8/27/2016

Termination of Commercial Agent/Distribution Agreements in Korea: Korea's Agent Compensation Rule

Distribution Agreement, in Korea, Terminated, in Seoul
Terminating an Agency Agreement in Korea
In many cases concerning the termination of a distribution/agent agreement in Korea compensation must be paid to the commission agent.

The law on the termination of Commission Agent-type agreement is governed, mainly, by the Commercial Act of Korea and its enforcement decrees.

The following explanation is, only, a brief overview of Korea's Distribution/ Agency Law relating to termination of a distributor/commercial agent and should, thus, not be relied on by the reader as the only source of information. Please note a much more nuanced explanation is necessary and essential for any manufacturer or supplier doing business with a commercial agent in Korea.

We suggest taking a look at an article we wrote on the selection of a Korean Distributor.  The article may be found at: Finding a Distributor or Agent in Korea.  Additionally, it is advisable to read an article we wrote on distribution agreements.  The article may be found at: Distribution/ Agent Agreements in Korea.  Also, a brief search in the field at the top right will bring up numerous other articles including an article on how, merely, choosing foreign law is not a solution to this issue.  The article may be found at: Choice of Law Issues in Agency/Distribution Agreements. 

Termination of a Distributor in Korea: Korean Commission Agent Termination Rule
Under Korea's Distribution Law, normally, a termination of a Commission Agent Agreement requires the providing of, at least, two-months notice and compensation equal to one year of commissions (agent) or profits (distributor).  Exceptions do exist.  The one year of commission/profit calculation is calculated, in most cases, by averaging the past five years of commissions/profit.

This Korean Commission Agent Termination Rule allowing termination of Korean Commission Agent agreements with, at least, two-month notice period is, on rare occasions, not followed by Korean courts based on interpretations by Korean courts of the Monopoly Regulation and Fair Trade Act.

The Supreme Court of Korea has noted that the Enforcement Decree of the Monopoly Regulation and Fair Trade Act Article 36(1) (Table 1, subparagraph 6(d)) should interpret a violation of this Act as meaning, in part, acts that abuse one’s transactional position to the disadvantage of the other party by considering the following factors:
"specific aspects such as the intention, objective, effect and influence of the act; characteristics of the goods; situation of transaction; degree of the prevailing position of the enterpriser; and contents and degree of disadvantage of the other party. Furthermore, such a determination must take into consideration whether there was a deviation from the practice of normal transactions and whether this impeded fair trade."
This Commission Agent Termination Test allows broad discretion to Korean courts to broadly interpret acts by manufacturers/suppliers as acts that violate these general tenants of fair trade. However, the Supreme Court of Korea has noted that a mere refusal to take part in a transaction with another party is, typically, not a violation of basic Korean fair trade principles.

However, the Korean Supreme Court noted that this general rule can be negated:
"in cases where such a refusal would negate the transactional opportunity of a specific enterpriser and possibly cause difficulties to its business operations, or in cases where a powerful enterpriser abuses its position by exercising such a refusal with the sole intent of causing difficulties to a specific enterpriser, or in cases where the refusal of transaction is an unjust act that aims to realize a purpose prohibited by the Fair Trade Act, such as to coerce a transaction."
This vague test leads to risk that is not easy to evaluate, because of the vague nature of the test and the lack of a long history of consistent jurisprudence on this issue by the Supreme Court of Korea, the high courts and district courts in Korea.

Most risks can be substantially mitigated by the drafting of a Korea-nuanced Agency Agreement and some good old fashion business savvy.  Please don't just use your foreign templates in Korea - get a good business-savvy and street-smart attorney that is on-the ground in Korea to assist.
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Sean Hayes may be contacted at: SeanHayes@ipglegal.com.

Sean 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.  Sean is known for his proactive New York-style street-market advice and his aggressive and non-conflicted advocacy.  Sean works with some of the leading retired judges, prosecutors and former government officials working in Korea.

Sean's profile may be found at: Sean C. Hayes