Software development subcontracting agreements: Essential legal regulations

Law firm Veat received a request from Company A ("the client") to review the notice and agreement related to subcontracting transactions, concerning a software development contract.

The client was the ordering party for the platform software development and was collaborating with subcontractor B to proceed with the project. However, B had outsourced the development work to subcontractor C, and subsequently, the client directly entrusted additional development work to C without entering into a separate contract for the additional work, and payment was not made.

Consequently, C claimed that the client violated the Subcontracting Act due to the breach of the obligation to deliver documents in writing (Subcontracting Act Article 3) and non-payment of subcontracting payment, and prepared for legal action. The client requested legal advice from Law firm Veat to resolve this legal dispute.

Subcontracting transactions

Subcontracting transactions generally refer to transactions that occur in various industries such as manufacturing, construction, and software development, where the main contractor (usually the ordering party) enters into a contract with a subcontractor to perform a specific task or service, and then entrusts the entire or part of that task to a subcontracting company (subcontractor) (Subcontracting Act Article 1, Paragraph 1).

Legal regulations for subcontracting transactions

Therefore, the principal and subcontractor involved in the subcontracting transaction must comply with the following legal regulations.

1) Obligation to deliver documents in writing: The ordering party and the subcontractor must deliver the contract details in writing when entering into a subcontracting contract (Subcontracting Act Article 3).
2) Obligation to pay subcontracting payment: The ordering party or the subcontractor must pay appropriate compensation at the right time for the work performed by the subcontractor (Subcontracting Act Article 4, Article 11, etc.).
3) Prohibition of unfair trade practices: The ordering party or the subcontractor must not engage in unfair practices such as unfairly changing the contract or imposing unreasonable conditions on the subcontractor (Subcontracting Act Article 4, etc.)

This is an important safeguard to protect the interests of the subcontractor as a subcontracting business, and plays a role in ensuring the transparency and clarity of the contract. Also, to support flexible transaction methods for subcontracting transactions that increase the efficiency of large-scale projects and utilize expertise in each field, it is essential to comply with relevant laws to protect the rights of subcontractors and maintain a fair trade order.

Law firm Veat thoroughly reviewed the obligation to deliver documents in writing and the obligation to pay subcontracting payment under the Subcontracting Act. They discovered that the contractual obligation for the client to entrust additional development work to C was not clearly organized in writing, and drafted a proper agreement to supplement this. They also provided legal interpretation based on relevant legislation regarding the client’s issue of non-payment of subcontracting payment, and recommended prompt payment.

Based on abundant experience in software development contracts and subcontracting transactions, they clarified the client’s legal obligations under the Fair Trade Act and the Subcontracting Act, minimized the risk related to non-payment of subcontracting payment, and supported efforts to avoid legal disputes and reach a favorable agreement.

Law firm Veat has played a vital role in legal advice related to IT and software. Law firm Veat has Partner Attorneys Baek Seung-cheol, certified by the Korea Bar Association as an IT specialist, and An Il-woon, Partner Attorney, along with backgrounds in engineering fields and practical experience in advanced fields, possess the strength of simultaneously understanding software, artificial intelligence, and other advanced fields’ knowledge and laws.

Law firm Veat promises to continue providing optimal legal services to clients in IT and startup legal advice, based on this expertise.

Thank you.
Law firm Veat