Sep 1, 2011

Fair Transactions with Subcontractors Act of Korea: So Buyer Beware or Simply Avoid the Risk and Buy the Seller?

Because of perceived abuse by Korean conglomerates of subcontractors, the Korean Fair Transactions in Subcontracting Act was passed in March of 2011. The Act was effective since the beginning of July of 2011.

The Act, in short, grants wide discretion to the Korea Federation of Small and Medium Businesses. This agency is now authorized to request adjustments to Korean subcontractors contractually obligated delivery prices and additionally may impose treble damages for certain violations of this Act, including for the act of misappropriation of the technology of subcontractors.

The Act also reverses the burden of proof in many instances, while requiring conglomerates to make technical requests in writing and to conduct formal subcontractor practice surveys.

The treble damages component of this Act is very rare in Korea. Punitive damages are only available in the most rare of cases and only if authorized by statute.

The inclusion of treble damages in Korea is welcome, but I am still always alarmed that even in the most egregious of professional negligence cases and in most other types of cases, treble/punitive damage is not available in Korea and the compensation awarded by the Korean court is often comical.

The Act seems “fair” on its face, but I have already been privy to instances when subcontractors have been using the Act to essentially extort more profit from conglomerates.

We expect that courts, if the Korean Federation of Small and Medium Businesses becomes overly aggressive, may, also, aggressively overturn the agency’s actions. The agency, in most respects, has been fair with regard to its power to fine, make formal recommendations and issue cease and desist orders, however, the agency, as its website clearly proclaims is an agency that “was established in 1962 to develop measures that can help SMEs to meet the challenges of the ever-changing management environment, while increasing their competitive power. By offering diverse user-oriented services, we are helping the SMEs to consolidate their position as the core of our domestic economy. We need to shift the focus of our economy from being centered on large companies to a greater emphasis on SMEs, so that we can share the effects of economic growth with all people, and to create a positive loop of growth and employment.”

The agency, if you employ a creative and proactive litigator is often able to convince the agency how a negative disposition is actually harmful to Korean SMEs. We recently dealt with such a case and the agency is willing to hear and often accept these arguments. However, the normal passive Korean attorney approach is not advised.

What do you think? Will this lead to more conglomerates in Korea buying subcontractors in order to eliminate the cost adjustment risk?
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SeanHayes@ipglegal.com