Distribution Agreements in Korea

Introduction

A deal can be analysed from the perspective of both commercial and legal risk: one impinges on the other. A well thought out Distribution Agreement will accordingly tend to underpin a good deal; however, a good agreement may do little to ameliorate a bad deal.

The purpose of this piece is to highlight some common provisions in distribution arrangements which may run contrary to Korean law. Yet, an allusion to the same would be incomplete without some reference to certain commercial considerations which ought necessarily to precede these factors.

Historical Overview

There are at least two general themes which pervade, namely (1) that Korea is a highly specialised market and (2) that while Korea has continued to grow and has actively encouraged foreign investment, it has at the same time being protective of its industries often to the chagrin of foreign investors.

Korea has a highly educated workforce. However, its economy has historically been dominated by the chaebol, the family-owned conglomerates which have tended to distort the market. All adult men must do two years of military service. This has often manifested itself in somewhat militaristic and male-dominated work culture.

Things have and continue to change apace; this is an enduring feature of Korea – its balli balli culture. The government is also encouraging a start-up culture which in part is designed to offset the power of the chaebol. And different organisations, of course, have different corporate cultures.

At the same time, Korea has one of the lowest birth rates in the world. This has and will lead to myriad issues. Korea has long encouraged foreign investment and to a certain extent, immigration of certain classes of workers. It remains, however, a somewhat tricky market to enter and such step should be taken very much with one’s eyes open.

Commercial Issues – getting a good deal

A market entrant should always consider at least the following.

• Feasibility –as Korea is a specialised market some products and services will work and others will not, often for reasons which would not be immediately apparent. It is therefore extremely important to do your research or have a specialist do so for you.

 

• Partnering – given the chaebol dominated economy, there tends to be significant horizontal and vertical integration. If your product competes with the chaebol, it may be a non-starter. Alternatively, they may be the perfect partner with the right product or service. Notwithstanding finding the right partner is critical.

Distribution Agreements: The Law

The main legislation which tends to affect distribution agreements is the Monopoly Regulation and Fair Trade Act (“MRFTA”), the Fair Agency Transaction Act (“FATA”), their supporting Enforcement Decrees and various subordinate guidelines. The law is administered by the Fair Trade Commission.

Generally, you will only refer to an agreement when it is considered initially or when there is a problem. The most likely problems are of course non-payment and non-performance. The following is a summary of the key areas common to distribution arrangements which should be approached with care.

Required minimum purchases are illegal and targets and early termination, therefore, need to be considered with extreme caution. As stated above, Korea is rather protective of its businesses such which frequently frustrates foreign companies.

Imposing more stringent contractual terms when a contract subsists is a very tricky area. You may have a verbal arrangement or a very simple contract but which you subsequently want to review. This needs to be considered with great care because the imposition of less favourable terms on the local distributor may be considered unfair and therefore illegal.

Excessive contractual provisions impinging on local management are illegal. Distribution Agreements often contain provisions about local management and also informational requirements. Any such provisions ought to be reasonable and not excessive.

Resale price maintenance and territorial segregation of the market is illegal. This is a common feature in most developed markets. Korea is no different. It should also be borne in mind that it is illegal to divide the market into territories.

Conclusion

Do you do due diligence before entering the market? Finding the right partner is probably key. Mitigate your legal risk with a well-considered Distribution Agreement.