1. Reasons for Amendment

The Fair Transactions in Subcontracting Act was amended (Act No. 19562; promulgated on July 18, 2023; to be enforced on October 4, 2023) in relation to the introduction of a variable subcontract price system and easing of the eligibility requirements for mediated negotiation of subcontract price adjustments. Accordingly, this Amendment prescribes and modifies provisions delegated by Presidential Decree.

2. Major Provisions

A. Specify matters to be stated in documents in relation to variable subcontract prices (Article 3 (1) 7)

1) Article 3 (2) 3 of the amended Act stipulates matters to be stated in documents to be issued by the prime contractor to the subcontractor when adopting variable subcontract prices.

2) Prescribe that the documents shall state the name of the subject matter, etc., key raw materials, conditions for adjustment, and reference indices and formulas as specified in the Act as well as the base period and comparison period for calculating raw material price variation, adjustment date, adjustment frequency, and effective date of the adjusted price as matters necessary for the operation of the variable subcontract price system.

B. Specify criteria for short-term contracts that are exempt from requirements concerning matters to be stated in documents in relation to variable subcontract prices (Article 3 (2))

1) Article 3 (4) 2 of the amended Act stipulates that short-term contracts that are exempt from requirements concerning matters to be stated in documents in relation to variable subcontract prices shall have a maximum term as specified by Presidential Decree but within a limit of 90 days.

2) Prescribe that the maximum term shall be 90 days within the limit specified in the Act, but allow the Fair Trade Commission to announce a different limit depending on the nature of the transaction.

C. Specify criteria for small-sum contracts that are exempt from requirements concerning matters to be stated in documents in relation to variable subcontract prices (Article 3 (3))

1) Article 3 (4) 3 of the amended Act stipulates that small-sum contracts that are exempt from requirements concerning matters to be stated in documents in relation to variable subcontract prices shall have a maximum value as specified by Presidential Decree but within a limit of 100 million won.

2) Prescribe that the maximum value shall be 100 million won within the limit specified in the Act, but allow the Fair Trade Commission to announce a different limit depending on the nature of the transaction.

D. Specify the selection method and procedure and support policies for exemplary companies, etc. (Article 6-6)

1) Article 3-6 (1) of the amended Act stipulates that the Fair Trade Commission may establish and implement support policies to select and reward companies that have set a good example in adopting variable subcontract prices and persons who have contributed to the promotion of the variable subcontract price system.

2) Allow the Fair Trade Commission to select exemplary companies each year and prescribe that detailed information on the selection method and procedure shall be determined and publicly announced in advance. Allow the exemplary companies to be incentivized, such as by being awarded extra points when implementing various policies to promote fair transactions in subcontracting, and prescribe that administrative and financial support measures may be established by negotiating with the relevant administrative agencies.

E. Specify the business operations of support headquarters (Article 6-7)

1) Article 3-7 (2) of the amended Act stipulates that support headquarters shall engage in operations such as providing raw material price information, checking variable subcontract price records, education, and consulting, and that other business operations necessary for promoting variable subcontract prices shall be prescribed by Presidential Decree.

2) Add promotional activities in relation to variable subcontract prices, identification of exemplary cases, preparation and management of statistics, performance analysis and satisfaction surveys, cost analysis support, support for the development of reference indices for raw material prices, etc. as business operations of support headquarters.

F. Specify standards and procedures for the designation and revocation of support headquarters (Article 6-8 and Table 6)

1) Article 3-7 (4) of the amended Act stipulates that the Fair Trade Commission may revoke the designation or order the suspension of business of a support headquarters under certain circumstances. The detailed matters concerning standards and procedures for designation and revocation shall be prescribed by Presidential Decree.

2) Allow the Fair Trade Commission to designate a support headquarters for each business separately, and prescribe designation requirements for support headquarters in terms of such factors as organization, personnel, and office space. Prescribe documents to be submitted when applying to be designated as a support headquarters, an obligation for support headquarters to submit annual operation plans and operating performance information, and detailed criteria for the revocation of the designation and business suspension of support headquarters.

G. Prescribe the criteria for imposing penalty points in relation to variable subcontract prices (Table 3)

1) Article 26 (2) of the amended Act prescribes that violations of the Act against which penalty points may be imposed shall include violations concerning matters to be stated in documents in relation to variable subcontract prices (Article 3 (2) of the Act), violations of the obligation to negotiate in good faith (Article 3 (3) of the Act), violations concerning matters to be stated in documents (Article 3 (4) of the Act), and evasion of the Act (Article 3 (5) of the Act).

2) Impose 5.1 penalty points on any prime contractor who evades the Act by forcing or encouraging an agreement outside the variable subcontract price system, and impose 3.1 penalty points on any other evasion of the Act. Impose 0.25 to 2.0 penalty points on any other violations of the Act (violations concerning matters to be stated in documents in relation to variable subcontract prices, violations of the obligation to negotiate in good faith, agreements outside the variable subcontract price system where the intent and reasons are unspecified) depending on the type of corrective action in accordance with the current penalty point imposition system.

H. Prescribe criteria for imposing administrative fines in relation to variable subcontract prices (Table 5)

1) Article 30-2 (5) of the amended Act prescribes that a business entity that has failed to specify variable subcontract price information shall be punished by an administrative fine of up to 10 million won and paragraph 4 of the same Article prescribes that evasion of the Act in relation to variable subcontract prices shall be punished by an administrative fine of up to 50 million won, while delegating the detailed criteria to Presidential Decree.

2) Impose an administrative fine of 10 million won on violations concerning matters to be stated in documents in relation to variable subcontract prices, and impose fines of 30 million won (first offense), 40 million won (second offense), and 50 million won (third offense) on evasions of the Act in relation to variable subcontract prices. Prescribe that where an entity violator has committed its first violation but it has been selected as an exemplary business, etc. with respect to the variable subcontract price system in the past three years, the administrative fine may be reduced by up to 50%.

I. Ease eligibility requirements for mediated negotiation of subcontract price adjustments (Article 9-2)

1) Article 16-2 of the amended Act deleted the eligibility requirements for mediated negotiation of subcontract price adjustments, which had been delegated to Presidential Decree. Critics have also pointed out that the requirement for small and medium enterprise cooperatives to refer their case for mediated negotiation to a general meeting or board of directors’ meeting for resolution hinders the promotion of mediated negotiations.

2) Delete the eligibility requirements for mediated negotiation of subcontract price adjustments prescribed in the Decree. Allow small and medium enterprise cooperatives to engage in mediated negotiation without a resolution from a general meeting or Board of Directors’ meeting while also simplifying document requirements for mediated negotiations.