Exclusive Supply Contracts in South Korea: Buyer’s Perspective Matters
Table of Contents
- 1. Why Perspective Matters in Exclusive Supply Contracts
- 2. Supplier Perspective vs. Buyer Perspective: Key Differences
- 3. The Three Critical Risks Buyers Face
- 4. Exclusivity Clauses: Declarations Are Not Enough
- 5. Penalty Clauses vs. Liquidated Damages: One Word Can Mean Millions
- 6. Minimum Guaranteed Volume: Making Supply Obligations Concrete
- 7. How to Design Deposit Protection Mechanisms
- 8. Immediate Termination Rights and Notarization Benefits
- 9. FAQ
Real Case: “Can I just sign the contract they brought?” asked a client who was about to prepay several hundred million won as a deposit. Upon review, the contract was entirely drafted from the supplier’s perspective. There were no penalties for exclusivity violations, and supply obligations were vaguely defined. The contract required complete redesign.
Supplier-Drafted Contract vs. Buyer-Redesigned Contract
※ This case is based on an actual contract advisory matter, with certain facts modified for clarity and client confidentiality protected.
The client was in the recycled raw materials business. They were entering a 5-year exclusive purchase agreement for all raw materials from a specific business consortium, with deposits alone reaching several hundred million won. The problem was the contract the supplier brought. While titled “Exclusive Supply Agreement,” it lacked any penalties for exclusivity violations and contained no specific supply obligations. Deposit refund conditions heavily favored the supplier. Our legal team completely redesigned this contract from the buyer’s perspective: strong penalty clauses for exclusivity violations, minimum guaranteed volumes with tiered penalties, late payment interest on deposits, and mandatory notarization. The supplier ultimately signed the revised contract. We will explain in detail why buyer-perspective contract design matters and analyze each key provision.
1. Why Perspective Matters in Exclusive Supply Contracts
Every Contract Has a Point of View
Every contract reflects the drafter’s perspective. Even with the same title “Exclusive Supply Agreement,” a supplier-drafted contract and a buyer-drafted contract contain completely different content. Suppliers minimize their obligations and liability; buyers clarify supply duties and strengthen penalties for non-performance.
The Trap of Signing Counterparty-Drafted Contracts
In practice, one party typically drafts the initial contract and presents it to the other. The drafter naturally includes provisions favorable to themselves. The problem is that non-legal professionals often cannot accurately assess these advantages and disadvantages.
Why You Should Never Sign a Counterparty’s Contract As-Is
- No or minimal penalties for exclusivity violations
- Abstract supply obligations with broad exemption clauses
- Deposit refund conditions favoring the supplier
- Termination grounds designed around supplier interests
- Penalty provisions that may be interpreted as liquidated damages
When Buyer-Perspective Contracts Are Essential
Buyer-perspective review or redrafting is essential in the following situations:
- When prepaying large deposits or advance payments
- When stable supply is core to your business operations
- When the supplier’s creditworthiness or performance capability is uncertain
- For long-term contracts with high dispute potential
- For scarce materials with limited alternative suppliers
2. Supplier Perspective vs. Buyer Perspective: Key Differences
Core Differences by Perspective
Supplier-perspective and buyer-perspective contracts design even identical clauses in opposite directions. Key differences include:
| Clause | Supplier Perspective | Buyer Perspective |
|---|---|---|
| Exclusivity | Abstract declaration, broad exceptions | Specific prohibited acts listed, minimal exceptions |
| Exclusivity Violation | No penalty or liquidated damages | High penalty + separate actual damages claim |
| Supply Obligation | “Best efforts,” broad force majeure | Minimum guaranteed volume, strict exemptions |
| Volume Shortfall | No penalty or minor consequence | Tiered penalties + termination right |
| Deposit | Forfeiture nature, difficult refund conditions | Advance payment nature, immediate refund on default + interest |
| Termination | Limited buyer termination, long cure periods | Broad immediate termination grounds, no cure required |
| Notarization | Not required (weakens evidence) | Mandatory, rescission right if not completed |
Key Points Redesigned in This Contract
The key provisions redesigned from the buyer’s perspective in this contract were:
Provisions Added/Strengthened for Buyer Protection
- Exclusivity Specifics: Explicitly listed prohibitions on third-party sales, reservations, and information disclosure
- Penalty Clause: Clearly stated as “penalty (위약벌), not liquidated damages (손해배상 예정)”
- Minimum Guaranteed Volume: Specific minimum supply amounts for defined periods
- Tiered Penalties: Graduated penalty structure based on actual delivery volume
- Late Payment Interest: 20% annual interest on deposits from day after contract execution
- Immediate Termination: No-cure termination for exclusivity breach, volume shortfall, credit deterioration
- Mandatory Notarization: Rescission right + full deposit refund if not completed within 14 days
3. The Three Critical Risks Buyers Face
Risk 1: Exclusivity Violation
The core of an exclusive supply contract is “exclusivity.” But what happens if the supplier sells to a third party offering higher prices? Under Korean law, exclusivity agreements only have contractual effect (채권적 효력). This means if the supplier sells to a third party, the buyer cannot directly demand return from that third party—only seek damages from the supplier.
The problem is proving damages is difficult. You must prove hypothetical damages: “If they hadn’t sold to the third party, I would have purchased that volume and earned X profit.” Therefore, penalty clauses that allow claims without proving actual damages are essential.
Risk 2: Supply Non-Performance
This occurs when the supplier fails to deliver promised volumes. This risk increases significantly when the supplier doesn’t hold inventory directly but must secure it from third parties. In this contract, the supplier was an intermediary who needed to obtain materials from a business consortium, creating material procurement failure risk.
To protect against supply non-performance, Minimum Guaranteed Volume clauses are necessary. Without them, the supplier could deliver just 1 ton and claim contract performance. For buyers who prepaid large deposits, this is the greatest risk.
Risk 3: Deposit Non-Recovery
When suppliers violate exclusivity or fail to deliver, buyers must be able to recover prepaid deposits. However, if refund conditions are unclear or only refund obligations exist without late payment interest, suppliers face no penalty for delaying refunds.
Essential Deposit Protection Mechanisms
- Specify deposit is an advance payment to be offset against future purchase prices
- Immediate refund obligation for unset amounts upon contract termination
- 20% annual late payment interest from day after contract execution until refund
- Deposit refund obligation separate from penalty and damages (cumulative claims allowed)
4. Exclusivity Clauses: Declarations Are Not Enough
Limitations of Abstract Exclusivity Clauses
Many contracts simply state: “Party A grants Party B exclusive supply rights.” Such abstract clauses create interpretation issues during disputes, reducing effectiveness. Questions arise: “Does selling to a third party violate exclusivity?” “Does sharing price information without prior consultation also violate it?”
List Prohibited Acts Specifically
From the buyer’s perspective, acts constituting exclusivity violations should be listed as specifically as possible. This contract specified:
Specific Enumeration of Exclusivity Violations
- Transferring or selling to third parties without buyer’s prior written consent
- Entering into any transaction with third parties including sales contracts, reservations, or priority negotiation rights
- Providing volume-related information to third parties without buyer’s prior written consent
Importance of Written Consent Requirements
Specifying “prior written consent” is crucial. Oral or implied consent can lead to disputes about whether consent was given. Written communication should include email, fax, text messages, and messengers for practical convenience, but must create a record.
Penalties for Exclusivity Violations
Exclusivity clauses without violation penalties lack effectiveness. This contract specified cumulative penalties for exclusivity violations:
- Penalty claim (per violation occurrence)
- Demand for immediate cessation of violation
- Damages claim for volumes not supplied due to third-party transactions
- Contract termination right
- Deposit refund claim (including late payment interest)
5. Penalty Clauses vs. Liquidated Damages: One Word Can Mean Millions
The Critical Difference: Ability to Claim Actual Damages
Whether a damages clause is a penalty (위약벌) or liquidated damages (손해배상 예정) can mean millions of won in difference. The key distinction:
- Penalty (위약벌): A sanction for contract violation, claimable regardless of actual damages. Actual damages can be claimed separately.
- Liquidated Damages (손해배상 예정): Pre-determined damages amount, only the pre-determined amount is claimable. Actual damages cannot be claimed separately.
Korean Supreme Court’s Presumption Rule
The Korean Supreme Court held: “When it is unclear whether a penalty clause constitutes liquidated damages or a penalty, it is presumed to be liquidated damages” (Supreme Court Decision 92da46905, March 23, 1993). Therefore, if a contract only states “damages” without specification, it will be interpreted as liquidated damages, preventing separate actual damage claims.
You Must Explicitly State “Penalty (위약벌)”
From the buyer’s perspective, penalty clauses are absolutely advantageous. To secure penalty clause effectiveness, contracts must clearly state:
“This penalty constitutes a penalty (위약벌), not liquidated damages (손해배상 예정), and Party B may claim compensation for actual damages arising from exclusivity violations separately from this penalty.”
Considerations for Setting Penalty Amounts
Excessively high penalties may be reduced by courts applying Article 398(2) of the Korean Civil Code by analogy. Therefore, amounts should be set reasonably considering:
- Total contract value and duration
- Economic value of exclusivity
- Expected damages from violations
- Balance with deposit amounts
- Industry practices
6. Minimum Guaranteed Volume: Making Supply Obligations Concrete
Why Minimum Guaranteed Volume Is Necessary
“Exclusive supply” agreements alone do not specify concrete supply obligations. In extreme cases, a supplier delivering just 1 ton over a 5-year contract period could claim “supply obligations fulfilled.” For buyers who prepaid large deposits, this is the greatest risk.
Minimum Guaranteed Volume (MGV) clauses solve this problem. They specify minimum supply quantities in concrete amounts for defined periods, triggering penalties and termination rights upon shortfall.
Considerations for Setting MGV
- Realistic achievable percentage of expected total volume
- Minimum volume needed to recover buyer’s investment (deposit)
- Supplier’s actual supply capability
- Market conditions and volatility
- Reasonable performance periods
Advantages of Tiered Penalty Structures
Flat penalties for MGV shortfalls create problems. If the same penalty applies whether 90% or 10% is delivered, suppliers may feel it’s unfair, and there’s no incentive for partial performance.
This contract designed a tiered structure where penalties decrease based on actual delivery volumes. Higher delivery volumes mean lower penalties, incentivizing continued supply while maintaining strong sanctions for complete non-performance.
Effects of Tiered Penalty Structure
- Provides partial performance incentive to suppliers
- Fair sanctions proportional to delivery volume
- Maximum penalty for complete non-performance
- Penalty exemption upon 100% MGV achievement
7. How to Design Deposit Protection Mechanisms
Clarifying the Legal Nature of Deposits
The legal nature of deposits must be clarified. Under Korean Civil Code, “deposits” are presumed to be earnest money (Article 565). This means forfeiting the deposit allows contract rescission, while the counterparty can rescind by returning double the deposit.
However, in large transactions, deposits typically function as advance payments. This contract clearly specified that deposits are advance payments to be sequentially offset against future purchase prices.
Importance of Late Payment Interest Clauses
If only refund obligations are specified, suppliers face no disadvantage for delaying refunds. This contract designed 20% annual late payment interest from the day after contract execution until actual refund.
Why “From the Day After Contract Execution”?
Suppliers can use and profit from deposits from the moment of receipt. By calculating late payment interest from deposit receipt rather than when refund obligations arise, buyers can recover the supplier’s gains from holding the funds and strengthen prompt refund incentives.
Specifying Cumulative Claim Rights
The relationship between deposit refund obligations, penalties, and damages must be clarified. To prevent arguments like “we returned the deposit, so we don’t owe penalties,” the contract specified that each obligation is independently performed and buyers may make cumulative claims.
8. Immediate Termination Rights and Notarization Benefits
Designing Immediate Termination Events
Typical contract termination requires demanding performance from the counterparty and waiting a period. However, for certain events, termination without cure period must be available for buyers to respond quickly.
Essential Immediate Termination Events from Buyer’s Perspective
- Credit Deterioration: Bankruptcy, rehabilitation proceedings, default, bank transaction suspension, enforcement, tax seizure
- Business Cessation: Closure, dissolution
- Core Obligation Breach: Exclusivity violation, MGV shortfall
- Performance Impossibility: Objectively clear loss of contract performance capability
- Upstream Contract Termination: Termination, rescission, or modification of contract between supplier and original source (business consortium)
Benefits of Notarization Clauses
Notarization is not legally required but provides significant benefits in large transactions:
- Contract Authenticity: Notary confirms party identity and intent, blocking claims of “I never signed that contract”
- Strengthened Evidence: Notarized deeds have high evidentiary value under Korean Civil Procedure Act
- Acknowledged Enforcement: Notarized deeds acknowledging compulsory execution allow immediate enforcement of deposit refunds without separate litigation if suppliers default
Sanctions for Notarization Non-Compliance
Requiring notarization without consequences for non-compliance lacks effectiveness. This contract designed:
- Notarization completion obligation within 14 days of contract execution
- Buyer’s contract rescission right if not completed within period
- Full deposit refund + late payment interest upon rescission
- Notarization costs borne by supplier
9. FAQ
Atlas Legal has extensive experience in corporate advisory and commercial disputes in South Korea. We specialize in designing contracts tailored to our clients’ positions in complex inter-company transactions including exclusive supply agreements, joint venture agreements, and shareholders’ agreements. In cases like this one, we have completely redesigned supplier-presented contracts from the buyer’s perspective, implementing comprehensive safeguards including exclusivity protection, explicit penalty clauses, tiered penalty structures, deposit late payment interest, and mandatory notarization.
※ The case presented in this article is based on an actual contract advisory matter, with certain facts modified for clarity and client confidentiality protected.