Regulator cracks down on violation of direct payment obligation under subcontracting law

The Sewha School Foundation has been sanctioned by the Korea Fair Trade Commission for failing to pay part of a construction subcontract fee it had agreed to remit directly to a subcontractor.

The Fair Trade Commission announced Wednesday it had issued a corrective order against Sewha School Foundation for violating the Subcontracting Act, requiring the foundation to prevent a recurrence.

The Korea Fair Trade Commission at the Government Sejong Complex in Eojin-dong, Sejong. [Newsis]
The Korea Fair Trade Commission at the Government Sejong Complex in Eojin-dong, Sejong. [Newsis]

According to the Fair Trade Commission, Sewha School Foundation awarded a slope reinforcement project at Sewha High School to Company A in September 2021. Company A then subcontracted the earthwork portion of the project to Company B in December of that year.

The three parties subsequently signed a direct payment agreement under which Sewha School Foundation would pay Company B's subcontracting fee directly. The foundation honored the arrangement for most of the project but withheld the final balance of 26.4 million won (approximately $17,500), citing construction defects.

However, a meeting attended by the project owner, the primary contractor, the subcontractor and the construction supervisor confirmed that the outstanding earthwork payment amounted to 26.4 million won, and that the defects in question were linked to landscaping work carried out by a different subcontractor, not Company B.

The Fair Trade Commission determined that Sewha School Foundation had violated the Subcontracting Act by failing to fulfill its direct payment obligation despite the binding agreement.

However, because Company A has filed a lawsuit against Sewha School Foundation seeking payment of construction fees that include Company B's subcontracting amount, the commission issued a corrective order to prevent recurrence rather than a direct payment order.

"This case makes clear that when a direct payment agreement exists, even a project owner who is not a party to the subcontract bears a payment obligation under the Subcontracting Act," the commission said. It added that it would continue to monitor and strictly penalize conduct that undermines the order of subcontracting transactions, including violations of project owners' direct payment obligations.


y2k@heraldcorp.com