Reasons for Proposal
Article 5 of the current law prohibits the principal contractor from compelling the subcontractor to purchase or use goods, equipment, supply of service duties, etc., designated by the principal contractor except for justifiable reasons. However, in reality in some manufacturing sectors, where the so-called “exclusive subcontracting” is widespread, the principal contractor frequently compels the subcontractor to purchase molds for goods production, raw materials, etc., in the name of “subcontract of credit.”
Thus, in the current law, there is a provision to prevent the contract terms from being unfavorable when the subcontractor purchases such goods.
However, the current law only regulates cases where the subcontractor purchases relevant goods, etc. from the “principal contractor,” and not when the principal contractor designates a certain business operator to purchase from, making it very easy to sidestep the relevant regulation. Hence, principal contractors shall also be prohibited from making the contract terms unfavorable by forcing “subcontract of credit” on subcontractors through certain business operators when purchasing molds or raw materials.
In an exclusive subcontracting relationship, it is commonplace for the principal contractor to engage in illegal acts such as severing the contract relationship arbitrarily, forcibly seizing molds provided in the form of “subcontract of credit” without settling accounts with the subcontractor, etc. So, a provision shall be inserted to prohibit such acts.
Furthermore, Article 12-2 of the current law prohibits the principal contractor from unfairly requesting economic profits such as money and valuables, etc., from subcontractors without justifiable grounds. However, it is commonplace for some principal contractor employees to abuse the subcontractors’ vulnerable position to demand money and valuables as bribes or entertainment and to coerce them to re-subcontract part of the order quantity to their relatives or friends. Yet, in many cases, subcontractors are unable to obtain legal relief due to difficulties in providing evidence. Thus, such illegal acts by some principal contractors shall be eradicated by making it clear that the burden of proof for justifiable grounds rests with the principal contractor.
Also, as a result of the principal contractors engaging in unfair subcontracting practices over a long period under the exclusive subcontracting structure, there are numerous cases of the subcontractor suffering severe financial crises such as insolvency, bankruptcy, etc. For subcontractors with such limited options, it is necessary to grant the option of putting an emergency stop to fulfilling the contractual obligation with the principal contractor for the company to survive or to prevent the overdue wages from accumulating.
Especially, in civil cases where the subcontractor is in a critical situation such as corporate bankruptcy crisis and is obliged to discontinue the delivery of goods and negotiate a settlement of the contractual relationship with the principal contractor, the state’s application of criminal sanctions should be refrained from application since doing so would be an abuse of the state punishment power.
However, in cases where such action by the subcontractor is causing the principal contractor losses, there is a need to pursue a fair sharing of losses and protect the principal contractor’s property rights by putting the civil responsibility on the subcontractor through executive injunction or a compensation system, and it is necessary to make it clear that the subcontractor has the duty to give advance notice and is not exempted from civil responsibility.
Through these law revisions, principal contractors shall be induced to refrain from excessively unfair subcontracting, especially in the exclusive subcontracting structure where a horizontal transaction practice between the principal contractor and the subcontractor shall be newly established and the big and small businesses can both be in a win-win situation (Article 11, paragraph 2, subparagraph 5; Article 12; Article 12-2; Article 21-2).
