The Republic of Korea is the seventh largest trading partner of the United States, valued at US$82 billion dollars in 2007, of which US$29 billion worth of products was exported to Korea.  The brisk trade between the two nations has drawn many U.S. businesses to seek exporting opportunities with Korean importers.  Some exporters have met with success, while others have met with frustrations and losses, especially during the recent global economic downturn.  In April 2009, exports from Korea fell 19% to $30.7 billion from the same month last year, and imports to Korea dropped 35.6% to $24.7 billion.  For U.S. exporters, answers to the following four basic questions may have reduced the headaches of exporting to Korea.

One: Do You Know Your Importer?

As an exporter, you are delighted to have met an importer in Korea.  You want to export your goods, but do you know to whom are you exporting?  More important, will they be able to pay?

Unless the Korean importer is a sole proprietor, a simple look in the Korean Commercial Registry will provide basic information about a Korean company, such as directors, date of establishment, capitalization if the exporter is a corporation, and address.  Some trade organizations also publish a membership directory that can provide some credence regarding the trustworthiness of a Korean importer if it is a member.  If an exporter wants to establish a long-term relationship, a credit report can be ordered.  A credit report will show the main assets, such as real property owned by the Korean company, and whether those assets have a lien.  Multiple liens on assets, especially recent liens, lead to the conclusion not only that the company is financially unsound, but also that a potential lawsuit to recover damages may be futile in case of a breach of contract, or even fraud.  For first time or initial transactions with importers, it is good practice to take out an insurance policy for nonpayment by the importer.

Two: How should I get paid?

Ideally, an exporter should get paid in cash, up front, in full, or at least in part.  However, the vast majority of trade transactions are not ideal, and there are a number of financial instruments and financial arrangements available for an exporter in dealing with a Korean importer.  The second best thing next to cash is a letter of credit.  However, a letter of credit (L/C) is second best and is not an absolute guarantee of payment without satisfying the documentation requirements and the other terms and conditions.  Of course, other common financial arrangements include documents against payment (D/P) and documents against acceptance (D/A).  These transactions are common in Korea, and a systematic implementation of payment arrangements and instructions should be in place when dealing with new Korean importers (after getting to know your importer).

Three: What are some issues with payment and nonpayment?

Since most transactions are not paid in cash but use L/Cs, D/Ps, D/As, or a combination thereof, serious issues can arise for these types of transactions where the cargo arrives in Korea but the importer does not claim the goods.  If the goods sit at the port, demurrage accrues, and if the Korean importer does not claim the goods at the port within a certain period of time, the Korean Customs Service (KCS) will auction them off.  Another option is to have the cargo exported out of the port.  If the exporter waits too long, the cargo is auctioned and must clear customs before it is re-exported to a different destination.  The threat of an auction puts the Korean importer at an advantage in causing re-negotiation of the price of the goods and other terms and conditions.  If the auction is looming, the exporter is cornered into accepting new pricing and terms demanded by the importer and has little leverage in demanding that the importer abide by the original terms.  In case of an auction, the Korean Customs Service will value the cargo and place the cargo on auction at the full valued price.  If the cargo is not sold in the first week of the auction, the KCS will reduce the value price by a certain percentage and put it up for auction for another week.  This process continues for a few weeks until the cargo is sold.  Any party can participate in the auction, including the original exporter.

Four: Do I need a contract?

Under Korean law, written contracts are not necessary to be enforceable.  However, it is very difficult to prove the terms and conditions of an oral contract, since the other party can simply refute the agreed terms or conditions.  To make explicit the terms and conditions and to agree on terms and conditions in case of an unexpected event, like nonpayment, well-written contracts will help resolve problems.  Common provisions in import-export contracts include the details of the goods (quality, number, packaging, insurance, shipping and others), type and schedule of payment, timing and method of delivery, termination, force majeure, compensatory damages, arbitration, governing law, and jurisdiction.  Korean attorneys can offer U.S. exporters insight into common issues with Korean importers and provide information on options for unexpected events.

Conclusion

U.S. exporters can profit from transactions with other countries.  However, there are potential pitfalls that can cause serious issues with cargo and payment.  To reduce the number of sleepless nights due to problems with Korean importers, U.S. exporters should get to know the Korean importer, determine the terms and conditions, know the potential pitfalls, and prepare for these matters with a well-written contract.

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Yu-Kwang Yoon is a Korea-licensed attorney with Lee International IP & Law Group.  Yu-Kwang handles international transactions such as import/export matters.

Jae H. Cho is a New York-licensed attorney working as a foreign legal consultant with Lee International IP & Law Group.

Established in 1961, Lee International is a full-service law firm offering expertise and experience in all major areas of the law.  Lee International advises foreign and domestic clients on international transactions, finance, trade, customs, corporate, intellectual property, employment and litigation.