Series Index
Part 1 | Unpaid Corporate Transactions: Liability Behind the Veil
Part 2 | Trade Name Continuity and the Liability of a Successor
Part 3 | Directors’ Liability for Damages
Part 4 | The Person Behind the Company Name
Part 5 | The Limits of Self-Defense in Assault Cases
Part 6 | Criminal Settlement Money: How Much Is Appropriate?
Part 7 | Can Quasi-Rape Be Established If One Has No Memory After Drinking?
Part 8 | Freelancers and Severance Pay: What Courts Really Examine
Part 9 | Assignment of Receivables for Business Financing
Part 10 | Can You Get Divorced If Your Foreign Spouse Disappears?
Part 11 | Can a Tenant Terminate a Lease if Repairs Are Refused?
Part 12 | Can a Subcontractor Recover Payment if the Main Contractor Disappears?
By Hong Seung-kwon
Principal Attorney, PAN Law Firm (skh@law-pan.com)
When a building is renovated, the owner typically hires an interior contractor. That contractor, in turn, hires subcontractors such as painters, electricians, and tile installers to perform the actual work. Occasionally, however, the project is completed while the people who carried out the work never receive payment.
This usually happens because the interior contractor collects the contract price from the building owner and then disappears. Although the subcontractors are understandably frustrated, their contract is with the interior contractor—not with the building owner. As a general rule, if the contractor fails to pay, there is no direct legal basis for demanding payment from the owner.
Korean law, however, provides limited exceptions. These are found in Article 14 of the Fair Transactions in Subcontracting Act and Article 35 of the Framework Act on the Construction Industry.
Under the Fair Transactions in Subcontracting Act, subcontractors who actually performed the work may, under specific circumstances, demand payment directly from the project owner without going through the principal contractor. The purpose of the law is to protect subcontractors when payment through the ordinary contractual chain becomes impossible.
The key point is that this right to direct payment does not arise automatically. Article 14(1) of the Act provides four situations in which it may apply, but two are particularly relevant for smaller construction projects.
The first is where the principal contractor becomes unable to pay because of bankruptcy, insolvency, suspension of payments, or similar financial distress, and the subcontractor requests direct payment from the owner.
The second is where the principal contractor has failed to pay subcontract amounts on at least two occasions, allowing the subcontractor to request direct payment from the owner. In practice, one of these statutory conditions generally must be satisfied before a direct claim against the owner becomes available.
Even then, the owner's obligation is not unlimited. Direct payment is available only to the extent that the owner still owes money to the principal contractor. In other words, if the owner has already paid the contractor in full and completed the final settlement, there may be no remaining funds from which the subcontractor can recover payment.
When an interior contractor disappears after receiving the contract price, it usually means that the owner has already made full payment. In that situation, the statutory right to direct payment often provides little practical protection.
Another issue is whether the relevant statutes apply in the first place. Most interior renovation work falls within the scope of the Framework Act on the Construction Industry. If the scheduled contract value exceeds KRW 15 million, only a properly licensed construction company may legally perform the work.
This licensing requirement also applies where the contractor merely subcontracts the work rather than performing it directly. Accordingly, if the subcontract was awarded by an unlicensed interior contractor, the statutory right to direct payment may not be available.
What, then, should a subcontractor do when the right to direct payment cannot be exercised?
The primary option is to file a civil lawsuit against the contractor seeking payment of the outstanding construction fees. If there is evidence that the contractor accepted payment with no genuine intention of paying subcontractors, criminal charges—such as fraud—may also be considered.
In practice, the safest approach is to obtain a direct payment agreement from the project owner before construction begins. On smaller projects, however, such arrangements are often overlooked.
If communication with the principal contractor suddenly ceases, subcontractors should notify the project owner and request direct payment as quickly as possible. Pursuing criminal proceedings against the contractor at the same time may also strengthen their legal position.
Finally, subcontractors who employ workers should also review their employees' wage claims. Under Article 44-2 of the Korean Labor Standards Act, the principal contractor or project owner may, in certain circumstances, bear joint liability for unpaid wages.
About the Author
Hong Seung-kwon is an attorney at Law Firm PAN. His practice covers civil and criminal litigation as well as emerging legal issues arising in the digital economy. He regularly analyzes how technological innovation, property rights, and regulatory developments reshape legal frameworks and market governance.
