Kyusung Lee Attorney at Law

What Foreign Companies Need to Know Before Signing

“The overseas manufacturer just sent us a draft — should we just sign it?” “We’re not sure if there are any hidden toxic clauses.” “We need ongoing legal support for our English-language contract work.”   If any of these sound familiar, Attorney Kyusung Lee is here to help.

Hello, I am Kyusung Lee, a Korean attorney specializing in international contract law. Today I want to walk through a topic that comes up constantly for foreign companies manufacturing in Korea or partnering with Korean OEM manufacturers: what to watch for in an OEM contract — and why you should never sign the first draft without a thorough legal review.

On the surface, an OEM arrangement looks simple: a company outsources product manufacturing to a specialist. In practice, however, an OEM contract is a high-stakes international agreement that touches intellectual property rights, market exclusivity, supply chain control, pricing structures, and dispute resolution — all at once.

Once an OEM contract is signed, the business structure tends to lock in. Renegotiating from a position of weakness is extremely difficult. That is why getting the contract right before signing is far more valuable than any litigation strategy afterward.

What an OEM Contract Actually Does

An OEM agreement is not simply a purchase order for manufactured goods. It is a comprehensive allocation of rights and liabilities — defining who owns what, who is responsible for what, and what happens when things go wrong.

Manufacturer-drafted agreements typically include provisions that:

• Assign IP rights in tooling, designs, and specifications to the manufacturer
• Convert buyer forecasts into binding minimum order quantities (MOQ)
• Set broad defect thresholds that reduce the manufacturer’s liability exposure
• Effectively waive penalties for delivery delays through force majeure carve-outs
• Leave open the door for the manufacturer to sell identical products in third-country markets

⚠ Warning: These clauses are routinely described as “standard” by overseas manufacturers. For the buying company, however, they can erode brand value, undermine market exclusivity, and destroy pricing power.   IP ownership and tooling title are the most frequently litigated issues in global OEM disputes — and the hardest to remedy after the fact.

7 High-Risk Areas in Every OEM Contract

Based on my experience advising on OEM contracts across multiple industries, these are the seven issues that consistently require the most attention.

1) IP Ownership and Scope of Use

If it is not clear who owns the product design, tooling, and packaging elements, the manufacturer may be free to produce and sell identical products under their own brand in third-country markets. Once this happens, undoing it through litigation is both slow and expensive.

2) Exclusivity Provisions

A single ambiguous clause can inadvertently grant the manufacturer exclusive rights in a market or territory. This can fundamentally block your expansion strategy — and you may not realize the risk until it is too late.

3) MOQ and Price Adjustment Mechanisms

When MOQ is framed as a firm obligation, your company bears the cost of excess inventory even when demand falls. Manufacturer-friendly pricing adjustment clauses add further exposure, particularly in multi-year contracts.

4) Quality Assurance and Defect Standards

Without precisely defined defect rates, inspection procedures, and sample approval processes, proving the manufacturer’s liability for defective goods becomes extremely difficult. Many companies fail to recover their losses simply because this clause was left vague.

5) Delivery Delays and Penalty Structures

Overseas manufacturers frequently try to limit delivery liability by citing global supply chain disruptions. The commercial damage caused by late delivery — lost sales, stockouts, customer claims — can be enormous. A strong penalty clause is essential.

6) Third-Country Distribution Restrictions

Without an explicit prohibition in the contract, preventing a manufacturer from selling your product design in other markets is legally very difficult. A brand confusion argument alone rarely provides adequate protection. This must be addressed at the drafting stage.

7) Governing Law and Dispute Resolution

If the contract is governed by the manufacturer’s local law and requires arbitration in their home jurisdiction, the cost and complexity of dispute resolution increases dramatically. Neutral governing law (e.g., Singapore, English law) and a reputable arbitral seat (ICC, SIAC) are strongly preferable.

What Needs to Change in a Manufacturer’s Draft

When I review manufacturer-provided drafts, they are almost always skewed heavily in the manufacturer’s favor. The goal is not simply to correct individual clauses — it is to restructure the entire agreement around the buyer’s interests.

✓	Redesign IP ownership and scope of permitted use
✓	Establish clear title to tooling and dies; include right of recovery
✓	Insert explicit third-country distribution prohibition
✓	Strengthen delivery obligation and penalty provisions
✓	Define defect rate calculation, inspection procedures, and sample approval
✓	Remove or condition binding MOQ obligations
✓	Neutralize governing law and arbitration seat

Negotiating with an overseas manufacturer is not about revising a draft. It is about proposing an entirely different framework.   A single sentence in an OEM contract can determine whether your product succeeds in the market — and whether your brand remains yours. Engaging specialized legal counsel before signing is the most rational and cost-effective decision you can make.

About Attorney Kyusung Lee

Name	Kyusung Lee, Attorney at Law
Title	Korean Bar Association Registered Startup & International Contract Lawyer
Education	B.A. Economics (Honors), Brown University | The Hotchkiss School
Career	Former BofA Merrill Lynch Securities Research | Former Samsung C&T Legal Team
Credentials	CAMS (Certified Anti-Money Laundering Specialist)
Contact	02-6264-7604 | kyusungii@gmail.com | http://www.kyusunglee.com

📞 Phone: +82-2-6264-7604 ✉️  Email: kyusungii@gmail.com 🌐 Website: http://www.kyusunglee.com 💬 Feel free to mention this post when reaching out — available in English.

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