One of the areas in which we specialise in providing advice is in Foreign Direct Investment. Korea continued the process of opening up its markets particularly in the wake of the Asian Financial crisis at the end of the 1990s and continues to do so apace with its accession to one free trade agreement after another. It is now at the forefront in many fields of business, industry and politics. That does not mean doing business in Korea is necessarily simple; challenges will be faced.
The process of establishing a Foreign Direct Invested company in Korea is now relatively simple. There are two main forms of corporate entity: the “ju sik hoe sa” and the “yu han hoe sa”. These approximate to the western forms of a stock company and “llc” respectively. There are of course myriad and various other regulatory requirements which vary in form and complexity depending on the type of business. There are also the usual corporate and business registration requirements such as tax and VAT registration and business licences. A company will also need its own seal – a somewhat anachronistic requirement. It is fair to say that there is at least an adequate amount of red tape!
However, whilst the establishment of a business presence in Korea is relatively simple; for the foreigner doing business here it is often not so and one of the reasons is the collision of two often very different cultures. One area, (of many!) in which this will manifest itself is in the attitude towards contracts. The Korean contractual norm is significantly different from that of the Anglo-American tradition. Contracts in Korea tend to be rather short and imprecise – from the point of view of a western lawyer.
This is by design; things will deliberately left to be decided at a later stage using instead what could be described as somewhat precatory statements of principle. Western contracts tend to be much more comprehensive making provision for specific events and occurrences with the emphasis being on certainty. The situation is changing as the markets become more cosmopolitan but that change is not necessarily evenly spread across the board.
The Korean tradition has its roots in its former agrarian society. Everyone knew each other. There was therefore a degree of “trust” and pragmatism. Of course, cynically it could be argued that any outcome would be the product of power dynamics, although that is the realpolitik everywhere. The European tradition of contracts arose in a period of international trade where people did not know each other. We would rely more on contractual certainty than trust.
This situation presents both commercial and legal risk. How can it be managed? How would you litigate upon it when the language is so imprecise? This leaves us at a point at which the two cultures meet and a political decision needs to be taken. It is our view that regardless of “culture” a contract from a prudential business governance point of view should be reasonably certain. A form of compromise is therefore recommended. The question then becomes to what extent should the contracts be amended and how can this be achieved.
There are a number of options, the first of which would be to import wholescale Western style amendments. The risk in so doing comes to the heart of the differing Western-Korean legal cultures and that it would cause significant and perhaps unnecessary resentment. An alternative is the presentation of relatively minor amendments but the commercial and legal risk would remain. The compromise position is to draft something which is very simple and very clear – a well drafted version of something which is somewhere between and Korean and Western style contract; this is often our recommendation.
The reality is that when a foreign business wants to establish a corporate presence in Korea, it needs to come with its eyes wide open. We try to provide both commercial and legal advice giving contextual meaning to a business problem. We are able to do this because we have both foreign and Korean lawyers and can leverage both sides of the cultural equation.
