Even Public Enterprises Cannot Override Higher Law…Brakes on Mechanical Bidding Restrictions

-Legal column by Attorney Choi Dae-il, Daeryun LLC (Law Firm)

A court ruling has been issued holding that, even if a public enterprise restricts a company's bidding eligibility based on its own internal regulations, such a disposition is unlawful if it exceeds the requirements set by higher law. It is expected to cause ripples in that it directly addresses the point that the bidding-restriction legal principles applied to state agencies and to public enterprises differ.

The Seoul Administrative Court recently issued a ruling (2025 Guhap 54418) that put the brakes on a public enterprise's arbitrary bidding-eligibility restriction disposition. Mr. C, the site manager of construction firm A, provided approximately 420,000 won worth of meals and alcohol to employees of the defendant, Korea Land and Housing Corporation (LH). The defendant regarded this as bribery and imposed a 3-month bidding-eligibility restriction disposition on Company A and its former CEO, Mr. B, respectively. However, the court cancelled all of these, holding that the subordinate rule had no legal binding force and that the grounds for the disposition did not exist. The significance of this ruling does not lie in the company winning because the amount of the entertainment provided was small. The core is that the court pointed out that the defendant itself failed to meet the statutory disposition requirements demanded by the Act on the Management of Public Institutions.

The issue is not the 'amount' but the difference in the sanction-basis statute applied to the ordering party. When a state agency is the ordering party, under the State Contract Act, bidding eligibility can be restricted if only certain grounds such as bribery exist. In contrast, public enterprises are subject to the Act on the Management of Public Institutions, which sets stricter requirements, allowing restriction at discretion only in cases where it is 'clear that the proper performance of the contract will be harmed,' going beyond mere bribery.

The defendant imposed the sanction by asserting that the subordinate rule (former Contract Affairs Rules) delegated under the Act on the Management of Public Institutions applied the State Contract Act's binding provisions as is. However, the court's judgment was different. It held that even if a public enterprise sanctions based on internal regulations, if those regulations arbitrarily relax the strict requirements of higher law and exceed the scope of delegation, they have no effect on the company. It reaffirmed the principle that an administrative agency's internal rules cannot restrict the people's rights beyond the scope of delegation by higher law. In the end, the court's conclusion was that, in a large-scale construction project amounting to 65.1 billion won, a meal treat at the level of 420,000 won cannot be concluded to be a 'clear case of harming the proper performance of the contract.' It held that the grounds for the sanction itself did not exist.

This ruling does not stop at the victory of one particular construction firm. It has greater significance as a case that reconfirmed the legal standards for bidding-eligibility restrictions across institutions subject to the Act on the Management of Public Institutions, such as LH, Korea Electric Power Corporation, and Korea Expressway Corporation. Corporate legal officers should build defense logic based on the following four criteria when they receive a public-bidding sanction notice.

First, one must distinguish the ordering party's legal status and the applicable law. Since the applicable law and the strictness of the sanction requirements completely differ depending on whether the ordering party is a state agency or a public enterprise, one must clearly separate these in responding.

Second, one must objectively demonstrate whether there was substantive contract infringement. Through objective materials such as the progress rate, quality, completion status, and whether there were contractual defects, one must actively prove that the proper performance of the contract was not actually infringed.

Third, one must thoroughly secure the facts from the early audit stage. Since each early statement—such as who first proposed the meal, how the payment and subsequent settlement were made, and whether there was actually any mention related to the contract—determines whether bidding is restricted, the corporate legal team must actively intervene from the audit stage.

Fourth, one must actively object to and contest routine sanction dispositions. Construction firms often give up prematurely when they receive a bidding-restriction notice. However, as in this case, if one drills into not only the content of the act itself but also the limits and illegality of the subordinate rule that forms the legal basis of the disposition, the disposition itself can be nullified.

Bidding-eligibility restriction does not stop at a mere 3-month suspension of business. It has cascading adverse effects, including damage to trust in the public-bidding market as well as on financial institutions' credit evaluations and private ordering parties' contract reviews. This ruling shows that not all sanctions by public enterprises are lawful. A company must, immediately upon receiving a sanction notice, review not only the facts but also the legal basis of the disposition and the scope of delegation by higher law. It is necessary to remember that administrative sanctions, too, cannot exceed the limits set by law.

Reporter Lee Dong-o (canon35@mt.co.kr)

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