What Should Be Included in a Manufacturing Agreement with a Korean Company?

Short Answer

A manufacturing agreement with a Korean company should clearly define the product, specifications, production obligations, delivery terms, inspection and acceptance procedures, quality control, payment terms, intellectual property ownership, confidentiality, liability, termination, and dispute resolution.

In practice, many disputes arise not because the parties had no business relationship, but because the contract failed to clearly address key issues such as:

• who owns molds, tooling, drawings, samples, and technical data;
• when products are deemed inspected and accepted;
• what happens if products are defective;
• who is responsible for delay or non-delivery;
• whether the buyer can withhold payment for non-conforming goods;
• whether the manufacturer can subcontract production;
• whether confidential information can be used for other customers; and
• how disputes will be resolved and enforced in Korea.

Depending on the facts, a Korea-facing manufacturing relationship may be characterized as a sale, a contract for work, or a hybrid made-to-order supply arrangement. This can affect inspection and notice timelines, defect remedies, warranty periods, payment defenses, termination rights, and damages analysis under Korean law.

For foreign companies working with Korean manufacturers, a well-drafted OEM or ODM manufacturing agreement can significantly reduce the risk of payment disputes, delivery problems, product defects, intellectual property misuse, and enforcement difficulties.

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Why Manufacturing Agreements Matter in Korea

Korea has many experienced manufacturers, suppliers, OEM producers, ODM companies, component makers, and technology-based production partners.

Foreign companies may work with Korean manufacturers for:

• OEM manufacturing;
• ODM product development;
• component supply;
• private-label production;
• cosmetics or consumer goods manufacturing;
• machinery or equipment production;
• electronics and parts manufacturing; and
• prototype development.

However, manufacturing relationships often involve more than simple purchase and sale. They may involve technical drawings, samples, molds, tooling, confidential know-how, brand requirements, quality control, certifications, and long-term supply planning.

For this reason, a simple purchase order may not be enough. A detailed manufacturing agreement is often necessary to protect the foreign buyer’s commercial and legal position.

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What Products and Specifications Should Be Defined?

The agreement should clearly identify the products to be manufactured.

This may include:

• product name and model number;
• specifications and drawings;
• approved samples;
• materials and components;
• packaging and labeling requirements;
• applicable standards or certifications;
• testing requirements;
• tolerances and defect criteria; and
• any prohibited materials or substitute components.

The contract should also state whether the manufacturer may change materials, components, production methods, or subcontractors without prior written approval.

This is important because many disputes arise when the manufacturer changes parts, materials, components, or production processes without the buyer’s consent.

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How Should Development and Sample Approval Be Handled?

In OEM or ODM transactions, the parties often go through product development, sample production, testing, and approval before mass production begins.

The agreement should clearly address:

• who is responsible for development work;
• who pays development costs;
• when samples must be submitted;
• what approval standard applies;
• whether written approval is required;
• what happens if samples fail testing; and
• whether approval of a sample limits later defect claims.

Sample approval should be documented carefully. If mass-produced goods later differ from the approved sample, the buyer may have stronger grounds to claim breach, rejection, replacement, damages, or termination.

At the same time, the agreement should clarify whether sample approval waives only visible issues or whether the buyer may still raise claims for hidden defects, safety issues, regulatory defects, or non-conformity discovered after production.

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Who Owns Molds, Tooling, and Production Equipment?

This is one of the most important issues in Korean manufacturing disputes.

Foreign buyers often pay for molds, tooling, jigs, dies, or other production equipment, but the physical equipment may remain in the Korean manufacturer’s factory.

The agreement should clearly state:

• who owns the molds and tooling;
• who paid for them;
• where they will be stored;
• whether they must be marked as buyer-owned property;
• whether the manufacturer may use them for other customers;
• whether the buyer can inspect them;
• when they must be returned; and
• who bears maintenance, repair, or replacement costs.

If the buyer owns the molds or tooling, the contract should expressly prohibit the manufacturer from using them to produce goods for itself, affiliates, subcontractors, or third parties.

The contract should also include clear return obligations after termination, expiration, or the buyer’s request.

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Who Owns the Intellectual Property?

A manufacturing agreement should clearly address intellectual property ownership.

This is especially important where the buyer provides designs, trademarks, drawings, formulas, technical data, software, specifications, or confidential know-how.

The agreement should specify who owns:

• product designs;
• drawings and technical data;
• formulas or recipes;
• software or firmware;
• trademarks and logos;
• product improvements;
• manufacturing know-how;
• molds and tooling designs; and
• newly developed IP created during the project.

For foreign buyers, it is usually important to state that the manufacturer may use the buyer’s IP only for the purpose of producing the contracted goods and may not use, copy, register, disclose, reverse engineer, or commercialize the IP for any other purpose.

This issue is closely connected to confidentiality, non-use, subcontracting restrictions, and post-termination obligations.

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How Should Trade Secrets and Confidential Information Be Protected?

Manufacturing relationships often require disclosure of sensitive business and technical information.

The agreement should include a strong confidentiality clause and non-use obligation covering:

• technical drawings;
• product formulas;
• customer information;
• pricing and commercial terms;
• samples and prototypes;
• testing data;
• manufacturing methods;
• process conditions;
• quality control standards;
• business plans; and
• other proprietary information.

For technical information to receive stronger protection as a trade secret, the foreign company should also take practical steps to keep the information secret. Contract wording alone may not be enough.

The agreement should therefore require practical confidentiality controls, such as:

• confidentiality markings;
• access restrictions;
• secure storage;
• prohibition on copying or external transfer;
• employee and subcontractor confidentiality obligations;
• access logs where appropriate;
• return, deletion, or destruction obligations; and
• written certification of return or destruction after termination.

This helps create a factual record that the information was treated as confidential and not merely shared casually.

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Can the Korean Manufacturer Subcontract Production?

Subcontracting should be clearly controlled.

A Korean manufacturer may want to outsource part of the production process to subcontractors. This may be commercially normal, but it can create risks involving quality, confidentiality, IP leakage, regulatory compliance, and delivery delay.

The agreement should state whether subcontracting is:

• prohibited;
• allowed only with prior written consent;
• allowed only for approved subcontractors; or
• allowed only for limited production steps.

If subcontracting is permitted, the manufacturer should remain fully responsible for the acts and omissions of its subcontractors.

The agreement should also require subcontractors to comply with confidentiality, IP, quality, inspection, security, and compliance obligations. A manufacturer should not be able to avoid responsibility simply by arguing that the problem was caused by a subcontractor.

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What Delivery and Incoterms Provisions Should Be Included?

Delivery terms should be specific.

The contract should address:

• production schedule;
• delivery dates;
• delivery location;
• shipment method;
• Incoterms;
• risk of loss;
• title transfer;
• export and import responsibilities;
• customs documents;
• partial shipment;
• late delivery consequences; and
• force majeure procedures.

In cross-border transactions, Incoterms should be used carefully. The parties should confirm who is responsible for export clearance, shipping costs, insurance, customs documents, and risk during transportation.

Delivery obligations should also be coordinated with payment terms and inspection rights.

For Korea-facing contracts, late delivery provisions should also address whether the manufacturer is responsible for delay, whether a cure period applies, whether delay penalties or liquidated damages apply, and whether special losses such as downstream customer penalties are excluded or preserved.

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What Quality Control, Inspection, and Acceptance Rights Are Needed?

Quality control is often the core issue in manufacturing disputes.

The agreement should define the required quality standard and inspection procedure. This may include:

• pre-production inspection;
• in-process inspection;
• final inspection;
• factory audit rights;
• sample testing;
• third-party testing;
• acceptance criteria;
• defect classification;
• corrective action procedures; and
• documentation requirements.

Inspection and acceptance provisions are especially important in Korea because, in merchant-to-merchant sales, inspection and defect notice timing may affect whether a buyer can later raise defect claims.

The agreement should therefore clearly state:

• when inspection must occur;
• what happens if the buyer does not inspect within the stated period;
• how defects must be notified;
• whether hidden defects are treated differently;
• whether sample approval affects later defect claims;
• whether acceptance waives only visible defects; and
• what records must be preserved.

If the contract is silent, statutory rules and commercial law principles may become important, which may create uncertainty for both parties.

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What Happens If Products Are Defective?

The agreement should clearly define remedies for defective products.

Possible remedies may include:

• repair;
• replacement;
• rework;
• refund;
• price reduction;
• reimbursement of inspection costs;
• reimbursement of recall costs;
• damages;
• termination for material defects; and
• indemnity for third-party claims.

The contract should also specify the defect notice procedure, time limits, evidence requirements, and whether the manufacturer has a right to cure.

In some Korea-facing transactions, statutory inspection periods, defect notice duties, or warranty periods may become relevant depending on whether the transaction is treated as a sale, contract for work, or mixed manufacturing arrangement.

For foreign buyers, it is important to preserve remedies for serious or recurring defects, especially where products are resold to customers or used in downstream manufacturing.

For Korean manufacturers, it is equally important to define defect notice deadlines and cure procedures to avoid open-ended liability.

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How Should Payment Terms Be Drafted?

Payment terms should be clear and tied to production, inspection, delivery, and acceptance milestones.

The agreement should address:

• unit price;
• currency;
• payment schedule;
• deposit or advance payment;
• payment after inspection or delivery;
• taxes and bank charges;
• invoices;
• payment deadlines;
• late payment interest;
• set-off rights; and
• payment withholding for defective or delayed goods.

In manufacturing contracts, payment and performance obligations are often connected. For example, a buyer may want to withhold payment until conforming goods are delivered or inspection is passed. The manufacturer may argue that production or delivery is not required until advance payment, specifications, samples, or materials are provided.

To reduce disputes, the agreement should clearly state:

• what must happen before each payment is due;
• whether payment is tied to inspection or acceptance;
• whether the buyer may withhold the disputed portion only;
• whether set-off is permitted;
• whether undisputed amounts must still be paid; and
• what happens if the buyer delays payment or approvals.

This type of drafting helps reduce disputes involving concurrent performance, payment defenses, and delivery obligations.

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Should Minimum Order Quantities and Forecasts Be Included?

Yes, if they are commercially important.

Manufacturing agreements often involve minimum order quantities, rolling forecasts, production capacity planning, raw material purchases, and inventory commitments.

The agreement should clearly state whether forecasts are binding or non-binding.

Important issues include:

• minimum order quantity;
• minimum purchase obligation;
• rolling forecasts;
• lead times;
• inventory holding obligations;
• raw material commitments;
• order cancellation rights;
• responsibility for unused inventory;
• price changes based on volume;
• exchange rate or raw material price adjustment triggers; and
• disposal of unused materials after termination.

This is important because disputes often arise when one party treats a forecast as a firm order while the other party treats it as a non-binding estimate.

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How Should Change Control and Engineering Changes Be Handled?

Manufacturing projects often require changes after production begins.

The agreement should include a clear change control process for:

• engineering changes;
• design modifications;
• material substitutions;
• component changes;
• tooling changes;
• process changes;
• labeling changes;
• regulatory changes;
• packaging changes; and
• testing changes.

The contract should state that the manufacturer may not make changes without the buyer’s prior written approval.

It should also specify who bears the cost of changes, whether the production schedule will be adjusted, whether new testing or sample approval is required, and whether existing inventory can still be used.

This is especially important where unauthorized changes may affect product safety, regulatory compliance, certification, warranty, or downstream customer requirements.

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What Liability, Indemnity, and Insurance Clauses Are Important?

The agreement should coordinate liability, indemnity, and insurance provisions.

Depending on the transaction, the manufacturer may be responsible for:

• defective products;
• late delivery;
• IP infringement;
• confidentiality breaches;
• product recalls;
• regulatory non-compliance;
• subcontractor misconduct;
• injury or property damage; and
• third-party claims.

The agreement should clarify whether liability is subject to a cap, whether indemnity claims are carved out, whether consequential or special damages are excluded, and whether product liability, recall, IP misuse, or confidentiality breaches are treated separately.

The contract should also avoid double recovery or conflict between:

• limitation of liability clauses;
• indemnity clauses;
• liquidated damages or delay penalty clauses;
• warranty clauses;
• recall provisions; and
• termination clauses.

Insurance requirements may also be important, especially for product liability, recall, cargo damage, cyber/data risks, and workplace-related risks.

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How Should Termination Be Addressed?

Termination provisions should be specific.

The agreement should state when either party may terminate, whether notice and cure are required, and what happens after termination.

Termination events may include:

• material breach;
• repeated delivery delays;
• serious product defects;
• failure to pay;
• insolvency;
• unauthorized subcontracting;
• misuse of IP or confidential information;
• regulatory violations;
• unauthorized changes to materials or process; and
• change of control or business closure.

Under Korean law, termination or rescission for breach may require notice and an opportunity to cure in many circumstances, unless an exception applies. Therefore, the agreement should clearly define when immediate termination is permitted and when a cure period is required.

The agreement should also address post-termination obligations, including return of molds, drawings, samples, confidential information, inventory, work-in-progress, and buyer-owned materials.

For foreign buyers, post-termination access to molds, tooling, drawings, and production data may be critical.

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What Dispute Resolution Clause Should Be Used?

The dispute resolution clause should be drafted with enforcement in mind.

The parties should consider:

• governing law;
• Korean court jurisdiction;
• foreign court jurisdiction;
• arbitration;
• language of proceedings;
• interim remedies;
• evidence location;
• enforcement against assets; and
• emergency relief.

If the Korean manufacturer’s assets are located in Korea, enforcement in Korea may be important even if the contract provides for foreign law or arbitration.

Foreign buyers should also consider whether they may need provisional attachment, injunctions, preservation of evidence, or other urgent measures in Korea to protect claims, molds, products, or confidential information.

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Practical Considerations for Foreign Companies

Foreign companies should not treat a manufacturing agreement as a simple purchase document.

Before signing a manufacturing agreement with a Korean company, foreign buyers should carefully review:

• product specifications;
• sample approval process;
• inspection, acceptance, and defect notice timeline;
• warranty period and hidden defect treatment;
• ownership of molds and tooling;
• IP ownership and restrictions;
• confidentiality and non-use obligations;
• subcontracting controls;
• delivery and Incoterms;
• payment and set-off rights;
• MOQ, forecasts, and inventory commitments;
• change control and engineering changes;
• defect remedies and cure procedures;
• indemnity and liability caps;
• insurance requirements;
• termination rights;
• post-termination return obligations; and
• dispute resolution and enforcement strategy.

Many disputes can be avoided if the agreement clearly addresses these issues before production begins.

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Conclusion

A manufacturing agreement with a Korean company should do more than state the product name, price, and delivery schedule.

It should clearly address specifications, sample approval, molds and tooling, intellectual property, confidentiality, subcontracting, inspection and acceptance, defects, payment, forecasts, change control, liability, termination, and dispute resolution.

For foreign companies, the most important goal is to prevent uncertainty before a dispute arises. A carefully drafted OEM or ODM manufacturing agreement can protect the buyer’s products, intellectual property, payment position, and enforcement rights in Korea.

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