3/04/2015

Korean Manufacturing/Sub-Contractor Agreement Payment Terms Matter: Don't fall for the "Service" Trap

We handle numerous cases of the less than scrupulous in Korea taking advantage of the more than trusting from abroad.  

The, typical, situation occurs when a Korean company (Buyer or General Contractor) agrees to purchase a product or services from a non-Korean company (Manufacturer or Sub-Contractor).

Often, the Korean company agrees to pay a percentage upfront with future payments based on progress milestones.  Often these "progress milestone" are not clearly defined and even if they are Korean companies are notorious for asking for work beyond the scope of the agreement.  Because of the structure of these agreements the Korean company has significant leverage over the Manufacturer/Sub.

The leverage comes from the fact that most of the risk is on the non-Korean company.  The down payment is, typically, only enough to cover basic costs and the progress payment, only, is paid upon completion of the milestone, thus, the manufacturer is fronting the expense and is, thus, encouraged to meet the demands of the Korean Buyer/General Contractor.

The Korean companies know this very well and play this to get the manufacture/Sub to go beyond the scope of the project, since they know that the, only, recourse is, typically, litigation in a Korean court that will lead to, at best, a long delay in payment.

I like to call this situation the "Service" trap.  Korean companies love requesting free services right when they know their payment is due.  

Thus, please, prior to engaging in an agreement to manufacturer or provide construction services for a Korean company consider the following:
  1. Investigate the Reputation of the Korean Company. Due Diligence. Due Diligence and More Due Diligence.  Ask around, honest and experienced lawyers are, often, aware of these issues as are Korean-based consultants.  Many companies, in Korea, are notorious at playing the free "service" game.  Most with significant experience know who these companies are and are happy to advise on how to negotiate contracts with these companies.
  2. Clear Korean-focused Contract.  The contract should be clear.  Don't pull an agreement from the internet and don't blindly accept an agreement from the Korean company.  If you contract is not drafted by someone with an understanding of Korean realities, you may have an issue. 
  3. Jurisdiction, Choice of Law & Arbitration.  Consider the place to resolve the dispute, consider the law to be applied to the agreement and consider if arbitration is the right manner of resolving a dispute.  If you are performing sub-contracting work in Europe for a Korean company and the Korean company is demanding that disputes be resolved at the Seoul Central District Court - you may have an indication of an issue that will arise. 
  4. Upfront Payments.  Simple.  Of course try to get as much upfront as you can.  As we know, many types of relationships, these days, have typical deposits based on the type of transaction.  However, no harm in trying.
  5. Contracting Party.  Many Korean companies have significant assets abroad.  It is much easier enforcing an agreement in the States against a Korean company than in a Korean court.  Thus, consider having the contract executed by a capitalized subsidiary of the Korean company.
  6. Negotiator. To get the best deal, you need to understand the mentality of Koreans.  Get someone experienced to negotiate the agreement. 
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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 first non-Korean attorney to have worked 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. Sean is ranked, for Korea, as one of only two non-Korean lawyers as a Top Attorney by AsiaLaw.