CONTENTS
- 1. Litigation Under the Act on Contracts to Which the State Is a Party, Detailed Background
- - Litigation Under the Act on Contracts to Which the State Is a Party, Relevant Statutes
- 2. Litigation Under the Act on Contracts to Which the State Is a Party, the Lower Courts' Determination
- 3. Litigation Under the Act on Contracts to Which the State Is a Party, the Supreme Court's Determination
- 4. Litigation Under the Act on Contracts to Which the State Is a Party, Daeryun's Strategy
1. Litigation Under the Act on Contracts to Which the State Is a Party, Detailed Background
The plaintiff who first brought this lawsuit was a social welfare corporation, A.
Corporation A had been designated as a production facility for products made by persons with severe disabilities, and it had been manufacturing items such as clothing.
Several years ago, it entered into a contract with the Defense Acquisition Program Administration to manufacture and supply Army athletic wear.
Accordingly, pursuant to the contract, Corporation A submitted to the Defense Acquisition Program Administration a test report from an accredited institution stating that the fabric to be used in producing the athletic wear conformed to the quality standards set out in the purchase requisition.
Thereafter, the Defense Acquisition Program Administration commissioned an accredited institution to test the finished athletic wear supplied by Corporation A against 16 items.
As a result, unlike the fabric test results that Corporation A had previously conducted, 6 of the 16 items for the finished athletic wear, including moisture-control properties and antibacterial level, were found to fall below the quality standards.
The Defense Acquisition Program Administration then requested Corporation A to take measures concerning the defects in the athletic wear, but Corporation A did not accept this request.
The Defense Acquisition Program Administration thereupon issued a disposition restricting Corporation A's eligibility to participate in bidding for 6 months, in accordance with the Act on Contracts to Which the State Is a Party.
Because Corporation A once again declined to accept this disposition, the related administrative litigation commenced.
Litigation Under the Act on Contracts to Which the State Is a Party, Relevant Statutes
■ Act on Contracts to Which the State Is a Party, Article 27 (Restriction on Bidding Eligibility of Unfair Business Entities, etc.)
(1) The head of each central government agency shall, with respect to a person falling under any of the following subparagraphs (hereinafter referred to as an "unfair business entity"), restrict the eligibility to participate in bidding within a period of up to 2 years, as prescribed by Presidential Decree, and shall immediately notify the heads of other central government agencies of the fact of such restriction. In this case, the heads of other central government agencies who receive such notification shall restrict the bidding eligibility of the relevant unfair business entity, as prescribed by Presidential Decree.
1. A person who, in performing a contract, did so in a poor, shoddy, or improper manner, or committed an improper act
2. A person who, in the course of competitive bidding or the conclusion or performance of a contract, consulted in advance with other bidders or counterparties to agree on the bid price, the volume of orders, the terms of the contract, or the like, or who colluded to secure the successful bid for a particular person or the selection of a particular person as the supplier
3. A person who subcontracted in violation of the restrictions on subcontracting under the 「Framework Act on the Construction Industry」, the 「Electrical Construction Business Act」, the 「Information and Communications Construction Business Act」, the 「Software Promotion Act」, or other statutes (excluding cases of violation of the obligation to give notice of subcontracting), as well as a person who subcontracted without the approval of the ordering agency or who changed the subcontracting conditions approved by the ordering agency
4. A person who, through fraud or any other improper act, caused damage to the State in the course of bidding, awarding, or the conclusion or performance of a contract
■ Enforcement Decree of the Act on Contracts to Which the State Is a Party Article 76 (Restriction on Bidding Eligibility of Unfair Business Entities)
(3) The head of each central government agency shall immediately restrict the bidding eligibility of a person falling under any of the following subparagraphs within a range of not less than 1 month and not more than 2 years. Provided, that where a ground for restricting bidding eligibility has arisen because the agent, manager, or other employee of an unfair business entity committed an act falling under any of the subparagraphs of Article 27(1) of the Act, the bidding eligibility of the unfair business entity shall not be restricted if the unfair business entity did not neglect reasonable care and supervision to prevent such act by the agent, manager, or other employee.
(4) Matters concerning the period of restriction on bidding eligibility under paragraph (3) shall, for each act falling under the subparagraphs of Article 27(1) of the Act, be prescribed by Ordinance of the Ministry of Economy and Finance in consideration of poor-performance demerit points, the defect ratio, the type of improper act, whether the act was intentional or negligent, the amount of any bribe, the degree of damage caused to the State, and the like.
■ Enforcement Rule of the Act on Contracts to Which the State Is a Party
The detailed standards for restricting the bidding eligibility of an unfair business entity under Article 76(4) of the Enforcement Decree are as follows.
1. General Standards
A. Where, during the period from the date of the disposition until the date 6 months elapse after the end of the period of restriction on bidding eligibility, a ground for again qualifying as an unfair business entity arises with respect to a person who has been restricted from bidding eligibility, the head of each central government agency may, in consideration of the motive, content, frequency, and the like of the violation, extend the period of eligibility restriction within the range of one-half of the relevant sanction period under subparagraph 2. In this case, the aggregate period including the extended period may not exceed 2 years.
B. Where the head of each central government agency restricts the bidding eligibility of an unfair business entity for multiple acts the entity has committed in violation, the period of restriction on bidding eligibility shall follow the restriction standard that prescribes the longest restriction period among the restriction standards for the relevant violations prescribed in subparagraph 2.
C. Where the head of each central government agency restricts the bidding eligibility of an unfair business entity, the agency may, in consideration of the motive, content, frequency, and the like of the violation, reduce the period of eligibility restriction within the range of one-half of the period prescribed in subparagraph 2, and in this case the restriction period after mitigation must be at least 1 month. Provided, that for a person falling under Article 27(1)7 of the Act, the period of restriction on bidding eligibility must not be reduced.
D. Where the head of each central government agency, after imposing a restriction on bidding eligibility under item B, discovers a violation that occurred before that disposition, the agency may additionally restrict bidding eligibility for the period exceeding the original period of restriction on bidding eligibility, but only where it is determined that, had the relevant violation been discovered before that disposition, the agency would have imposed a longer period than the original period of restriction on bidding eligibility.
2. Individual Standards
3. Among persons falling under Article 27(1)1 of the Act, a person who performed a contract improperly or, in performing a contract, committed an improper act
A. A person who, contrary to the design documents, carried out improper construction such as shortening the durability lifespan of a structure or endangering its safety (sanction period: 1 year)
B. A person who carried out improper construction, such as using other materials of a lower standard than the reference specifications in the design documents (sanction period: 6 months)
C. A person who did not faithfully perform supervisory duties with respect to the improper construction under item A and the improper construction under item B, respectively (sanction period: 3 months)
2. Litigation Under the Act on Contracts to Which the State Is a Party, the Lower Courts' Determination
The courts of first and second instance ruled in favor of the Defense Acquisition Program Administration.
Their reasoning was that Corporation A's conduct fell within ‘a person who, in performing a contract, did so in a poor, shoddy, or improper manner, or committed an improper act’ under Article 27(1)1 of the Act on Contracts to Which the State Is a Party.
They further explained that the disposition was likewise made in accordance with the standards under the Enforcement Decree and the Enforcement Rule of the Act on Contracts to Which the State Is a Party, and that these sanction standards did not, in themselves, appear to contravene the Constitution or statutes or to be markedly unjust.
They added that the purpose of the system restricting the bidding eligibility of an unfair business entity is to secure the faithful performance of contracts concluded by the State while preventing, in advance, the disadvantages the State would otherwise suffer (See Constitutional Court, Decision of June 30, 2005, 2005 Heonga 1), and that, even when weighed against the disadvantages the plaintiff would suffer from this disposition, the public interest sought to be achieved through this disposition is by no means slight.
3. Litigation Under the Act on Contracts to Which the State Is a Party, the Supreme Court's Determination
The Supreme Court reached a determination different from that of the lower courts.
It reversed the lower judgment and remanded the case to the lower court.
According to the Supreme Court, when the structure and content of the Act on Contracts to Which the State Is a Party are considered together, ‘a person who committed an improper act’ should be understood to mean a person who breached a contractual obligation by actively using other materials of a lower standard than the reference specifications in the design documents, or an unjustifiable and improper method, not socially acceptable, of a comparable degree.
If so, the Defense Acquisition Program Administration, named as the defendant, must prove that Corporation A, in the course of manufacturing the athletic wear at issue, used other fabric that fell below the quality standards, or that it manufactured the goods by actively using an unjustifiable and improper method, not socially acceptable, of a comparable degree.
However, the Supreme Court determined that, on the basis of the evidence submitted by the defendant alone, it was difficult to find that Corporation A fell within ‘a person who engaged in improper manufacturing’.
Reviewing the athletic wear quality-standard results from several testing institutions, the Court observed that when fabric in a merely cut state goes through printing using chemicals or an ironing process to which high heat is applied, various values, such as abrasion fastness and moisture-control properties, change.
In other words, even if Corporation A used fabric that conformed to the quality standards, the possibility that the quality deteriorated during the manufacturing process cannot be excluded.
For that reason, according to the Supreme Court, the finished-product test results in this case alone cannot establish that Corporation A used other fabric of a lower standard than the reference specifications in manufacturing the athletic wear.
Also, during the trial, the Defense Acquisition Program Administration argued that, even granting that the manufacturing process could cause variations in fabric quality, the disposition was justified because Corporation A had a responsibility to maintain the fabric's quality standards in the finished-product state as well.
However, the Supreme Court pointed out that the mere fact that there was an objective defect in the result of the contract performance cannot establish that Corporation A engaged in conduct that is improper by social norms, and that no proof whatsoever had been made of circumstances suggesting that it committed any other improper act, such as manufacturing the athletic wear through an unusual process.
4. Litigation Under the Act on Contracts to Which the State Is a Party, Daeryun's Strategy
The Act on Contracts to Which the State Is a Party is the statute that sets out the basic matters concerning contracts to which the State is a party.
In the case of projects led by the State, the implementing company is in most instances selected through a public bidding notice.
Even after being selected as the implementing company, a party may incur civil liability if a breach of the agreed terms is discovered at the contract-performance stage.
In addition, as in the case above, a party may also be subject to a disposition restricting its eligibility to participate in bidding.
If a company is designated as an ‘unfair business entity’ as defined by the Act on Contracts to Which the State Is a Party, it can suffer very substantial economic losses.
For that reason, where a company has been sanctioned for violating the relevant statute, it is advisable to obtain the assistance of a dedicated legal team.
Likewise, in order to avoid being identified as an unfair business entity, obtaining legal advice during the course of a project may also be necessary.
At Daeryun Law Firm LLP, attorneys with extensive experience in administrative matters assist clients in a manner suited to each situation.
If you have any questions regarding the Act on Contracts to Which the State Is a Party, you are welcome to reach out to Daeryun Law Firm LLP at any time.
