contracts and construction projects including government-ordered works, large-scale construction, defense facility projects, and SOC construction, and resolving related litigation. If you need assistance with government-ordered works, private construction, public procurement contracts, or state/local/public property matters, please feel free to contact him at any time.

Cheongchul Law Firm is composed exclusively of attorneys with backgrounds in Korea's top five law firms, the prosecution service, and corporate legal teams. Rather than relying on a single attorney, we organize teams of specialists in the relevant fields for each case. Cheongchul provides comprehensive legal consulting that goes beyond resolving specific issues to address the entire business, ultimately focusing on achieving what our clients truly want. If you need help reaching your goals, do not hesitate to contact Cheongchul.