Illustrated by Kim Sung-kyu

The Korea Fair Trade Commission (KFTC) has initiated a study to determine if the Fair Transactions in Subcontracting Act can be applied to foreign companies subcontracting with South Korean small and medium-sized enterprises (SMEs). Created to protect subcontractors from abusive practices like price gouging and non-payment, the Act is under review due to concerns about multinational and domestic companies with overseas subsidiaries engaging in these practices beyond current legal boundaries. The KFTC plans to also examine contracts involving domestic and international joint ventures, as well as local subsidiaries abroad. However, there is concern that this could hinder the international expansion of South Korean SMEs.

Graphics by Kim Sung-kyu

According to the government on May 8, the Korea Fair Trade Commission commissioned a study on May 7 to examine the possibility of extraterritorial application of the Subcontracting Act to foreign companies subcontracting to domestic SMEs. Until now, the KFTC has restricted the application of the subcontracting law to contracts between domestic companies, arguing that the law was designed to protect domestic companies and should, therefore, only apply to them.

Increasing conflicts between foreign companies and domestic subcontractors have led to growing criticism of the KFTC’s conservative stance. For example, in 2022, Nike faced accusations of unfair practices against Sukyoung Textile, a domestic shoe material supplier, including slashing prices and passing on losses, but the KFTC did not pursue an investigation, stating that foreign companies were not subject to the law.

That same year, DL E&C and SK Ecoplant faced controversy for not paying additional construction fees to a domestic subcontractor in their joint venture for the Çanakkale Bridge in Turkey.

The KFTC plans to explore whether the current subcontracting act can apply when the main contractor is a foreign company, and is considering a separate provision for extraterritorial enforcement against abuses.

While the intention to protect domestic SMEs is clear, there are concerns that strict regulations may suppress transactions between foreign and domestic companies. Apart from Korea and Japan, few countries have specific subcontracting laws, and most subcontracting disputes are resolved through civil litigation. Korea is unique among major countries like Germany, Japan, and the United States in mandating that payments for subcontracting be made exclusively in cash or regulated to a certain level by law.

Since the law specifies payment schedules and contract requirements, foreign companies might find these provisions operationally cumbersome. Jeon Yeong-jun, director of the Construction Economy Research Institute of Korea, said, “With more small and mid-sized construction and engineering firms going abroad, extending subcontracting laws extraterritorially could reduce their competitiveness,” adding, “Foreign companies might prefer hiring local firms over complying with mandatory payment schedules and other difficulties.”