On Article 3-4 (3) Of The Amended Subcontracting Act: Invalidity Of Unfair Contractual Terms

I. Introduction

The prior provision prohibiting unfair contractual terms under the Fair Transactions in Subcontracting Act (hereinafter, the "Subcontracting Act") did not specify the legal effect of such terms. As a result, even though the Korea Fair Trade Commission (hereinafter, "KFTC") could take administrative measures, such as issuing corrective orders or imposing penalty surcharges, the unfair contractual terms themselves remained valid under civil law. Accordingly, even where a subcontractor considered a contractual term established by a prime contractor to be unfair, the subcontractor remained obligated to perform under the term. Moreover, because a claim for restitution of unjust enrichment was unavailable, the subcontractor was left only with a claim for damages based on tort, which required the subcontractor to bear the burden of proof. Thus, under the prior Act, there existed a gap between the protective purpose of the provision and the actual relief available in practice.

To address the insufficient protection afforded to subcontractors, the Subcontracting Act was amended in 2025 to introduce Article 3-4 (3), which renders unfair contractual terms null and void. This opens a way for subcontractors to challenge only those contractual terms that may be deemed unfair, while maintaining the underlying subcontracting relationship, and to seek prompt relief for their losses through restitution of unjust enrichement. In addition, as the amendment eliminates the civil-law benefits that prime contractors have previously been able to obtain from the validity of unfair contractual terms, it is expected to reduce incentives for them to impose such terms.

Meanwhile, the newly inserted provision invalidating unfair contractual terms adopts a dual structure. Under this structure, unfair contractual terms falling under Article 3-4 (2)1 through 3 become immediately null and void to the extent of the relevant part, while those falling under subparagraph 4, which are taken into the Presidential Decree and relevant Public Notice, are rendered null and void only to the extent of the relevant part "if they are deemed to be significantly unfair to either party." Given this structure, the manner in which "significant unfairness" is to be assessed is expected to be a decisive factor in determining the effectiveness of the amendment. Accordingly, this article examines the determination criteria and methods of application under the Framework Act on the Construction Industry and Article 104 of the Civil Act, and explores whether these standards may provide foreseeable criteria for assessing "significant unfairness" under the Subcontracting Act.

II. Unfair Contractual Terms under the Subcontracting Act and Their Civil-Law Validity

1. Implications of the Newly Introduced Provision Invalidating Unfair Contractual Terms

1. Contents and Rationale of the Provision

Article 3-4 (3) of the amended Subcontracting Act, which entered into force on October 2, 2025, provides as follows:

Article 3-4 (3), which directly provides for the invalidity of "unfair special agreements" (referred to in this article as "unfair contractual terms"), adopts a dual structure. While unfair contractual terms falling under subparagraphs 1 through 3 of Article 3-4 (2) become null and void to the extent of the relevant part without any additional requirements, those falling under subparagraph 4, as specified by the Presidential Decree and relevant Public Notice, are rendered null and void to the extent of that part only if they are deemed to be significantly unfair.

The legislative purpose of the amendment is clear. While the introduction of a provision prohibiting unfair contractual terms enabled administrative measures against prime contractors, there remained certain limitations in protecting subcontractors' rights. Because unfair contractual terms remained valid under civil law between the contracting parties, subcontractors continued to be bound by such terms, and pursuing judicial remedies against prime contractors imposed a significant burden on them. Against this backdrop, the amendment explicitly provides for the civil-law invalidity of unfair contractual terms, with the aim of preventing the imposition of such terms in advance and enabling swift relief for subcontractors. In doing so, the amendment revises the previous legal framework and interpretative approach that treated administrative sanctions and civil remedies separately, thereby reinforcing the effectiveness of subcontractor protection.

2. Enhanced Practical Protection for Subcontractors

The most important effect of the introduction of Article 3-4 (3) is that subcontractors can promptly assert the invalidity of unfair contractual terms, while maintaining the subcontracting relationship.

Specifically, first, once an unfair contractual term becomes invalid under civil law, a prime contractor may no longer demand performance based on that term, nor does any obligation to perform arise on the part of the subcontractor thereunder. Accordingly, even where an unfair contractual term is incorporated into a subcontracting agreement, the subcontractor may assert its invalidity and refuse to perform the relevant obligations.

Moreover, even where contractual obligations have already been performed pursuant to unfair contractual terms, such performance constitutes a benefit conferred without legal cause. Accordingly, the subcontractor may claim restitution of unjust enrichment from the prime contractor. Unlike tort-based claims for damages, a claim for restitution of unjust enrichment does not require a determination as to whether the prime contractor acted with intent or gross negligence, but rather whether there was no legal cause for the proprietary or labor-related benefits obtained by the prime contractor. For this reason, a restitution claim may function as an effective remedy, as it involves clearer and more expedited procedures compared to a damages action, which requires the subcontractor to bear the burden of proof².

Secondly, this amendment is expected to discourage prime contractors from establishing unfair contractual terms. Currently, even though the KFTC may impose corrective orders or penalty surcharges, such terms remain judicially valid. As a result, prime contractors often make a business decision to establish unfair contractual terms where the expected gains outweigh the potential costs arising from administrative sanctions. Within this structure, despite recognizing that certain terms may constitute legal violations, some prime contractors often adopt a passive approach to substantive compliance, limiting their efforts to formal or superficial measures rather than actively modifying or deleting the relevant provisions.

Under the amendment that renders unfair contractual terms null and void under civil law, the economic incentives that could previously be obtained from their inclusion are eliminated, while the burden arising from administrative sanctions remains. This change prevents prime contractors from treating the inclusion of unfair contractual terms as a viable business option and is expected to strengthen internal controls by prompting advance reviews to ensure that no such terms are included in subcontracting procedures.

Thirdly, by strengthening civil remedies available to subcontractors, the amendment enables the KFTC to focus more effectively on its core function of imposing administrative sanctions. Previously, subcontractors faced significant difficulty in obtaining civil remedies and therefore tended to rely on administrative procedures for damage relief. This effectively required the KFTC to play a quasi-dispute resolution role in individual cases. However, the newly introduced Article 3-4 (3) allows subcontractors' remedies to be addressed more swiftly through civil procedures. This, in turn, enables the KFTC to allocate its enforcement capacity toward market-wide regulation and preventive oversight, thereby improving the overall effectiveness of the enforcement system.

As such, the newly introduced Article 3-4 (3) addresses the limitations of the previous regulatory framework and enables effective protection of subcontractors' rights, thereby contributing to the establishment of the fair transaction order pursued by the Act and facilitating further structural improvements in subcontracting transactions.

2. Determination of "Significant Unfairness"

1. Necessity for Further Discussion

To better achieve the legislative purpose of Article 3-4 (3), further discussion is required regarding the term "significant unfairness." The provision differentiates between two categories of unfair contract terms: it provides for the automatic invalidation of contractual terms falling under subparagraphs 1 through 3 of Article 3-4 (2) of the Act, while limiting invalidation in cases under subparagraph 4 to situations where significant unfairness is established. Accordingly, in order to extend the effectiveness of this provision to unfair contractual terms covered by subparagraph 4, it is necessary to clarify the scope and criteria of "significant unfairness."

Predictability, in particular, is important. If courts determine "significant unfairness" through a comprehensive, case-by-case assessment of individual circumstances, subcontractors may find it difficult to obtain swift damage relief under Article 3-4 (3). At the same time, an overly expansive approach that treats all unfair contractual terms specified in public notices and review guidelines as automatically invalid would run counter to the legislative intent underlying the differentiated structure of Article 3-4 (3). In this regard, academic commentators have noted that the provision's recognition of invalidation only after an additional determination of "significant unfairness" entails a degree of doctrinal ambiguity, given the practical difficulty of uniformly invalidating all unfair contractual terms whose scope has been broadly expanded under the Enforcement Decree and relevant public notices³.

Consequently, it is necessary to establish clear criteria for determining "significant unfairness," based on a comprehensive consideration of the provision's legislative purpose, the exceptions to the principle of private autonomy, and the potential effects on subcontracting transactions in practice. Only when such criteria are clarified can the invalidation under subparagraph 4 of Article 3-4 (3) function effectively, thereby enabling subcontractors to obtain swift damage relief once a dispute arises.

2. Determination Criteria in Consideration of Other Laws

It appears that accumulated court decisions concerning Article 104 of the Civil Act and unfair contractual terms under the Framework Act on the Construction Industry may provide useful guidance for clarifying the meaning of "significant unfairness."

First, Article 104 (Unfair Juristic Act) of the Civil Act provides that a juristic act that has conspicuously lost fairness due to a party's strained circumstances, rashness, or inexperience shall be null and void. In this regard, the Supreme Court has held that "whether an act constitutes an unfair juristic act should be determined by comparing and assessing the objective values of the agreed performance and the counter-performance at the time the juristic act was executed." The Court further noted that, "as a general principle, issues arising from the non-performance of an agreement should be treated as consequences of default, unless special circumstances exist." This line of reasoning suggests that, in determining "significant unfairness," the compensational relationship at the time of execution of the subcontracting agreement should serve as the standard⁴.

Next, Article 22 (5) of the Framework Act on the Construction Industry provides that where contractual terms are substantially unfair to either party, such terms shall be deemed invalid. When determining whether substantial unfairness exists, courts appear to examine whether it is concretely demonstrated that the terms reach the level of seriously impairing the fairness of the contract, taking into account various factors, including whether the terms were established through mutual agreement rather than unilateral coercion, and whether the allocation of risks or costs is reasonable in light of the overall structure of the agreement and related provisions, even where the terms appear unfair in isolation⁵.

Comprehensively, the criteria for determining "significant unfairness" under Article 3-4 (3) may be established as follows, based on the items for determining illegality set forth in the Unfair Special Agreement Review Guidelines: (i) whether the unfair contractual terms were included through practical negotiation between the parties, taking into account the contracting circumstances (contracting circumstances and the free will of subcontractors); (ii) whether the unfair special provision unilaterally imposes unforeseeable losses without compensation (reasonableness of loss transfer and foreseeability); and (iii) whether, even if the unfair special provision itself appears unfair, there exist compensatory or preferential conditions elsewhere in the agreement that, in practice, restore contractual balance (overall balance of the agreement). The relevant time for this determination should be the time of execution of the agreement.

Ultimately, "significant unfairness" would not be recognized solely on the ground that a contractual term is unfavorable to a subcontractor. Rather, a term should be deemed null and void only where a clear and excessive imbalance exists to the detriment of the subcontractor, following a comprehensive consideration of the practical negotiation process, the method of loss allocation, and the overall balance of the contract, as assessed at the time of execution of the agreement.

III. Conclusion

The recent amendment to the Subcontracting Act specifies that unfair contractual terms are null and void under civil law and allows subcontractors to exclude such terms while maintaining the validity of the subcontracting agreement. This enables simplified and swift damage relief for subcontractors through claims for the restitution of unjust enrichment and significantly reduces the incentives for prime contractors to include such terms, thereby expectedly curbing the practice of imposing unfair contractual terms.

However, that the institutional effectiveness of the amendment depends on how the requirement of "significant unfairness" is applied in practice. With reference to judicial decisions interpreting Article 104 of the Civil Act and unfair contractual terms under the Framework Act on the Construction Industry, this article proposes three criteria: (i) the contracting circumstances and the free will of subcontractors; (ii) the reasonableness of loss allocation and foreseeability; and (iii) the overall balance of the agreement. This analysis indicates that mere unfavorable terms are insufficient for a finding of significant unfairness; rather, it must be established that the contractual terms created a clear and excessive imbalance to the detriment of the subcontractor at the time of execution of the agreement.

Looking ahead, particular attention should be paid to the respective roles of the KFTC and the courts. For the KTFC, a key issue is whether, in the course of imposing administrative sanctions for unfair contractual terms, it will make an explicit determination regarding "significant unfairness," and, if so, whether such a determination will be reflected in the severity of the sanctions imposed. Conversely, the KFTC may choose to confine determinations regarding invalidity to the sphere of civil remedies and maintain its existing enforcement approach.

It is also a key issue how courts will reference dispositions issued by the KFTC. To date, courts have treated the fact that the KFTC imposed corrective orders or penalty surcharges for violations as a basic factual premise, while independently determining liability for damages and the validity of the agreement. An important question following going forward is whether this framework will continue to apply, or whether courts will take into account, to some extent, the severity of the KFTC's disposition when assessing the significance of unfairness.

Ultimately, the implications of the recent amendment will be revealed not so much through the statutory text itself as through the KFTC's enforcement practices and judicial decisions. Whether Article 3-4 (3) will take root as a substantial protection mechanism, or instead remain a merely formal requirement, will depend on how the KFTC and the courts allocate their respective roles and interact with one another.

Footnotes

1 This article is developed from a designated discussion at a joint academic conference on subcontracting transactions and unfair contractual terms, co-hosted by the Korea Fair Trade Mediation Agency and the Korea Subcontract Law Society on May 16, 2025.

2 Jung, J. (2025). The Legal Validity of Unfair Special Contract in the Subcontracting Act. InHa Law Review (korlaw), 28(1), 171-196.

3 Hwang, T. (2025). Prohibition of Unfair Specific Terms of Subcontract in Subcontract Act. Journal of Korean Competition Law, 51, 326-343.

4 Supreme Court Decision 2010Da42075 delivered on September 26, 2013

5 Seoul Central District Court Decision 2024Gahap45465 delivered on May 21, 2025; Seoul High Court Decision 2021Na2007410 delivered on November 25, 2021; and Ansan Branch of the Suwon District Court Decision 2023Gadan81315 delivered on August 14, 2024, etc.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.