What Can You Do When a Client Refuses to Pay? Supply Price Disputes in South Korea [Series 1]
Table of Contents
- 1. How Does South Korea’s Win-Win Cooperation Act Regulate Non-Payment?
- 2. What Is the Legal Difference Between Price Reduction and Non-Payment?
- 3. How Do I Report to the Ministry of SMEs and Startups — and What Will It Accomplish?
- 4. How Much Compensation Can a Subcontractor Claim?
- 5. How Should a Subcontractor Secure Evidence in a Payment Dispute?
- 6. FAQ
A CEO of a mid-sized South Korean manufacturer walked into the office after ten years of uninterrupted business with a large conglomerate affiliate. For three months, the client had withheld KRW 200 million in supply payments, with the procurement manager offering only a vague excuse about “delayed head-office approval.” The contract clearly stated payment within 60 days of delivery. Could South Korea’s Win-Win Cooperation Act provide a remedy?
Why a Decade-Long Client Relationship Does Not Protect Your Payment Rights
* The scenario above is hypothetical and presented for illustrative purposes only.
In cases like this, the contract itself is rarely the problem. The payment terms are clear, and the delivery records — transaction slips, tax invoices, and signed acknowledgments — are all in order. What most subcontractors lack is an understanding of the specific legal rights they hold and the procedural steps available to enforce them. South Korea’s Win-Win Cooperation Act is not merely a set of regulatory guidelines. It is a substantive legal instrument covering non-payment, price reduction, retaliation, and technology misappropriation — each with enforceable remedies. This series explains, step by step, what subcontractors need to know to protect themselves.
1. How Does South Korea’s Win-Win Cooperation Act Regulate Non-Payment?
Article 25(1) of the Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises enumerates specific acts that principal enterprises are prohibited from engaging in when consigning manufacturing to subcontractors. With respect to supply price disputes, three provisions are particularly relevant.
Key Prohibited Acts Under Article 25(1) (Supply Price Related)
| Subparagraph | Prohibited Conduct | Damages Available |
|---|---|---|
| Article 25(1)(i) | Refusing to accept goods or reducing the supply price without cause attributable to the subcontractor | Up to treble damages (Article 40-2(2)(i)) |
| Article 25(1)(ii) | Failing to pay the supply price by the due date | Standard compensatory damages (Article 40-2(1)) |
| Article 25(1)(iii) | Setting a supply price substantially below the amount ordinarily paid for equivalent goods | Up to treble damages (Article 40-2(2)(i)) |
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Articles 25(1) and 40-2(2)
Who Does This Law Cover? Defining the Principal-Subcontractor Relationship
The Win-Win Cooperation Act applies specifically to manufacturing consignment relationships — not ordinary commercial purchase transactions. The law covers arrangements in which the principal enterprise (the ordering party) commissions the subcontractor (the supplier) to manufacture, process, repair, or provide services. Standard retail or wholesale transactions, or contracts for the purchase of finished goods, may fall outside the Act’s scope. Confirming the nature of the commercial relationship is therefore the first step in any potential claim.
Article 25(1)(xiv) further prohibits retaliation against a subcontractor that has reported a prohibited act to the relevant authorities. This anti-retaliation provision is the statutory mechanism that allows subcontractors to exercise their legal rights without fearing that the business relationship will be terminated as a consequence.
2. What Is the Legal Difference Between Price Reduction and Non-Payment?
Although both non-payment (Article 25(1)(ii)) and unlawful price reduction (Article 25(1)(i)) violate the Win-Win Cooperation Act, they carry materially different legal consequences. Understanding this distinction is essential to formulating an effective litigation strategy.
The Special Interest Provision for Delayed Payment Following a Price Reduction
Article 25(3) of the Win-Win Cooperation Act establishes a specific interest obligation tied to the price reduction prohibition in Article 25(1)(i). Where a principal enterprise pays a reduced supply price — in violation of Article 25(1)(i) — more than 60 days after the date the goods were received, it must pay interest on the overdue amount at a rate set by Presidential Decree, within a ceiling of 40 percent per annum.
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Article 25(3)
This provision is triggered by an Article 25(1)(i) violation — an unlawful price reduction — not by a straightforward payment delay under Article 25(1)(ii). In practice, accurately characterizing whether the principal’s conduct constitutes a price reduction or a simple non-payment is critical to calculating the total amount recoverable.
When Does Substantially Below-Market Pricing Become a Separate Violation?
Where a principal enterprise sets the supply price significantly below the amount ordinarily paid for equivalent goods or services, Article 25(1)(iii) may be implicated. This is also subject to treble damages under Article 40-2(2)(i). If the supply price was unilaterally and substantially reduced during contract negotiation, an Article 25(1)(iii) claim should be examined alongside any payment dispute.
3. How Do I Report to the Ministry of SMEs and Startups — and What Will It Accomplish?
When a supply price dispute arises in South Korea, subcontractors have two main paths: administrative reporting to the Ministry of SMEs and Startups, and civil litigation. Pursuing both in parallel is often the most effective strategy.
The Ministry’s Investigative Powers
Article 40(1) of the Win-Win Cooperation Act authorizes the Minister of SMEs and Startups, where deemed necessary, to require relevant enterprises to submit documents or to dispatch officials to enter offices, business premises, and factories to inspect books, records, facilities, and other materials. This is a powerful tool for subcontractors who cannot independently access the principal enterprise’s internal payment records and accounting data.
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Article 40(1)
The Practical Significance of the Anti-Retaliation Rule
The most common reason subcontractors hesitate to report violations is fear of losing the business relationship. Article 25(1)(xiv), however, expressly prohibits reducing order volumes, suspending transactions, or otherwise disadvantaging a subcontractor because it reported a prohibited act or filed a mediation request. Retaliatory conduct of this kind is itself a prohibited act under the same article and is subject to treble damages under Article 40-2(2)(i).
The Supply Price Adjustment Request System
Article 22-2 of the Act establishes a formal mechanism through which subcontractors may request an adjustment of the supply price in response to changes in economic conditions — such as rising raw material costs. If the principal enterprise refuses to engage with the request, the subcontractor may escalate the matter to the Minister of SMEs and Startups for formal dispute mediation. Filing such a request is itself protected conduct under Article 25(1)(xiv)(b).
4. How Much Compensation Can a Subcontractor Claim?
The Win-Win Cooperation Act provides for two types of damages: standard compensatory damages and punitive (treble or quintuple) damages. The available remedy depends on which specific provision has been violated.
Standard Compensatory Damages (Article 40-2(1))
Where a principal enterprise violates the Act and causes harm, it is liable for the resulting loss. Under the proviso to Article 40-2(1), the enterprise may be relieved of liability only if it proves the absence of intent or negligence. This reversal of the burden of proof is favorable to subcontractors: the claimant need only establish the violation and the resulting loss — it is for the defendant to prove freedom from fault.
Punitive Damages (Article 40-2(2))
For specific categories of violations, the Act authorizes damages exceeding the actual loss sustained.
| Provision Violated | Conduct | Maximum Damages |
|---|---|---|
| Article 25(1)(i) | Unlawful reduction of supply price (without cause attributable to subcontractor) | Up to 3x actual loss |
| Article 25(1)(iii) | Setting supply price substantially below the prevailing market rate | Up to 3x actual loss |
| Article 25(1)(vii) | Substantially reducing or suspending orders without cause (where goods are defect-free) | Up to 3x actual loss |
| Article 25(1)(xiv)(a)(1) or (b) | Retaliation for reporting a violation or filing for mediation | Up to 3x actual loss |
| Article 25(1)(xiv)(a)(2) or Article 25(2) | Retaliation for reporting technology misappropriation, or technology misappropriation itself | Up to 5x actual loss |
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Article 40-2(2)
An important point: straightforward non-payment under Article 25(1)(ii) does not qualify for punitive damages. Only standard compensatory damages apply under Article 40-2(1). This is why determining whether the principal’s conduct amounts to a price reduction (Article 25(1)(i)) or a simple failure to pay (Article 25(1)(ii)) has direct consequences for the damages available.
Factors Courts Consider When Setting Punitive Damages
Article 40-2(3) directs courts to consider the following when determining the amount of punitive damages: the degree of intent or awareness of the risk of harm; the scope of losses suffered by the subcontractor and others; the economic benefit gained by the principal enterprise; whether improvement orders, corrective recommendations, or corrective orders were issued and complied with; any criminal sanctions imposed; the duration and frequency of the violation; the principal enterprise’s financial position; and the extent of its efforts to remedy the harm caused.
5. How Should a Subcontractor Secure Evidence in a Payment Dispute?
In supply price disputes under South Korean law, the first priority for any subcontractor is to systematically compile and preserve the evidence already in its possession. The strength of the evidence base frequently determines the outcome of both litigation and settlement negotiations.
The Document Retention Obligation as an Evidence Framework
Article 39 of the Win-Win Cooperation Act and Article 11 of its Enforcement Rules require both principal and subcontractor enterprises to retain documents relating to the payment and receipt of supply prices for three years from the end of the transaction. For the subcontractor, this statutory obligation provides a useful framework for identifying which categories of documents are legally significant and should be preserved.
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Article 39; Enforcement Rules, Article 11(1)(iii) and (2)
Key Evidence to Secure Immediately
- Written agreement or contract specifying the supply price payment due date
- Delivery confirmations, signed acknowledgments, and goods receipt records
- Tax invoices and electronic tax invoice records
- Written payment demands: emails, formal letters, and text messages
- Records of the principal enterprise’s explanations for the delay: call recordings, emails, or internal memos if obtainable
- Evidence that the principal enterprise received and used the delivered goods following delivery
- Any documentation in which the principal enterprise acknowledges delayed internal approval or budget constraints
Using the Court’s Document Production Order
Where a subcontractor cannot independently obtain the principal enterprise’s internal records, it may apply to the court for a document production order during litigation. Article 40-5(1) of the Win-Win Cooperation Act empowers a court, on application by a party, to order the opposing party to produce documents necessary to prove the existence of a violation or to calculate the amount of loss. If the principal enterprise refuses to comply without legitimate justification, the court may treat the claimant’s assertions regarding those documents as true (Article 40-5(4)).
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Articles 40-5(1) and (4)
In practice, this mechanism is particularly effective when a principal enterprise withholds internal payment approval records or accounting data. A refusal to comply with a court-ordered document production may itself become evidence supporting the subcontractor’s claims.
6. FAQ
Payment disputes under South Korea’s Win-Win Cooperation Act are not simply debt recovery matters. They require a careful assessment of the available legal pathways — administrative reporting, civil litigation, or both — and a clear-eyed determination of which statutory provisions apply to the specific conduct in question. In practice, the decisions made at the outset, particularly around evidence preservation and legal characterization of the violation, tend to have an outsized effect on the ultimate outcome.
The next installment in this series addresses technology misappropriation — the prohibition under Article 25(2) of the Win-Win Cooperation Act, the quintuple damages exposure it creates, and the evidentiary framework established under Articles 40-3 and 40-4 for these claims.
* The legal information in this article is provided for general informational purposes only. All statutory references are to the Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises and its Enforcement Rules as currently in force. Legal outcomes depend on the specific facts of each case, and this article does not constitute legal advice. Parties involved in actual disputes should consult a qualified attorney.
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