Prime Contractor's Payment Responsibility Specified for Owner's Nonpayment... Subcontract Agreement Revised

Follow-Up Measures to the Amended Subcontracting Act Effective August 11

Fair Trade Commission Revises Standard Subcontract Agreement for the Construction Industry

Going forward, even if an agreement is reached at a construction site for the project owner to pay subcontracting fees directly to the subcontractor, the prime contractor's obligation to guarantee payment will not be waived. It is now stipulated in the written contract that, if the project owner fails to pay on time, the prime contractor will bear the ultimate payment responsibility.

The Korea Fair Trade Commission announced on August 5 that it has revised the 'Standard Subcontract Agreement for the Construction Industry (Agreement on Direct Payment of Subcontract Fees)' reflecting these changes, as a follow-up to the amended Subcontracting Act taking effect on August 11.

Previously, at construction sites where the project owner, prime contractor, and subcontractor all agreed to 'direct payment of subcontract fees,' a legal loophole existed whereby the prime contractor's obligation to guarantee payment could be exempted. As a result, when project owners failed to pay due to financial difficulties or business disruptions, subcontractors often faced the issue of not being able to secure payment guarantees—an ongoing concern in the industry.

In response, the National Assembly revised the Subcontracting Act to mandate payment guarantees by the prime contractor even when direct payment is agreed upon (deleting grounds for exemption from payment guarantee), and the Fair Trade Commission immediately updated the standard contract templates used in the field to align with the law's enforcement.

The amended Article 6 of the standard direct payment agreement newly includes a provision specifying that 'even if a direct payment agreement is in place, if the project owner fails to fulfill the direct payment obligation, the prime contractor is ultimately responsible for paying any unpaid subcontracting fees to the subcontractor.'

This effectively creates a dual safety net, preventing disputes arising from a failure by the prime contractor to fulfill the payment guarantee, and enabling subcontractors to recover payments from either the prime contractor or a guarantee institution even if the project owner is unable to pay.

The Fair Trade Commission stated, "We will post the revised standard subcontract agreements on our official website and actively encourage their adoption by major construction associations and organizations." The Commission also commented, "This will serve as a substantial step to better protect the subcontracting payments of small subcontractors during the current slump in the construction industry."

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