Sales Agency vs. Distributorship in South Korea
Contents
- 1. Why is the “agency” label a trap?
- 2. What is a commercial agent under Korean law?
- 3. How does a distributor differ from a commercial agent?
- 4. Does a Korean court look at the label or the substance?
- 5. Can a distributor claim compensation on termination?
- 6. What should foreign companies check before signing?
- Frequently Asked Questions (FAQ)
“We signed a ‘sales agency agreement’ with a Korean supplier and spent years building the market. If they terminate, can we recover anything for the customer base we created?” This is a question we hear often in corporate counseling for companies operating in South Korea.
The short answer: the words “agency agreement” on the cover decide nothing. Under South Korean law, the legal nature of the relationship is determined by its substance, not its label. The same “agency” signboard may, in law, mean a commercial agent, a distributor (special dealer), or a commission business.
And which one it is changes everything — commission versus margin, who bears inventory risk, non-compete duties, and whether any compensation is owed when the contract ends. This article explains the difference between a sales agency (commercial agent) and a distributorship agreement in South Korea, grounded in Supreme Court precedent.
1. Why is the “agency” label a trap?
Because “daerijeom” (agency/dealership) is not a legal term but a signboard used loosely in commerce. Very different legal relationships hide behind the same word.
The Korean Supreme Court noted long ago that “in ordinary commerce, the actual legal relationship may be a commercial agent, a special dealer (distributor), or a commission business, yet all are loosely referred to as ‘daerijeom’ (agency)” (Supreme Court 88Daka8354, Oct. 10, 1989). The label itself does not fix the legal nature, and using it does not by itself expose the supplier to liability as a name-lender.
So when dealing with an agency or distribution contract in South Korea, you must look past the title of the document to whose name and account the transactions run under, whether income is commission or margin, and who bears the inventory risk. That is the starting point for distinguishing an agent from a distributor.
2. What is a commercial agent under Korean law?
A commercial agent negotiates or brokers transactions in the principal’s name and on the principal’s account, and is paid a commission. Think of it as someone who “connects” another party’s transactions.
Article 87 of the Korean Commercial Act defines a commercial agent as “a person who, without being a commercial employee, continually acts as an agent for, or brokers, transactions belonging to a certain merchant’s line of business.” The essence is that the agent acts in the principal’s name and on the principal’s account and is paid a commission. The legal effect of each sale belongs to the principal, and the principal bears the risk of unsold inventory.
The Commercial Act imposes several duties and rights on an agent. The agent must notify the principal without delay after acting as agent or broker (Article 88), and owes a non-compete duty: without the principal’s permission it may not transact within the principal’s line of business on its own or a third party’s account, nor become an unlimited partner or director of a competing company (Article 89). It may also retain goods or securities held for the principal until claims arising from the agency fall due and are satisfied (Article 91).
3. How does a distributor differ from a commercial agent?
A distributor (special dealer) buys goods from the supplier in its own name and on its own account and resells them for a margin — an independent merchant. It differs from an agent in three decisive respects.
First, it buys on its own account: ownership of the goods passes to the distributor. Second, its income is the margin, not a commission, but the spread between purchase and resale price. Third, it bears the inventory risk itself: if goods do not sell, the loss is the distributor’s, and it generally sets its own resale price.
| Category | Commercial agent (sales agency) | Distributor (special dealer) |
|---|---|---|
| Name of transaction | Principal’s (supplier’s) name | Its own name |
| Account | Principal’s account | Its own account |
| Income structure | Sales commission | Purchase–resale margin |
| Inventory / price risk | Borne by principal | Borne by itself |
| Legal effect | Attributed to principal | Attributed to itself |
Adding the commission agent completes the picture of three intermediary types. Article 101 of the Korean Commercial Act defines a commission agent as “a person who engages in buying or selling goods or securities in its own name but on another’s account.” The name is its own, but the profit and loss (account) belong to the consignor — which sets it apart from both agent and distributor.
4. Does a Korean court look at the label or the substance?
Always the substance. The Supreme Court has consistently decided agency status by the actual content of the contract rather than its name.
A leading example is the karaoke-machine distribution case. A company that signed a “dealership/general distribution contract” with a manufacturer bought the main units, attached some ten peripheral devices itself, set the price, and sold to consumers. The Supreme Court held that “the mere fact that a party signed a contract labeled a dealership/general distribution contract with a manufacturer does not make it a commercial agent under Article 87; whether it is an agent must be judged by examining the substance of the contract,” and found the company was not a commercial agent (Supreme Court 97Da26593, Feb. 5, 1999).
The same reasoning was confirmed in Supreme Court 2011Da28342 (Feb. 14, 2013). A company that signed a “mega-dealership contract” with a household-goods supplier and sold to its customers in its own name and on its own account, setting resale prices, was held not to be a commercial agent because it “sold products in its own name and on its own account,” and the Court added that “the conclusion is no different even if [it] was economically dependent on [the supplier].” Economic dependence on the supplier does not convert a distributor into an agent.
5. Can a distributor claim compensation on termination?
In principle the compensation claim belongs only to a commercial agent, but a distributor may exceptionally borrow it if it satisfies three strict requirements. This is the most heavily litigated issue in practice.
Article 92-2(1) of the Korean Commercial Act provides that “if, through the agent’s activities, the principal acquired new customers or the volume of business increased significantly, and the principal continues to benefit after the contract ends, the agent may claim reasonable compensation from the principal.” The amount may not exceed the average annual remuneration over the five years before termination (paragraph 2), and the claim lapses six months after the contract ends (paragraph 3). This short limitation period deserves particular attention in practice.
The provision, by its wording, applies only to a “commercial agent.” Can it reach a distributor that buys and resells on its own account? Supreme Court 2011Da28342 opened that door, holding that Article 92-2 may be applied by analogy to a non-agent distributor where all of the following are met:
① it was effectively integrated into the supplier’s sales organization — for example, holding an exclusive sales right in a defined territory while bound to follow the supplier’s sales instructions — and performed functions identical or similar to an agent; ② it bore a contractual duty to transfer customer information so the supplier could exploit those customer relationships after termination; and ③ considering the circumstances of formation, the capital invested and its recovery, and the state of the business, it deserves protection equivalent to a commercial agent.
All three must be satisfied; if any one is missing, the analogy fails. Indeed, in that very case the Court declined to award compensation because there was no evidence establishing the requirements. The door is open, but the threshold is high.
6. What should foreign companies check before signing?
Because Korean courts decide by substance, the legal position turns on how the contract is drafted and, just as importantly, how it is actually performed. This matters especially for foreign investors operating through the Incheon Free Economic Zone (IFEZ) — Songdo International Business District, Cheongna International City, and Yeongjong International City.
If you are the supplier (principal)
If you want a distributorship structure, make clear in the contract that the counterparty buys in its own name and on its own account, bears inventory risk, and sets resale prices — and run the relationship accordingly. To reduce exposure to a compensation claim on termination, avoid unnecessarily imposing the three analogy factors, especially a clause requiring the transfer of customer information or controls that look like integration into your sales organization.
If you are the dealer or distributor
First check whether you earn a commission (agent) or a margin (distributor) and who bears the inventory risk — that is the starting point for the legal characterization. If you hope to claim compensation after termination, preserve evidence of (1) integration into the supplier’s sales network, (2) any duty to provide customer information, and (3) the capital invested and your contribution to opening the market. Above all, the compensation claim lapses six months after termination, so obtain legal advice immediately upon receiving a termination notice.
Frequently Asked Questions (FAQ)
Q. What is the key difference between a sales agency and a distributorship agreement in South Korea?
A. The difference lies in whose name and account the transactions are made and how income is earned. A commercial agent (sales agency) negotiates or brokers transactions in the principal’s name and on the principal’s account, earns a commission, and the principal bears the inventory risk. A distributor buys goods in its own name and on its own account, resells them for a margin, and bears the inventory risk as an independent merchant. Article 87 of the Korean Commercial Act defines a commercial agent as a person who continually acts as an agent for or brokers transactions belonging to the principal’s line of business.
Q. If a contract is called a “daerijeom” (agency) contract, does that make the party a commercial agent under Korean law?
A. No. The Korean Supreme Court has held that merely signing a contract labeled an agency contract does not automatically make a party a commercial agent under Article 87; the substance of the contract must be examined (Supreme Court 2011Da28342; Supreme Court 97Da26593). If the party buys goods on its own account and sets its own resale price, it is a distributor in substance regardless of the label.
Q. What is a commercial agent’s compensation claim under the Korean Commercial Act?
A. Under Article 92-2(1) of the Korean Commercial Act, if the agent’s activities gained new customers or significantly increased the volume of business, and the principal continues to benefit after termination, the agent may claim reasonable compensation. The amount cannot exceed the average annual remuneration over the five years before termination (paragraph 2), and the claim lapses six months after the contract ends (paragraph 3).
Q. Can a distributor also claim commercial agent compensation in South Korea?
A. Only exceptionally. The Supreme Court held that Article 92-2 may be applied by analogy to a party that sells in its own name and on its own account if all three requirements are met: (1) it was effectively integrated into the supplier’s sales organization and performed functions identical or similar to an agent; (2) it bore a contractual duty to transfer customer information so the supplier could use those customer relationships after termination; and (3) considering the circumstances, invested capital, and business situation, it deserves protection equivalent to a commercial agent (Supreme Court 2011Da28342). Because all three must be satisfied, the threshold is high.
Q. How is a commercial agent different from a commission agent under Korean law?
A. A commercial agent acts in the principal’s name and on the principal’s account (Article 87), while a commission agent is “a person who engages in buying or selling goods or securities in its own name but on another’s account” (Article 101). In other words, a commission agent uses its own name but the profit and loss belong to the consignor. The Supreme Court has noted that a relationship commonly called “daerijeom” may in substance be an agency, a distributorship, or a commission business (Supreme Court 88Daka8354).
Q. What duties does a commercial agent owe under the Korean Commercial Act?
A. A commercial agent must notify the principal without delay after acting as agent or broker (Article 88) and owes a non-compete duty: without the principal’s permission, it may not engage in transactions within the principal’s line of business on its own or a third party’s account, nor become an unlimited partner or director of a company in the same business (Article 89). It may also retain goods or securities held for the principal until claims arising from the agency are satisfied (Article 91). These do not, in principle, apply to an independent distributor.
Q. How soon must a compensation claim be made after termination in South Korea?
A. Within six months of termination. Article 92-2(3) of the Korean Commercial Act provides that the compensation claim lapses six months after the contract ends. Because this short period also applies when the provision is applied by analogy to a distributor, a party that receives a termination notice should obtain legal advice immediately to avoid missing the deadline.
Whether you are entering a distribution or agency arrangement in South Korea or facing termination of one, the first step in preventing and handling disputes is to characterize the relationship by examining both the contract wording and how it is actually performed. Atlas Legal advises Korean and foreign companies — including investors in the Incheon Free Economic Zone — on structuring these agreements and on compensation and termination disputes.
