Complete Guide to International Contract Drafting: Business Strategies and Essential Checkpoints for Companies in South Korea

1. Why International Contracts are Critical

In the global economy era, international contracts are not merely documents but essential tools for business success for companies in South Korea aspiring to expand overseas. In transactions between parties with different legal systems, languages, and cultural backgrounds, international contracts serve as a legal safety net that minimizes unpredictable risks and ensures stable business operations.

International contracts differ from domestic contracts in that they include international elements called ‘foreign connections,’ which can give rise to complex legal issues. Various factors that don’t need to be considered in domestic contracts exist, such as which country’s laws to apply (governing law), which court to resolve disputes in case of conflicts (jurisdiction), and how to manage risks from currency fluctuations.

Particularly for export-import companies and foreign investment firms, cooperation with overseas partners is inevitable, and without proper international contracts, there’s a high risk of getting involved in unexpected legal disputes. Given that the omission of a single minor clause or ambiguous expression can lead to hundreds of millions of won in losses, the importance of international contracts cannot be overemphasized.

2. Basic Structure and Characteristics of International Contracts

To draft effective international contracts, it’s essential to first understand their basic structure. Generally, international contracts consist of the following components.

The contract title and party information section clarifies the nature of the contract and identifies the contracting parties. It should detail the parties’ exact legal names, principal business addresses, and in the case of corporations, the governing law of incorporation. For example, stating “ABC Corp., a corporation duly organized and existing under the laws of the Republic of Korea” helps prevent future confusion.

The preamble briefly explains the background and purpose of the contract. Since the legal binding force of preambles may be interpreted differently depending on the governing law, it’s safer to clearly stipulate specific rights and obligations in the main clauses.

The definitions clause clearly defines key terms used throughout the contract, preventing disputes that may arise from interpretation. Core concepts of the contract such as “Confidential Information,” “Products,” and “Territory” should be organized alphabetically to enhance readability.

The operative provisions detail the specific rights and obligations of the parties, while general provisions deal with standardized clauses related to contract interpretation, management, validity, and dispute resolution. Although called ‘boilerplate,’ these provisions often play crucial roles that can determine the fate of a contract in actual disputes, requiring careful review.

3. Governing Law and Dispute Resolution Clause Strategy

One of the most fundamental and important clauses in international contracts is the governing law clause and dispute resolution clause. These two clauses serve as criteria for determining what country’s laws will apply to contract-related legal issues and through what procedures disputes will be resolved.

In selecting governing law, parties can freely choose according to the principle of party autonomy, but such selection cannot exclude the application of mandatory rules of the relevant legal system. For example, mandatory rules related to consumer protection or worker protection may apply with priority over agreements between parties.

For dispute resolution methods, parties can choose between litigation and arbitration. When selecting arbitration, careful consideration should be given to the arbitration institution (ICC, SIAC, KCAB, etc.) and the number of arbitrators. International arbitration generally enables faster and more specialized resolution than litigation, but results can vary significantly depending on arbitrator selection and arbitration venue decisions.

Governing law clauses and dispute resolution clauses should be designed in coordination with each other. If a specific country’s law is chosen as governing law, it’s efficient for that country’s courts or arbitrators familiar with that law to resolve disputes. When governing law and dispute resolution methods are misaligned, the dispute resolution process can become more complex and increase time and costs.

4. Payment Terms and Currency Risk Management

Payment terms are the most critical commercial conditions in international contracts, clearly stipulating in what currency, through what methods and procedures, and by when payment for goods or services should be made.

When designating transaction currency, it should be specifically stated such as “US Dollar” or “Euro” to prevent confusion. In international transactions, risks from currency fluctuations always exist, so consideration should be given to which party will bear currency fluctuation risks or whether to include provisions for fixing specific exchange rates or currency hedging.

Payment methods include various options such as letters of credit (L/C), collections, remittances, and open accounts, each differing in terms of creditworthiness between parties, transaction safety, and cost burden. The most favorable payment method for exporters is advance payment, but this transfers the risk of not properly receiving goods to importers. Conversely, the open account method most favorable to importers imposes the risk of not recovering payments on exporters.

Payment timing should be specifically stated such as “within 30 days from the date of shipment” or “within 15 days after completion of goods inspection,” and consideration can be given to including clauses imposing late payment interest when payment is delayed.

5. Contract Subject Matter and Inspection Conditions

Clearly and specifically describing the scope and specifications of goods, services, technology, etc., which are the subject matter of the contract, is the most basic yet important matter in establishing performance standards and preventing future disputes.

For goods sales contracts, items, model names, quantities, quality standards, specifications, and packaging methods should be detailed. For service contracts, the specific content and scope of services to be provided, performance standards, performance measurement indicators, and reporting obligations should be specified.

Disputes frequently arise from quantity or quality issues, and in such cases, inspection methods should be recorded based on industry practices and agreed upon to enable swift resolution when disputes arise later. Rather than using abstract expressions such as ‘excellent quality’ or ‘latest technology,’ quality and specifications should be defined using objectively verifiable criteria such as measurable specific indicators, recognized standards (e.g., ISO specifications), or judgment criteria from third-party inspection agencies agreed upon by the parties.

In inspection conditions, the timing of inspection (before shipment, after arrival), location, method, inspection agency, and party bearing inspection costs should be clearly specified. For goods sales, it’s also important to determine whether quality determination timing should be at the time of shipment (shipped quality terms) or at the time of landing (landed quality terms).

6. Intellectual Property Protection Clauses

Intellectual property rights such as technology, brands, and creative works are core assets of modern companies, and clearly stipulating intellectual property-related matters in international contracts is very important.

For existing intellectual property rights, it should be clearly stated that ownership of intellectual property rights already held by each party before contract conclusion continues to belong to that party. For intellectual property rights arising during contract performance, it should be clearly stipulated to whom ownership of intellectual property rights newly developed or created during contract implementation will belong.

The attribution and usage rights of improvement technology are particularly complex, and proactive agreement is very important. Beyond simply stipulating unilateral ownership, detailed agreement on all possible scenarios in advance, such as whether to grant free or paid licenses to the other party and how to define each party’s scope of rights exercise in case of joint ownership, is essential for maintaining long-term cooperative relationships and preventing potential disputes.

In license grant conditions, exclusivity/non-exclusivity, geographical scope, duration, field of use, sublicense permission, and royalties should be specifically stated. In infringement liability and warranties, warranties of non-infringement of third parties’ intellectual property rights and indemnification obligations in case of infringement should be stipulated.

7. Limitation of Liability and Indemnification Clause Design

Limitation of liability clauses and indemnification clauses play important roles in managing risks and enhancing predictability by predetermining the scope of legal liability that parties must bear when contract breaches or specific events occur.

Limitation of liability clauses limit the scope of damage compensation liability to a certain extent when one party breaches contractual obligations and causes damage to the other party. Most legal systems tend not to recognize the effectiveness of limitation of liability clauses for damages caused by one party’s ‘intent’ or ‘gross negligence,’ so clauses should be drafted within the scope permitted by the governing law.

Including clauses that exclude indirect damages or consequential damages is also common. For example, “Under no circumstances shall either party be liable to the other party for indirect, consequential, or incidental damages resulting from loss of profits, loss of business opportunities, business interruption, etc.”

Indemnification is a clause where one party agrees to protect the other party from all losses, damages, costs, etc., that the other party may incur due to specific reasons and to compensate or defend against them. Typical examples include indemnification against third-party intellectual property infringement claims and product liability lawsuits.

8. Contract Term and Termination Conditions

Contract term clauses specify when the contract becomes effective and how long it lasts, while termination clauses stipulate conditions and procedures for ending the contractual relationship when specific events occur.

In contract terms, the effective date and termination date should be clearly stipulated. The effective date may be the same as the contract execution date or may be conditional upon the fulfillment of specific conditions. Contract terms may be set for a fixed period or until completion of a specific project.

In renewal conditions, automatic renewal clauses may be included so that the contract is extended under the same conditions without separate declarations of intent, or renewal may be determined through unilateral or bilateral renewal notices.

Termination grounds can be divided into termination for cause and termination for convenience. Termination for cause includes cases of material contract breach by the other party, insolvency, initiation of legal proceedings, etc., while termination for convenience grants one party the right to terminate the contract without special reasons.

Termination procedures generally require written notice, specifically stipulating notice methods and notice periods. Termination effects specify the handling of already incurred rights and obligations, return or destruction of provided confidential information and materials, inventory handling, and damage compensation liability.

9. Understanding Differences Between Common Law and Civil Law

Since international transactions frequently involve parties from common law and civil law countries, understanding the major differences in contract law between these two legal systems is very important.

In terms of legal sources, common law is centered on case law while civil law is centered on statutory law. In contract formation requirements, common law traditionally requires ‘consideration’ as a unique requirement in addition to offer and acceptance. In contrast, civil law principles hold that contracts are formed by mutual agreement between parties.

In the principle of good faith, civil law treats it as an important principle throughout contracts, while common law has traditionally applied it only in limited circumstances. In damages and remedies, common law prioritizes monetary compensation and recognizes specific performance only exceptionally, while civil law relatively broadly recognizes claims for specific performance.

In contract drafting style, contracts governed by common law tend to envision all possible scenarios and stipulate parties’ rights and obligations very detailedly and explicitly. In contrast, civil law-based contracts can be relatively concise.

In contract interpretation methods, common law tends to follow the ‘four corners rule’ which emphasizes the objective meaning of contract language itself. In contrast, civil law tends not to be bound solely by language but considers various circumstances such as contract conclusion background to explore parties’ true intentions.

10. Precautions and Checkpoints in Contract Drafting

Successful drafting and review of international contracts requires clear communication, risk prediction, and strategic negotiation skills beyond legal knowledge.

To ensure clarity and specificity, plain language should be used when possible, but important legal terms should be used with accurate understanding of their meanings. Rather than unclear expressions like “reasonable efforts,” descriptions should use objectively judgeable criteria.

To prevent omission of key clauses, care should be taken not to miss core clauses such as governing law, jurisdiction, and force majeure. The three elements for dispute prevention – contract term and amount, contract termination methods, and dispute resolution methods – must be clearly included.

For accuracy in party identification, the exact legal names of contracting parties must be verified through government-issued certificates. To minimize dependence on oral agreements, it should be noted that due to ‘entire agreement clauses,’ oral promises not specified in written contracts are difficult to gain legal recognition.

For consistency between master contracts and individual orders, it’s important to specify order of precedence clauses stating “In case of conflict between the conditions of this master contract and individual purchase orders, the conditions of this master contract shall prevail.”

Due diligence on counterparties should go beyond simple payment capability verification, as involvement in illegal or unethical issues by counterparties can seriously damage one’s own company’s reputation, requiring thorough investigation.

International contracts are fields that essentially require assistance from legal experts due to their complexity and potential risks. Many small and medium enterprises skip expert review due to cost concerns, but initial consulting costs are much less compared to the enormous litigation costs, time waste, and business opportunity losses that must be borne when disputes arise later.

Atlas Legal has extensive experience in reviewing and drafting numerous international contracts recently and has successfully handled various international contract matters related to companies’ overseas expansion in South Korea. Legal expert assistance in international contracts is not a cost but a wise investment to prevent greater future losses.