(1) Reasons for Proposal

This amendment aims to not only reflect the content of the Plans for the Improvement of Trading Practices and Expansion of Win-Win Cooperation Between Large Enterprises and Small and Medium Enterprises (SMEs) (December 16, 2019) prepared and announced by the Fair Trade Commission jointly with relevant Ministries in the Enforcement Decree to enhance the negotiating power of SMEs and spread voluntary win-win cooperation, but also supplement some shortcomings that have emerged in the operation of the current system.

(2) Major Provisions

A. Activate subcontract consideration adjustment by an SME cooperative (Article 9-2 (3) 2, current Article 9-2 (4) and (5) are deleted) 

1) The current Enforcement Decree allows subcontractors to apply for subcontract consideration adjustments to their prime contractors through an SME cooperative if certain requirements are met, but the proportion of SMEs using SME cooperatives is very low because the current Enforcement Decree has strict requirements, such as that a prime contractor shall fall into “companies belonging to a business group subject to limitations on cross-shareholding or mid-sized company with annual sales of more than 300 billion won” and that “60 days have passed since the subcontract was signed.”

2) Aim to increase the bargaining power of subcontractors by expanding the scope of the prime contractor subject to being applied for subcontract consideration adjustment through an SME cooperative to “a company belonging to a business group subject to limitations on cross-shareholding or all mid-sized companies” and allowing subcontractors to apply for the adjustment “without an elapsed period.”

B. Adjust/improve reasons for penalty point reduction and reduction width ([attached Table 3] 3 A (1) and (7), current [attached Table 3] 3 A (2), (3), and (5) are deleted) 

1) The current Decree allows to impose penalty points on a business entity that violates the statutory provisions and reduce penalty points for certain reasons, but it has been criticized that training completion, awards receipt, etc., are not highly related to the protection of subcontractors’ rights and that the provisions of the use of a standard contract and the direct payment of subcontract consideration may be too strict, or penalty point reduction may be doubled.

2) Aim to increase the credibility of the penalty system and promote the use of the standard contract by adjusting and improving the reasons and width of penalty point reduction, such as deleting the items of training completion, awards receipt, and the ratio of electronic bidding and easing or rationalizing the reduction requirements related to the standard contract and subcontract consideration among the current reasons for penalty point reduction.

C. Establish new reasons for penalty point reduction related to damage relief, etc. ([attached Table 3] 3 A (5), (6), and (8)) 

1) Even if the Fair Trade Commission take measures on violations of subcontract laws, it is often necessary for a subcontractor to go through separate procedures, such as civil litigation, to receive compensation for damages, and there is a system that selects best-practice contractors in subcontract transactions and a fair-trade compliance program to induce improvements in the behavior of violators. However, in some cases, the operation of the system has been suspended, and the compliance program is not included in the reasons for penalty point reduction.

2) Aim to encourage law-violating contractors to voluntarily remedy the damages of subcontractors and improve trading practices by establishing reasons for penalty point reduction related to damage relief, best-practice contractors in subcontract transactions, and fair-trade compliance programs.

D. Establish new reasons for penalty point reduction related to bid information disclosure ([attached Table 3] 3 A (3) newly inserted) 

1) Though Article 4 (2) 7 of the Fair Transactions in Subcontracting Act defines the acts, determining subcontract consideration at a price lower than the lowest bid price without justifiable reasons when signing a subcontract through a competitive bid, as an unfair subcontract consideration decision, in some cases, the prime contractor requests additional negotiations after the bidding is over since competitive bidding results are not disclosed in the process of entrustment with construction.

2) Aim to encourage prime contractors to voluntarily disclose bidding results and furthermore to prevent unfair subcontract consideration decisions by reducing penalty points for construction entities whose share of disclosing competitive bidding results (minimum bid price and successful bid price) in public/private ordering construction is above a certain level.

E. Improve regulations related to the operation of the penalty point system ([attached Table 3] 3 A and C) 

1) The efficiency of enforcement is reduced because the current Enforcement Decree provides two points of judgment for the reason for penalty point reduction - one is “the business year immediately before the day of recognizing an incident” and the other is “the year before the day of taking corrective measures” - and calculates cumulative penalty points, including cases in which objection procedures, such as appeals, are in progress. Also, the current Enforcement Decree does not specify whether the penalty shall be extinguished when the Fair Trade Commission requests a bid participation restriction or suspension of business from the relevant administrative agencies.

2) Aim to ensure consistency and efficiency in law enforcement by unifying the points of judgment for reasons for penalty point reduction as the business year immediately before the day of taking corrective measures and by in principle, excluding the incidents that objection procedures such as an appeal are in progress and that requests such as a bid participation restriction are already made from the calculation objects of accumulated penalty points.

F. Expand the scope of targets subject to exemption from the Fair Transactions in Subcontracting Act (Article 2 (4)) 

1) The current Enforcement Decree excludes any SME whose annual sales are below two billion won in cases of entrustment with manufacturing and repair and any SME whose amount of appraised construction capacity is below three billion won in cases of entrustment with construction, but it does not reflect changes in economic conditions since, for the cases of manufacturing and repair and the cases of entrustment with construction, the standards were set in 1997 and 2005, respectively.

2) Considering the increase in sales of SMEs and the rise in prices, aim to upgrade the targets to be exempted from the Fair Transactions in Subcontracting Act; from any SME whose annual sales are below 2 billion won to below 3 billion won in cases of entrustment with manufacturing and repair and any SME whose amount of appraised construction capacity is below 3 billion won to below 4.5 billion won in cases of entrustment with construction, respectively.

G. Activate the cooperation among related Ministries (Article 17-2) 

1) The Fair Trade Commission operated a so-called “subcontract policy cooperation network” in a way that each Ministry supports best-practice contractors in subcontract transactions or reflects habitual violators in related evaluations when the Commission notifies the relevant Ministries of the list of best-practice contractors and habitual violators, but the stability of the operation was low because there were no legal grounds for such actions.

2) Aim to establish the basis for the operation of the subcontract policy cooperation network in a way that the Fair Trade Commission shall notify related administrative agencies of the list, and the related administrative agencies may take necessary measures including support to the relevant contractors and that the relevant administrative agencies shall notify the Fair Trade Commission when they take measures.

H. Expand payment guarantee institutions for entrustment with construction (Article 8 (2) 5) 

1) The current Act and Enforcement Decree mandates that the prime contractor shall guarantee the payment of the construction consideration to the subcontractor and the subcontractor shall guarantee the performance of a contract to the contractor when a construction contract is entrusted. Also, they designate mutual-aid cooperatives under construction related Acts, such as the Framework Act on the Construction Industry and the Information and Communications Construction Business Act, as guarantee institutions, but mutual-aid cooperatives under the Engineering Industry Promotion Act are not included in the guarantee institutions.

2) Aim to make it possible for a prime contractor and its subcontractors to choose a wider range of guarantee institutions by including the engineering mutual-aid cooperative under the Promotion Act of the Engineering Industry in the guarantee institutions that may guarantee the construction consideration and guarantee the performance of a contract.