According to the Framework Act on the Construction Industry, if an agreement (hereinafter referred to as a "direct payment agreement") is reached between the client, the contractor, and the subcontractor regarding the direct payment of subcontract fees, the subcontractor acquires the right to claim direct payment without the need for additional procedures. The Supreme Court has ruled that if the seizure of the payment claim occurs after the direct payment agreement, such seizure is considered "invalid" as it pertains to a claim that has already been extinguished. This overturns the lower courts' decisions, which had required subsequent procedures such as a "direct payment claim," and is being evaluated as a progressive legal interpretation that broadly recognizes the rights of subcontractors. On April 3, the Supreme Court's Civil Division 3 (Presiding Justice Lee Heungku) overturned the previous ruling and remanded the case to the Suwon District Court in a lawsuit regarding the right to claim the payment of a deposited amount (2021Da273592).
[Facts]
The case originated from a dispute over the payment of subcontract fees related to a bridge construction project commissioned by Jeongeup City, North Jeolla Province. Company A, which received the construction contract from Jeongeup City, subcontracted part of the work to Company B. Subsequently, Jeongeup City, Company A, and Company B entered into a "direct payment agreement" under the Framework Act on the Construction Industry, stipulating that the subcontract fee would be paid directly to Company B.
However, other creditors of Company A executed seizures and provisional seizures against Company A's claims, and as a result, Jeongeup City deposited the entire subcontract fee with the court. Afterwards, the subcontractor, Company B, claimed priority and requested the payment of the deposit, while the seizing creditors objected, asserting that they were entitled to receive the deposit.
[Issues]
The main issues were: when the subcontractor's right to claim direct payment arises upon the conclusion of a direct payment agreement; whether this right takes precedence over third-party seizures; and, given that the Subcontracting Act stipulates direct payment is possible at the "time of agreement," whereas the Framework Act on the Construction Industry allows it only when the "method and procedure of payment are clearly agreed upon," which legal principle should be applied in case of interpretative conflict.
[Lower Court's Judgment]
Both the first trial and the appellate court dismissed the plaintiff Company B's claim. The first-instance court ruled, "Under the Framework Act on the Construction Industry, the right to claim direct payment arises only after procedures such as 'claiming payment after progress inspection' are completed," and "since the right does not arise solely from the direct payment agreement, and the defendants completed the seizure before the direct payment claim, Company B cannot assert priority."
The appellate court also held, "The direct payment agreement requires procedures such as the subcontractor's separation of construction details and settlement claims," and "the direct payment right arises only after such procedures are fulfilled." The court further stated, "To protect the contractor's creditors, the provisions of the Framework Act on the Construction Industry should be interpreted as narrowly as possible."
[Supreme Court's Judgment]
The Supreme Court found that the lower courts misunderstood the legal principles regarding the timing and legal effect of the right to claim direct payment. The Supreme Court stated, "The subcontractor, Company B, acquired the right to claim direct payment from Jeongeup City at the moment the direct payment agreement was concluded, and this means Jeongeup City's obligation to pay Company A for the construction work was transferred to Company B while maintaining its identity." The Court further ruled that, after the direct payment agreement, Company A's claim is legally attributed to the subcontractor, and any subsequent seizure or provisional seizure pertains to a claim that has already been extinguished and is therefore ineffective. The Supreme Court interpreted that, following the direct payment agreement, Company B's right is not merely a potential claim for payment, but rather that Company A's claim against Jeongeup City has been substantively transferred to Company B.
[Legal Community Response]
A presiding judge at a bankruptcy court commented, "This ruling is an example of an active interpretation for the protection of subcontractors, representing a forward-looking decision intended to prioritize the protection of subcontractors over contractors or ordinary creditors."
On the other hand, Kim Yongwoo (age 42, Judicial Research and Training Institute class 41), an attorney at Barun Law LLC, stated, "Although the Subcontracting Act and the Framework Act on the Construction Industry have different legislative purposes and requirements for application, granting the same effect to both may raise issues regarding the coherence of the legal system."
An Jaemyoung, Legal Times Reporter
※This article is based on content supplied by Law Times.
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