[Types of Contracts Based on Competition Forms and Their Existence] – (2) Restricted Competitive Bidding Contracts – Restrictions based on Region, Small and Medium Enterprises, Financial Status, etc.

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

Today marks the second session where I explain 'Restricted Competitive Bidding Contracts' to the contract managers of national and local governments, as well as practitioners from participating companies.

Please refer to the link below for the posting regarding the performance restrictions mentioned in the first session.

[Types of Contracts Based on Competition Forms and Their Existence] – (2) Restricted Competitive Bidding Contracts – Performance Restrictions - Cheongchul Law Firm

[Question]

Please let me know the restriction requirements for restricted competitive bidding contracts, including restrictions based on region, small and medium enterprises, financial status, etc.

[Answer]

2. Region Restriction

a. Contracts Below a Certain Amount

According to Article 21, Clause 1, Item 6 of the Enforcement Decree of the National Contract Act and Article 20, Clause 1, Item 6 of the Enforcement Decree of the Local Contract Act, in the case of contracts with an estimated price below a certain amount, participation qualifications can be restricted to the location of the main office of the corporation (for individual businesses, the location stated on the business registration certificate, etc.).

Contracts subject to region restrictions are defined differently under the National Contract Act (Article 24 of the Enforcement Rules) and the Local Contract Act (Article 24 of the Enforcement Rules):

The scope of regional restrictions must be limited to entities located within the jurisdiction of special cities, metropolitan cities, special self-governing cities, provinces, or special self-governing provinces where the site or delivery place of the project is situated. However, in special cases, such as when the site or delivery place of the project spans adjacent cities or provinces, it can be expanded to include adjacent cities or provinces.

b. Purchase of Products from Entities Located in Specific Regions

In national contracts, if goods produced by entities located in specific regions are to be purchased, the relevant conditions can be established as restrictions under restricted competitive contracts.

1) Those who reside in special support areas for small and medium enterprises as defined by Article 23 of the Act on the Promotion of Small and Medium Enterprises and Innovation

2) Those who reside in industrial complexes established under the Agricultural and Fishing Village Maintenance Act

3. Small and Medium Enterprises Restrictions

a. Purchase of Competitive Products Among Small and Medium Enterprises

According to Articles 6 and 7 of the Act on the Promotion of Purchase of Products from Small and Medium Enterprises (hereinafter referred to as 'Market Support Act'), for the competitive products designated and announced by the Minister of Small and Medium Enterprises and Startups, procurement contracts must be entered into through restricted competition limited to small and medium enterprises or competitive bidding among designated small and medium enterprises.

This is also prescribed in Article 21, Clause 1, Item 8 of the Enforcement Decree of the National Contract Act and Article 20, Clause 1, Item 6 of the Enforcement Decree of the Local Contract Act.

b. Purchase of Competitive Products Through Joint Ventures Among Small and Medium Enterprises

According to Paragraph 2 of Article 7-2 of the Market Support Act, if three or more small businesses or micro enterprises jointly produce products or services that fall under competitive products in collaboration with a small and medium enterprise cooperative, a restricted competitive bidding can only be conducted among those small businesses or micro enterprises participating in the joint venture.

This is also prescribed in Article 21, Clause 1, Item 8-2 of the Enforcement Decree of the National Contract Act and Article 20, Clause 1, Item 11 of the Enforcement Decree of the Local Contract Act.

c. Prior Procurement Contracts with Small and Medium Enterprises

The Market Support Act states in Article 4 that for goods and services below the amount published by the Minister of Strategy and Finance (excluding competitive products among small and medium enterprises), priority procurement contracts must be established with small and medium enterprises.

This is also prescribed in Article 21, Clause 1, Item 10 of the Enforcement Decree of the National Contract Act and Article 20, Clause 1, Item 12 of the Enforcement Decree of the Local Contract Act.

4. Financial Status Restrictions

According to Article 21, Clause 1, Item 9 of the Enforcement Decree of the National Contract Act, if deemed necessary to prevent the deterioration of contract performance, qualifications for bidders may be limited based on their financial status.

Additionally, Paragraph 3 of Article 5 of the 'Government Bidding and Contract Execution Guidelines' defines financial status as 'being in a state of current default or considered unable to conduct normal business operations due to bankruptcy, etc.'

However, in local contracts, the financial status restriction requirement has been removed since June 25, 2019.

Cheongchul Law Firm is a corporate law firm established by attorneys from the four major law firms, providing comprehensive solutions related to national contracts, bidding, and investigations by the Fair Trade Commission related to bidding. Please feel free to contact us via email or phone if you have any additional inquiries.