What is the responsibility of the principal company when canceling a subcontracting agreement? Key issues based on practical advice.

Law firm Veat received a request for legal advice regarding the termination of a subcontract agreement from a KOSPI-listed IT company (hereinafter referred to as "client").

This case involved a request for a comprehensive review of whether the client would bear legal responsibility for termination based on the situation where subsequent subcontract agreements also had to be terminated as some of the main contract concluded by the client was terminated.

Law firm Veat first reviewed the applicability of Article 1,537 to review the legal feasibility of whether the subcontract agreement would continue or not, as the main contract was partially terminated unexpectedly and the subcontract agreement was dependent on it. The provision stipulates the principle that legal responsibility is exempted when the inability to perform a contract arises due to a cause not attributable to the fault of both contracting parties.

In this case, as the subcontract agreement was concluded on the premise that the main contract was valid, there was a high possibility that the purpose of the subcontract agreement itself would become impossible to achieve as the main contract was terminated. We explained that the legality of the contract termination could be secured based on the grounds that performance was impossible due to a cause not attributable to the fault of both parties.

However, even if a reason for termination exists under the Civil Code, the client may not be completely released from legal responsibility.

In particular, the Subcontract Act imposes strict requirements for cancellation of entrustment to protect subcontractors. Even if the reason for the termination of the main contract exists, if the subcontractor has not been notified or consulted on the termination of the contract, and no compensation for losses has been provided, the subcontractor may judge it as an unfair cancellation of entrustment. The Fair Trade Commission has previously judged cases where a contract was terminated without prior consultation or compensation despite no fault of the subcontractor as an unfair cancellation of entrustment.

Law firm Veat recommended that prior consultation be held with the subcontractor to avoid an unfair cancellation of entrustment, that reasonable compensation for losses be prepared in the event that consultation is difficult, and that all communications be documented to prepare for possible legal disputes.

The termination of a subcontract agreement is a sensitive matter that goes beyond contractual legal issues and is directly related to whether or not a violation of the Subcontract Act exists. In particular, the Subcontract Act is based on the principle of protecting small and medium-sized enterprises, so interpretations often favor the subcontractor, and if the principal fails to respond accordingly, it may lead to Fair Trade Commission sanctions or civil damages lawsuits.

Help from a Subcontract Law Expert to comprehensively review the possibility of conflict between the Civil Code and the Subcontract Act, regulatory risks, and potential for post-termination disputes and get advice on proactive measures to avoid unnecessary risks is recommended.

Law firm Veat has strengths in presenting optimal solutions tailored to the characteristics of each case, based on abundant practical experience in handling various subcontract disputes.

In particular, we have established effective legal strategies considering the balanced interests of both the principal and the subcontractor in relation to contract termination and the Subcontract Act and the Civil Code, and we have reviewed legal issues that may arise throughout the entire process from contract negotiation to termination and regulatory response.

Also, we have extensive experience in responding to investigations and sanctions procedures of regulatory agencies including the Fair Trade Commission, and can provide rapid and professional responses to administrative risks related to violations of the Subcontract Act.

Like this, Law firm Veat provides practical legal advice from the client’s perspective, covering all stages from proactive risk prevention to regulatory agency response and dispute resolution.

If you need legal advice regarding unfair subcontract transactions and subcontract agreements, please contact Subcontract Lawyer Law firm Veat.

This case study can also be found on the Law firm Veat blog.

- What is the principal’s responsibility when a subcontract agreement is terminated? Core issues viewed through practical advice

Thank you.

Law firm Veat