Hello, I am Attorney Kyusung Lee, a specialist in English-language commercial contracts.

For many foreign companies entering the Korean market, the very first agreement they sign is a distribution, dealership, or agency contract.

However, these contracts often contain structural risks that disproportionately disadvantage foreign businesses.

This is largely because foreign companies are unfamiliar with Korean laws and commercial practices, and because the initial draft is usually prepared by the Korean partner.

Most importantly, distribution and dealership agreements are not simple sales arrangements. They involve interconnected provisions such as:

• Minimum purchase quantities (MOQ)
• Exclusivity
• Pricing policies and margin structures
• Grounds for termination
• Trademark/design (IP) usage rights

Even a minor drafting error can lead to disputes or financial losses running into hundreds of thousands of dollars.

In this article, I will highlight the key risks that arise when distribution or dealership agreements are signed without legal review, and identify the essential points that must be examined beforehand.

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☎  Tel: +82 2 6264 7604  (Direct line to Attorney Lee)

📧  kyusungii@gmail.com  (Recommended for overseas clients or after hours)

Exclusivity Rights

Korean companies frequently insert exclusivity clauses into their initial drafts.

Granting exclusivity essentially transfers substantial market control to the distributor, so this provision must be reviewed with particular caution.

Once exclusivity is granted, you may end up stuck with inventory you cannot sell elsewhere—and have no legal leverage to compel sales activity.

There are real cases in which a Korean distributor was given indefinite exclusivity, conducted virtually no sales activities, yet maintained exclusive rights, causing the foreign company to suffer substantial harm.

If exclusivity must be granted, the following safeguards are essential:

• Minimum monthly/quarterly/annual purchase commitments
• Automatic conversion to non-exclusive status if targets are not met
• Clear definition of permitted online sales channels
• A detailed, enforceable mechanism for reclaiming distribution rights

Minimum Purchase Quantities (MOQ) and Penalties

Many Korean draft agreements set minimum purchase quantities far higher than what the market can realistically absorb.

Foreign companies, often unfamiliar with the actual size of the Korean market, tend to approve these terms too easily.

The real issue arises when:

• Failure to meet MOQ triggers penalties borne entirely by the foreign company
• MOQ is set without market research, or shortfalls obligate the foreign company to accept returns or issue refunds

These structures significantly undermine long-term market stability for foreign companies. If MOQs are included, they must be negotiated based on:

• Realistic market capacity and demand forecasts
• A test period of 3–6 months
• A clear standard for sharing promotional costs
• Explicit allocation of responsibility for returns or refunds when targets are not met

MOQs should be a tool to fairly distribute risk—not a mechanism that transfers disproportionate burden to the foreign supplier.

Intellectual Property Ownership and Usage

In distribution/dealership agreements, IP issues extend far beyond permitting the distributor to use a logo.

Common disputes include:

• Korean partners pre-registering trademarks under their own names
• Overly broad rights granted to use product images, designs, or marketing content
• Unauthorized use of the brand in online advertisements
• Korean partners claiming independent rights over product improvements or translated materials

If a foreign company does not establish IP protections early, it may later spend significant litigation costs—often tens of thousands of dollars—to reclaim its trademarks.

To prevent this, the contract should include safeguards such as:

• Trademark ownership in Korea vested exclusively in the foreign company
• Explicit prohibition on trademark filings by the Korean partner
• Clear limits on the use of content, images, and manuals
• Immediate cessation of all IP use upon contract termination

Contract Termination

Termination provisions are, in my experience, the single most dangerous area for foreign companies.

Korean law imposes strict requirements regarding notice, timing, and ‘just cause.’ Therefore, English-style clauses imported from common-law jurisdictions often lose effectiveness—or worse, work against the foreign party.

Essential clauses include:

• Immediate termination for failure to meet performance requirements
• Termination for unfair conduct or damage to the brand
• Clear rules for handling unsold inventory
• Procedures for settling outstanding payments
• A 2–3 year post-termination non-compete period

If termination provisions are drafted poorly, the foreign company’s business can become fully dependent on the Korean distributor—an extremely dangerous position.

Planning to Enter the Korean Market?

For foreign companies and entrepreneurs entering Korea, the most critical factor is contract risk management.

When executing distribution or dealership agreements with Korean partners, the central issue is not language—but whether the legal structure is disadvantageous to the foreign party.

Many companies seek legal advice only after disputes arise, but once a contract has already been executed, the scope for correction is extremely limited.

A contract is not simply a formality—it is your market entry strategy and the primary tool for preventing disputes.

With proper structuring, you can drastically reduce both cost and risk. It is wise to obtain legal review early rather than later.

As an attorney registered by the Korean Bar Association as a startup specialist, I assist clients with:

• Drafting and reviewing English-language agreements
• Redesigning exclusivity, MOQ, and IP structures to comply with Korean law
• Providing negotiation strategies with Korean partners

Whenever you need support, I will help you identify key risks and ensure the contract is structured in your favor. Thank you.

📌 상담 문의 / Contact

☎  Tel: +82 2 6264 7604  (Direct line to Attorney Lee)

📧  kyusungii@gmail.com  (Recommended for overseas clients or after hours)

🌐  http://www.kyusunglee.com

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