National Assembly passes amendments to the Act on Contracts to which the State is a Party

1.        Major Amendments and Reasons for Amendments

A summary of the key amendments is as follows:

(1)     A contract to which the state is a party (a “State Contract”) may include provisions requiring the counterparty to comply with labor relations laws (Article 5-4, as newly inserted);

(2)     The periods for the filing of a petition for objection, the examination of such petition, and the filing of a petition for conciliation following the results of such petition in respect of matters relating to a public tender notice, the determination of a successful bidder, etc. have each been extended by five days (Article 28, Paragraphs (2) to (4), as amended); and

(3)     If the State Contract Disputes Conciliation Committee conducts an examination or conciliation, the petitioner and the head of the competent central government agency (and their respective representatives) will have an opportunity to provide their opinions before the case is closed (Article 31, Paragraph (3), as newly inserted).

The amendments to the State Contract Act are intended to protect working conditions of workers employed by companies performing State Contracts and to promote and secure the effectiveness of the State Contract dispute conciliation system by improving and supplementing existing processes.

We will discuss below the details of and implications posed by the provision (Article 5-4) newly inserted to protect the working condition of workers employed by companies performing State Contracts.

2.        Implications of the newly inserted Article 5-4 of the State Contract Act

Details of the Provision

“Article 5-4 (Compliance with Labor Relations Laws): In entering into a contract, the head or the contracting officer of a central government agency may include provisions in the contract obligating a counterparty thereto to ensure that working conditions of workers performing the relevant contract (including workers employed by a subcontractor under the Fair Transactions in Subcontracting Act) shall comply with labor relations laws, including the Labor Standards Act.”

Background to the Amendments

The draft amendments to the State Contract Act proposed by Assembly Member Kyung-hyup Kim on June 29, 2016 contained a provision which stated that in entering into a State Contract, the head or contracting officer of a central government agency may specifically stipulate working conditions, including wages of workers, performing the State Contract (including workers employed by a subcontractor) as terms of the State Contract.

In addition, the draft amendments to the State Contract Act proposed by Assembly Member Sam-hwa Kim on March 17, 2017 contained a provision which stated that in entering into a State Contract, the head or contracting officer of a central government agency shall stipulate as terms thereof that a counterparty shall comply with matters concerning working conditions such as wages of workers, and if the counterparty fails to perform such terms, the head or contracting officer of a central government agency may request the counterparty to take corrective or supplementary measures and receive a report of the results thereof. Further, the proposed amendments stipulated that other necessary matters regarding working conditions, including wages, shall be prescribed in the Presidential Decree.

After the above amendments were proposed, related discussions continued in the National Assembly for more than three years. Certain issues were raised, including the following:

(a)      it is more appropriate for practical improvements to working conditions of workers employed by subcontractors to be made under the Fair Transactions in Subcontracting Act (the “Subcontracting Act”) or labor relations laws, such as, the Minimum Wage Act;

(b)     if the head or contracting officer of a central government agency requests a counterparty to set wages for workers (including workers employed by subcontractors) at a certain level, it will be contrary to the nature of a State Contract which essentially is a contract governed by private law; and

(c)      allowing each respective authority awarding State Contracts to determine working conditions may lead to the making of arbitrary decisions.

Accordingly, an alternative amendment, which did not provide for authorities to determine working conditions, such as, specific wages in a State Contract, but emphasized compliance with proper working conditions of workers in consideration of the public interest aspects of a State Contract, was adopted, and as a result, Article 5-4 was newly inserted in the State Contract Act.

Implications (Possibility of Restrictions on Qualification for Participation in Tender Processes due to Violation of Labor Relations Laws)

Even under the current State Contract Act, with respect to certain construction works and services, restrictions on the qualification for participation in tender processes may be placed, if there is a concern that a counterparty’s failure to perform, without a reasonable basis, the subcontractor management plan or a plan to uphold working conditions for outsourced workers (submitted at the time the counterparty’s ability to perform a State Contract was examined) may interfere with the proper performance of a State Contract (Article 27, Paragraph (1), Subparagraph 8, Item (b) of the State Contract Act, Article 42, Paragraph (5) and Article 76, Paragraph (1), Subparagraph 2, Item (a) of the Enforcement Decree of the State Contract Act, and Article 5, Paragraph (1) of the Criteria for Eligibility Examination (Established Rule for Contracts), etc.).

The newly inserted Article 5-4 of the State Contract Act will provide a statutory basis pursuant to which an obligation to comply with labor relations laws may be included in State Contracts. Thus, while we will have to wait and see how Article 5-4 of the State Contract Act will operate in practice with respect to State Contracts, we expect that it will have a significant impact if it is linked to possible restrictions on the qualification for participation in tender processes. 

In other words, based on the above provision, the head or contracting officer of a central government agency may include an obligation to comply with labor relations laws as a major term in a State Contract and stipulate that if a counterparty breaches this obligation, the counterparty shall be subject to restrictions on the qualification for participation in tender processes, in which case there is also the possibility that sanctions under Article 76, Paragraph (1), Subparagraph 2, Item (a) of the Enforcement Decree of the State Contract Act may be imposed. 

There is a need to pay close attention to amendments to State Contracts which may be proposed by central government agencies going forward, particularly given that the newly inserted Article 5-4 of the State Contract Act allows the inclusion of a term which prescribes that working conditions of not only workers directly employed by a counterparty to the State Contract but also workers employed by a subcontractor under the Subcontracting Act must comply with labor relations laws. Furthermore, as illustrated by the background to the amendments, the public interest aspects of a State Contract have recently been increasingly emphasized, prompting a stronger movement towards safeguarding compliance with working conditions of workers through State Contracts. Accordingly, in light of the foregoing, it is necessary to keep in mind the possibility that a counterparty who enters into a State Contract and fails to comply with labor relations laws may be subject to contractual disadvantages as well as additional sanctions under the State Contract Act.