How to Draft an Exclusive Distributor Agreement in South Korea? Key Clauses and Practical Checklist

1. What Is an Exclusive Distributor Agreement?

Definition of Exclusive Distributor Agreement

An Exclusive Distributorship Agreement is a contract where a Manufacturer grants a Distributor the exclusive right to sell its products in a specific territory. “Exclusive” means the distributor becomes the only authorized seller of the manufacturer’s products in that region.

The key difference from a non-exclusive distributor agreement is as follows: In a non-exclusive agreement, the manufacturer can appoint multiple distributors in the same territory, creating competition among them. In an exclusive agreement, the manufacturer cannot appoint other distributors in that territory, making the distributor the sole official sales channel.

Legal Nature Under South Korean Law

Under South Korean law, an exclusive distributor agreement is an atypical contract (not a named contract type defined in the Civil Code). Therefore, the parties’ agreement determines the contract’s content, making careful contract drafting extremely important.

This type of contract combines elements of a sales contract (product supply), agency contract (representing the manufacturer), and mutual cooperation obligations.

Why Exclusive Distributor Agreements Are Preferred for Overseas Market Entry

When entering overseas markets, particularly Europe and Southeast Asia, exclusive distributor agreements are preferred for several reasons.

First, they encourage active investment by local partners. A distributor granted exclusivity will actively invest in marketing, personnel, and infrastructure to protect its exclusive interests. Second, brand management becomes easier. A single distributor allows consistent maintenance of pricing policy, service quality, and brand image. Third, local regulatory compliance is more efficient. In regulated industries like medical devices, a reliable local partner is needed for permits, customs clearance, and after-sales service.

However, granting exclusivity means the manufacturer concentrates significant business opportunities with a single distributor, making thorough distributor qualification verification and careful contract term design essential.

2. How to Design Exclusive Distribution Rights Clauses?

Key Elements of Exclusive Distribution Rights Clauses

The exclusive distribution rights clause is the contract’s core. This clause must clearly define the contract products, territory scope, specific exclusivity content, and consideration for exclusivity.

Defining Contract Products

Contract products should be defined specifically and clearly. Rather than broad definitions like “all products manufactured by the manufacturer,” it is preferable to specify product names, model numbers, and specifications in an appendix. When new products are added later, updating the product list through separate agreement effectively prevents disputes.

In our contract drafting practice, we specified “Contract Products means the products defined in Appendix 1” and prepared a table in the appendix with product photos, names, model numbers, and unit prices. This minimized potential disputes over contract scope.

Defining the Territory

The territory is typically specified at the country level. However, for large countries like Europe, it may be limited to specific provinces or cities. Key considerations when defining territory include:

First, treatment of online sales. How to handle sales made through the internet to customers outside the territory must be specified. Second, prohibition of re-export. Explicitly prohibiting the distributor from re-exporting products to third countries is essential.

Specific Content of Exclusive Rights

Simply stating “exclusive distribution rights are granted” is insufficient. The following matters must be specifically defined:

First, manufacturer’s obligations: the duty not to appoint other distributors in the territory and the duty not to sell directly in the territory. Second, distributor’s obligations: the duty not to sell through third parties without the manufacturer’s prior written consent and the duty not to sell directly or indirectly outside the territory.

In our contract, we specified: “Without Manufacturer’s prior written consent, Distributor cannot sell Products through third parties in the Territory” and “Distributor and its subsidiaries or sub-dealers shall not sell Products directly or indirectly to countries outside the Territory,” effectively blocking circumvented sales.

3. How to Set Exclusivity Fees and Minimum Purchase Amounts?

Purpose of Exclusivity Fees

An Exclusivity Fee is the amount a distributor pays to the manufacturer in exchange for exclusive distribution rights in a specific territory. This is paid separately from the minimum purchase amount and reflects the value of the exclusivity itself.

Reasons for setting an exclusivity fee include: First, verifying the distributor’s commitment. Only distributors willing to pay the fee are likely to engage in active sales activities. Second, compensating for the manufacturer’s opportunity cost. It partially recovers the value of other business opportunities the manufacturer foregoes by granting exclusivity. Third, preventing distributor defection. A distributor that has already paid the fee has less incentive to abandon the contract.

Payment Structure for Exclusivity Fees

In our contract drafting practice, we designed the exclusivity fee to be paid quarterly. The annual fee is divided into four equal parts, paid at the beginning of each quarter. This installment payment approach distributes the distributor’s financial burden while enabling immediate action in case of non-payment.

The contract included a table specifying each quarter’s period, due date, and amount. For example, “The fee for the period January 1, 2026 to March 30, 2026 shall be paid by January 7, 2026.” Setting the due date within 7 days of the quarter’s start provides slight flexibility while encouraging prompt payment.

Designing Minimum Purchase Amount Clauses

The Minimum Purchase Amount is a core clause in exclusive distributor agreements. If a distributor granted exclusivity does not actually engage in sales activities, the manufacturer generates no revenue in that market. Therefore, imposing a minimum purchase obligation on the distributor ensures active sales engagement.

Considerations when setting minimum purchase amounts include: First, reflecting market size. Set realistic amounts considering the territory’s market size, competitive landscape, and distributor’s sales capacity. Second, considering staged increases. Set higher minimums for years 2 and 3 than the first year to drive growth after market development. Third, clarifying consequences of non-compliance.

In our contract, we specified: “Distributor shall purchase Products equivalent to the minimum purchase amount within one year from the contract execution date” and “If Distributor fails to achieve 80% of the minimum purchase amount, Manufacturer may revoke the exclusivity grant, adjust the territory, or terminate this Agreement.”

Utilizing Prepayment Systems

To ensure the effectiveness of minimum purchase amounts, a prepayment system can be utilized. The distributor prepays a certain amount, from which product purchase payments are deducted.

In our contract, we specified: “Distributor shall prepay the purchase price in specified units when purchasing products corresponding to the minimum purchase amount.” We also stated: “The balance remaining after deducting actual ordered product prices from the prepayment shall not be refunded during the contract period, and Distributor must exhaust the prepayment by purchasing Products from Manufacturer,” ensuring the prepayment effectively guarantees performance of purchase obligations.

4. How to Allocate Obligations Between Manufacturer and Distributor?

Manufacturer’s Obligations

The Manufacturer’s obligations are to support the distributor in successfully conducting sales activities. In our contract drafting practice, we defined the manufacturer’s obligations as follows:

First, technical support obligations. Providing product usage and maintenance guidelines to the distributor to ensure stable product performance. For specialized products like medical devices, technical training is essential.

Second, marketing support obligations. Providing product briefing materials, sharing annual marketing plans with the distributor, and providing product-related materials (brochures, technical specifications, case studies, etc.) accessible through the manufacturer’s website.

Third, supply obligations. Ensuring smooth production and supply of products. If part of an order cannot be fulfilled or delivery is delayed, the manufacturer must immediately notify the distributor and actively resolve the issue. Failure to supply without justification requires compensating the distributor for economic losses.

Distributor’s Obligations

The Distributor’s obligations represent active sales activities and manufacturer brand protection in exchange for exclusivity. In our contract, we detailed the distributor’s obligations:

First, marketing and sales obligations. Diligently marketing, promoting, and selling contract products in the territory at its own expense according to the mutually agreed annual marketing plan. This specifically includes preparing promotional materials, advertising in trade media, participating in trade fairs, and digital media promotion.

Second, exhibition attendance obligations. The contract specified: “Distributor shall attend relevant exhibitions and seminars in the Territory at least 12 times per year (monthly average of once) to conduct continuous brand marketing activities, shall organize dedicated personnel for contract products for sales activities, and shall share relevant activity materials with Manufacturer.” Specifying concrete numbers enables objective assessment of obligation fulfillment.

Third, brand guideline compliance obligations. All promotional materials developed by the distributor must receive written approval from the manufacturer before distribution. However, we included an implied approval clause where materials are deemed approved if the manufacturer does not object within 15 days of receiving them, ensuring business efficiency.

Fourth, non-compete obligations. We specified: “During the period of maintaining exclusive distribution rights under this Agreement, Distributor shall only handle Manufacturer’s contract products for products with identical or similar functions, and cannot handle competing products from other companies.” This represents the distributor’s obligation to focus on the products in exchange for exclusivity.

Fifth, unfair trade practice prohibition. We prohibited dumping sales or other activities that could disrupt market order or damage the manufacturer’s brand value, with provisions allowing the manufacturer to demand sales cessation or terminate the contract upon violation.

Sixth, price confidentiality obligations. Contract product prices must not be publicly disclosed. This prevents brand value decline due to price competition.

5. Key Points for Pricing and Payment Terms

Product Pricing Methods

Product prices are typically defined in an appendix rather than the main contract. This allows price changes by replacing only the appendix without modifying the entire contract.

In our contract, we defined product prices in an appendix with an exchange rate adjustment clause: “If the exchange rate varies by more than 10% above or below the base rate at contract execution, product prices may be adjusted within the exchange rate fluctuation range through mutual written agreement.” However, we added a proviso that “price changes shall not apply to orders placed before the effective date of the change” to protect reliance on existing orders.

Price Terms – Incoterms

In international transactions, price terms are set according to Incoterms (International Commercial Terms). In our contract, we adopted EXW (Ex Works) terms.

Under EXW terms, the manufacturer’s obligations are complete upon delivering goods at its factory or warehouse; thereafter, all transportation costs, insurance, import/export customs clearance, and duties are borne by the distributor. This is the most favorable condition for manufacturers and is suitable when the distributor has local logistics infrastructure.

Other options include FOB (Free On Board), CIF (Cost, Insurance and Freight), and DAP (Delivered at Place), determined by negotiation between the parties.

Payment Currency and Terms

Payment currency is very important in international transactions. In our contract, we designated US Dollars (USD) as the payment currency. USD, as an international reserve currency, facilitates exchange and makes exchange rate risk management relatively easier.

We adopted prepayment terms: “If the order amount exceeds the deposited amount, Manufacturer may restrict shipment of products corresponding to the excess amount until additional deposits are received,” eliminating receivable risk at the source. Since it is difficult to monitor overseas distributors’ credit status in real-time, prepayment is safer for manufacturers.

6. How to Draft Warranty and Defect Inspection Clauses?

Structure of Warranty Clauses

Warranty clauses define the manufacturer’s responsibility for product quality over a specified period. In our contract, we structured warranty clauses as follows:

First, warranty period. The warranty begins from the date the distributor inspects and accepts the contract products, for the period specified in the appendix. For medical microscopes and lights, we set 12 months; for batteries, 6 months, applying different periods based on product characteristics.

Second, warranty content. We warrant that contract products conform to the manufacturer’s published product specifications, standards, and criteria, and that contract products are free from defects in design, components, and manufacturing.

Third, warranty exclusions. Management defects—issues arising from misuse, abuse, careless handling, failure to follow user manuals, or other causes not attributable to the manufacturer—are excluded from warranty.

Defect Inspection and Claim Procedures

The distributor conducts defect inspections after receiving products and may request replacement if defects are found. In our contract, we specified: “Distributor’s claims regarding product defects must be submitted in writing with detailed information within 7 business days from the date of customs clearance completion in the Territory.”

Clearly defining the claim period is important for dispute prevention. Claims submitted after the deadline are implicitly understood to be outside the manufacturer’s responsibility.

Product Liability (PL) Preparation

For products used directly on the human body, such as medical devices, product liability issues may arise. In our contract, we specified: “If local disputes arise due to product quality issues, both parties shall cooperate to resolve the problem, and all resulting economic losses shall be borne by Manufacturer. Manufacturer shall secure appropriate insurance for its products to prepare for potential medical disputes locally.”

While this clause may burden the manufacturer, it represents a reasonable allocation since product quality is within the manufacturer’s control. However, manufacturers must obtain product liability (PL) insurance to manage this risk.

7. Why Are Trademark Usage Clauses Important?

Necessity of Trademark Usage Rights

Distributors need to use the manufacturer’s trademarks for product promotion. However, unlimited trademark usage risks trademark infringement, brand value damage, and false representation. Therefore, the scope, methods, and limitations of trademark usage must be clearly defined.

Structure of Trademark Usage Clauses

In our contract, we detailed trademark usage clauses as follows:

First, granting non-exclusive usage rights. We specified: “Manufacturer grants Distributor the non-exclusive right to use Manufacturer’s trademarks registered in the Territory for promotion within the Territory during the contract period.” Being non-exclusive allows the manufacturer to use the trademarks for other purposes as needed.

Second, prior approval requirements. We specified: “If Distributor wishes to use trademarks, it must provide Manufacturer in advance with the intended usage format and samples of materials containing trademarks, such as catalogs, flyers, posters, and advertisements, for approval.” This allows the manufacturer to control brand image.

Third, property rights confirmation. We stated: “Distributor confirms that names, designs, copyrights, and other property rights of trademarks imprinted or used on Products are property exclusively belonging to Manufacturer. Distributor shall not acquire any rights to such property rights.”

Fourth, trademark registration prohibition. We specified: “Distributor shall not directly or indirectly apply to register the trademarks or similar trademarks in any country in connection with the Products or other goods.” This clause is crucial as some overseas distributors have been known to pre-emptively register manufacturers’ trademarks locally.

Fifth, cessation upon termination. We specified: “Upon termination of this Agreement, Distributor may not present itself as a seller of the Products and may not use Manufacturer’s trade name, property rights, or similar trademarks.”

Sixth, trademark infringement response. If third parties infringe the trademarks or claim that the distributor’s trademark usage infringes their rights, the distributor must immediately notify the manufacturer and cooperate. Related costs are borne by the manufacturer.

8. Scope and Effect of Confidentiality Obligations

Necessity of Confidentiality Obligations

In exclusive distributor agreements, both parties access each other’s sensitive information during the transaction. The manufacturer shares product technology, pricing policy, and marketing strategies with the distributor, while the distributor reports customer information, market trends, and sales performance to the manufacturer. If such information leaks to competitors, both parties suffer damage.

Structure of Confidentiality Clauses

In our contract, we defined confidentiality obligations as follows:

“Manufacturer and Distributor shall not disclose to third parties or use for purposes other than performing obligations under this Agreement any product information and business information (including prices, discount policies, sales terms, customers, and trade secrets) acquired during the transaction without the other party’s prior written consent. Any party violating confidentiality obligations shall compensate the other party for resulting economic damages.”

Scope of Confidential Information

Specifically enumerating the scope of confidential information is a notable feature. Product information, prices, discount policies, sales terms, customer information, and trade secrets are explicitly listed. Such specific enumeration reduces disputes over what constitutes confidential information.

Effects of Violation

We explicitly stated damages liability for confidentiality breaches. However, since proving actual damages can be difficult, adding a penalty clause may also be considered.

Duration of Obligations

The contract stated: “Even if this Agreement is terminated, provisions regarding representations and warranties, intellectual property/trademarks, confidentiality, personal information protection, and indemnification shall remain in effect.” This means confidentiality obligations continue even after contract termination. While limiting obligations to a specific period after termination (e.g., 3 or 5 years) is possible, continuing obligations as long as trade secrets retain value favors the manufacturer.

9. How to Design Contract Term and Termination Clauses?

Setting Contract Term

The term of an exclusive distributor agreement involves different interests for each party. Distributors prefer long-term contracts because recovering initial investments (permits, marketing, personnel) and generating profits requires time. Manufacturers prefer short-term contracts with renewal options to evaluate distributor performance before deciding on continuation.

In our contract, we set a 5-year term with automatic renewal provisions: “Unless Manufacturer or Distributor requests changes to contract terms or provides written notice of termination at least 30 days before expiration of the contract period or any renewal period, this Agreement shall automatically renew for successive 1-year periods under the same terms.”

We also guaranteed renegotiation opportunities: “Three months before this Agreement expires, Manufacturer shall grant Distributor priority negotiation rights and renegotiate,” partially protecting the distributor’s acquired rights.

Grounds for Termination

Termination clauses often become the focus of disputes and require careful design. In our contract, we specifically enumerated termination grounds:

First, non-payment. “Manufacturer may terminate this Agreement if Distributor fails to pay the exclusivity fee or minimum purchase amount by the due date.”

Second, material breach. The contract may be terminated “if the other party breaches a material provision of this Agreement and such breach cannot be cured, or if curable, is not cured within 20 days after receiving notice of breach.” Providing an opportunity to cure is fair.

Third, assignment of rights. The contract may be terminated “if the other party assigns this Agreement or rights under the Agreement to a third party without Manufacturer’s prior written consent.”

Fourth, cessation of business or bankruptcy. The contract may be terminated upon closure, cessation of normal business, insolvency, liquidation, or bankruptcy.

Fifth, force majeure. The contract may be terminated if natural disasters, war, terrorism, or other force majeure events prevent performance of material obligations for 30 days or more. However, lack of funds or foreseeable events are excluded from force majeure.

Sixth, supply failure. “Distributor may terminate if Manufacturer fails to supply contract products normally for 60 business days or more.”

Seventh, minimum purchase shortfall. “If Distributor fails to achieve 80% of the annual minimum purchase amount, Manufacturer may revoke exclusivity, adjust the territory, or terminate this Agreement.”

Post-Termination Procedures

Post-termination handling provisions are also important. In our contract, we specified the following:

First, immediate cessation of business activities. The distributor must immediately cease all marketing, promotion, sales, and other business activities for contract products.

Second, return of materials. All advertising and similar materials provided by the manufacturer must be promptly returned.

Third, inventory handling. “Upon termination of this Agreement, contract products remaining in Distributor’s inventory may be sold by Distributor under the same terms as this Agreement. However, Manufacturer may repurchase contract products held by Distributor at EXW price.” This clause protects the distributor’s inventory investment while giving the manufacturer a repurchase option.

Fourth, preservation of acquired rights. “Termination of this Agreement shall not affect rights and claims acquired by either party prior to such termination,” maintaining pre-termination creditor-debtor relationships regardless of termination.

Fifth, indemnification. “Upon termination of this Agreement, Manufacturer shall not be liable to Distributor for loss of future fees, goodwill, investment costs, advertising costs, promotional costs, or similar expenses.” This prevents the distributor from claiming damages from the manufacturer based on loss of expected benefits due to termination.

10. Dispute Resolution: Arbitration vs. Litigation

Special Characteristics of International Dispute Resolution

When disputes arise in international transactions, questions arise about which country’s court will hear the case and under which country’s law. Even if home court jurisdiction is selected, enforcing judgments in the other country may be difficult. Due to these issues, arbitration is preferred in international transactions.

Advantages of Arbitration

The advantages of arbitration include: First, ease of enforcement. Under the 1958 New York Convention (Convention on the Recognition and Enforcement of Foreign Arbitral Awards), arbitral awards can be enforced relatively easily in member countries (over 170 countries). Second, expertise. Parties can select industry experts as arbitrators. Third, speed. Arbitration generally proceeds faster than court litigation. Fourth, confidentiality. Unlike litigation, proceedings and results are not made public, protecting trade secrets.

Structure of Dispute Resolution Clauses

In our contract, we specified dispute resolution as follows:

“All disputes arising from or related to this Agreement and its non-performance shall be resolved by arbitration in Seoul, Republic of Korea, according to the rules of the Korean Commercial Arbitration Board. The governing law shall be the laws of the Republic of Korea, the number of arbitrators shall be one, and the language shall be Korean.”

Notable features of this clause include: First, we designated Seoul, Republic of Korea as the arbitration venue. Since the manufacturer is a Korean company, conducting arbitration in Korea is advantageous. Second, we designated the Korean Commercial Arbitration Board (KCAB) as the arbitration institution. KCAB, as Korea’s leading international arbitration institution, provides systematic arbitration procedures. Third, we designated Korean law as the governing law, meaning Korean law applies to contract interpretation and application. Fourth, we set the number of arbitrators at one. Compared to three-arbitrator panels, this reduces costs and time. However, for large-value disputes, three arbitrators may be more prudent. Fifth, we designated Korean as the language. While other languages like English could be used, Korean was selected to reduce costs for the manufacturer.

11. FAQ

Atlas Legal has extensive experience in corporate advisory and international transaction services, having drafted and reviewed numerous contracts. We have prepared many international distribution agreements, joint venture agreements, and technology transfer agreements, particularly in the medical device, manufacturing, and IT sectors. We specialize in designing contracts that prevent legal risks that may arise in international transactions and protect our clients’ interests.

* The contract content introduced in this article is based on actual drafting experience. Some facts have been modified for clarity, and client confidentiality and trade secrets have been protected.