{"id":1814,"date":"2026-08-08T23:07:19","date_gmt":"2026-08-08T23:07:19","guid":{"rendered":"https:\/\/atlaw.kr\/en-blog\/won-at-the-supreme-court-lost-on-remanddirect-payment-agreements-in-korean-construction\/"},"modified":"2026-08-08T23:10:13","modified_gmt":"2026-08-08T23:10:13","slug":"subcontract-direct-payment-agreement-seizure-south-korea","status":"publish","type":"post","link":"https:\/\/atlaw.kr\/en-blog\/subcontract-direct-payment-agreement-seizure-south-korea\/","title":{"rendered":"Won at the Supreme Court, Lost on Remand: Direct Payment Agreements in Korean Construction"},"content":{"rendered":"<p><!-- ATLAS_HREFLANG_START -->\n<link rel=\"alternate\" hreflang=\"ko\" href=\"https:\/\/atlaw.kr\/kr-blog\/subcontract-direct-payment-agreement-seizure-kr\/\" \/>\n<link rel=\"alternate\" hreflang=\"en\" href=\"https:\/\/atlaw.kr\/en-blog\/subcontract-direct-payment-agreement-seizure-south-korea\/\" \/>\n<link rel=\"alternate\" hreflang=\"x-default\" href=\"https:\/\/atlaw.kr\/kr-blog\/subcontract-direct-payment-agreement-seizure-kr\/\" \/>\n<!-- ATLAS_HREFLANG_END --><\/p>\n<p><!-- ATLAS_SEO_BLOCK_START --><br \/>\n<script type=\"application\/ld+json\">{\"@context\":\"https:\/\/schema.org\",\"@type\":\"Article\",\"@id\":\"https:\/\/atlaw.kr\/en-blog\/subcontract-direct-payment-agreement-seizure-south-korea\/#article\",\"mainEntityOfPage\":{\"@type\":\"WebPage\",\"@id\":\"https:\/\/atlaw.kr\/en-blog\/subcontract-direct-payment-agreement-seizure-south-korea\/#webpage\"},\"headline\":\"Won at the Supreme Court, Lost on Remand: Direct Payment Agreements and Creditor Seizures in South Korea\",\"description\":\"Under South Korean law, a direct payment agreement made under Article 35(2)1 of the Framework Act on the Construction Industry transfers the corresponding construction payment claim to the subcontractor at the moment of the agreement, so later seizures by the prime contractor's creditors have no effect. Yet the subcontractor still lost on remand because it could not prove the value of work completed before the first seizure.\",\"datePublished\":\"2026-08-09T09:00:00+09:00\",\"dateModified\":\"2026-08-09T09:00:00+09:00\",\"inLanguage\":\"en-US\",\"author\":{\"@type\":\"Person\",\"@id\":\"https:\/\/atlaw.kr\/taejin-kim\/#person\",\"name\":\"Taejin Kim\",\"alternateName\":\"\uae40\ud0dc\uc9c4\",\"jobTitle\":\"Managing Partner\",\"worksFor\":{\"@id\":\"https:\/\/atlaw.kr\/#legalservice\"}},\"publisher\":{\"@type\":\"LegalService\",\"@id\":\"https:\/\/atlaw.kr\/#legalservice\",\"name\":\"Atlas Legal\",\"url\":\"https:\/\/atlaw.kr\"},\"about\":[\"Direct payment agreement under the Framework Act on the Construction Industry\",\"Timing of a subcontractor's direct payment claim in South Korea\",\"Transfer of construction payment claims without change of identity\",\"Burden of proving completed work value before a seizure\",\"Supreme Court of Korea Decision 2021Da273592 (April 3, 2025)\",\"Suwon District Court Decision 2025Na55580 (March 25, 2026)\"]}<\/script><br \/>\n<script type=\"application\/ld+json\">{\"@context\":\"https:\/\/schema.org\",\"@type\":\"FAQPage\",\"@id\":\"https:\/\/atlaw.kr\/en-blog\/subcontract-direct-payment-agreement-seizure-south-korea\/#faqpage\",\"inLanguage\":\"en-US\",\"mainEntity\":[{\"@type\":\"Question\",\"name\":\"Does a subcontractor in South Korea acquire a direct payment claim on the day the agreement is signed?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"Yes. The Supreme Court of Korea held that where the parties enter into an agreement under Article 35(2)1 of the Framework Act on the Construction Industry, the project owner's duty to pay the subcontractor directly arises at that moment, the owner's payment obligation toward the prime contractor is extinguished to that extent, and the corresponding claim is transferred to the subcontractor without change of identity. Progress inspection and a payment demand are procedures for fixing the amount, not conditions for the right to arise (Supreme Court Decision 2021Da273592, April 3, 2025).\"}},{\"@type\":\"Question\",\"name\":\"Article 35(3) says the debt is extinguished when the owner has actually paid. Why does the Court use the agreement date?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"The wording differs from Article 14(2) of the Fair Transactions in Subcontracting Act. The Supreme Court nevertheless held that the Subcontracting Act is a special statute aimed at establishing a fair subcontracting order, that Article 34 of that Act directs the Subcontracting Act to prevail where the Framework Act conflicts with it, and that the direct payment mechanism exists to protect subcontractors ahead of the prime contractor and its general creditors. The timing under the Framework Act must therefore be read consistently with the purpose of the Subcontracting Act.\"}},{\"@type\":\"Question\",\"name\":\"Does the entire construction payment claim pass to the subcontractor?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"No. Only the amount corresponding to the portion the subcontractor has actually performed passes. The Supreme Court held as early as 2008 that a direct payment agreement does not create an obligation for the full subcontract price but only for the amount corresponding to work actually manufactured, repaired, constructed, or performed (Supreme Court Decision 2007Da54108, February 29, 2008). On the day of signing, no work has yet been performed, so the amount transferred that day is zero and grows as construction proceeds.\"}},{\"@type\":\"Question\",\"name\":\"If the subcontractor won at the Supreme Court, why did it lose on remand?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"It failed to prove the value of work completed. The subcontractor calculated approximately KRW 10 million for the fourteen days between the agreement and the first seizure by pro-rating the total construction period. The remand court rejected that calculation because no specific records of the work performed during that period were submitted (Suwon District Court Decision 2025Na55580, March 25, 2026).\"}},{\"@type\":\"Question\",\"name\":\"What happens if a seizure arrives before the direct payment agreement?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"To that extent no direct payment claim arises. Where a third-party creditor of the prime contractor has secured the claim by seizure or provisional attachment before the direct payment event occurs, the secured claim is not extinguished, and no direct payment claim arises for the corresponding amount (Supreme Court Decision 2015Da4238, December 5, 2017).\"}},{\"@type\":\"Question\",\"name\":\"Is it safer for a subcontractor to obtain its own provisional attachment first?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"It can backfire. The Supreme Court held that this rule does not operate only relatively between the parties to the attachment order, and that it applies equally where the provisional attachment was obtained by the subcontractor itself to enforce its own subcontract payment claim. A subcontractor's own provisional attachment can therefore prevent its direct payment claim from arising (Supreme Court Decision 2015Da4238, December 5, 2017).\"}},{\"@type\":\"Question\",\"name\":\"Can the project owner raise defenses against the subcontractor?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"Yes. The direct payment mechanism operates only to the extent that it imposes no new burden on the owner beyond its existing contract debt, so the owner may assert against the subcontractor any defense it could have asserted against the prime contractor before the direct payment demand. A simultaneous performance defense based on a defect repair guarantee has been recognized (Supreme Court Decision 2010Da24176, May 10, 2012).\"}},{\"@type\":\"Question\",\"name\":\"What does this mean for foreign companies operating in the Incheon Free Economic Zone?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"Foreign-invested companies building facilities in Songdo International Business District, Cheongna International City, or Yeongjong International City are usually the project owner in this structure. Two practical points follow: keep a dated record of every direct payment agreement and every seizure notice received, and expect that a subcontractor's entitlement is measured by verified progress rather than by elapsed time. Signing a direct payment agreement removes the corresponding amount from the prime contractor's estate on that date.\"}}]}<\/script><br \/>\n<script type=\"application\/ld+json\">{\"@context\":\"https:\/\/schema.org\",\"@type\":[\"LegalService\",\"LocalBusiness\"],\"@id\":\"https:\/\/atlaw.kr\/#legalservice\",\"name\":\"Atlas Legal\",\"alternateName\":[\"\ubc95\ubb34\ubc95\uc778 \uc544\ud2c0\ub77c\uc2a4\",\"Atlas Law Firm\"],\"url\":\"https:\/\/atlaw.kr\/en\/home-en\/\",\"telephone\":\"+82-32-864-8300\",\"email\":\"info@atlaw.kr\",\"priceRange\":\"$$$\",\"address\":{\"@type\":\"PostalAddress\",\"streetAddress\":\"B-2901, 323 Incheon Tower-daero\",\"addressLocality\":\"Yeonsu-gu, Incheon\",\"addressRegion\":\"Incheon Metropolitan City\",\"postalCode\":\"22007\",\"addressCountry\":\"KR\"},\"geo\":{\"@type\":\"GeoCoordinates\",\"latitude\":37.399438,\"longitude\":126.629812},\"openingHoursSpecification\":[{\"@type\":\"OpeningHoursSpecification\",\"dayOfWeek\":[\"Monday\",\"Tuesday\",\"Wednesday\",\"Thursday\",\"Friday\"],\"opens\":\"09:00\",\"closes\":\"18:00\"}],\"areaServed\":[{\"@type\":\"Country\",\"name\":\"South Korea\"},{\"@type\":\"Place\",\"name\":\"Songdo International Business District\"},{\"@type\":\"Place\",\"name\":\"Cheongna International City\"},{\"@type\":\"Place\",\"name\":\"Yeongjong International City\"},{\"@type\":\"Place\",\"name\":\"Incheon\"},{\"@type\":\"Place\",\"name\":\"Seoul Metropolitan Area\"},{\"@type\":\"Place\",\"name\":\"Incheon Free Economic Zone (IFEZ)\"}],\"knowsAbout\":[\"Construction Subcontracting Law in South Korea\",\"Direct Payment of Subcontract Price in South Korea\",\"Framework Act on the Construction Industry in South Korea\",\"Fair Transactions in Subcontracting Act in South Korea\",\"Seizure and Provisional Attachment of Construction Payment Claims in South Korea\",\"Court Deposit and Mixed Deposit Practice in South Korea\",\"Corporate Disputes in South Korea\",\"Incheon Free Economic Zone (IFEZ) Legal Services\"],\"serviceType\":[\"Construction Dispute Resolution\",\"Subcontracting and Fair Trade Compliance\",\"Corporate Dispute Resolution\",\"Debt Collection and Enforcement Litigation\",\"Foreign Direct Investment Legal Services\"]}<\/script><br \/>\n<!-- ATLAS_SEO_BLOCK_END --><\/p>\n<style>@import url('https:\/\/cdn.jsdelivr.net\/gh\/orioncactus\/pretendard@v1.3.9\/dist\/web\/static\/pretendard.css'); 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} \/* \uc800\uc790 \ubc15\uc2a4 *\/ .author-box { display: flex; align-items: center; gap: 14px; padding-top: 40px; margin-top: 40px; border-top: 1px solid var(--rule); } .author-avatar { width: 56px; height: 56px; border-radius: 50%; object-fit: cover; flex-shrink: 0; align-self: flex-start; } .author-text { flex: 1; } .author-name { font-size: 18px; font-weight: 600; color: var(--navy); } .author-meta { font-size: 13px; color: var(--text); margin-top: 2px; } .author-link { display: inline-block; margin-top: 8px; font-size: 15px; font-weight: 600; color: var(--wine); text-decoration: none; } .author-link:hover { text-decoration: underline; } .author-section-label { font-size: 15px; font-weight: 700; letter-spacing: 1px; text-transform: uppercase; color: var(--muted); margin-bottom: 8px; } .author-detail { font-size: 16px; color: var(--text); line-height: 1.7; margin-bottom: 1px; } @media (max-width: 640px) { body { font-size: 15px; } p { font-size: 15px; } li { font-size: 15px; } .hero { padding: 32px 14px 24px; } .hero h1 { font-size: 22px; } .hero-title { font-size: 22px; } .hero-info { font-size: 12px; } .content { padding: 28px 0 60px; } .toc-nav { margin-left: -14px; margin-right: -14px; border-radius: 0; border-left: none; border-right: none; padding: 12px 4px; margin-bottom: 28px; } .toc-label { font-size: 16px; } .toc-nav ol li { font-size: 14px; padding: 3px 0; } h2 { font-size: 20px; margin: 44px 0 10px; } h3 { font-size: 15px; margin: 24px 0 8px; } .lead-text { font-size: 16px; } .summary-text { font-size: 15px; } .context-text { font-size: 14px; } .formula { flex-direction: column; padding: 16px 12px; } .f-num { font-size: 18px; } th { font-size: 13px; padding: 8px 10px; } td { font-size: 13px; padding: 8px 10px; } .faq-q { font-size: 14px; } .faq-item p:not(.faq-q) { font-size: 14px; } .author-box { display: block; overflow: hidden; } .author-avatar { float: left; width: 36px; height: 36px; margin-right: 10px; border-radius: 50%; } .author-section-label { display: inline; font-size: 11px; letter-spacing: 0; margin: 0 3px 0 0; } .author-name { display: inline; font-size: 14px; } .author-detail { clear: both; font-size: 13px; line-height: 1.55; margin-top: 8px; margin-bottom: 1px; } .author-detail ~ .author-detail { clear: none; margin-top: 2px; } .author-link { clear: both; display: block; font-size: 13px; margin-top: 8px; } p.closing { font-size: 14px; } }<\/style>\n<div class=\"hero\">\n  <span class=\"category-tag\">Antitrust, Competition &amp; Subcontract<\/span><\/p>\n<div class=\"hero-title\">Won at the Supreme Court, Lost on Remand<br \/>Direct Payment Agreements in Korean Construction<\/div>\n<div class=\"hero-meta\">\n<div class=\"hero-info\">\n      <strong>Taejin Kim<\/strong> \u00b7 Managing Partner, Atlas Legal<br \/>\n      Supreme Court of Korea Decision 2021Da273592 (April 3, 2025) &nbsp;\u00b7&nbsp; Suwon District Court Decision 2025Na55580 (March 25, 2026)\n    <\/div>\n<\/p><\/div>\n<\/div>\n<div class=\"content\">\n<div class=\"direct-answer\">\n    <strong>Key answer:<\/strong> Under South Korean law, a direct payment agreement (<em>jikbul hab-ui<\/em>) under Article 35(2)1 of the Framework Act on the Construction Industry gives rise to the project owner&#8217;s direct payment duty <strong>on the day the agreement is made<\/strong>, and the corresponding construction payment claim transfers to the subcontractor without change of identity, so seizures arriving afterward have no effect (Supreme Court Decision 2021Da273592, April 3, 2025). Even so, this subcontractor <strong>lost on remand<\/strong> because it could not prove how much work it had completed before the first seizure (Suwon District Court Decision 2025Na55580, March 25, 2026).\n  <\/div>\n<div class=\"toc-nav\">\n<p class=\"toc-label\">Contents<\/p>\n<ol>\n<li><a href=\"#sec-1\">1. When does the claim actually pass to the subcontractor?<\/a><\/li>\n<li><a href=\"#sec-2\">2. What happened in this case?<\/a><\/li>\n<li><a href=\"#sec-3\">3. Why did the lower courts rule against the subcontractor?<\/a><\/li>\n<li><a href=\"#sec-4\">4. Why did the Supreme Court reverse?<\/a><\/li>\n<li><a href=\"#sec-5\">5. So why did the subcontractor lose again on remand?<\/a><\/li>\n<li><a href=\"#sec-6\">6. How much of the claim actually transfers?<\/a><\/li>\n<li><a href=\"#sec-7\">7. What if a seizure arrives first?<\/a><\/li>\n<li><a href=\"#sec-8\">8. Can the project owner raise defenses?<\/a><\/li>\n<li><a href=\"#sec-9\">9. What does this mean for foreign companies in the IFEZ?<\/a><\/li>\n<li><a href=\"#sec-faq\">Frequently asked questions<\/a><\/li>\n<\/ol><\/div>\n<p class=\"lead-text\">A local government in South Korea awarded a bridge construction project. On the same day the prime contractor subcontracted the earthwork and structural work, the project owner, the prime contractor, and the subcontractor signed a direct payment agreement. Thirteen days later, creditors of the prime contractor began seizing the construction payment claim, and the owner deposited KRW 50,075,900 with the court because it could not tell who was entitled to it.<\/p>\n<p class=\"context-text\">The subcontractor lost at first instance and on appeal. Then, on April 3, 2025, <strong>the Supreme Court of Korea reversed<\/strong>: the claim had already moved to the subcontractor on the day of the agreement, so the later seizures attached to nothing. That is where most summaries of this case stop. The actual ending is different. On remand, in March 2026, <strong>the subcontractor lost again<\/strong>. It had won the legal principle but could not prove the number. This article covers both decisions together, because in practice they are one lesson.<\/p>\n<p><\/p>\n<h2 id=\"sec-1\">1. When does the claim actually pass to the subcontractor?<\/h2>\n<p class=\"lead-text\">On the day the agreement is made. The Supreme Court held that where the parties conclude an agreement under Article 35(2)1 of the Framework Act on the Construction Industry, the owner&#8217;s duty to pay the subcontractor directly arises at that point, the owner&#8217;s payment obligation toward the prime contractor is extinguished to that extent, and the corresponding claim transfers to the subcontractor without change of identity.<\/p>\n<p>The operative word is <strong>transfer<\/strong>. The subcontractor does not acquire a new right against the owner. The very claim the prime contractor held changes hands, and to that extent it disappears from the prime contractor&#8217;s estate. That is why a seizure served afterward attaches to nothing.<\/p>\n<p>This was already settled law under Article 14 of the Fair Transactions in Subcontracting Act, commonly called the Subcontracting Act (Supreme Court Decision 2012Da85267, December 24, 2014). What Decision 2021Da273592 adds is an express confirmation that the same rule governs Article 35 of the Framework Act on the Construction Industry, despite the difference in statutory wording discussed below.<\/p>\n<p><\/p>\n<h2 id=\"sec-2\">2. What happened in this case?<\/h2>\n<p class=\"lead-text\">The subcontract and the direct payment agreement were signed on the same day, April 19, 2019. The first seizure reached the owner on May 2, 2019. Those thirteen days are the entire case.<\/p>\n<table>\n<thead>\n<tr>\n<th>Date<\/th>\n<th>Event<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>April 19, 2019<\/td>\n<td>Prime contractor subcontracts earthwork (KRW 89.15 million) and structural work (KRW 291.7 million) of a bridge project<\/td>\n<\/tr>\n<tr>\n<td>April 19, 2019<\/td>\n<td>Owner, prime contractor, and subcontractor sign a direct payment agreement under Article 35(2)1<\/td>\n<\/tr>\n<tr>\n<td>April 19 to June 15, 2019<\/td>\n<td>Subcontractor performs for 58 days, then stops work<\/td>\n<\/tr>\n<tr>\n<td>May 2 to July 19, 2019<\/td>\n<td>Provisional attachments and seizure and collection orders obtained by the prime contractor&#8217;s creditors reach the owner (claims totaling KRW 230 million)<\/td>\n<\/tr>\n<tr>\n<td>June to July 2019<\/td>\n<td>Owner pays the subcontractor directly: KRW 14,628,900 in May labor costs and KRW 25,107,500 in June labor costs<\/td>\n<\/tr>\n<tr>\n<td>July 2019<\/td>\n<td>Parties settle the remaining balance at KRW 39,543,600; subcontractor demands payment on July 19<\/td>\n<\/tr>\n<tr>\n<td>August 2, 2019<\/td>\n<td>Owner makes a mixed deposit of KRW 50,075,900, citing both performance and execution grounds<\/td>\n<\/tr>\n<tr>\n<td>September 25, 2020<\/td>\n<td>First instance (Suwon District Court Ansan Branch 2019GaDan70783) rules against the subcontractor<\/td>\n<\/tr>\n<tr>\n<td>August 17, 2021<\/td>\n<td>Appellate court (Suwon District Court 2020Na89155) dismisses the appeal<\/td>\n<\/tr>\n<tr>\n<td>April 3, 2025<\/td>\n<td>Supreme Court (2021Da273592) reverses and remands<\/td>\n<\/tr>\n<tr>\n<td>March 25, 2026<\/td>\n<td>Remand court (Suwon District Court 2025Na55580) dismisses the appeal; subcontractor finally loses<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>One detail deserves attention: the direct payment agreement was actually working. Even after the seizures arrived, the owner paid the subcontractor&#8217;s labor costs directly. The dispute concerned only the final settlement balance, which was far smaller than the creditors&#8217; combined claims.<\/p>\n<div class=\"formula\">\n<div class=\"f-item\">\n<div class=\"f-num\">Apr 19, 2019<\/div>\n<div class=\"f-label\">Direct payment<br \/>agreement<\/div>\n<\/div>\n<div class=\"f-op\">\u2192<\/div>\n<div class=\"f-item\">\n<div class=\"f-num\">13 days<\/div>\n<div class=\"f-label\">Only this period&#8217;s<br \/>progress is protected<\/div>\n<\/div>\n<div class=\"f-op\">\u2192<\/div>\n<div class=\"f-item f-result\">\n<div class=\"f-num\">May 2, 2019<\/div>\n<div class=\"f-label\">First seizure<br \/>served<\/div>\n<\/div><\/div>\n<p><\/p>\n<h2 id=\"sec-3\">3. Why did the lower courts rule against the subcontractor?<\/h2>\n<p class=\"lead-text\">They held that the direct payment event does not arise from the agreement alone, but only when the subcontractor undergoes a progress inspection and demands direct payment. By the time the subcontractor demanded payment on July 19, 2019, the entire remaining claim had already been secured by creditors.<\/p>\n<p>The appellate court gave two reasons. <strong>First, the wording of this particular agreement.<\/strong> It required the prime contractor to submit the subcontractor&#8217;s completed portions separately at progress and completion inspections, to claim the subcontract price separately, and required the owner to pay into a designated account. The court read those procedural clauses as conditions for the right itself.<\/p>\n<p><strong>Second, the wording of the statute.<\/strong> Article 35(3) of the Framework Act provides that the debts are extinguished where the owner <strong>has directly paid<\/strong> the subcontractor. The appellate court added that treating the owner&#8217;s debt as extinguished earlier could expose the prime contractor&#8217;s creditors to unexpected loss, so the provision should be construed as narrowly as possible.<\/p>\n<p>The difference in statutory language is real.<\/p>\n<table>\n<thead>\n<tr>\n<th>Point<\/th>\n<th>Subcontracting Act, Article 14<\/th>\n<th>Framework Act, Article 35<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Triggering event<\/td>\n<td>Paragraph 1, item 2 \u2014 tripartite agreement<\/td>\n<td>Paragraph 2, item 1 \u2014 agreement between owner and prime contractor, or tripartite<\/td>\n<\/tr>\n<tr>\n<td>Extinguishment language<\/td>\n<td>Paragraph 2 \u2014 when &#8220;the event has occurred&#8221;<\/td>\n<td>Paragraph 3 \u2014 when the owner &#8220;has directly paid&#8221;<\/td>\n<\/tr>\n<tr>\n<td>Prior practice<\/td>\n<td>Settled: agreement date<\/td>\n<td>Split: payment date or demand date<\/td>\n<\/tr>\n<tr>\n<td>After this decision<\/td>\n<td>Unchanged<\/td>\n<td>Agreement date, aligned with the Subcontracting Act<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><\/p>\n<h2 id=\"sec-4\">4. Why did the Supreme Court reverse?<\/h2>\n<p class=\"lead-text\">The Court acknowledged the textual difference but held that the timing of extinguishment under the Framework Act must be construed so as not to conflict with the purpose of the Subcontracting Act, which is a special statute.<\/p>\n<p>Three grounds supported that conclusion.<\/p>\n<p><strong>The relationship between the two statutes.<\/strong> The Framework Act on the Construction Industry aims at proper execution of construction works and sound development of the construction industry, while the Subcontracting Act aims specifically at establishing a fair subcontracting order so that prime contractors and subcontractors may develop on an equal footing. The latter is a special statute in this field.<\/p>\n<p><strong>An express conflict rule.<\/strong> Article 34 of the Subcontracting Act provides that where the Framework Act on the Construction Industry conflicts with the Subcontracting Act, the Subcontracting Act prevails.<\/p>\n<p><strong>The purpose of the mechanism.<\/strong> The direct payment provisions impose a direct payment duty on the owner only to the extent that no new burden beyond its existing contract debt is created, thereby protecting the subcontractor ahead of the prime contractor and its general creditors (Supreme Court Decision 2010Da24176, May 10, 2012). Postponing the moment the right arises until a formal demand would let ordinary creditors overtake the subcontractor in the interval, defeating that purpose.<\/p>\n<p>Applied here, the subcontractor&#8217;s right arose on April 19, 2019, so the seizures served from May 2 onward reached a claim that had already been transferred and extinguished, and were therefore ineffective.<\/p>\n<p><\/p>\n<h2 id=\"sec-5\">5. So why did the subcontractor lose again on remand?<\/h2>\n<p class=\"lead-text\">Because it could not prove the value of the work it had completed. The subcontractor claimed roughly KRW 10 million for the fourteen days up to the first seizure, but the remand court found that no specific records of the work performed in that period had been submitted.<\/p>\n<p>The calculation offered was a simple pro-rating: fourteen of the fifty-eight construction days had elapsed, so the corresponding share of the contract value was KRW 9,545,006. The subcontractor reduced its claim to about KRW 10 million on that basis.<\/p>\n<p>The remand court rejected it for three reasons: the subcontractor had already received May and June labor costs directly from the owner; the period at issue was only fourteen days; and <strong>no specific records of the work performed during that period were submitted at all<\/strong>. The court concluded that the evidence was insufficient to find progress worth approximately KRW 10 million, and dismissed the appeal (Suwon District Court Decision 2025Na55580, March 25, 2026).<\/p>\n<table>\n<thead>\n<tr>\n<th>Stage<\/th>\n<th>Question<\/th>\n<th>Outcome<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Supreme Court<\/td>\n<td>When does the direct payment claim arise? (law)<\/td>\n<td>Subcontractor wins \u2014 on the agreement date<\/td>\n<\/tr>\n<tr>\n<td>Remand court<\/td>\n<td>How much was built before the seizure? (fact and proof)<\/td>\n<td>Subcontractor loses \u2014 proof failed<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>A favorable legal principle opens the door. What you carry through it is decided by construction records. Pro-rating by elapsed time did not substitute for them.<\/p>\n<p><\/p>\n<h2 id=\"sec-6\">6. How much of the claim actually transfers?<\/h2>\n<p class=\"lead-text\">Only the amount corresponding to the portion the subcontractor has performed. A direct payment agreement does not transfer the full subcontract price.<\/p>\n<p>This limit is not new. In 2008 the Supreme Court held that where a direct payment agreement exists, the owner does not become obliged to pay the entire subcontract price, but only &#8220;the subcontract price corresponding to the portion manufactured, repaired, constructed, or performed by the subcontractor,&#8221; and the owner&#8217;s debt to the prime contractor is extinguished within that range (Supreme Court Decision 2007Da54108, February 29, 2008).<\/p>\n<p>The practical consequence is easy to miss. <strong>On the day of signing, nothing has been built yet.<\/strong> In this case the subcontract and the agreement were signed the same day, so the amount transferred that day was zero. The transferred amount grows as construction proceeds, and the line is drawn wherever the seizure lands.<\/p>\n<p>Read correctly, then, &#8220;the claim transfers on the agreement date&#8221; means that <strong>progress accumulated after the agreement is secured ahead of seizing creditors<\/strong>. That is precisely why this subcontractor claimed only the first fourteen days.<\/p>\n<p><\/p>\n<h2 id=\"sec-7\">7. What if a seizure arrives first?<\/h2>\n<p class=\"lead-text\">To that extent, no direct payment claim arises. A claim already secured by seizure or provisional attachment before the direct payment event is not extinguished by that event.<\/p>\n<p>The Supreme Court has consistently held that because neither statute contains a provision displacing the effect of compulsory or preservative execution completed earlier, a claim secured before the direct payment event survives, and no direct payment claim arises for the corresponding amount (Supreme Court Decision 2015Da4238, December 5, 2017). Decision 2021Da273592 confirms the same for Article 35 of the Framework Act.<\/p>\n<p>The same decision contains a trap that catches subcontractors in practice. Because the rule exists to resolve competing creditor interests uniformly rather than relatively, it <strong>does not operate only between the parties to the attachment order<\/strong>, and it applies equally where the provisional attachment was obtained <strong>by the subcontractor itself<\/strong> to enforce its own subcontract payment claim. A subcontractor that pre-emptively attaches the prime contractor&#8217;s claim against the owner may find that its own direct payment claim never arises for that amount.<\/p>\n<table>\n<thead>\n<tr>\n<th>Sequence<\/th>\n<th>Result<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Agreement, then seizure<\/td>\n<td>Seizure ineffective as to progress accumulated after the agreement; subcontractor has priority<\/td>\n<\/tr>\n<tr>\n<td>Seizure, then direct payment event<\/td>\n<td>No direct payment claim arises for the secured amount<\/td>\n<\/tr>\n<tr>\n<td>Attachment obtained by the subcontractor itself<\/td>\n<td>Same as above; self-help does not create an exception<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><\/p>\n<h2 id=\"sec-8\">8. Can the project owner raise defenses?<\/h2>\n<p class=\"lead-text\">Yes. Because the mechanism imposes no burden beyond the owner&#8217;s existing contract debt, the owner may assert against the subcontractor any defense it could have asserted against the prime contractor before the direct payment demand.<\/p>\n<p>The Supreme Court confirmed this in a defect repair guarantee case. Where the prime contractor had agreed to deposit a defect repair guarantee in cash or to deliver a guarantee certificate before receiving the contract price, the owner could withhold payment until it received one, and could assert that defense against the subcontractor as well (Supreme Court Decision 2010Da24176, May 10, 2012).<\/p>\n<p>In addition, Article 35(5) of the Framework Act allows the owner to withhold direct payment where the prime contractor, attaching documents proving that the subcontractor has delayed wages or material costs, requests suspension of direct payment. A direct payment agreement therefore does not close off every variable.<\/p>\n<p><\/p>\n<h2 id=\"sec-9\">9. What does this mean for foreign companies in the IFEZ?<\/h2>\n<p class=\"lead-text\">Foreign-invested companies building or fitting out facilities in the Incheon Free Economic Zone (IFEZ) \u2014 Songdo International Business District, Cheongna International City, and Yeongjong International City \u2014 normally sit in this structure as the project owner. Three practical points follow.<\/p>\n<ul>\n<li><strong>The signing date is a legal event, not a formality.<\/strong> Signing a direct payment agreement removes the corresponding amount from the prime contractor&#8217;s estate that day. Record the date and keep the original.<\/li>\n<li><strong>Log every seizure notice with its service date.<\/strong> The comparison between the agreement date and each service date is the first thing a Korean court will run.<\/li>\n<li><strong>Draft procedural clauses carefully.<\/strong> In this case the appellate court read inspection and separate-billing clauses as conditions for the right to arise. Keep payment mechanics clearly labeled as mechanics.<\/li>\n<\/ul>\n<p>For subcontractors, including foreign trade contractors working under a Korean prime contractor, the operative lesson is evidentiary. Keep daily work logs, daily labor and equipment records, material delivery slips, and dated photographs by work item. A seizure can arrive on any day, and whatever day it lands on, you must be able to show what had been built by then.<\/p>\n<p>This decision resolved a genuine split between the Framework Act on the Construction Industry and the Subcontracting Act on when the owner&#8217;s debt is extinguished. The remand judgment in the same case shows, just as clearly, that a unified legal principle does not by itself turn into money.<\/p>\n<p><\/p>\n<h2 id=\"sec-faq\">Frequently asked questions<\/h2>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. Does a subcontractor in South Korea acquire a direct payment claim on the day the agreement is signed?<\/p>\n<p>A. Yes. The Supreme Court of Korea held that where the parties enter into an agreement under Article 35(2)1 of the Framework Act on the Construction Industry, the project owner&#8217;s duty to pay the subcontractor directly arises at that moment, the owner&#8217;s payment obligation toward the prime contractor is extinguished to that extent, and the corresponding claim is transferred to the subcontractor without change of identity. Progress inspection and a payment demand are procedures for fixing the amount, not conditions for the right to arise (Supreme Court Decision 2021Da273592, April 3, 2025).<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. Article 35(3) says the debt is extinguished when the owner has actually paid. Why does the Court use the agreement date?<\/p>\n<p>A. The wording differs from Article 14(2) of the Fair Transactions in Subcontracting Act. The Supreme Court nevertheless held that the Subcontracting Act is a special statute aimed at establishing a fair subcontracting order, that Article 34 of that Act directs the Subcontracting Act to prevail where the Framework Act conflicts with it, and that the direct payment mechanism exists to protect subcontractors ahead of the prime contractor and its general creditors. The timing under the Framework Act must therefore be read consistently with the purpose of the Subcontracting Act.<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. Does the entire construction payment claim pass to the subcontractor?<\/p>\n<p>A. No. Only the amount corresponding to the portion the subcontractor has actually performed passes. The Supreme Court held as early as 2008 that a direct payment agreement does not create an obligation for the full subcontract price but only for the amount corresponding to work actually manufactured, repaired, constructed, or performed (Supreme Court Decision 2007Da54108, February 29, 2008). On the day of signing, no work has yet been performed, so the amount transferred that day is zero and grows as construction proceeds.<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. If the subcontractor won at the Supreme Court, why did it lose on remand?<\/p>\n<p>A. It failed to prove the value of work completed. The subcontractor calculated approximately KRW 10 million for the fourteen days between the agreement and the first seizure by pro-rating the total construction period. The remand court rejected that calculation because no specific records of the work performed during that period were submitted (Suwon District Court Decision 2025Na55580, March 25, 2026).<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. What happens if a seizure arrives before the direct payment agreement?<\/p>\n<p>A. To that extent no direct payment claim arises. Where a third-party creditor of the prime contractor has secured the claim by seizure or provisional attachment before the direct payment event occurs, the secured claim is not extinguished, and no direct payment claim arises for the corresponding amount (Supreme Court Decision 2015Da4238, December 5, 2017).<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. Is it safer for a subcontractor to obtain its own provisional attachment first?<\/p>\n<p>A. It can backfire. The Supreme Court held that this rule does not operate only relatively between the parties to the attachment order, and that it applies equally where the provisional attachment was obtained by the subcontractor itself to enforce its own subcontract payment claim. A subcontractor&#8217;s own provisional attachment can therefore prevent its direct payment claim from arising (Supreme Court Decision 2015Da4238, December 5, 2017).<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. Can the project owner raise defenses against the subcontractor?<\/p>\n<p>A. Yes. The direct payment mechanism operates only to the extent that it imposes no new burden on the owner beyond its existing contract debt, so the owner may assert against the subcontractor any defense it could have asserted against the prime contractor before the direct payment demand. A simultaneous performance defense based on a defect repair guarantee has been recognized (Supreme Court Decision 2010Da24176, May 10, 2012).<\/p>\n<\/p><\/div>\n<div class=\"faq-item\">\n<p class=\"faq-q\">Q. What does this mean for foreign companies operating in the Incheon Free Economic Zone?<\/p>\n<p>A. Foreign-invested companies building facilities in Songdo International Business District, Cheongna International City, or Yeongjong International City are usually the project owner in this structure. Two practical points follow: keep a dated record of every direct payment agreement and every seizure notice received, and expect that a subcontractor&#8217;s entitlement is measured by verified progress rather than by elapsed time. Signing a direct payment agreement removes the corresponding amount from the prime contractor&#8217;s estate on that date.<\/p>\n<\/p><\/div>\n<p class=\"closing\">This article is a general explanation based on published judgments and the statutes in force. Outcomes turn on the wording and circumstances of the particular direct payment agreement, the calculation and proof of completed work, and the dates on which seizure or provisional attachment notices were served, so it should not be applied directly to an individual matter.<\/p>\n<div class=\"author-box\">\n    <img decoding=\"async\" class=\"author-avatar\" src=\"https:\/\/atlaw.kr\/wp-content\/uploads\/2022\/12\/\uae40\ud0dc\uc9c4-1.png\" alt=\"Taejin Kim, Managing Partner \u2014 Atlas Legal\"><\/p>\n<div class=\"author-text\">\n<div class=\"author-section-label\">About the Author<\/div>\n<div class=\"author-name\">Taejin Kim | Managing Partner<\/div>\n<div class=\"author-detail\">Corporate Counseling, Corporate Disputes, White-Collar Crime<\/div>\n<div class=\"author-detail\">Former Public Prosecutor | Judicial Research and Training Institute, 33rd Class<\/div>\n<div class=\"author-detail\">Korea University LL.B. &amp; LL.M. (Criminal Law), University of California, Davis LL.M.<\/div>\n<div class=\"author-detail\">Atlas Legal | Incheon Songdo, South Korea<\/div>\n<p>      <a class=\"author-link\" href=\"https:\/\/atlaw.kr\" target=\"_blank\" rel=\"noopener noreferrer\">Visit Atlas Legal Homepage \u2192<\/a>\n    <\/div>\n<\/p><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>A direct payment agreement under Korea&#8217;s Framework Act on the Construction Industry transfers the construction payment claim to the subcontractor on the signing date, so later seizures fail. Yet the subcontractor lost on remand for failing to prove completed work.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"_kadence_starter_templates_imported_post":false,"_kad_post_transparent":"","_kad_post_title":"","_kad_post_layout":"","_kad_post_sidebar_id":"","_kad_post_content_style":"","_kad_post_vertical_padding":"","_kad_post_feature":"","_kad_post_feature_position":"","_kad_post_header":false,"_kad_post_footer":false,"_kad_post_classname":"","footnotes":""},"categories":[227],"tags":[884,885,887,888,886],"class_list":["post-1814","post","type-post","status-publish","format-standard","hentry","category-antitrust-competition","tag-direct-payment-agreement","tag-construction-subcontracting-korea","tag-framework-act-on-the-construction-industry","tag-korean-supreme-court","tag-seizure-of-payment-claims"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.2 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Subcontract Direct Payment in South Korea | Atlas Legal<\/title>\n<meta name=\"description\" content=\"A direct payment agreement under Korea&#039;s Framework Act on the Construction Industry transfers the construction payment claim to the subcontractor on the signing date, so later seizures fail. 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