Complete Guide to Corporate Contract Review in South Korea: From Legal Risk Prevention to Dispute Resolution

1. What is Contract Review?

Contract review is an essential legal procedure that involves analyzing the legal validity, fairness, and risk factors of all contracts entered into by a corporation to protect corporate interests and minimize the possibility of disputes.

A contract is a document that clearly records the agreed terms between parties and legally establishes rights and obligations. It is not merely a formalistic procedure but a core risk management tool for corporate operations.

Legal Basis for Contract Review

Article 103 of the Korean Civil Code stipulates that “a juristic act whose contents violate good morals or other social order shall be null and void,” and Article 104 states that “a juristic act which is unconscionable due to a party’s distress, rashness, or inexperience shall be null and void.”

This means that contracts may become void if their contents are unclear or violate laws, making it essential to eliminate risk factors through preliminary review.

2. Major Types of Corporate Contracts for Review

The major types of contracts encountered in corporate operations each have unique legal characteristics and considerations in South Korea.

Sales Contracts

These are commercial transactions under Article 46 of the Commercial Code involving the sale of goods or assets. Key review points include timing of ownership transfer, risk allocation, and warranty obligations.

Service Contracts

Contracts for the provision of specific services, characterized as either service contracts or mandate contracts under the Civil Code. Clear definition of work scope and ownership of deliverables are key issues.

Lease Agreements

Subject to the Commercial Building Lease Protection Act and Residential Lease Protection Act, these contracts involve important statutory rights such as rent increase restrictions, deposit protection, and lease renewal rights.

Subcontract Agreements

Governed by the Fair Transactions in Subcontracting Act, these contracts prohibit unfair subcontract payment decisions and coercive special terms. They are subject to strict monitoring by the Korea Fair Trade Commission.

Franchise Agreements

Under the Fair Transactions in Franchise Business Act, various regulations apply including provision of disclosure documents, cooling-off periods, and prohibition of unfair franchise fees.

Non-Disclosure Agreements (NDAs)

Subject to the Unfair Competition Prevention and Trade Secret Protection Act, these agreements aim to protect information that meets the requirements of trade secrets: confidentiality, economic utility, and non-publicity.

3. Legal Risks of Inadequate Contract Review

Disputes Due to Ambiguous Contract Terms

When contracts use abstract expressions such as “as soon as possible” or “at an appropriate level,” disputes arise over interpretation. The Supreme Court has ruled that “when contract conditions are unclear, the parties’ intentions should be reasonably interpreted, but when this cannot be clarified, the contract’s validity may be denied.”

Damage from Unfair Terms

Article 6 of the Act on the Regulation of Terms and Conditions states that “terms unreasonably disadvantageous to customers are void.” However, if not recognized in advance, parties may be bound by unfavorable conditions until disputes arise.

Sanctions for Legal Violations

When contract clauses violate the Fair Trade Act, Subcontracting Act, or Franchise Business Act, not only are such provisions void, but penalties including fines, prosecution, and business suspension may be imposed.

Governing Law Issues in International Contracts

Under Korean Private International Law, when parties do not specify governing law, “the law of the country most closely connected to the contract” applies, which can lead to unexpected legal disputes.

4. Essential Points for Contract Review

Verification of Party Legitimacy

For corporations, the name, address, and representative as stated in the corporate registry must be accurately recorded, and any restrictions on representation authority must be verified.

Clarity of Contract Purpose and Scope

The contract’s purpose and parties’ obligations must be specifically defined. Legal acts with indeterminate content cause legal problems, so specific quantities, specifications, and deadlines should be clearly stated rather than using abstract expressions.

Payment Conditions

Payment timing, methods, and interest rates for delays must be clearly stipulated. Under Article 54 of the Commercial Code, the statutory interest rate for commercial claims is 6% per annum, so any different agreement must be specified.

Damages and Penalty Clauses

The nature of penalties (liquidated damages or penalty) must be clarified under the Civil Code, and it should be considered that courts can reduce excessive penalties.

Contract Termination Conditions

Legitimate grounds and procedures for termination must be specifically stipulated. It is advisable to draft considering the requirements for exercising termination rights and notice procedures under the Civil Code.

5. Special Considerations by Contract Type

Peculiarities of Subcontract Agreements

Article 3-2 of the Fair Transactions in Subcontracting Act stipulates “obligations for written issuance and document preservation,” and Article 4 specifies “prohibition of unfair subcontract payment decisions.” Violations may result in corrective orders and fines from the Korea Fair Trade Commission.

Regulatory Matters for Franchise Agreements

Article 7 of the Fair Transactions in Franchise Business Act stipulates the “obligation to provide disclosure documents” before franchise contract conclusion, and Article 11 guarantees a “14-day cooling-off period.”

Considerations for International Contracts

The applicability of international norms such as the UN Convention on Contracts for the International Sale of Goods (CISG) and ICC Incoterms must be verified, and arbitration procedures and jurisdiction must be clearly established for dispute resolution.

6. Contract Review Process and Checklist

Stage 1: Basic Information Verification

• Accurate names and addresses of contracting parties
• Specificity of contract purpose and scope
• Contract duration and effectiveness requirements

Stage 2: Rights and Obligations Analysis

• Major obligations of each party
• Performance timing and methods
• Responsibilities and remedies for non-performance

Stage 3: Risk Factor Assessment

• Excessive penalty or damage compensation clauses
• Unilaterally disadvantageous special terms
• Potential legal violations

Stage 4: Dispute Response Measures

• Jurisdiction and governing law clauses
• Arbitration or mediation procedures
• Confidentiality and trade secret protection

7. Contract Drafting Strategies for Dispute Prevention

Clear Definition Clauses

Key terms should be clearly defined at the beginning of contracts to prevent interpretive disputes. Concepts such as “material breach,” “force majeure,” and “trade secrets” should be specifically defined.

Phased Performance Procedures

For complex contracts, performance should be divided into phases with clear completion criteria for each stage to reduce potential disputes.

Dispute Resolution Mechanisms

Establishing stages such as consultation and mediation before litigation is effective for reducing dispute resolution costs and increasing the possibility of relationship recovery.

8. English Contract Drafting Considerations

As international transactions increase, the importance of English contract drafting has grown. English contracts are based on different legal traditions and practices from Korean contracts, requiring special attention.

Considering Differences Between Common Law and Civil Law

English contracts are primarily based on the Common Law system, while South Korea follows the Civil Law system. In Common Law, case law plays an important role, so it is common to include more detailed and specific clauses in contracts.

Key English Contract Clauses

Governing Law and Jurisdiction

Clear governing law must be established, such as “This Agreement shall be governed by and construed in accordance with the laws of [Country/State].” Also, jurisdiction must be specified: “Any disputes arising out of this Agreement shall be subject to the exclusive jurisdiction of the courts of [Location].”

Force Majeure

Force majeure clauses in English contracts are written very specifically. Specific causes such as “Acts of God, war, terrorism, epidemic, government actions, natural disasters” should be enumerated, and notification obligations and response procedures upon occurrence should be detailed.

Limitation of Liability

It is common to include clauses limiting liability for indirect damages, emphasized in capital letters: “IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES.”

Entire Agreement

It must be specified that the contract includes all agreements between parties: “This Agreement constitutes the entire agreement between the parties and supersedes all prior negotiations, representations or agreements.”

Linguistic Features of English Contracts

Accurate Use of Legal Terms

“Shall” indicates obligation, “May” indicates authority, and “Will” is used to express future facts. This distinction of modal verbs is crucial for determining the scope of rights and obligations.

Use of Doublets

Using parallel words with similar meanings such as “Terms and conditions,” “Null and void,” and “Free and clear” to reinforce meaning is a characteristic of English contracts.

Importance of Definition Clauses

In English contracts, accurate definitions of key terms such as “Affiliate,” “Confidential Information,” and “Material Adverse Effect” are crucial for dispute prevention.

Cultural Difference Considerations

Communication Methods

Western business culture prefers direct and clear expressions, so it is advisable to use specific and definitive phrases rather than Korean-style indirect expressions.

Dispute Resolution Methods

When including arbitration clauses, arbitration institutions should be specified, and arbitration venue and language should be specifically determined.

Practical Considerations

Translation Accuracy

When translating Korean contracts into English, translation that accurately conveys legal meaning rather than simple literal translation is necessary. Korean-specific legal concepts such as statutory damages and joint guarantee should be appropriately converted to corresponding Common Law concepts.

Local Law Review

Review of local laws in the contracting party’s country is essential. For example, in the United States, contract law differs by state, so specific state law such as Delaware law or New York law should be designated as governing law.

9. Key Summary

Corporate contract review is not merely a formalistic procedure but an essential process for legal risk prevention and corporate protection. Safe transaction environments can be created through ensuring contract clarity, compliance with relevant laws, and preparation of dispute response measures.

Particularly for special types of contracts such as subcontracting, franchising, and international contracts, each type’s relevant laws and regulations must be carefully reviewed, and systematic approaches with expert assistance are advisable.

Atlas Legal has recently successfully performed complex contract review work with companies from various industries. The firm is particularly recognized for its expertise in international contract review for multinational companies in Songdo International Business District and Fair Trade Act consulting related to subcontracting in South Korea.