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Korean Public Procurement and “Unfair Acts” of Suppliers: Practical Implications of Supreme Court Decision 2024Du32393

2024.08.05

<div>Amid Korea’s robust economic expansion, the Korean public sector procurement market surged to a record of around 210 trillion Korean Won (approximately USD 150 billion) last year, marking a notable 30% increase since 2019.1 This growth underscores Korea’s strategic economic trajectory, fueled by export-oriented policies and importation of advanced technologies.2 As the Korean public sector ramps up its investment in sophisticated tools to enhance Korea’s technological edge, foreign suppliers are increasingly drawn to lucrative opportunities within Korea’s public sector procurement market. However, whilst these opportunities with the Korean public sector are significant, they come with certain challenges requiring vigilance particularly for foreign companies. 
 
In Korea, public sector contracts primarily adhere to competitive bidding principles, which are governed by the "Act on Contracts to Which the State is a Party" ( "State Contracts Act").3 The State Contracts Act lays down stringent criteria for a supplier to qualify as a bidder for public sector procurement opportunities, as well as grounds for public institutions to restrict a supplier’s eligibility. Thus, any restrictions on a bidder’s qualifications can profoundly impact a potential supplier’s ability to conduct business with the public sector, and disputes often arise over the legitimacy of such sanctions. This is particularly important for foreign companies seeking to do business in Korea, as it underscores the need to adhere strictly to required standards to mitigate business risks and avoid legal conflicts. 
 
Article 27(1) of the State Contracts Act stipulates nine justifications to restrict a bidder’s qualification to participate in the bidding process for a public sector contract. The focus of this article is on the first justification, which may limit the bidding qualification for a business entity for up to two years if it "acts in a poor, coarse, or unfair manner or has engaged in unfair acts in the course of fulfilling a contract".4 Particularly, since the State Contracts Act does not explicitly define "unfair acts", interpretation as to what sort of conduct specifically meets the threshold for sanction has raised considerable controversy. Recently, Korea’s highest court has addressed the uncertainty surrounding the first justification under Article 27(1) of the State Contracts Act in Supreme Court Decision 2024Du32393 of 27 June 2024.5 This ruling has brought much needed clarification into the interpretation of “unfair acts” which may warrant bidding restrictions under the State Contracts Act, providing both local and foreign companies with clearer guidelines when bidding for and performing public sector contracts in Korea. 
 
The case in question involved a sportswear manufacturer which secured a contract with the Defense Acquisition Program Administration ("DAPA") to produce and supply military sportswear. The manufacturer submitted a test report from an accredited institution confirming that its sportswear fabric met the quality standards set forth in the purchase requisition. However, when the fabric was tested on the finished product, it was found that some items did not meet the quality standards. Consequently, the Defence Acquisition Program Administration restricted the manufacturer’s bidding qualification for six months based on the first justification under Article 27(1) of the State Contracts Act and related provisions. 
 
Both the Seoul Administrative Court and the Seoul High Court upheld the sanctions, dismissing the manufacturer’s claims and appeals. However, the Supreme Court reversed these decisions, ruling that the evidence provided by the DAPA was insufficient to meet the threshold set out in Article 27(1). It should be noted that the test results presented as evidence by the DAPA were for the finished product, not the fabric. The Supreme Court held that even if the manufacturer used fabric that met the quality standards, since it could not be ruled out that the fabric quality deteriorated during the manufacturing process, it could not therefore be concluded based solely on the test results of the finished product that the plaintiff used a fabric with lower quality than the specified standard. 
 
The Supreme Court rejected defendant DAPA’s argument that the manufacturer was responsible for maintaining the quality standards of the fabric in the finished product, holding that the manufacturer could not be determined to have committed "unfair acts" in a socially unjust manner when performing the contract simply because there was an objective defect in the result of the contract performance. The Supreme Court also held that the manufacturer did not commit "unfair acts" by manufacturing sportswear using an unusual process that is not generally used in the manufacturing of clothing. 
 
This ruling brings some clarification to the meaning of "unfair acts" under the State Contracts Act. In reaching its conclusion, the Supreme Court deployed a systematic interpretation of the first justification under Article 27(1) of the State Contracts Act.6 Through this interpretation, the Supreme Court determined that whilst differing sanction periods were stipulated depending on the degree of damages suffered by the State, there was no distinction between fraud and other "unfair acts". Therefore, the Supreme Court concluded that the burden of proof ultimately lies with the public sector institution to demonstrate that a supplier actively used sub-standard materials or socially unjust manufacturing methods contrary to established industry practices. This underlines the importance that both local and foreign suppliers servicing the Korean public sector maintain comprehensive documentation and evidence of compliance throughout their production process. 
 
The implications of this ruling for foreign companies seeking opportunities in Korea’s growing public sector procurement market are clear: adherence to contract specifications, stringent quality control, and comprehensive documentation are paramount. These measures not only ensure continued eligibility and competitiveness of foreign companies in bidding for Korean public sector contracts, but also mitigate the risk of potential legal challenges. 
 
<a href="https://www.jipyong.com/kr/board/news_view.php?seq=13199" target="_blank">[Link to Korean Newsletter]</a></div>

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<div style="line-height: 110%;">1 <a href="https://www.pps.go.kr/kor/content.do?key=00159#none" target="_blank">Procurement policiesㆍStatistics, Public Procurement Service</a> 
2 <a href="https://pps.go.kr/eng/content.do?key=01157#none" target="_blank">Foreign Procurement, Public Procurement Service</a> 
3 <a href="https://law.go.kr/%EB%B2%95%EB%A0%B9/%EA%B5%AD%EA%B0%80%EB%A5%BC%EB%8B%B9%EC%82%AC%EC%9E%90%EB%A1%9C%ED%95%98%EB%8A%94%EA%B3%84%EC%95%BD%EC%97%90%EA%B4%80%ED%95%9C%EB%B2%95%EB%A5%A0" target="_blank">Act on Contracts to Which the State is a Party</a> 
4 Id., at Article 27(1)(1). 
5 <a href="https://www.scourt.go.kr/portal/news/NewsViewAction.work?currentPage=&searchWord=&searchOption=&gubun=4&seqnum=9940" target="_blank">Supreme Court Decision 2024Du32393 (June 27, 2024)</a> 
6 <a href="https://law.go.kr/%eb%b2%95%eb%a0%b9/%ea%b5%ad%ea%b0%80%eb%a5%bc%eb%8b%b9%ec%82%ac%ec%9e%90%eb%a1%9c%ed%95%98%eb%8a%94%ea%b3%84%ec%95%bd%ec%97%90%ea%b4%80%ed%95%9c%eb%b2%95%eb%a5%a0%ec%8b%9c%ed%96%89%eb%a0%b9" target="_blank">Enforcement Decree of the Act on Contracts to which the State is a Party</a> 
 
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