Fair Trade Commission Revises Standard Subcontract Agreements for 8 Industries Including Elevator Installation, Construction, and Automotive
[Sejong=Asia Economy Reporter Joo Sang-don] A standard subcontract agreement has been prepared for eight manufacturing and construction sectors to ease the unfair interest burden between primary contractors and subcontractors by requiring prior agreement on delayed interest.
On the 16th, the Fair Trade Commission announced that it has newly established and revised the standard subcontract agreements for the 'elevator installation, defense, construction, machinery, pharmaceutical manufacturing, automobile, electrical, and electronics' sectors.
The standard subcontract agreement is a contract formulated and distributed by the Fair Trade Commission to ensure balanced transaction conditions between primary contractors and subcontractors and to promote fair subcontract transaction order. It is currently distributed across 46 sectors. While the use of the standard contract is not mandatory, adopting it can earn bonus points during fair trade agreement evaluations or reduce penalty points under the Subcontracting Act.
The newly established and revised standard contracts require the parties to agree in advance on delayed interest related to damages, refund of payments, and other matters beyond the delayed compensation payable under the Subcontracting Act. For subcontract payments, the delayed interest rate is set at 15.5% per annum if the payment is delayed beyond 60 days from the due date. However, for other payments, interest rates ranging from 6% to 24% per annum can be applied according to the Commercial Act and the Interest Limitation Act. This has caused issues where primary contractors bear delayed interest at 6% per annum, while subcontractors bear 24% per annum.
Additionally, the standard contract stipulates that if an unfair subcontract payment determination occurs, the subcontractor can claim payment of the unfairly reduced subcontract amount from the primary contractor. It explicitly allows claims not only for adjustment requests but also for the difference between the legitimately determined payment and the actual payment.
In the case of elevator installation projects, many subcontract transactions exist between general construction companies (primary contractors) and joint ventures (composed of large elevator manufacturers and installation contractors). There have been issues where the elevator manufacturer, as the representative of the joint venture, unilaterally instructs the installation contractor members without agreeing or sharing contract terms with the primary contractor. Also, since payments are made in the order of 'primary contractor → representative → members,' subcontract payment disputes arise due to the inability to verify the primary contractor’s payment details. Accordingly, the newly established standard contract for the elevator installation sector requires that when subcontract transactions occur in the form of a joint venture, the primary contractor must provide the contract to all joint venture members and pay subcontract amounts directly to each member.
For the defense sector, the standard contract includes provisions that subcontract agreements for defense supplies, which are settled post-delivery between the ordering party and the primary contractor, should in principle be concluded as estimated contracts. However, if the primary and subcontractors agree, they may conclude fixed contracts. This reflects the frequent use of estimated contracts in the defense sector due to the difficulty of applying existing unit prices amid numerous new weapon system developments, requiring actual cost settlement and post-delivery contract price confirmation.
Furthermore, the standard contracts for the automobile, electrical, and electronics sectors specify that if the subcontractor proves exemption under the Product Liability Act, the primary contractor cannot seek reimbursement from the subcontractor for litigation costs or damages. While the warranty period for defects is generally based on the Civil Act and the Automobile Management Act, the contract allows extension of the warranty period if the primary contractor agrees with the subcontractor and pays a considerable fee.
The standard contract for the construction sector additionally requires that when the subcontractor uses construction machinery rented by the primary contractor for the project, the primary contractor must clearly provide information on the machinery’s operating hours and workability to the subcontractor.
A Fair Trade Commission official stated, "Through the establishment and revision of the standard subcontract agreements, the difficulties raised by primary and subcontractors have been thoroughly reflected, enabling both parties to conduct business activities under more balanced transaction conditions." The official added, "We plan to actively promote the key contents of the standard subcontract agreements to businesses by holding explanatory sessions and other events to encourage wider use of the standard contracts."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
