Case Study | Full Recovery in a Complex Sub-Subcontract Payment Dispute — Wrongful Deductions Blocked in Full

1. Unpaid Sub-Subcontract Payments: What Small and Mid-Sized Businesses Need to Know

Construction projects frequently extend beyond the primary contract and subcontract into a further tier of sub-subcontracting. The problem is that companies who complete their work in good faith are often left without payment at this level.

In the case Sugar Square Law & Advisors handled, the primary contractor — Defendant B — had subcontracted the entire project to Defendant C, who in turn sub-subcontracted to Sugar Square's client, Company A. Company A completed the work under a contract worth approximately 500 million won, but was left unpaid on approximately 120 million won of that amount.

2-1. Winning Strategy ① Establishing Contract Validity and Proving Actual Performance

In many cases, the party seeking to avoid payment will argue either that the sub-subcontract itself was not validly formed, or that the client was not the party that actually performed the work. Countering these arguments requires clear proof that the contract was definitively concluded and that the client completed the work.

In this case, the other side argued that the contract had not taken effect because certain conditions had not been met — such as the submission of a performance bond — and that they had performed the work themselves.

Sugar Square Law & Advisors analyzed the contract terms and confirmed that the contract had been conclusively formed. Work logs prepared during the construction period, testimony and work records from on-site personnel, and litigation records in which the opposing party had themselves acknowledged the client's completion of the work were all submitted to establish that Company A had performed and completed its obligations.

Sugar Square Law & Advisors also presented records of partial payments previously made by the opposing party to the client, further supporting the existence of the contract and the fact of performance. Establishing these foundations is the most basic — and most important — first step in securing sub-subcontract payments.

2-2. Winning Strategy ② Blocking Wrongful Deduction Claims

Even where liability to pay is established, the opposing party will often argue that various amounts should be deducted from the contract sum. In construction, there is a particular tendency to attempt to pass costs such as on-site management expenses and taxes down to lower-tier contractors.

In this case, the opposing party argued for deductions including corporate tax amounts, site manager salary, and sums paid by an upstream contractor.

Sugar Square Law & Advisors demonstrated that the relevant costs — a 2% corporate tax and site manager salary — had already been factored into the contract price at the time of contracting, blocking any attempt at double deduction. It was made clear that amounts already reflected in the client's claim could not be deducted again. Sugar Square Law & Advisors also argued actively that passing costs such as site manager salary — ordinarily borne by the primary or subcontractor — down to the sub-subcontractor constitutes an unfair special agreement that is void under the Framework Act on the Construction Industry as being grossly prejudicial to the subcontractor.

The court rejected all of the opposing party's deduction arguments in full and recognized the entirety of the client's sub-subcontract payment claim. Sugar Square Law & Advisors then secured the debt through attachment and execution against bank accounts and government receivables via provisional attachment and seizure. Company A received full payment from Company C.

3. Pursuing Liability Further Up the Chain

A recurring issue in sub-subcontract payment disputes is whether liability can be extended to upstream contractors. This arises where the company that contracted directly with the upstream party is effectively the same entity, or where an upstream contractor is using a subsidiary's separate legal personality to evade responsibility.

In this case, it was established as a meaningful fact that Defendant B — the upstream subcontractor — and Defendant C — the sub-subcontractor — were family-run and had frequent financial flows between them, and that some contract payments had been made from the upstream contractor's account. However, the court took a strict approach. Holding an upstream contractor liable requires satisfying all of the following.

• Establishing the actual contracting party. It is essential to clearly identify who the actual party to the construction contract was. Holding a party not named in the contract liable requires additional legal grounds.

• The difficulty of piercing the corporate veil. Courts apply the doctrine of corporate veil piercing very restrictively. Financial flows between companies or a family relationship alone are not sufficient — concrete evidence of substantive hollowing-out of the legal entity or abuse of the corporate form is required.

• Joint liability of upstream contractors under Article 44 of the Labor Standards Act is recognized only where the subcontractor's default arises from a cause attributable to the upstream contractor.

Because upstream contractor liability is recognized only in limited circumstances, careful review and negotiation at the contract formation stage is essential to prevent risk. Consulting an experienced corporate attorney from the outset is strongly recommended.

4. Prevent Disputes Through Legal Counsel for Small and Mid-Sized Businesses

Recovering sub-subcontract payments in full within a complex construction contract structure requires addressing contract validity, proof of actual performance, wrongful deduction claims, and upstream contractor liability from multiple angles. Because sub-subcontract payment disputes are structurally complex and evidence gathering is critical, working with an experienced corporate attorney is essential.

Sugar Square Law & Advisors has protected clients' rights across sub-subcontract payment disputes and a wide range of construction and subcontracting matters through its legal counsel services for small and mid-sized businesses. If payment has been withheld, don't give up — the right support can get it back.

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