So you have decided to outsource the manufacturing of your products to Korea. Good choice in choosing quality-focused Korea over quantity-focused China, but don't make the bad choice of not even taking the basic legal steps necessary to protect your good name, technology, brand and the future of your business.
If you plan on just dealing through a purchase order (PO) in Korea, you
are heading down a path that will invariably lead to a kick in the tail.
The recession has hit small/medium-sized manufacturers even harder than
large manufacturers. Many of these SMEs have decided that the only way to
survive is OEM (original equipment manufacturing) outsourcing to China, India,
Korea and other parts of Asia.
I, also, do a good deal of enjoyable work
in China and India. I am, however, always happy to see clients choose Korea over
India and China, since many of the headaches you will experience in China and
India will never be felt in Korea.
The legal system, in Korea, is
generally transparent, fair, and the judges tend, with a little guidance, to be
able to understand commercial disputes. Also, I have been told that Korean
manufacturers need much less guidance than Indian and Chinese manufacturers and
the cost of doing business in Korea is not substantially greater, for high
This situation being known, foreign companies often
make the poorest of choices when doing business with Korean companies. Korea is
still far behind the United States and the West in terms of business ethics,
protection of intellectual property and legal transparency. Many risks, not even
considered potential risks in the West, are regularly realized in Korea.
Before entering into any Korean OEM agreements, please consider and
follow these very basic pieces of advice. As in an article I wrote for a Korean
daily entitled Listen
to your Mother -- always look both ways before crossing the street, carry an
umbrella in the spring and don't go out alone at night.
1. Request and
obtain the company’s business registration number and perform a credit check on
the company. A basic credit check can be obtained through the Korean Investors
2. Register all your intellectual property
rights (copyright, patents, trademarks etc.) in Korea. Registration will help to
prevent your competitor, a disgruntled distributor, or your manufacturer from
counterfeiting your goods and exporting your product from Korea to your
customers and potential customers. Registration in the United States and Europe
does not guarantee that your intellectual property rights are protected in
Korea. IP treaties only provide you a window of time to register in a member
3. Your Korean license, distribution, OEM agreements and other
agreements used in other nations are not adequate for Korea. All “standard”
distribution, license, OEM agreements and other agreements should only be used
as guides in Korea. Korea has a unique legal system with unique business risks.
If you are planning to deal only through a purchase order (PO), you are a goat
waiting to be milked.
4. All agreements, to avoid any initial
misunderstandings, should be drafted in English and Korean. A well drafted
Korean OEM agreement is not complete until it is translated. Even the best
English speaking Koreans, are ill prepared to understand agreements of this
nature. Clear misunderstandings upfront and avoid legal fees down the
5. Know-how, trade secrets and the like should be protected through
a written agreement. A standard non-disclosure agreement (NDA) is not enough.
This agreement should be signed prior to any course of dealing and normally
should include confidentiality, non-use, non-circumvention, non-competition
clauses with a liquidated damage clause.
6. For at least the first few
shipments, don’t pay until the goods are inspected. For the first shipment,
check the goods at the port yourself. Afterwards, procedures can be put in place
that guarantees the quality, quantity and delivery time through local
If you heed these simple pieces of advice you are well on your
way to having a successful relationship with a Korean manufacturer.
Sean Hayes may be contacted at: SeanHayes@ipglegal.com.
Sean Hayes is co-chair of the Korea Practice Team at IPG Legal. He is the only non-Korean to have worked as an attorney for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty.