Regulation on Subcontracting Transactions by Foreign Companies: Expansion of Korea’s Subcontracting Act Abroad?

Purpose - This study explores whether Korea’s Subcontracting Act can be applied to subcontracting transactions involving foreign companies and, if not, seeks ways to minimize the practical problems arising from this limitation. The Subcontracting Act is a special law designed to protect subcontractors, particularly small and medium-sized enterprises (SMEs), who are often in a weaker bargaining position. Enforcement of the Subcontract Act against foreign companies must align with the Act’s purpose and structure while ensuring that cross-border subcontracting and trade are not hindered. Design/Methodology - After reviewing the structure and provisions of the Subcontracting Act of Korea, this paper examines its proposed amendment to introduce extraterritorial application and a recent decision by the Constitutional Court of Korea. The Constitutional Court confirmed that foreign companies do not qualify as “prime contractors” under Paragraph (2) of Article 2 of the Subcontract Act, thus limiting the applicability of this Act. Findings - Unreasonable outcomes could occur if the Subcontracting Act does not consistently apply to foreign companies. For instance, while a foreign company may formally appear as a party to a subcontracting transaction, a domestic entity may, in fact, be the substantial party, making key decisions and executing important matters. This study explores whether extraterritorial or direct application is preferable in such cases, utilizing the single economic entity doctrine. Originality/value - While the extraterritorial application of competition laws has been widely discussed, there has been limited research on extending special laws such as Korea’s Subcontracting Act. Given the frequent occurrence of cross-border subcontracting, this paper contributes by defining the scope and limitations of applying such laws internationally.