Law Firm Cheongchul (Responsible Attorneys: Eom Sang-yun, Lee Young-kyung) reviewed a subcontracting agreement related to product manufacturing at the request of a sculpture manufacturing company, providing overall consultation related to the subcontracting law, ensuring that the agreement complies with the regulations under the Act on Fair Transactions in Subcontracting (hereinafter "Subcontracting Law") and that there are no illegalities in the performance of contractual obligations such as payment.

The Subcontracting Law defines 'subcontracting transactions' as well as 'primary contractors' and 'subcontractors', thereby delineating the scope of application of the Subcontracting Law. In this case, the contract pertains to the manufacture or sale of goods and falls under the 'manufacturing consignment' type of subcontracting transaction, and both the primary contractor and subcontractor qualify as small and medium-sized enterprises under the Small and Medium Enterprises Basic Act, thus being subject to the Subcontracting Law.

When the Subcontracting Law applies, the parties are subject to various regulations, including written issuance of contractual documents (Article 3), prohibition of unfair special provisions (Article 3-4), prohibition of unfair pricing (Article 4), payment of advance payments (Article 6), and prohibition of reductions (Article 11).

In particular, if the primary contractor receives an advance payment from the ordering party, they must pay the subcontractor the advance payment received within 15 days from the date of receipt of the advance payment (in cases where the advance payment was received prior to the consignment of manufacture, from the date of consignment) according to the content and rate of the advance payment. If this deadline is exceeded, they must pay late damages at the market bank interest rate (Article 6, Paragraph 1 and 2).

This interest payment is similarly applicable in cases of payments under the subcontracting payment terms, where the primary contractor is required to pay the subcontracting payment within 60 days from the date of receipt of the goods. If this deadline is exceeded, they must also pay late damages similar to that of the advance payment (Article 13, Paragraph 1 and 6).

For this client, it was necessary to review the overall aspects of the subcontracting agreement to be signed with the subcontractor and make modifications to ensure it does not excessively disadvantage them in violation of the Subcontracting Law.

If the Subcontracting Law is violated, the business in question may face administrative sanctions such as corrective orders and fines from the Korea Fair Trade Commission, and relevant personnel may be subject to criminal penalties. Therefore, companies with many subcontracting transactions should organize the details of their contracts and actual subcontracting practices to minimize legal compliance risks.

Also, for businesses where public institution contracts account for a significant portion of revenue, there is a possibility that qualifications for bidding participants may be restricted due to violations of the Subcontracting Law, making it essential to eliminate legal violation risks as much as possible for business operations.

Law Firm Cheongchul prepared subcontracting agreement clauses tailored to the business content of the client and its partner companies and reviewed compliance with the Subcontracting Law and related precedents. This allowed the client to proactively prevent the occurrence of disputes arising from violations of the Subcontracting Law.

The Subcontracting Law is a primary area of interest for the Korea Fair Trade Commission, which actively sanctions violations. Therefore, it is necessary for the primary contractor to standardize the contract content to avoid breaching the Subcontracting Law as much as possible, and the subcontractor should review the legal implications in case of any wrongful actions by the primary contractor and consider legal action. If you require legal advice regarding subcontracting agreements, please feel free to contact Law Firm Cheongchul.