In line with the Park Geun-hye administration’s pledge of so-called economic democratization, on April 30, 2013, an amendment (the “Amendment”) to the Fair Transactions in Subcontracting Act (the “Subcontracting Act”), the key provision of which is a strengthened punitive damages system, was passed by the National Assembly.

  • Liability for punitive damages of up to 3 times actual damages possible for unreasonable determination and reduction of subcontracting prices, unreasonable cancellation of entrustment, or unreasonable return of goods      

Under the previous Subcontracting Act, liability for punitive damages of up to 3 times actual damages was possible only for misappropriation of technical data (Article 12-3(3) of the Subcontracting Act).  In order to eradicate unfair subcontracting practices and protect small-medium enterprises in accordance with the new administration’s economic democratization policy, the Amendment expands the scope of the punitive damages provision of the Subcontracting Act (Article 35) to (i) unreasonable determination of subcontracting prices, (ii) unreasonable cancellation of entrustment, (iii) unreasonable return of goods, and (iv) reduction of subcontracting prices.

Further, the Amendment establishes a new provision expressly stating the factors to be considered by courts in determining punitive damages, so that courts determine the amount of punitive damages reasonably, up to a maximum of 3 times the amount of actual damages (Article 35(3) of the Subcontracting Act).

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  • Korea Federation of Small and Medium Businesses granted the right to negotiate adjustment of supply prices and the right to apply for mediation of disputes

The previous Subcontracting Act only recognized the right of the Korea Federation of Small and Medium Businesses (the “Federation”) “to request an adjustment” of subcontracting prices from the principal contractor in cases where a subcontractor, which is a member of the Federation, unavoidably had to adjust its subcontracting prices due to a sharp change in raw material prices (Article 16-2(2) of the Subcontracting Act), and negotiations with the principal contractor were to be conducted by the subcontractor directly.  However, as subcontractors often could not properly negotiate with principal contractors due to concerns about severing business relations, among other reasons, and the Amendment grants to the Federation the power to negotiate on behalf of member subcontractors with their principal contractors for adjustment of supply prices, and if negotiations fail, the Federation may also apply for mediation through the Subcontract Dispute Mediation Council (Articles 16-2(2) through (8), 24-4(1) of the Subcontracting Act).  

  • Monitoring and level of sanctions against unfair subcontracting practices of large companies to be strengthened, and risk of civil liability for damages from unfair practices to be expanded

As the Amendment is being viewed as the first piece of legislation in support of the so-called economic democratization policy, the monitoring of and the level of sanctions imposed against the unfair subcontracting practices of large companies by the relevant governmental agencies, including the Korea Fair Trade Commission and the Small and Medium Business Administration, are expected to be strengthened.  The Amendment becomes effective after a period of 6 months from the date of its announcement, and particularly since the punitive damages provision (Article 35) is expected to apply to violations that first occur after the Amendment goes into effect (Article of the Supplementary Provisions of the Amendment), companies involved in a lot of subcontracting transactions need to exercise heightened caution so that unfair subcontracting transactions do not occur.