Privity of Contract in Franchise Agreements in Korea: Korean Franchise Law Updates

Normally, in Korea, a contract/agreement cannot confer rights nor impose obligations upon a person who is no a party to the contract/agreement.  One interesting case, in franchise law, applied this principle to the benefit of the franchisor and the detriment to a supplier.  A Supplier delivered food through a Distributor to a Franchisee based on a franchisee requirement iterated in a franchise agreement with a franchisor.  The case brings to light, also, the potential liability of franchisors for acts of Korean franchisees.  The dispute occurred, of course, since the Supplier was not paid for an outstanding order, since the Franchisee was insolvent.  The Franchisor (deep pocket) was not insolvent and, thus, the only available option for collection was via the Franchisor.  One caveat is that the Franchisor was paid a commission by the Supplier/Distributor for sales to the Franchisee and as noted above, the Franchisee was mandated to use this specific Supplier.  Thus, the

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Expiration Versus Termination of a Distribution Agreement in Korea: Korean Distributor Basics

While Korean Law does not specifically detail the differences in treatment in law between the non-renewal (expiration) of a distribution agreement versus the termination, in reality, Korean courts are less likely to rule in favor of distributors in cases where a distribution agreement is not renewed.  Thus, typically, it is advisable to have a distribution agreement based on a specified term of years.  However, even with the expiration of the Korean Distribution Agreement, termination risks exist. In some cases, Korean courts have noted that termination and even non-renewal is a violation of Korean Law since the non-renewal or termination of the Korean distributor was not based on “good faith.”  In many cases, Korean courts have required a showing of “good cause” to terminate or even to not renew a relationship.  Contractual formalities and structural realities often assist in allowing a non-performing distributor from prevailing in court.  Thus, a nuanced and

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Non-Compete Restrictive Covenant in Employment Contracts in Korea

Korean courts have invalidated numerous, non-compete agreements, reduced the amount of time of the non-compete period and/or have reduced liquidated damage amounts for violation of non-compete agreements.  Courts typically balance the freedom to work (an ability to work outside the specific field) with the significance of the interest in the employer to enforce the covenant not to compete.  The primary factors courts utilize in determining whether to enforce a non-compete agreement are: if compensation was paid in exchange for the covenant not to compete; if the interest being sought protection over includes valuable trade secrets and other valuable intellectual property; if the position of the employee was such that the employee would be able damage the future of the employer; if the employee was terminated for justifiable reasons; if the industry practice is to enforce covenants not to compete; and if the employee is harmed by the covenant not to

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Tender Offers in Korea: Conditional Offers under Korea Capital Markets Act

The Korean Capital Market Act and related regulations dictate the basics for tender offers in Korea.  The rules in Korea are, simple: 1.  If the total number of tendered shares is less than the intended number of shares to be purchased by the tender offeror, the offeror may not purchase any of the shares; and 2.  If the total number of tendered shares is more than the number that is intended to be purchased by the tender offeror, the tender offeror shall purchase the shares pro rata. The tender offeror is required to validate that it has the resources to purchase the shares. Other articles on The Korean Law Blog that may be of interest to the reader: Minority Squeeze-outs in Korea Korean M & A Basics Korean Due Diligence Check List Selling to Korea via Distributors, Agents & other Non-Direct Sales Channels Joint Venture/Partnerships in South Korea Test the

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Statutory Severance Obligations in Korea after Acquisition of Company in Korea

Korean employers have, attempted, in many cases unsuccessfully, through mergers, to reduce the statutory severance obligations of a Company through a company acquiring a Company with a workforce with large outstanding severance obligations.  The acquired company, in most cases, is strapped with debt and an inefficient workforce. The acquiring company, inter alia, often alleges that as a separate legal entity it owes no duties to the employees of the acquired company. The acquiring company, thus, alleges that the employees of the old Company are not obligated to receive the accumulated years of severance, thus, reducing vested employee obligations. The Korean Supreme Court has ruled, on numerous occasions, that if an employee has continued work with the new acquiring company that the duties owed to the employees by the acquired company in Korea is owed to the employees by the acquired company, thus, often negating the benefit of the merger. Some

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A “Tasty” Exclusive Agent Agreement for Artists & Entertainers in Korea: Entertainment Law Basics in Korea

The Fair Trade Commission of Korea (FTC) created a sample standard-form Exclusive Agent Agreement for Entertainment Agreements, in Korea, that was, recently, challenged by the Chinese Band Twin Duo “Tasty.” The Chinese band filed a lawsuit against the Korean entertainment company – SM C&C – in order to invalidate a 7-year exclusive agent agreement – claiming that because of major differences with the Korean entertainment company, the relationship between the parties was frustrated.  SM utilized a standard-form agency agreement that was developed by the FTC. In 2015GaHab19327, the Seoul Central District Court ruled, among other things, that: The FTCs standard-form agency agreement is presumptively valid in the entertainment business in Korea. The Seoul Central District Court, further, noted that the intent of this exclusive agreement was not to bind the entertainers to long terms, thus, the FTC made the standard-form exclusive agency agreement term at seven years in order to

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Liquidated (Penalty) Damages Necessary in Most Korean NDA and Non-Compete Agreements

For any company engaged in negotiations, agreements, pre-M & A due diligence, OEM outsourcing or other activities with a Korean business or individuals that may lead to you disclosing your companies intellectual property, know-how or other proprietary information, always include in your no-competition, non-use, non-circumvention and non-compete agreements a liquidated damages (Penalty Damages) clause.  Without a Penalty Damages Clause – good luck in proving damages when a breach occurs. If the other party refuses to sign the clause, this is good sign that the party will breach. The clause is of course, only triggered when a breach occurs. I, recently, had a client that was very worried about losing “goodwill.” Easy solution, blame the “lawyer.” For companies that are not engaged in active, continuous and substantial business in Korea, the chance of finding evidence of damage, after a breach, is remote – best. The reason stems from proof of market potential in

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Starting a Company in Korea: Establishing a Foreign Capital-Invested Korean Company, Branch or Liaison Office

Korea, for many business, is an excellent market to enter.  We assist numerous franchisers, tech companies, chemical companies, oil & gas companies, automotive suppliers, defense companies and basic manufacturing companies on compliance and contentious issues related to their business in Korea.  We, also, assist entrepreneurial individuals in establishing and doing business in Korea. To establish a company in Korea, there are, in short, three legal manners for a foreign company or individual to do business in the Korean Market.  A business may enter as a Foreign Capital-Invested Company (Foreign Direct Investment Company)a Branch or Liaison Office.  In most situations, the most suitable manner to enter the Korean market is via the FDI Company route in order to avail of certain favorable tax treatments, not expose the foreign entity to liability, easier remittance of profits and easier processing of visas. However, many exceptions to this general rule do exist.  The basics

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Sean Hayes Invited to Chair Panel for Horasis Foundation

Sean Hayes shall chair a panel for the Horasis Foundantion’s Conference in Seoul, Korea.  The Horasis Foundation shall hold the conference on September 22 to the 24th. The Conference is entitled: Entrepreneurship: Balancing Disruption and Consent.  Participants at the conference shall include the Chairman of Hansol, the UN Special Envoy for Disaster Risk Reduction, Chairmen of two leading Indian pharmaceuticals, the Chief Investment Officer for IFC, a Vice Minister of Foreign Affairs, a former Prime Minister of Japan, a Former Prime Minister of Korea, the Vice Chairman & CEO of the Federation of Korean Industries, and other dignitaries from industry, government and leading NGOs. More information on this conference can be found at the website of Horasis.  Welcome To Horasis Horasis is a global visions community dedicated to inspiring our future. Together with our members we explore, define, and implement trajectories of sustainable growth. Horasis provides strategic foresight to public

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Korean Distributor Sales Territory or Customer Restrictions in Korea: Korean Distributor law Agreements in Korea

Korea’s Distribution Law is governed, primarily, by the Commercial Code of Korea, Monopoly Regulation and Fair Trade Law of Korea (FTL) and the, newly enacted, Fairness in Distributor Transactions Act of Korea.  These laws comprise a substantial body of law that is consistently evolving. The main regulatory body enforcing the FTL of Korea is the Fair Trade Commission of Korea (“FTC”).  The Fair Trade Laws of Korea, in most cases, creates the most significant risk for suppliers and manufacturers doing business with distributors in Korea.  A nuanced understand coupled with a proactive approach to your distributors is necessary in succeeding in the Korean market. Distribution Agreements in Korea General Rule In general, Korea prohibits the “unfair restriction” of trade based on the territory or type of customer. However, numerous exceptions exist to this general restriction.  I shall be detailing some of these exceptions over the next couple of months.  Please check

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Liquidated Damages vs. Penalty Damages: Korean Contract Law Basics

Liquidated Damages v. Penalty Damages in Korea In Korea, liquidated damage clauses in South Korean contracts may be invalidated if the liquidated damage amount is deemed, by a Korean court of law, as “unduly excessive.” (Civil Act Art. 398(2)). Article 398 of the Civil Act may be found below.  Korean Liquidated damages law is governed by the Civil Act of Korea and related Korean Law. However, if an agreement, in Korea, notes a “penalty,” the amount of the “penalty is presumed to be determined in advance of the damages” (Civil Act Art. 398(4)) and is presumed valid.  Of course, the difference between “liquidated” and “penalty” damages, thus, would seem critical.  However, presently, in Korea, form is prevailing, in most cases, over substance. Liquidated damages, according to Korean courts, are damages where the parties contract with the intent to compensate the non-breaching party for the actual damages caused.  While, a penalty

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

In many cases of termination of a distribution/agent agreement in Korea compensation must be paid to the commission agent.  In many cases, the same rules are applied to distributors.  The law on the termination of Commission Agent-type agreement is governed, mainly, by the Commercial Act of Korea and its enforcement decrees.  Korea law does not facially differentiate between termination and expiration of agent/distribution agreements. The following explanation is, only, a brief overview of Korea’s Distribution/ Agency Law relating to termination of a distributor/commercial agent.  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.

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Entering into a Joint Venture/Partnership in South Korea?

One of the major parts of my law practice for international clients, in Korea, is the structuring of joint ventures and the resolution of joint venture disputes in court and through arbitration.  I find, in most of these cases, the non-Korean party is not in need of a joint venture with a a Korean party to succeed in Korea and the Korean party does not realize or has no intent in satisfying obligations under the joint venture agreements.  The parties are commencing a relationship, thus, with an immediate potential for failure. Thus, many disputes are caused by the realization by the non-Korean party that he/she doesn’t need the Korean party and the realization by the non-Korean party that the Korean party had no intent, at signing, in following the joint venture agreement.   Do You Need a Korean Joint Venture to Succeed in Korea? We find that a joint venture is,

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Enforcement of Sales Promotions by Franchisors under Korean Franchise Law

Can an international franchisor force a local Korean franchise to cut the prices of a product via a sales event? This issue was addressed by the Korean Supreme Court in 2003Du7484.  In this Supreme Court of Korea case, a franchisor, among other things, mandated via the franchise agreement for a franchisee to hold sales events.  The franchise agreement did not specify the specific details of the sales events. The franchisor elected to utilize the clause in the franchise agreement to force the franchisee to initiate a sales event – the franchisee refused and, thus, the commencement of the dispute. The Supreme Court opined that: “A franchise business means a continuous business relationship in which a franchisor allows franchisees to use its own trademarks, service marks, trade names, signs, or any other business marks in selling goods (including raw materials and auxiliary materials) or services in conformity with certain quality standards

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Korean Trust Act of 1961 Amended

The 1961 Korea Trust Act has been criticized as being an archaic law that does not reflect generally accepted international trust standards and practices.  The revised Korean trust law was passed to alleviate many of the problems of the old Korean Trust Law.  The new law in Korea will came into effect in July of 2012.  This post is a revised version of a post that was first posted in 2012. The most significant changes to Korea’s Trust Act are listed below. The new Korea Trust Law allows the designation of a settlor as a trustee.  The trustee, however, will be unable to windup the Korean trust and will be required to meet specific formalities when executing the powers as a trustee. The new Trust Law of Korea allows for beneficiary certificates to be issued by the Korean trust. The new Korean Trust Law allows the the trust to issue

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Enforceability of Korean Executed Holographic/Handwritten Wills in Korea

Holographic wills are enforceable in Korea under Article 1066 of the Civil Act of Korea.  Our law firm is, presently, handling a matter concerning the estate of a decadent where the decadent executed a handwritten (holographic) will and the inheritors are Korean and foreign nationals. Holographic Wills This is a common issue for lawyers at our firm to handle – with the exception of the handwritten will issue. We, rarely, see cases, these days, of a testator that has executed a handwritten will.  This, however, was not so rare in the not so distant past. We, highly, recommend not utilizing a handwritten will and having a will formally drafted and executed.  However, in some cases where a testator is near death it may be advisable to execute a handwritten will quickly and, also, quickly, contact an attorney to get a formal will drafted and executed. Article 1066 of the Civil

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Enforcement of Covenants Not to Compete in Employment Agreements in Korea: Restrictive Covenants in Korea

It is getting easier for an employer to enforce non-compete restrictive covenants in employment agreements in Korea, because of recent judgments by lower Korean courts noting, among other things, the value of trade secrets in competitive industries in Korea. Korean Non-Compete Agreements Recently, a interesting case, in a Seoul, Korean court, concerning the wedding planning business was handed down by the Seoul Central District Court (2104NA63529).  The Court upheld a three non-compete clause against an employee, but reduced a liquidated damage clause from KRW 1,000,000 per day to KRW 100,000 per day. The relevant restrictive covenant noted that: “the Employee shall not work at another company in the same field for three years after termination of employment and the Employee shall pay indemnification of KRW 1,000,000 per day if this Agreement is breached by the Employee.”  The business of the company was the wedding planning business.  The business is very

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Voluntary Resignation of an Employee in Korea: Employment Law Updates

A Seoul Central District Court ruled in favor of the employer in a case of an employee claiming damages for, inter alia, the not accepting of the voluntary resignation of an employee.  The dispute was between the Industrial Bank of Korea and an employee under a criminal investigation for alleged work-related malfeasance. The Korean bank has an internal rule that an employee may not receive “special” severance payments if the employee, in question, is under investigation for work-related malfeasance.  The employer provides increased severance payments for employees that retire before a certain age and for other reasons.  The employee was acquitted of the criminal charges and prevailed in a civil case against his accuser. The employer requested to resign from the company, seemingly, in order to receive “special” severance payments allocated to these certain classified employees (reached the age of 55) and the company refused to accept the resignation, since

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Starting a Manufacturing Business in South Korea: Top 14 Things to Know Before you Start a Business in Korea

Korea, in most cases, is a much better choice for the manufacturing of chemical, petroleum, construction equipment, complex crafted metals, specialty steel, automotive parts, semi-conductor, medical and pharmaceutical equipment and goods than China and most nations in Asia, because of Korea’s skilled work force, government incentives and increasingly transparent business practices. In many cases, manufacturing in Korea will not, in the end, be more costly than manufacturing in China, because of the increased efficiency of Korean workers and the, often, lower cost of doing business.  China is no longer cheap and China will never be easy. However, before going into any manufacturing arrangement in Korea here are the Top 14 things you need to know before investing money in Korea in a manufacturing venture or like Korean venture. The list assumes that you will have a local company as your JV partner in this manufacturing venture in Korea (you don’t

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Fiscal Transparency in International Business: International Business Structures

The September 2015 edition of International Bar Associations “Business Law International” has an interesting article entitled: “Fiscal Transparency – International Business Structures and Issues” The article is useful for, also, those doing business in Korea.  The articles does not, specifically, address in any detail issues in Korea, the article does a great job in explaining issues relevant to those forming partnerships/joint ventures with UK, U.S. and developed European economies. The article notes, in part,  that: “The continued globalization of business generally and the increased burdens imposed by such measures as common reporting have brought into focus the issues arising with transparent entities and how they are regarded internationally.  Most unsatisfactorily is the absence of a consistent position as to whether an entity is transparent or opaque by default.  As the Anson cases demonstrated, the complexity in this area can be considerable.  resolving this may prove difficult and it might be

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