According to Article 4(2)7 of the Fair Transactions in Subcontracting Act (“Subcontracting Act”), fixing a subcontract price below the lowest bid price without good cause in a competitive bidding process is considered “fixing an unreasonable subcontract price” and such a practice is generally prohibited.

However, if the contractor can demonstrate “good cause,” such as having determined the executive budget reasonably and having notified in advance that additional negotiations may occur if the lowest bid exceeds the executive budget, such an act may not be considered as “fixing an unreasonable subcontract price” (Supreme Court Decision 2013Du19622).

When conducting a competitive bidding process, the prime contractor (“Client”), conducted two rounds of re-tendering on the grounds that the bid price of the lowest tendering company exceeded their executive budget. Subsequently, the Client entered into a subcontract agreement with a price of KRW 50 million lower than the initial lowest bid. Moreover, in a follow-up bidding process, after cancelling the agreement with Company B, the Client conducted two rounds of re-tendering, again because the bid price of the lowest bidder, exceeded the executive budget. The Client eventually entered into a subcontract agreement at a price KRW 109 million lower than the initial lowest bid. Both bidders reported the Client to the Korea Fair Trade Commission (“KFTC”) for engaging in “fixing unreasonable subcontract prices.”

Representing the Client, DR & AJU defended the Client during the KFTC’s deliberation by presenting the following arguments: (i) The Client established the executive budget reasonably, incorporating market prices researched at the time of setting the budget and comparing it with budgets from other companies; (ii) The Client notified bidders in advance through the bidding documents that “re-tendering may occur if the lowest bid exceeds the executive budget”; and (iii) The executive budget remained unchanged before and after the bidding process, was posted on the Client’s internal computer system, and was available for review at any time. Based on these points, we argued that the Client had a “good cause” and should therefore be acquitted.

The KFTC accepted all the explanations provided by DR & AJU and issued an acquittal, acknowledging that the Client had a good reason. Considering there have been few instances of acquittal from the KFTC after the Supreme Court established the “good cause” criteria necessary to avoid the classification of “fixing an unreasonable subcontract price,” DR & AJU’s handling of this case is seen as highly successful. This case is expected to set a significant precedent for similar future cases.