[1] The standard time to determine whether the subcontractor has the right to seek a direct payment of the subcontract price against the ordering person (i.e., when the expression of intent to request the subcontractor's direct payment reaches the ordering person), and the meaning of "where the principal contractor becomes unable to pay the subcontract price"

[2] Requirements for a principal contractor to take effect as a request for direct payment under the Fair Transactions in Subcontracting Act, which was made by the principal contractor to the ordering person upon delegation by the subcontractor (i.e., that the ordering person knew or could have known that the request for direct payment was made by the subcontractor)

[1] Article 14(1)1 and (2) of the Fair Transactions in Subcontracting Act, Article 9(1) of the Enforcement Decree of the Fair Transactions in Subcontracting Act / [2] Article 14(1)1 and (2) of the Fair Transactions in Subcontracting Act, Article 9(1) of the Enforcement Decree of the Fair Transactions in Subcontracting Act

[1] Supreme Court Decision 2008Da65839 decided Mar. 12, 2009 (Gong2009Sang, 450)

Goam Engineering Co., Ltd. (former trade name before the change: Korean Design Corporation)

Defendant (Law Firm LLC, Attorneys Lee Dong-hoon et al., Counsel for defendant-appellant)

Suwon District Court Decision 2017Na5713 decided January 30, 2018

The part of the lower judgment against the Defendant is reversed, and that part of the case is remanded to the Suwon District Court Panel Division.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. A. Article 14(1) of the Fair Transactions in Subcontracting Act (hereinafter “subcontract Act”) provides that “When a cause falling under any of the following subparagraphs occurs, the ordering person shall pay directly to the subcontractor the subcontract price corresponding to the portion of the manufacture, repair, construction, or service performed by the subcontractor.” Article 14(1)1 provides that “Where the prime contractor is unable to pay the subcontract price due to the suspension of payment by the prime contractor, bankruptcy, other similar causes, or permission, authorization, license, registration, etc. for the business, the prime contractor becomes unable to pay the subcontract price due to the cancellation of the license, authorization, license, registration, etc. for the prime contractor’s

Article 14(2) of the Subcontract Act provides, “If any ground under paragraph (1) arises, the obligation of the person ordering the principal contractor to pay the price and the obligation of the principal contractor to pay the subcontract price to the subcontractor shall be deemed extinguished within the scope of the said obligation.” Article 9(1) of the Enforcement Decree of the Subcontract Act provides, “The request of the subcontractor for the direct payment by the subcontractor under Article 14(1) of the Act shall take effect when the declaration of intention reaches the ordering person, and the fact that the declaration of intention has arrived shall be attested by the subcontractor.”

Therefore, when a subcontractor executes a construction work according to a subcontract and requests a direct payment of the subcontract price equivalent to the portion executed by the ordering person, the subcontractor's right to demand a direct payment of the subcontract price occurs to the ordering person, and the obligation to pay to the ordering person is extinguished within the scope of the subcontract price.

Therefore, whether a subcontractor has a right to seek a direct payment of the subcontract price against the ordering person, that is, whether a principal contractor is unable to pay the subcontract price due to the suspension of payment, bankruptcy, or any other similar cause, etc., should be determined at the time when the subcontractor’s declaration of intent to request a direct payment reaches the ordering person. In this context, “in the event of impossibility of payment” refers to an objective situation in which a debtor is unable to repay his/her obligation to be immediately due to lack of ability to repay (see Supreme Court Decision 2008Da65839, Mar. 12, 2009, etc.).

In addition, since the Subcontract Act and its Enforcement Decree provide that the subcontractor shall make a direct payment request, if the principal contractor requests the direct payment to the ordering person upon delegation from the subcontractor, the ordering person, who is the other party to the declaration of intention, should have known or could have known that the request for the direct payment was made by the subcontractor, shall take effect as a request for the direct payment by the subcontractor under the above Subcontract Act.

B. The lower court acknowledged the following facts.

1) On April 22, 2014, a secondary construction company (hereinafter “sub-construction”) contracted a new construction of a logistics center with the Defendant, and subcontracted the part of the sub-construction during the construction to the Plaintiff.

2) Around April 30, 2014, the Plaintiff completed subcontracted projects, and only KRW 30,100,000,000, out of the subcontract price of KRW 90,130,000.

3) On June 13, 2014, a sub-construction sent to the Defendant a “written request for direct payment of construction costs” to the effect that, upon the Plaintiff’s request, the sub-construction would directly pay KRW 61.2 million out of the remaining completed portion of the sub-construction to the Plaintiff. The written request contains the Plaintiff’s account number and the Plaintiff’s payment of KRW 61.2 million to the Plaintiff, and the subcontract document and the contract specifications were attached thereto.

4) On June 14, 2014, the Nonparty, an employee of the Defendant, received the written request.

5) On July 30, 2014, a sub-construction suspended construction on July 30, 2014, closed on September 3, 2014. On October 8, 2014, a sub-construction drafted an assignment of claim and a contract for transfer of claim for construction price against the Defendant to the creditors, including the Plaintiff, and notified the Defendant of the assignment of claim on October 24, 2014.

6) The Defendant directly disbursed KRW 48,490,590,000, in lieu of the additional construction between May 30, 2014 and October 28, 2014, the aggregate of the house rent, etc. related to the instant construction.

C. Next, the lower court determined that the subcontractor’s obligation to pay the subcontract price to the Plaintiff under Article 14(1)1 of the Subcontract Act was established on the ground that the subcontractor does not require a direct claim against the subcontractor, and that according to the above recognition facts, the Plaintiff’s intent to exercise the right to demand direct payment against the Defendant was inferred, on the ground that the subcontractor’s demand for direct payment of construction price was made on June 13, 2014.

D. However, in light of the above legal principles, we cannot agree with the above judgment of the court below for the following reasons.

1) According to the reasoning of the lower judgment and the record, the Defendant, when entering into the instant contract with the secondary construction and the instant construction, paid KRW 500,000,000,000 for the total construction cost corresponding to the base rate prior to approval for use; the remainder shall be paid within five days after obtaining loans from the preservation of ownership; the Defendant agreed to pay materials or settle the portion of the work performed; and ② the Defendant paid the total amount of KRW 50,00,000 to the secondary construction from April 30, 2014 to June 9, 2014 pursuant to the said agreement.

Therefore, even if the Defendant directly paid the purchase price, etc. for the subsidiary from May 30, 2014 to October 28, 2014 on behalf of the subsidiary construction, it can be deemed that the Defendant directly paid part of the purchase price under the aforementioned settlement agreement. Such circumstance alone cannot be deemed to have existed in an objective condition that, as of June 14, 2014, when the demand for direct payment of the subsidiary construction from June 13, 2014 was reached to the Defendant, it cannot be deemed that there was an objective condition that, as of June 14, 2014, the subsidiary construction was insufficient to perform the obligation to be immediately repaid due to the lack of payment capacity due to such reasons as suspension of payment and bankruptcy.

In addition, the remaining circumstances of the lower court are also the circumstances after the end of one half or two months from June 14, 2014, which were the base point of time, and such circumstances alone cannot be deemed as having existed at the time of June 14, 2014.

On the other hand, the court below also held that Article 35 (2) 3 of the Framework Act on the Construction Industry provides that "where the contractor delays payment of the subcontract price under Article 34 (1) on at least two occasions, the subcontractor requests a direct payment of the subcontract price to the ordering person" and Article 35 (2) 4 of the same Act provides that "Where the contractor becomes unable to pay the subcontract price due to the suspension of payment of the contractor, bankruptcy or other similar causes, or cancellation of the registration of construction business, the subcontractor is requested to the ordering person."

However, the reason under Article 35 (2) 4 of the Framework Act on the Construction Industry is the same as that under Article 14 (1) 1 of the Subcontract Act, and cannot be acknowledged as seen earlier. In addition, there was no specific assertion or certification as to whether the reason under Article 35 (2) 3 of the Framework Act on the Construction Industry falls under the reason under Article 35 (2) 3 of the Framework Act on the Construction Industry, and the court below did not make any determination as to whether the above legal provision was written or not. Therefore, it cannot be deemed that the defendant

2) The written request for direct payment of the construction price as of June 13, 2014 is a document in the name of sub-construction rather than the subcontractor. In addition, the Defendant asserts that the request for direct payment of the construction price as of June 13, 2014 was not a subcontractor but a sub-construction as the principal contractor, and thus cannot be deemed a request for direct payment under the Subcontract Act. Nevertheless, there was no assertion or proof as to whether the Defendant knew or could have known that the request for direct payment was made by the Plaintiff on June 13, 2014.

3) If so, the lower court should have deliberated on the following: (a) at the time of June 14, 2014, when a request for direct payment of a secondary construction from June 13, 2014 reaches the Defendant; (b) whether the secondary payment of a secondary construction from the date of payment suspension, bankruptcy, etc., was in an objective state in which a general and continuous performance could not be performed immediately due to the lack of ability to repay; and (c) whether the Defendant knew or could have known that a request for direct payment of a secondary construction from June 13, 2014 was made by the Plaintiff’s request for direct payment, and should have determined whether the demand for direct payment under the Subcontract Act was in a general and continuous state.

Nevertheless, solely on the grounds stated in its reasoning, the lower court determined that the Defendant’s obligation to pay the subcontract price to the Plaintiff pursuant to Article 14(1)1 of the Subcontract Act, upon a request for a direct payment of the construction price sent by the secondary construction to the Defendant on June 13, 2014. In so doing, the lower court erred by misapprehending the legal doctrine on the direct payment obligation under the Subcontract Act, thereby failing to exhaust all necessary deliberations, thereby adversely affecting the conclusion of the judgment. The allegation in the grounds of appeal assigning this error is with merit.

2. Therefore, without further proceeding to decide on the remaining grounds of appeal, the part against the defendant among the judgment below against the defendant is reversed, and that part of the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices

Justices Lee Ki-taik (Presiding Justice)