{"id":687,"date":"2026-03-13T22:43:51","date_gmt":"2026-03-13T22:43:51","guid":{"rendered":"https:\/\/atlaw.kr\/en-blog\/?p=687"},"modified":"2026-05-03T08:33:44","modified_gmt":"2026-05-03T08:33:44","slug":"subcontract-price-reduction-south-korea","status":"publish","type":"post","link":"https:\/\/atlaw.kr\/en-blog\/subcontract-price-reduction-south-korea\/","title":{"rendered":"When Is Reducing a Subcontract Price Lawful in South Korea?"},"content":{"rendered":"<p><!-- ATLAS_HREFLANG_START --><link rel=\"alternate\" hreflang=\"ko\" href=\"https:\/\/atlaw.kr\/kr-blog\/%ed%95%98%eb%8f%84%ea%b8%89%eb%8c%80%ea%b8%88-%ea%b0%90%ec%95%a1-%ec%a0%95%eb%8b%b9%ed%95%9c-%ec%82%ac%ec%9c%a0\/\" \/><link rel=\"alternate\" hreflang=\"en\" href=\"https:\/\/atlaw.kr\/en-blog\/subcontract-price-reduction-south-korea\/\" \/><link rel=\"alternate\" hreflang=\"x-default\" href=\"https:\/\/atlaw.kr\/kr-blog\/%ed%95%98%eb%8f%84%ea%b8%89%eb%8c%80%ea%b8%88-%ea%b0%90%ec%95%a1-%ec%a0%95%eb%8b%b9%ed%95%9c-%ec%82%ac%ec%9c%a0\/\" \/><!-- ATLAS_HREFLANG_END --><br \/>\n<!-- ===== Schema Markup ===== --><\/p>\n<p><!-- Article Schema --><br \/>\n<script type=\"application\/ld+json\">{\"@context\": \"https:\/\/schema.org\", \"@type\": \"Article\", \"headline\": \"When Is a Reduction in Subcontract Price Lawful in South Korea? Case Analysis Under the Fair Transactions in Subcontracting Act | Atlas Legal\", \"description\": \"Reducing a subcontract price in South Korea is presumptively unlawful. Learn what 'legitimate grounds' require under the Subcontracting Act \u2014 including the strict three-part test for raw material and exchange-rate-based reductions \u2014 based on Seoul High Court Case 2020Nu64561.\", \"author\": {\"@type\": \"Person\", \"name\": \"Taejin Kim\", \"jobTitle\": \"Managing Partner\", \"worksFor\": {\"@type\": \"LegalService\", \"name\": \"Atlas Legal\", \"url\": \"https:\/\/atlaw.kr\", \"address\": {\"@type\": \"PostalAddress\", \"addressLocality\": \"Incheon\", \"addressRegion\": \"Songdo\"}}, \"@id\": \"https:\/\/atlaw.kr\/en\/taejin-kim-en\/#person\"}, \"publisher\": {\"@type\": \"Organization\", \"name\": \"Atlas Legal\", \"url\": \"https:\/\/atlaw.kr\", \"@id\": \"https:\/\/atlaw.kr\/#legalservice\"}, \"datePublished\": \"2026-03-14\", \"dateModified\": \"2026-03-14\", \"mainEntityOfPage\": {\"@type\": \"WebPage\"}, \"@id\": \"https:\/\/atlaw.kr\/en-blog\/subcontract-price-reduction-south-korea#article\"}<\/script><\/p>\n<p><!-- FAQ Schema --><br \/>\n<script type=\"application\/ld+json\">{\"@context\": \"https:\/\/schema.org\", \"@type\": \"FAQPage\", \"mainEntity\": [{\"@type\": \"Question\", \"name\": \"Is reducing a subcontract price ever allowed under South Korea's Subcontracting Act?\", \"acceptedAnswer\": {\"@type\": \"Answer\", \"text\": \"Only in exceptional circumstances. Article 11(1) of the Fair Transactions in Subcontracting Act (Subcontracting Act) prohibits the primary contractor from reducing the agreed subcontract price. A reduction is permitted only when the primary contractor affirmatively proves 'legitimate grounds.' The burden of proof rests entirely on the primary contractor.\"}}, {\"@type\": \"Question\", \"name\": \"Can a primary contractor in South Korea reduce the subcontract price simply because raw material costs have fallen?\", \"acceptedAnswer\": {\"@type\": \"Answer\", \"text\": \"No. Seoul High Court Case 2020Nu64561 held that a raw-material-based reduction is legitimate only if all four of the following are satisfied: (1) a prior agreement to adjust unit prices in line with raw material cost changes; (2) a history of periodic price adjustments under that agreement; (3) evidence that unit prices were actually raised when raw material costs increased; and (4) the reduction amount is rationally calculated and does not exceed the subcontractor's actual cost savings.\"}}, {\"@type\": \"Question\", \"name\": \"Does a signed Lump-sum Payment (LSP) agreement prove the subcontractor voluntarily consented to the reduction in South Korea?\", \"acceptedAnswer\": {\"@type\": \"Answer\", \"text\": \"Not necessarily. Courts examine voluntariness by looking at factors including the primary contractor's degree of market dominance, the subcontractor's revenue dependence on the primary contractor, the circumstances of the negotiation, and the extent of the subcontractor's disadvantage. Where a subcontractor derives 60\u201380% of its revenue from the primary contractor, a signature cannot readily be treated as genuine consent.\"}}, {\"@type\": \"Question\", \"name\": \"What types of price reductions are categorically prohibited under Article 11(2) of South Korea's Subcontracting Act?\", \"acceptedAnswer\": {\"@type\": \"Answer\", \"text\": \"Article 11(2) lists nine categories that cannot constitute legitimate grounds, including: reductions demanded after the order without prior disclosure of reduction terms; retroactive application of a newly agreed unit price to already-ordered quantities; excessive deductions on the pretext of early or cash payment; deductions for the subcontractor's minor errors that caused no real damage to the primary contractor; and reductions justified by the primary contractor's own operating losses or sales price cuts.\"}}, {\"@type\": \"Question\", \"name\": \"Can exchange-rate movements justify a subcontract price reduction in South Korea?\", \"acceptedAnswer\": {\"@type\": \"Answer\", \"text\": \"Only if the same strict conditions applicable to raw-material-based reductions are met: a prior agreement to link unit prices to exchange-rate movements, a bidirectional history of adjustments (price increases when the rate moved against the subcontractor), and a rationally calculated reduction amount. The court rejected all exchange-rate-based reductions in Case 2020Nu64561, noting that one primary contractor had kept prices unchanged for over six years despite significant rate movements.\"}}, {\"@type\": \"Question\", \"name\": \"What procedural obligations must a primary contractor in South Korea satisfy even when legitimate grounds exist?\", \"acceptedAnswer\": {\"@type\": \"Answer\", \"text\": \"Under Article 11(3) of the Subcontracting Act and Article 7-2 of the Enforcement Decree, the primary contractor must provide the subcontractor with a written notice containing: (1) the reason and basis for the reduction; (2) the quantity of goods subject to reduction; (3) the reduction amount; (4) the method of deduction; and (5) any other information substantiating the legitimacy of the reduction.\"}}, {\"@type\": \"Question\", \"name\": \"What sanctions can the Korea Fair Trade Commission impose for an unlawful subcontract price reduction in South Korea?\", \"acceptedAnswer\": {\"@type\": \"Answer\", \"text\": \"The KFTC may issue: (1) a corrective order requiring cessation of the conduct; (2) a payment order requiring the primary contractor to pay the withheld subcontract amount plus statutory late-payment interest; and (3) a surcharge (penalty) under Article 25-3 of the Subcontracting Act. In Case 2020Nu64561, reductions totaling approximately KRW 8 billion resulted in surcharges of approximately KRW 11.7 billion.\"}}], \"@id\": \"https:\/\/atlaw.kr\/en-blog\/subcontract-price-reduction-south-korea#faq\"}<\/script><\/p>\n<p><!-- LocalBusiness Schema --><br \/>\n<script type=\"application\/ld+json\">\n{\n    \"@context\": \"https:\/\/schema.org\",\n    \"@type\": \"LocalBusiness\",\n    \"name\": \"Atlas Legal\",\n    \"image\": \"https:\/\/atlaw.kr\/logo.png\",\n    \"url\": \"https:\/\/atlaw.kr\",\n    \"telephone\": \"+82-32-864-8300\",\n    \"address\": {\n        \"@type\": \"PostalAddress\",\n        \"streetAddress\": \"323 Incheon Tower-daero, B-Tower Suite 2901, Songdo-dong, Yeonsu-gu\",\n        \"addressLocality\": \"Incheon\",\n        \"addressRegion\": \"Incheon Metropolitan City\",\n        \"addressCountry\": \"KR\"\n    },\n    \"priceRange\": \"$$\",\n    \"openingHoursSpecification\": {\n        \"@type\": \"OpeningHoursSpecification\",\n        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!important;\n    }\n    .entry-content {\n        margin-top: 0 !important;\n    }\n    .kb-row-container, .kb-column-container {\n        margin: 0;\n        padding: 0;\n    }\n<\/style>\n<p><!-- ===== Main Content ===== --><\/p>\n<div class=\"content-container\">\n<p>    <!-- Table of Contents --><\/p>\n<div class=\"toc\" style=\"padding: 15px; border-radius: 0; margin-bottom: 20px; background-color: #f5f5f5;\">\n<h2 style=\"font-size: 20px; margin-top: 0; margin-bottom: 10px;\">Table of Contents<\/h2>\n<ul style=\"list-style-type: none; padding-left: 0; margin: 0;\">\n<li><a href=\"#section1\">1. Is Reducing a Subcontract Price Permitted in South Korea?<\/a><\/li>\n<li><a href=\"#section2\">2. What Types of Reductions Are Categorically Prohibited Under Article 11(2)?<\/a><\/li>\n<li><a href=\"#section3\">3. How Do South Korean Courts Assess Voluntary Consent?<\/a><\/li>\n<li><a href=\"#section4\">4. When Is a Raw-Material-Based Price Reduction Legitimate in South Korea?<\/a><\/li>\n<li><a href=\"#section5\">5. How Have South Korean Courts Treated Exchange-Rate-Based Reductions?<\/a><\/li>\n<li><a href=\"#section6\">6. What Procedural Obligations Apply Even When Legitimate Grounds Exist?<\/a><\/li>\n<li><a href=\"#section7\">7. FAQ<\/a><\/li>\n<\/ul><\/div>\n<p>    <!-- Story Hook (50-80 words) --><\/p>\n<div class=\"story-hook\" style=\"padding: 15px 20px; margin-bottom: 15px; border-radius: 0; background-color: #f5f5f5;\">\n<p><strong>Case Background:<\/strong> A South Korean automotive parts manufacturer reduced subcontract prices for 45 suppliers by a combined KRW 8 billion, citing raw material cost declines and exchange-rate movements. The Korea Fair Trade Commission (KFTC) found these reductions unlawful and imposed surcharges of approximately KRW 11.7 billion. The company challenged the KFTC in court \u2014 and lost on almost every count. What determined the outcome?<\/p>\n<\/p><\/div>\n<p>    <!-- Direct Answer (40-60 words) --><\/p>\n<div class=\"direct-answer\" style=\"padding: 15px; border-radius: 0; margin-bottom: 20px; font-weight: 500; background-color: #f5f5f5;\">\n        <strong>Direct Answer:<\/strong> Under Article 11(1) of South Korea&#8217;s Fair Transactions in Subcontracting Act, reducing an agreed subcontract price is presumptively prohibited. A reduction is allowed only when the primary contractor proves legitimate grounds \u2014 a burden that, for cost- or exchange-rate-based reductions, demands prior agreement, a bidirectional adjustment history, and a rationally calculated amount.\n    <\/div>\n<p>    <!-- Story Development (100-150 words) --><\/p>\n<div class=\"story-detail\" style=\"padding: 20px; border-radius: 0; margin: 20px 0; background-color: #f5f5f5;\">\n<h3>The KFTC&#8217;s Case vs. the Primary Contractor \u2014 What the Court Found<\/h3>\n<p class=\"disclaimer\">\u203b This analysis is based on Seoul High Court Case 2020Nu64561 (judgment rendered February 2, 2023). The names of the parties and subcontractors are anonymized in accordance with the court&#8217;s notation. Certain facts have been summarized for clarity.<\/p>\n<p>Between June 2015 and August 2017, a manufacturer of automotive air-conditioning components carried out 106 lump-sum price reductions against 45 subcontractors. The company advanced multiple justifications \u2014 raw material price linkage, exchange-rate adjustments, productivity-sharing, new business awards, and investment cost recovery \u2014 but the Seoul High Court rejected nearly all of them after scrutinizing the company&#8217;s internal documents, emails, and negotiation records. The judgment provides a detailed, fact-specific roadmap of what &#8220;legitimate grounds&#8221; actually requires under South Korean subcontracting law, and it remains an important reference for both primary contractors managing supply chains and subcontractors evaluating whether a price reduction they accepted was, in fact, unlawful.<\/p>\n<\/p><\/div>\n<p>    <!-- Section 1 --><br \/>\n    <\/p>\n<h2 id=\"section1\">1. Is Reducing a Subcontract Price Permitted in South Korea?<\/h2>\n<p>As a general rule, no. Article 11(1) of the Fair Transactions in Subcontracting Act (Subcontracting Act) states: &#8220;A primary contractor shall not reduce the subcontract price determined at the time of the subcontracting order. However, if the primary contractor proves legitimate grounds, the subcontract price may be reduced.&#8221;<\/p>\n<h3>The Burden of Proof Rests with the Primary Contractor<\/h3>\n<p>The Seoul High Court in Case 2020Nu64561 confirmed that &#8220;in light of the legislative purpose, text, and structure of the Subcontracting Act, the &#8216;legitimate grounds&#8217; referred to in the proviso of Article 11(1) must be proved by the primary contractor asserting them.&#8221; A primary contractor cannot simply assert a rationale; it must establish that rationale through objective evidence.<\/p>\n<p>The court also clarified that Article 11 applies not only to reductions of amounts already payable, but also to reductions of amounts expected to become payable in the future. A primary contractor cannot escape the statute&#8217;s reach by framing a reduction as a &#8220;new unit price determination&#8221; for future orders when, in substance, it targets quantities whose delivery was already substantially fixed.<\/p>\n<p>    <!-- Section 2 --><br \/>\n    <\/p>\n<h2 id=\"section2\">2. What Types of Reductions Are Categorically Prohibited Under Article 11(2)?<\/h2>\n<p>Article 11(2) of the Subcontracting Act lists nine categories of conduct that cannot constitute legitimate grounds, regardless of other circumstances. A reduction falling within any of these categories is unlawful without further analysis.<\/p>\n<table>\n<tr>\n<th>Item<\/th>\n<th>Prohibited Conduct<\/th>\n<\/tr>\n<tr>\n<td>1<\/td>\n<td>Reducing the price after the order is placed on the basis of cooperation requests, order cancellations, or economic conditions, where no reduction terms were disclosed at the time of the order<\/td>\n<\/tr>\n<tr>\n<td>2<\/td>\n<td>Retroactively applying a newly negotiated unit price to quantities already ordered<\/td>\n<\/tr>\n<tr>\n<td>3<\/td>\n<td>Making excessive deductions on the pretext of early payment or cash payment<\/td>\n<\/tr>\n<tr>\n<td>4<\/td>\n<td>Reducing the price for the subcontractor&#8217;s errors that had no material effect on the primary contractor&#8217;s losses<\/td>\n<\/tr>\n<tr>\n<td>5<\/td>\n<td>Deducting amounts exceeding the fair price for goods or equipment the primary contractor required the subcontractor to purchase or use<\/td>\n<\/tr>\n<tr>\n<td>6<\/td>\n<td>Reducing the price because commodity prices or material costs have declined between the delivery date and the payment date<\/td>\n<\/tr>\n<tr>\n<td>7<\/td>\n<td>Reducing the price on unreasonable grounds such as the primary contractor&#8217;s own operating losses or sales price cuts<\/td>\n<\/tr>\n<tr>\n<td>8<\/td>\n<td>Passing on to the subcontractor costs the primary contractor is legally required to bear, such as employment insurance premiums or industrial safety management costs<\/td>\n<\/tr>\n<tr>\n<td>9<\/td>\n<td>Other conduct equivalent to items 1 through 8, as prescribed by Presidential Decree<\/td>\n<\/tr>\n<\/table>\n<p>    <!-- Section 3 --><br \/>\n    <\/p>\n<h2 id=\"section3\">3. How Do South Korean Courts Assess Voluntary Consent?<\/h2>\n<p>The existence of a signed agreement does not, by itself, establish that the subcontractor voluntarily consented to the reduction. The Supreme Court has held that voluntary consent must be assessed by examining all relevant circumstances, including the following factors (Supreme Court Decision 2010Da53457, January 27, 2011).<\/p>\n<table>\n<tr>\n<th>Factor<\/th>\n<th>Description<\/th>\n<\/tr>\n<tr>\n<td>Degree of the primary contractor&#8217;s superior bargaining position<\/td>\n<td>The primary contractor&#8217;s market dominance over the subcontractor<\/td>\n<\/tr>\n<tr>\n<td>Subcontractor&#8217;s revenue dependence<\/td>\n<td>The proportion of the subcontractor&#8217;s total revenue derived from the primary contractor<\/td>\n<\/tr>\n<tr>\n<td>Continuity of the trading relationship<\/td>\n<td>Duration and importance of the ongoing relationship to the subcontractor<\/td>\n<\/tr>\n<tr>\n<td>Availability of alternative customers<\/td>\n<td>Whether the subcontractor could realistically replace the primary contractor<\/td>\n<\/tr>\n<tr>\n<td>Difference between the original and reduced price<\/td>\n<td>The economic impact of the reduction on the subcontractor<\/td>\n<\/tr>\n<tr>\n<td>Timing gap between delivery and the reduction demand<\/td>\n<td>Whether the reduction was demanded after the goods had already been delivered<\/td>\n<\/tr>\n<tr>\n<td>Circumstances of the reduction<\/td>\n<td>How the negotiation was conducted and whether pressure was applied<\/td>\n<\/tr>\n<tr>\n<td>Nature and extent of the subcontractor&#8217;s disadvantage<\/td>\n<td>Actual financial harm caused by the reduction<\/td>\n<\/tr>\n<\/table>\n<h3>High Revenue Dependence Weighs Against Voluntary Consent<\/h3>\n<p>In Case 2020Nu64561, the court noted that most subcontractors derived approximately 60\u201380% of their total revenues from the primary contractor. Given this level of dependence, subcontractors faced a realistic risk of losing their entire business if they refused the primary contractor&#8217;s demands. The court therefore declined to treat their signatures as genuine consent and significantly discounted confirmation letters and witness testimony provided by subcontractor personnel after the KFTC investigation had commenced.<\/p>\n<p>    <!-- Section 4 --><br \/>\n    <\/p>\n<h2 id=\"section4\">4. When Is a Raw-Material-Based Price Reduction Legitimate in South Korea?<\/h2>\n<p>The mere fact that raw material costs have fallen is not sufficient. Seoul High Court Case 2020Nu64561 held that for a raw-material-based reduction to be legitimate in South Korea, all of the following must be established.<\/p>\n<ol>\n<li><strong>Prior Agreement<\/strong> \u2014 There must be a prior agreement between the primary contractor and the subcontractor to adjust the unit price in line with changes in raw material costs.<\/li>\n<li><strong>History of Periodic Adjustments<\/strong> \u2014 The parties must have actually been making periodic unit price adjustments pursuant to that agreement.<\/li>\n<li><strong>Bidirectional Adjustment<\/strong> \u2014 Critically, unit prices must have been <em>raised<\/em> when raw material costs increased. A mechanism that operates only in the primary contractor&#8217;s favor \u2014 lowering prices when costs fall but not raising them when costs rise \u2014 does not qualify.<\/li>\n<li><strong>Rational Calculation<\/strong> \u2014 The reduction amount must not exceed the actual decrease in the subcontractor&#8217;s production costs attributable to the raw material price decline.<\/li>\n<\/ol>\n<h3>The One Case Where the Court Accepted Legitimate Grounds<\/h3>\n<p>Of the 106 reductions examined, the court accepted legitimate grounds for only three. One involved an aluminum (A3003) price adjustment (the case referred to in the judgment as &#8220;Line Item 71&#8221;). The company&#8217;s electronic records confirmed that between 2014 and 2017, unit prices for the relevant subcontractor had been adjusted ten times based on the aluminum price index, and six of those adjustments were price <em>increases<\/em>. An email exchange the day before the reduction also clearly identified the specific aluminum price decline and the corresponding cost savings calculation. The reduction amount matched that calculation. These features \u2014 a documented bidirectional history, a contemporaneous written explanation, and a traceable calculation \u2014 distinguished this item from the others.<\/p>\n<p>    <!-- Section 5 --><br \/>\n    <\/p>\n<h2 id=\"section5\">5. How Have South Korean Courts Treated Exchange-Rate-Based Reductions?<\/h2>\n<p>South Korean courts apply the same rigorous standard to exchange-rate-based reductions as to raw-material-based ones. A primary contractor cannot justify a reduction simply by pointing to a favorable exchange-rate movement that has improved the subcontractor&#8217;s effective margins.<\/p>\n<h3>Why the Court Rejected All Exchange-Rate Reductions in This Case<\/h3>\n<p>For the reductions attributed to yen\/won exchange-rate movements, the company&#8217;s own transaction records showed that after a period of rate-linked adjustments ending around 2009\u20132011, the unit prices for the relevant subcontractors were held constant for six to eight years \u2014 through substantial rate fluctuations in both directions \u2014 before the company demanded lump-sum reductions in 2016\u20132017. The court found several aspects of the company&#8217;s position difficult to accept.<\/p>\n<p>First, the claim that rate-linked adjustments had been &#8220;accidentally omitted&#8221; for half a decade was inherently implausible. Second, even after making the first lump-sum reduction in July 2016, the company left the unit price unchanged and then made three additional lump-sum reductions for the same subcontractor \u2014 behavior inconsistent with a genuine correction of an oversight. Third, the LSP agreements for most of these transactions either contained no stated reason for the reduction, or stated a reason entirely different from exchange-rate movements (e.g., &#8220;productivity improvement&#8221;).<\/p>\n<p>The conditions that would need to be satisfied for an exchange-rate-based reduction to be legitimate in South Korea are, in summary:<\/p>\n<ul>\n<li>A <strong>prior agreement<\/strong> to link unit prices to exchange-rate movements<\/li>\n<li>A <strong>continuous history<\/strong> of exchange-rate-based adjustments, including rate <strong>increases<\/strong> when the rate moved against the subcontractor<\/li>\n<li>A <strong>rationally calculated<\/strong> reduction amount that does not exceed the reduction in the subcontractor&#8217;s actual production costs<\/li>\n<\/ul>\n<p>    <!-- Section 6 --><br \/>\n    <\/p>\n<h2 id=\"section6\">6. What Procedural Obligations Apply Even When Legitimate Grounds Exist?<\/h2>\n<p>Even where legitimate grounds can be demonstrated, a primary contractor in South Korea must follow prescribed procedures. Under Article 11(3) of the Subcontracting Act and Article 7-2 of the Enforcement Decree, the primary contractor is required to provide the subcontractor with a written notice containing all of the following information.<\/p>\n<ol>\n<li>The <strong>reason and basis<\/strong> for the reduction<\/li>\n<li>The <strong>quantity<\/strong> of goods or services subject to the reduction<\/li>\n<li>The <strong>reduction amount<\/strong><\/li>\n<li>The <strong>method of deduction<\/strong> (e.g., offset against future invoices)<\/li>\n<li>Any other information <strong>substantiating the legitimacy<\/strong> of the reduction<\/li>\n<\/ol>\n<h3>The Evidentiary Importance of Contemporary Documentation<\/h3>\n<p>One of the most striking aspects of Case 2020Nu64561 was the extent to which contemporaneous internal documents and email records \u2014 rather than retrospectively assembled agreements \u2014 determined the outcome. The court found that several LSP agreements either contained no stated reason, stated a reason inconsistent with the company&#8217;s litigation position, or had been fabricated or materially altered after the KFTC&#8217;s on-site investigation. Multiple employees admitted to inserting language into historic documents to create paper evidence of justifications that, in the court&#8217;s assessment, had never actually existed. Experience from handling subcontracting disputes in South Korea confirms that real-time documentation of the negotiation rationale \u2014 maintained in the ordinary course of business \u2014 is decisive in these cases.<\/p>\n<p>    <!-- FAQ Section --><br \/>\n    <\/p>\n<h2 id=\"section7\">7. FAQ<\/h2>\n<div class=\"faq-section\" style=\"padding: 20px; border-radius: 0; margin: 30px 0; background-color: #f5f5f5;\">\n<div class=\"faq-item\">\n<div class=\"faq-question\">Q1. Is reducing a subcontract price ever allowed under South Korea&#8217;s Subcontracting Act?<\/div>\n<div class=\"faq-answer\">A. Only in exceptional circumstances. Article 11(1) of the Subcontracting Act prohibits price reductions by default. A reduction is permitted only when the primary contractor affirmatively proves legitimate grounds. The burden of proof rests entirely on the primary contractor.<\/div>\n<\/p><\/div>\n<div class=\"faq-item\">\n<div class=\"faq-question\">Q2. Can a primary contractor in South Korea reduce the subcontract price simply because raw material costs have fallen?<\/div>\n<div class=\"faq-answer\">A. No. Seoul High Court Case 2020Nu64561 held that a raw-material-based reduction is legitimate only if (1) there is a prior agreement to adjust unit prices in line with raw material cost changes; (2) there is a history of periodic price adjustments under that agreement; (3) unit prices were actually raised when raw material costs increased; and (4) the reduction amount is rationally calculated and does not exceed the subcontractor&#8217;s actual cost savings.<\/div>\n<\/p><\/div>\n<div class=\"faq-item\">\n<div class=\"faq-question\">Q3. Does a signed Lump-sum Payment (LSP) agreement prove the subcontractor voluntarily consented to the reduction in South Korea?<\/div>\n<div class=\"faq-answer\">A. Not necessarily. Courts examine voluntariness by looking at the primary contractor&#8217;s market dominance, the subcontractor&#8217;s revenue dependence, the negotiation circumstances, and the extent of the subcontractor&#8217;s disadvantage. Where a subcontractor derives 60\u201380% of its revenue from the primary contractor, a signature cannot readily be treated as genuine consent.<\/div>\n<\/p><\/div>\n<div class=\"faq-item\">\n<div class=\"faq-question\">Q4. What types of price reductions are categorically prohibited under Article 11(2) of South Korea&#8217;s Subcontracting Act?<\/div>\n<div class=\"faq-answer\">A. Article 11(2) lists nine categories, including reductions demanded after the order without prior disclosure of reduction terms; retroactive application of a newly agreed unit price to already-ordered quantities; excessive deductions for early payment; deductions for minor subcontractor errors causing no real damage; and reductions justified by the primary contractor&#8217;s operating losses or sales price cuts.<\/div>\n<\/p><\/div>\n<div class=\"faq-item\">\n<div class=\"faq-question\">Q5. Can exchange-rate movements justify a subcontract price reduction in South Korea?<\/div>\n<div class=\"faq-answer\">A. Only if the same strict conditions applicable to raw-material-based reductions are met: a prior agreement to link unit prices to exchange-rate movements, a bidirectional history of adjustments (including price increases when the rate moved against the subcontractor), and a rationally calculated reduction amount. The court rejected all exchange-rate-based reductions in Case 2020Nu64561, noting that one primary contractor had kept prices unchanged for over six years despite significant rate movements.<\/div>\n<\/p><\/div>\n<div class=\"faq-item\">\n<div class=\"faq-question\">Q6. What procedural obligations must a primary contractor in South Korea satisfy even when legitimate grounds exist?<\/div>\n<div class=\"faq-answer\">A. Under Article 11(3) of the Subcontracting Act and Article 7-2 of the Enforcement Decree, the primary contractor must provide the subcontractor with a written notice containing: the reason and basis for the reduction; the quantity of goods subject to reduction; the reduction amount; the method of deduction; and any other information substantiating the legitimacy of the reduction.<\/div>\n<\/p><\/div>\n<div class=\"faq-item\">\n<div class=\"faq-question\">Q7. What sanctions can the Korea Fair Trade Commission impose for an unlawful subcontract price reduction in South Korea?<\/div>\n<div class=\"faq-answer\">A. The KFTC may issue a corrective order, a payment order requiring the primary contractor to pay the withheld amount plus statutory interest, and a surcharge under Article 25-3 of the Subcontracting Act. In Case 2020Nu64561, reductions totaling approximately KRW 8 billion resulted in surcharges of approximately KRW 11.7 billion.<\/div>\n<\/p><\/div>\n<\/p><\/div>\n<p>    <!-- GEO\/experience statement --><\/p>\n<p>Atlas Legal advises both primary contractors and subcontractors on supply-chain contract design, KFTC investigations, and administrative litigation in South Korea. The firm has handled numerous disputes involving unfair subcontracting practices, drawing on experience accumulated across a range of industries and transaction structures.<\/p>\n<p class=\"disclaimer\" style=\"margin: 20px 0;\">\u203b The information in this post is provided for general informational purposes only and does not constitute legal advice. The applicable legal analysis may differ depending on the specific facts of each case. Please consult a qualified attorney for advice on any particular matter.<\/p>\n<p>    <!-- Author Box --><\/p>\n<div class=\"author-box\" style=\"background-color: #f8f9fa; padding: 20px; border-radius: 0; margin-top: 30px; border-left: 2px solid #722f37;\">\n<h3>About the Author<\/h3>\n<div class=\"author-name\">Taejin Kim | Managing Partner<\/div>\n<div class=\"author-info\">Corporate advisory, corporate disputes &amp; corporate criminal defense<\/div>\n<div class=\"author-info\">Former Prosecutor | 33rd Class, Judicial Research and Training Institute<\/div>\n<div class=\"author-info\">LL.B. &amp; LL.M. in Criminal Law, Korea University; LL.M., University of California, Davis<\/div>\n<div class=\"author-info\">Atlas Legal | Incheon Songdo, South Korea<\/div>\n<p>        <a href=\"https:\/\/atlaw.kr\" target=\"_blank\" rel=\"noopener noreferrer\">Visit Atlas Legal<\/a>\n    <\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Table of Contents 1. Is Reducing a Subcontract Price Permitted in South Korea? 2. What Types of Reductions Are Categorically Prohibited Under Article 11(2)? 3. How Do South Korean Courts Assess Voluntary Consent? 4. When Is a Raw-Material-Based Price Reduction Legitimate in South Korea? 5. How Have South Korean Courts Treated Exchange-Rate-Based Reductions? 6. What&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_kadence_starter_templates_imported_post":false,"_kad_post_transparent":"default","_kad_post_title":"default","_kad_post_layout":"default","_kad_post_sidebar_id":"","_kad_post_content_style":"default","_kad_post_vertical_padding":"default","_kad_post_feature":"","_kad_post_feature_position":"","_kad_post_header":false,"_kad_post_footer":false,"_kad_post_classname":"","footnotes":""},"categories":[218,223,15,690],"tags":[539,538,540,537,536],"class_list":["post-687","post","type-post","status-publish","format-standard","hentry","category-corporate-counseling","category-corporate-disputes","category-corporate","category-employment-labor","tag-fair-transactions-subcontracting","tag-kftc","tag-korea-supply-chain-law","tag-subcontract-price-reduction","tag-subcontracting-act-south-korea"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.5 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>When Is Reducing a Subcontract Price Lawful in South Korea? | Atlas Legal<\/title>\n<meta name=\"description\" content=\"South Korea&#039;s Subcontracting Act bars price cuts unless the primary contractor proves legitimate grounds. 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