Under Article 11(1) of South Korea’s Fair Transactions in Subcontracting Act, reducing an agreed subcontract price is presumptively prohibited. A reduction based on raw material cost declines or exchange-rate movements requires prior agreement, a bidirectional adjustment history, and a rationally calculated amount — all three must be established.
Case Background
An automotive air-conditioning parts manufacturer carried out 106 lump-sum price reductions against 45 subcontractors between 2015 and 2017, totaling approximately KRW 8 billion. The Korea Fair Trade Commission (KFTC) found the reductions unlawful and imposed surcharges of approximately KRW 11.7 billion. The Seoul High Court, in its February 2, 2023 judgment in Case 2020Nu64561, upheld the KFTC’s determination on nearly all counts after scrutinizing the company’s internal documents, emails, and negotiation records.
The Prohibition and Burden of Proof
Article 11(1) of the Subcontracting Act prohibits price reductions by default; the burden of proving legitimate grounds rests entirely on the primary contractor. The court confirmed that the prohibition extends to amounts expected to become payable in the future, not merely amounts already accrued. Under Supreme Court Decision 2010Da53457 (January 27, 2011), even where a reduction agreement is civilly valid, a primary contractor that reduces prices without the subcontractor’s genuine consent — exploiting its superior bargaining position — commits an unlawful act giving rise to liability in damages.
Requirements for a Legitimate Raw-Material-Based Reduction
The court held that four cumulative conditions must be met: (1) a prior agreement to adjust unit prices in line with raw material cost changes; (2) a documented history of periodic adjustments under that agreement; (3) bidirectionality — unit prices must have been raised when material costs increased; and (4) a reduction amount that does not exceed the actual decrease in the subcontractor’s production costs. Of the 106 reductions examined, the court accepted legitimate grounds for only the single item (Line Item 71) where all four conditions — including a six-out-of-ten upward adjustment history for aluminum (A3003) and a contemporaneous email showing the exact calculation — were documented.
Exchange-Rate-Based Reductions: The Court’s Approach
The court applied the same rigorous standard to exchange-rate-based reductions. For one subcontractor, transaction records showed that after rate-linked adjustments ending around 2009–2011, unit prices were held constant for approximately six to eight years — through substantial rate movements in both directions — before lump-sum reductions were demanded in 2016–2017. The court found the claim that rate adjustments had been “accidentally omitted” for half a decade implausible, and noted that continued reductions after the first one, without restoring unit prices in the interim, was behavior inconsistent with a genuine correction of an oversight. LSP agreements that stated reasons inconsistent with exchange-rate adjustments, or that were fabricated after the KFTC’s on-site investigation, were given no weight.
Assessing Voluntary Consent
A subcontractor’s signature on an agreement does not establish voluntary consent. Courts evaluate the primary contractor’s market dominance, the subcontractor’s revenue dependence (approximately 60–80% in this case), the circumstances of the negotiation, and the financial impact on the subcontractor. Where dependence is high, a subcontractor’s signature — or a post-investigation confirmation letter provided by its personnel — will receive limited evidential weight.
Legal Expertise
Atlas Legal advises both primary contractors and subcontractors on supply-chain contract structure, KFTC investigations, and administrative litigation in South Korea. The firm’s practice spans unfair subcontracting disputes, competition law compliance, and corporate contract advisory across a range of industries and transaction structures.
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Subcontract Price Reduction South Korea – Legitimate Grounds Analysis
Under Article 11(1) of South Korea’s Fair Transactions in Subcontracting Act, reducing an agreed subcontract price is presumptively prohibited. A reduction based on raw material cost declines or exchange-rate movements requires prior agreement, a bidirectional adjustment history, and a rationally calculated amount — all three must be established.
Case Background
An automotive air-conditioning parts manufacturer carried out 106 lump-sum price reductions against 45 subcontractors between 2015 and 2017, totaling approximately KRW 8 billion. The Korea Fair Trade Commission (KFTC) found the reductions unlawful and imposed surcharges of approximately KRW 11.7 billion. The Seoul High Court, in its February 2, 2023 judgment in Case 2020Nu64561, upheld the KFTC’s determination on nearly all counts after scrutinizing the company’s internal documents, emails, and negotiation records.
The Prohibition and Burden of Proof
Article 11(1) of the Subcontracting Act prohibits price reductions by default; the burden of proving legitimate grounds rests entirely on the primary contractor. The court confirmed that the prohibition extends to amounts expected to become payable in the future, not merely amounts already accrued. Under Supreme Court Decision 2010Da53457 (January 27, 2011), even where a reduction agreement is civilly valid, a primary contractor that reduces prices without the subcontractor’s genuine consent — exploiting its superior bargaining position — commits an unlawful act giving rise to liability in damages.
Requirements for a Legitimate Raw-Material-Based Reduction
The court held that four cumulative conditions must be met: (1) a prior agreement to adjust unit prices in line with raw material cost changes; (2) a documented history of periodic adjustments under that agreement; (3) bidirectionality — unit prices must have been raised when material costs increased; and (4) a reduction amount that does not exceed the actual decrease in the subcontractor’s production costs. Of the 106 reductions examined, the court accepted legitimate grounds for only the single item (Line Item 71) where all four conditions — including a six-out-of-ten upward adjustment history for aluminum (A3003) and a contemporaneous email showing the exact calculation — were documented.
Exchange-Rate-Based Reductions: The Court’s Approach
The court applied the same rigorous standard to exchange-rate-based reductions. For one subcontractor, transaction records showed that after rate-linked adjustments ending around 2009–2011, unit prices were held constant for approximately six to eight years — through substantial rate movements in both directions — before lump-sum reductions were demanded in 2016–2017. The court found the claim that rate adjustments had been “accidentally omitted” for half a decade implausible, and noted that continued reductions after the first one, without restoring unit prices in the interim, was behavior inconsistent with a genuine correction of an oversight. LSP agreements that stated reasons inconsistent with exchange-rate adjustments, or that were fabricated after the KFTC’s on-site investigation, were given no weight.
Assessing Voluntary Consent
A subcontractor’s signature on an agreement does not establish voluntary consent. Courts evaluate the primary contractor’s market dominance, the subcontractor’s revenue dependence (approximately 60–80% in this case), the circumstances of the negotiation, and the financial impact on the subcontractor. Where dependence is high, a subcontractor’s signature — or a post-investigation confirmation letter provided by its personnel — will receive limited evidential weight.
Legal Expertise
Atlas Legal advises both primary contractors and subcontractors on supply-chain contract structure, KFTC investigations, and administrative litigation in South Korea. The firm’s practice spans unfair subcontracting disputes, competition law compliance, and corporate contract advisory across a range of industries and transaction structures.
Click here for detailed information