International Distribution Agreement Review in South Korea | Atlas Legal

1. What Are the Key Clauses in an International Distribution Agreement?

Nature of Distribution Agreements

An international distribution agreement is a contract where a supplier or manufacturer grants a distributor the right to sell its products in a specific territory. Unlike simple sales contracts, it is a complex agreement that includes continuous supply relationships, brand usage rights, and marketing obligations.

The agreement between Company X from Country A and the Korean distributor reviewed by Atlas Legal had this typical structure. It was a contract for distributing advanced large building cleaning robots in the Korean market, including technology transfer, training, and marketing support.

Ten Essential Clauses to Review

The essential clauses that must be reviewed and negotiated in international distribution agreements are as follows:

All ten clauses were included in the contract reviewed by Atlas Legal. However, most clauses were drafted in favor of the supplier, requiring comprehensive revision to protect the distributor’s rights.

Basic Principles of Contract Review

When reviewing international distribution contracts, the following principles must be maintained.

First, drafts provided by suppliers are usually written in their favor. Therefore, all clauses must be critically reviewed and unfavorable provisions must be negotiated.

Second, you must accurately understand both the legal terminology and actual business meaning in the contract. For example, “non-exclusive” does not simply mean non-exclusive, but that the supplier can add unlimited competing distributors in the same territory.

Third, matters not explicitly stated in the contract are likely to be interpreted in favor of the supplier under general principles. Therefore, all important matters must be explicitly stipulated.

Fourth, at least three rounds of revisions and negotiations are necessary before contract execution. Creating a perfect contract in one attempt is difficult.

Located in Songdo, Incheon, Atlas Legal systematically applied these principles based on extensive international contract review experience to complete a contract that minimizes business risks and maximizes profitability for clients.

2. Differences and Risks Between Exclusive and Non-Exclusive Rights

Meaning and Value of Exclusive Rights

An exclusive distribution agreement is one where the supplier grants product sales rights to only one distributor in a specific territory and promises not to sell directly in that territory. This is highly favorable to the distributor.

The value of exclusivity includes the following. First, you can maintain pricing power by monopolizing the market. Second, you can monopolize the benefits of marketing investments. Third, you can concentrate on brand building. Fourth, you can establish a sub-distributor network.

Risks of Non-Exclusive Rights

The contract reviewed by Atlas Legal was a non-exclusive distribution agreement. Article 1.4 of the original text stated:

“Company X hereby grants to Distributor the non-exclusive right, on the terms and conditions contained herein, to purchase, inventory, promote and resell Product within Territory.”

This means Company X can appoint additional distributors in the Korean market or sell directly. Such non-exclusive clauses create the following serious risks.

First, intensified market competition. Multiple distributors in the same territory lead to price competition and reduced margins.

Second, free-riding on marketing investments. When Distributor A spends substantial costs developing the market, Distributor B can enter that market without any investment.

Third, difficulty in brand management. Multiple distributors delivering different marketing messages confuse brand image.

Fourth, risk of supplier’s direct sales. When distributors successfully develop the market, suppliers have incentive to exclude distributors and engage in direct sales.

Atlas Legal’s Improvement Proposals

We determined that securing complete exclusivity in this contract would be difficult. However, we proposed adding the following clauses to minimize distributor risks.

First, stipulate 60 days’ advance notice obligation when appointing additional distributors in the territory. This secures time for the distributor to develop response strategies.

Second, insert a prohibition on supplier’s direct sales. While additional distributor appointments may be possible, the supplier itself cannot sell directly in the Korean market.

Third, clarify online sales authority. The original draft had no provisions for online sales, risking the supplier starting online direct sales. In this case, the distributor’s online exclusive sales rights can be specified.

Fourth, propose a performance-based exclusivity conversion clause. Negotiate a provision stating “If 50 or more units are sold annually in the first year, conversion to exclusive distributor for the Korean market from the second year onward,” creating a path to obtain exclusivity through performance.

3. How Should You Negotiate Minimum Order Quantity (MOQ)?

Meaning of MOQ and Supplier’s Intent

Minimum Order Quantity (MOQ) means the minimum quantity that the distributor must purchase within a certain period. Annex B of the contract reviewed by Atlas Legal stated:

“The yearly MOQ of Product is 50 units. Purchases are made in multiples of 05 unit(s).”

This means the distributor must purchase at least 50 units annually (approximately $2 million), and purchases are only possible in units of 5. Suppliers set MOQ for the following reasons.

First, production planning stability. Guaranteed minimum demand enables efficient production line operation.

Second, justification for marketing investment. It is a means to confirm whether the distributor is willing to sell sufficient volume.

Third, filtering out non-serious distributor candidates. It excludes small businesses that cannot handle the MOQ.

Risk Analysis of MOQ

However, excessive MOQ poses serious risks to distributors. This contract had the following problems.

First, bulk purchases without market validation. Annual purchase of 50 units poses significant risk when market demand in Korea is unknown.

Second, inventory burden. If sales are sluggish, large inventory must be held, leading to liquidity crisis.

Third, cash flow pressure. The contract requires “full prepayment before delivery,” so $2 million must be paid immediately to purchase 50 units.

Fourth, termination risk. Article 3.2 of the original contract stipulated “immediate termination possible if initial order not placed within 7 days,” not giving the distributor sufficient preparation time.

MOQ Negotiation Strategy

In this case, MOQ can be negotiated with the following strategies.

First, propose a phased increase structure. Set MOQ at 20 units in Year 1, 35 units in Year 2, and 50 units in Year 3, gradually increasing to secure time for market testing and network building.

Second, establish a market development period. Propose deferring MOQ application for the first 6 months after contract execution and purchasing only 5 demo units to test market response.

Third, soften penalties for MOQ shortfall. The original draft stated “immediate termination,” but change to “maintain contract if achieving 90% or more of MOQ, renegotiate if below 90%” to prevent unilateral termination.

Fourth, strengthen force majeure clause. Specify that MOQ obligation is waived or readjusted when MOQ achievement is impossible due to external factors such as pandemics or economic crises.

Fifth, extend initial order deadline. Change “within 7 days” to “within 30 days” to secure sufficient time for the distributor to review and prepare.

4. How to Set Pricing Terms and Margins?

Understanding Price Structure

Pricing terms are the most important factor determining profitability in distribution agreements. The contract reviewed by Atlas Legal contained the following pricing clauses.

Annex B Article 3.3: “The price per unit based on the MOQ is US$40,000.”

Annex B Article 3.4: “The recommended market price of the Company X robot is US$60,000.”

This means a distributor supply price of $40,000, theoretically indicating a 50% margin ($20,000). However, actual margin rates are much lower than this.

Analysis of Hidden Costs

Analyzing hidden costs that distributors must bear significantly reduces actual margin rates.

First, shipping and customs costs. The contract is DDU (Delivered Duty Unpaid) terms, with the distributor bearing import duties, value-added tax, and customs clearance costs. In Korea’s case, combining 8% customs duty and 10% VAT adds approximately $7,200.

Second, marketing costs. Article 5.1 of the contract stipulates that the distributor conducts marketing “at own expense.” New product launches require average marketing costs of $3,000 per unit.

Third, technical support and training costs. While initial 10-day training is supplier-paid, additional training thereafter, parts inventory, and service personnel maintenance costs are distributor-paid.

Fourth, inventory maintenance costs. Considering warehouse rent, insurance premiums, and product depreciation, $500 per unit per month is required.

Consequently, actual net margin is 20,000 – 7,200 – 3,000 – 2,000 (technical support) – 3,000 (6-month inventory) = $4,800, only 12%. Subtracting labor and overhead costs, net profit margin can drop below 5%.

Price Negotiation Strategy

In this case, pricing terms can be improved in the following ways.

First, introduce volume-based differential pricing. Set $40,000 per unit for 20 units annually, $38,000 for 35 units, $36,000 for 50 units to provide sales incentives.

Second, negotiate marketing support funds. Propose that the supplier provide 5% of annual sales as Market Development Fund (MDF) to reduce the distributor’s marketing burden.

Third, specify price adjustment clause. While the original draft had no clause for unilateral price increases by the supplier, propose specifying “once annually, maximum 10% increase possible with 3 months’ advance notice” to prevent disputes.

Fourth, insert price protection clause. Request that if the supplier sells at lower prices through other distributors in the same territory or online direct sales, the same price be applied to existing distributors.

5. What Are Payment Terms and Incoterms?

Importance of Payment Terms

Payment terms directly affect the distributor’s cash flow and are a key provision. Annex C of the contract reviewed by Atlas Legal stated:

“Payment for all types of Company X Product purchased by Distributor shall be made in full prior to delivery and shall be made via a direct bank transfer to Company X’s bank account, net of all bank charges.”

This means 100% prepayment before delivery. Based on MOQ of 50 units, $2 million (approximately 2.6 billion KRW) must be paid even before receiving the products. This is highly unfavorable to the distributor.

Risks of Prepayment

100% prepayment conditions create the following serious risks.

First, liquidity crisis. Large prepayments deplete operating funds, potentially paralyzing other business activities.

Second, supplier bankruptcy risk. If payment is made but the supplier goes bankrupt, neither products nor payments can be recovered.

Third, delivery delay risk. If payment is made but the supplier delays delivery, the distributor is helpless.

Fourth, loss of quality problem response capability. Even if defects are discovered after receiving products, negotiating power is weak since payment has already been made.

Payment Terms Improvement Plan

In this case, the following payment terms improvements can be proposed.

First, introduce split payment structure. Split into 30% upon order, 50% upon shipment, 20% after delivery and inspection completion to manage distributor risks at each stage.

Second, propose Letter of Credit (L/C) method. Through bank payment guarantee, product delivery and payment occur simultaneously, minimizing risks for both parties.

Third, propose Escrow method for initial transactions. For early stages without established trust, a third-party financial institution holds payment and releases it to the supplier after confirming product delivery.

Fourth, negotiate discount for short payment terms. Secure 2% discount for payment within 30 days as incentive for fast payment.

Understanding Incoterms

Annex B Article 2.1 stipulated DDU (Delivered Duty Unpaid) terms. This is one of the Incoterms (International Commercial Terms) established by the International Chamber of Commerce (ICC), defining the point of delivery and cost allocation.

DDU means the supplier transports goods to the designated location in the importing country, but the buyer (distributor) bears import customs clearance and duties. Since 2010, it has been replaced by DAP (Delivered At Place).

Major Incoterms and cost allocation are as follows:

Which terms are advantageous must be determined on a case-by-case basis.

6. How Should Termination Clauses Be Drafted?

Pitfalls of Contract Period and Automatic Renewal

Article 3 of the contract stated:

“This Agreement shall be valid on the date of execution and continue for a term of One (1) year (the ‘Term’), and shall automatically renew in additional twelve (12) month increments with the same terms and conditions, unless terminated by either Party under the terms below.”

This means a one-year contract with automatic renewal. While it may seem favorable to the distributor at first glance, automatic renewal clauses require caution.

First, loss of opportunity to renegotiate terms. Automatic renewal eliminates opportunities to renegotiate price, MOQ, etc.

Second, inability to respond to market changes. Even if business becomes unfavorable due to competing products or market shrinkage, the contract automatically extends.

Third, missing the termination notice deadline means enduring an additional year. Most automatic renewal clauses require “30 days’ advance notice to refuse renewal.”

Imbalance in Termination Grounds

Article 3.3 of the original contract stipulated termination grounds. However, termination rights between supplier and distributor were imbalanced.

The supplier could immediately terminate in the following cases. First, failure to place initial order within 7 days. Second, failure to remedy material breach within 10 days. Third, bankruptcy or liquidation. Fourth, force majeure lasting 30 days. Fifth, any reason with 30 days’ notice.

Particularly, Article 3.4 “Either Party may terminate this Agreement for any reason upon notice to the other Party in writing at least thirty (30) days prior to the intended date of termination” grants advantageous termination rights to the supplier. While this provision formally grants termination rights to both parties, the supplier suffers no loss from terminating without reason, whereas the distributor who invested costs and efforts in marketing and market development can be terminated without reason. This is a clear imbalance.

Improvement Plan

In this case, termination clauses were balanced as follows.

First, change automatic renewal to conditional renewal. Revised to “renewal only if both parties express renewal intent in writing 60 days before renewal date, with possibility of renegotiating terms.”

Second, extend initial order deadline from 7 to 30 days, and even if not complied with, soften from immediate termination to “termination after granting additional 30-day grace period.”

Third, delete unilateral termination clause (Article 3.4) or establish minimum contract period (e.g., 2 years) to prohibit termination without just cause before that period, allowing termination only with “6 months’ notice” after minimum contract period.

Fourth, add legitimate termination grounds for distributor. Specify supplier’s persistent quality defects, delivery delays (3 or more times), and failure to perform contractual support obligations as termination grounds.

Fifth, add inventory handling clause upon termination. Insert provision stating “upon contract termination, supplier repurchases inventory held by distributor at 90% of supply price” to minimize distributor’s inventory loss.

7. What Is the Scope of Intellectual Property License?

Importance of Trademark Usage License

Use of supplier’s trademarks, logos, and brand names is essential in distribution agreements. The contract contained the following provision:

“Company X hereby grants the Distributor a limited non-exclusive, non-transferable license to use the Company X and Product trademarks… during the course of this Agreement, only insofar as is necessary to effect, and only in relation to, the purposes of this Agreement.”

This means a limited, non-exclusive, non-transferable license that is valid only during the contract period and usable only within the scope necessary for contract purposes.

Risk Factors in Intellectual Property Usage

The following risk factors exist regarding trademark usage licenses.

First, ambiguity in usage scope. It is unclear what “scope necessary for contract purposes” specifically means, creating potential for future disputes.

Second, marketing material approval procedures. While the contract states “all marketing materials must be pre-approved, and deemed approved if no response within 15 days,” this practically restricts marketing activities.

Third, absence of online usage regulations. The original draft did not specify standards for trademark usage on SNS, websites, and online advertising, potentially restricting digital marketing.

Fourth, post-termination treatment. Article 11.3 requires immediate cessation of trademark use upon contract termination, making sales impossible if inventory remains.

Intellectual Property Clause Improvement Plan

In this case, intellectual property clauses can be clarified and distributor rights strengthened as follows.

First, specifically define usage scope. Expand to “all activities necessary for conducting distributor business including product sales, marketing, advertising, promotion, technical support, and customer service” to eliminate potential disputes.

Second, clarify online usage authority. Revise to “permit trademark usage in digital channels including website, SNS, search engine advertising, and email marketing; pre-approval unnecessary as long as supplier’s brand guidelines are followed.”

Third, simplify pre-approval procedures. Change to “standard marketing materials (brochures, technical specifications, etc.) do not require pre-approval; only new advertising campaign formats require submission 15 days in advance” to secure marketing agility.

Fourth, establish grace period after termination. Revise to “trademark usage permitted for 90 days after contract termination for inventory sales; trademark must be removed before sales thereafter” to prevent inventory loss.

Fifth, add joint marketing clause. Insert provision stating “supplier and distributor may jointly plan marketing campaigns, in which case costs are split 50:50 and both logos are used together” to strengthen partnership.

8. Importance of Governing Law and Dispute Resolution Clauses

Meaning of Governing Law

The contract contained the following provision:

“This Agreement shall be governed by and construed in accordance with the laws of Singapore.”

This means Singaporean law applies to contract interpretation and dispute resolution. Governing law selection is very important because it affects the following.

First, contract interpretation standards differ. The same clause may be interpreted differently by courts in different countries.

Second, burden of proof differs. In some legal systems the supplier bears it, in others the distributor.

Third, scope of damages differs. Common law systems compensate only foreseeable damages, while civil law systems compensate a broader range.

Fourth, grounds for contract invalidity differ. Public policy and mandatory rules differ by country.

Understanding Arbitration Clauses

The contract stipulated SIAC (Singapore International Arbitration Centre) arbitration.

“Should Parties fail to settle the Dispute within the Dispute Resolution Period; the Dispute shall be referred to arbitration for resolution through the Singapore International Arbitration Centre (SIAC), in accordance with its arbitration rules.”

Arbitration is a dispute resolution method different from court litigation, with the following characteristics.

First, speed. Court litigation takes two to three years, but arbitration typically concludes within six months to one year.

Second, confidentiality. Court judgments are public, but arbitration awards are confidential, protecting corporate trade secrets.

Third, expertise. Parties can select experts as arbitrators, advantageous for technical matters.

Fourth, enforceability. Under the New York Convention, arbitration awards can be enforced in over 160 countries.

However, arbitration also has disadvantages. First, it is expensive. SIAC arbitration costs are three to five percent of the dispute amount, reaching tens of millions of won. Second, appeal is impossible. Arbitration awards are final with no appellate level. Third, foreign arbitration has language and distance barriers.

9. Improvements Proposed in Actual Contract Review

Comprehensive Risk Analysis

The Company X distribution agreement reviewed by Atlas Legal was a typical supplier-centered contract. The 17-page contract detailed the distributor’s obligations but stipulated the distributor’s rights only minimally.

We identified the following risk factors:

Key Improvements

Atlas Legal reviewed the contract and proposed the following for key clauses.

1. Establishing Path to Exclusivity

While changing from non-exclusive to complete exclusivity was difficult, proposed adding a “conversion to exclusivity from Year 2 if 50 or more units sold in Year 1” clause to establish a performance-based path to securing exclusivity.

2. Extension and Softening of Initial Order Deadline

Proposed extending “within 7 days” to “within 30 days” and softening even non-compliance to “renegotiation after additional 30-day grace period” rather than immediate termination to eliminate termination risk.

3. Phased MOQ Increase Structure

Proposed phasing fixed annual 50 units to “Year 1: 20 units, Year 2: 35 units, Year 3: 50 units” and “first 6 months: purchase only 5 units for demo” to secure market testing period.

4. Payment Terms Improvement

Proposed changing “100% prepayment” to “30% deposit upon order, 50% upon shipment, 20% after delivery and inspection” to reduce cash flow burden.

5. Volume-Based Differential Pricing

Proposed differentiating uniform “$40,000” to “20 units: $40,000, 35 units: $38,000, 50 units: $36,000” to provide sales incentives.

6. Securing Marketing Support Funds

Proposed changing from no supplier marketing support obligation to “providing 5% of annual sales as MDF (Market Development Fund)” to reduce distributor’s marketing burden.

7. Deleting Unilateral Termination Rights

Proposed deleting supplier’s “termination without reason with 30 days’ notice” clause and restricting to “termination only for material breach or bankruptcy.”

8. Sharing Warranty Responsibility

Proposed clearly distinguishing “all A/S costs borne by distributor” to “manufacturing defects borne by supplier, user negligence borne by distributor.”

9. Inventory Repurchase Upon Termination

Proposed adding provision “supplier repurchases inventory at 90% of supply price upon contract termination” to minimize distributor’s inventory loss.

10. Clarifying Online Sales Authority

Proposed adding online sales clause not in original draft to secure “distributor’s online exclusive sales rights” and prohibit supplier’s online direct sales.

11. Strengthening Technical Support Obligations

Specified supplier’s technical support obligations including “quarterly on-site training, technical inquiry response within 24 hours, new product training twice annually.”

10. FAQ

Atlas Legal provides legal services in corporate specialization, corporate disputes, corporate advisory, and international transactions in Songdo, Incheon, South Korea. We recently reviewed a robot distribution contract between Company X from Country A and a Korean distributor, improving 12 key clauses to minimize business risks for the distributor. We provide professional advisory and negotiation representation services for international distribution agreements, international sales contracts, joint venture agreements, and all international contracts.