[Case] Won subcontract dual-contract case for KFTC

1. Introduction

Cheongchul Law Firm (attorneys in charge: Eom Sang-yoon, Lee Young-kyung) represented the defendant, the Korea Fair Trade Commission (KFTC), in a suit brought by construction company A (the plaintiff) seeking cancellation of a corrective order and a penalty surcharge payment order (Seoul High Court 2024Nu70939), and secured a complete victory dismissing all of the plaintiff's claims.

On its surface, this case appeared to be a simple dispute over whether the duty to issue a written document had been violated. In substance, however, the prime contractor A—in order to evade the ordering party's review of the adequacy of the subcontract—issued to the subcontractors only a "notified-price contract" stating a false amount different from the actual successful bid price, while keeping both copies of the "bid-price contract" stating the actual bid price and never delivering them to the subcontractors. Cheongchul proved the substantive meaning of the "issuance of a written document" under Article 3(1) of the Subcontracting Act (하도급법 제3조 제1항) and led the court to find that the prime contractor had violated its duty to issue a written document.

2. Background

The prime contractor A, after being awarded an apartment construction project by the ordering party, Korea Land and Housing Corporation (LH), entered into 27 subcontracts with 20 subcontractors including Company B between around March 2020 and October 2022. In doing so, A adopted a dual-contract structure: it prepared, in non-electronic form, two copies of a written document stating the amount actually won by the subcontractor (the "bid-price contract"), while separately preparing a written document stating a false amount higher than the actual bid price (the "notified-price contract") and reporting the latter to the ordering party.

The fundamental motive behind this dual contract was to evade the ordering party's review of the adequacy of the subcontract under Article 31 of the Framework Act on the Construction Industry (건설산업기본법 제31조) and Article 34 of its Enforcement Decree. A judged that a subcontract based on the actual bid price would be unlikely to pass that adequacy review, and therefore prepared the notified-price contract and the bid-price contract separately.

The KFTC found that A's conduct violated the duty to issue a written document under Article 3(1) and (2) of the former Fair Transactions in Subcontracting Act (before amendment by Act No. 19562 of July 18, 2023; the "former Subcontracting Act"), and imposed on A a corrective order and an order to pay a penalty surcharge of KRW 48 million. A then brought this suit seeking cancellation of those dispositions.

3. Legal Issues (Cheongchul's Key Grounds and Arguments)

The core issues were (i) whether A's preparation of the bid-price contract and its continued retention of it without delivering it to the subcontractors constituted "issuance" under Article 3(1) of the former Subcontracting Act, and (ii) whether the after-the-fact confirmation statements submitted anew during litigation in the names of six subcontractors could be recognized as having evidentiary weight.

On this point, Cheongchul argued that "issuance" under Article 3(1) of the former Subcontracting Act means a state in which the subcontractor can, at any time, verify the content of the contract and assert its rights on that basis; therefore, a prime contractor's preparation of a written document followed by its retention without delivering it to the subcontractor does not amount to "issuance." If such retention were recognized as "issuance," prime contractors would frequently reclaim written documents on various pretexts such as loss prevention, hollowing out the provision; and even if a subcontractor in an inferior bargaining position formally consented to non-delivery, this cannot be regarded as genuine consent.

Cheongchul further emphasized that the after-the-fact confirmation statements in the names of six subcontractors, belatedly submitted by A during litigation, were hard to regard as voluntary statements and could not be believed as they stood. Those statements: (i) all bore the same date and were completely identical in content and wording; (ii) explained the subcontractors' supposed refusal to keep the bid-price contract stating the actual bid price in a manner inconsistent with other statutory duties, such as the document-retention duty imposed on subcontractors; and (iii) came from subcontractors and their staff who were each in a position—by superior transactional status or subordinate personnel relationship—that made it difficult to refuse the prime contractor's request. In light of these points, their voluntariness and authenticity are hard to accept.

The court fully accepted Cheongchul's arguments, holding that "issuance" under Article 3(1) of the former Subcontracting Act means a state in which the subcontractor can at any time verify the contract's content and assert its rights on that basis, and that A's preparation of the bid-price contract while retaining it without delivering it to the subcontractors does not constitute "issuance." The court also denied the credibility of the after-the-fact confirmation statements in the names of six subcontractors submitted by A during litigation, held that A's violation of the duty to issue a written document was established, and dismissed the plaintiff's claims. Moreover, the court found that the non-issuance of the bid-price contract brought no economic benefit whatsoever to the subcontractors, and instead appeared to be A's way of withholding the bid-price contract so that the subcontractors could not raise issues about the dual drafting—thereby expressly rejecting A's argument that the dual contract accorded with the economic interests of both parties.

4. Implications of This Case

This judgment is significant in that it strictly applied the substantive requirements of Article 3(1) of the Subcontracting Act to a prime contractor's non-issuance of a written document arising under the informal trade practice of evading the ordering party's adequacy review of subcontracts, thereby providing robust protection to subcontractors.

It was clearly confirmed that even where a prime contractor has completed the preparation and signature/seal of a subcontract, if it does not actually deliver that document to the subcontractor but continues to retain it, this cannot be regarded as performance of the duty to issue a written document. It was further confirmed that even where the prime contractor obtained an outward consent to non-delivery from the subcontractor, this cannot be regarded as the genuine consent of a subcontractor in an inferior bargaining position, so the prime contractor cannot escape liability for breach of the issuance duty through such a "consent" defense.

In addition, this judgment carries practical significance in that, where a prime contractor belatedly collected confirmation statements favorable to itself from subcontractors en masse and submitted them at the litigation stage after the disposition stage, the court viewed the credibility of those statements as low.

Meanwhile, from the subcontractors' standpoint, this is a meaningful judgment in that it secures a legal basis on which they may expressly refuse when a prime contractor demands, for example, delivery of only a written document stating a false amount different from the bid price, or reclamation and retention of the bid-price contract itself; and as to such demands, it is essential to review in advance whether they may run afoul of related statutes such as the Subcontracting Act and the Framework Act on the Construction Industry.