(1) Reasons for Proposal

The Fair Transactions in Subcontracting Act was amended (promulgated by Act No.15612, Apr. 17, 2018 and enforced Oct. 18, 2018) in such a way that the deadline for inspecting the principal contractors’ request for technical data and abuse thereof is extended from three years to seven years. Accordingly, this Amendment aims to determine matters legally delegated and things necessary for the enforcement thereof, and to resolve some inadequacies arising in the process of operating the current system.

(2) Major Provisions

A. Extend the period during which documents related to technical data shall be retained (Article 6, paragraph 2)

1) The Act was amended in such a way that the deadline for inspecting the principal contractors’ request for technical data and misuse thereof is extended from three years to seven years. Consistent therewith, it is also necessary to extend the period during which various documents that the principal contractors may request from subcontractors are retained so that the effectiveness of investigations by the Fair Trade Commission can be secured.

2) Extend the period during which documents related to technical data shall be retained from the current “three years" after the discontinuation of a transaction to “seven years"

B. Require the period of use, method of return, disposal, etc., of requested technical data to be stated in a document (newly insert Article 7-3, subparagraphs 6-2 through 6-4)

1) The current Act and the Enforcement Decree thereof provide that when a principal contractor requests technical data from a subcontractor, the principal contractor shall issue the subcontractor a document specifying the purpose, scope, etc., of the request only, excluding the period of use of technical data, subsequent measures, etc. Due to this, such a problem that the principal contractor obtains the technical data of the subcontractor and retains and uses them for an indefinite period occurs.

2) Add the “period of use of technical data,” “method of return or discard,” and “date of return or discard” to matters to be specified in a document when a principal contractor requests technical data from the subcontractor, thereby better protecting the technical data of a subcontractor

C. Reduce grounds for the exemption from guarantees for payment of consideration of construction subcontracts (delete Article 8, paragraph (1), subparagraph 2)

1) The current Act provides that where a principal contractor entrusts a subcontractor with construction, the principal contractor shall be obligated to guarantee the payment of consideration of subcontracted construction work, and the Enforcement Decree provides that the principal contractor shall be exempted from the obligation “if the principal contractor obtained a credit rating above a certain level.” However, i) even if the credit rating obtained by the principal contractor is above a certain level, there is still a risk that the subcontractor would not be paid in consideration of construction work as in the case where the financial status of the principal contractor deteriorates in a short period and a workout program is applied for; and ii) previously, the Enforcement Rule of the Framework Act on the Construction Industry provided that enterprises with a credit rating above a certain level might be exempted from the obligation to guarantee for the payment in consideration of construction work, but excluded such case from grounds for the exemption on Feb. 6, 2014 to strengthen the protection of subcontractors’ receivables in consideration of construction work, thereby causing inconsistency between related statutes because the subcontracting-related statutes still provide that such case falls under grounds for exemption.

2) Delete the case “where a principal contractor obtained a credit rating above a certain level” from grounds for exemption from guarantee for the payment in consideration of subcontract construction work, thereby strengthening the protection of subcontractors’ receivables in consideration of construction work

D. Increase the upper limit of the flat-rate penalty surcharge base amount from 500 million won to one billion won (attached Table 2)

1) Pursuant to the current Enforcement Decree of the Act, the penalty surcharges against violations of laws shall be calculated by such process that i) the “base amount” is determined by a doubled violation amount times a certain percentage (20 to 80%), and ii) the penalty surcharge is finally determined after extra addition or reduction is made, and if there is difficulty in calculating the violation amount, the “base amount” is determined to be up to “500 million won.” In such cases, there is a concern that the upper limit is too low to be an effective penalty surcharge to restrain some violations of laws such as the misuse of technologies and retaliation.

2) Strengthen deterrence against violations of laws by increasing the upper limit of the “base amount” from 500 million won to one billion won, where the flat-rate penalty surcharge is imposed due to the difficulty of calculating the violation amount

E. Supplement the penalty point system for enhancing the deterrence against violations of laws (attached Table 3)

1) Notwithstanding the current Act providing that the penalty points prescribed by Presidential Decree shall be imposed on a principal contractor or a subcontractor who violates laws and if the penalty points are accumulated, measures such as placing limitations on participation in bidding shall be taken, the current laws and regulations alone have some limitations in restraining unfair business practices that restrict the self-sustainable growth of small and medium enterprises, such as unfair decision or reduction in consideration of subcontracts and misuse of technologies.

2) Enhance deterrence against such violations by i) increasing the penalty points imposed on the accused unfair determination or reduction in consideration of subcontracts or misuse of technologies from three points to five point one points so that it is possible to restrict bidding participation of an enterprise on which the penalty surcharges are imposed once, and ii) increasing the penalty points imposed on unfair determination or reduction in consideration of subcontracts, misuse of technologies and retaliations that are subject to the penalty surcharges from two point five to two point six, so that it is possible to restrict bidding participation of an enterprise on which the penalty surcharges are imposed twice within three years

F. Introduce guidelines for imposing administrative fines on the hindrance of a documentary fact-finding investigation (attached Table 4)

1) This Amendment provides that administrative fines of up to 50 million won shall be imposed on a principal contractor that requests a subcontractor not to submit materials on a documentary fact-finding investigation, or to submit false materials thereon to the Fair Trade Commission, and administrative fines of up to five million won shall be imposed on the executives and staff of the principal contractor.

2) Enhance the transparency of imposing administrative fines and the predictability of principal contractors and subcontractors by  the guidelines for imposing administrative fines of up to 50 million won on the principal contractor and five million won on the executives and staff depending on the number of administrative fines issued thereto during the last three years