In brief: defence procurement law fundamentals in South Korea

Bizar Male

Defence procurement law fundamentals

Mandatory procurement clauses

Are there mandatory procurement clauses that must be included in a defence procurement contract or that will be read into the contract regardless of their actual inclusion?

The Defence Acquisition Program Administration (DAPA) prescribes the mandatory terms and conditions of procurement contracts.

One mandatory condition is the selection of the Korean law as the governing law for overseas procurements and conformity with the Act on Contracts to Which the State is a Party (ACSP). It is also important that DAPA or a contracting officer execute a procurement contract using the general terms and conditions and the contract form, as prescribed by the administrative rules in existence.

The procurement contract must also expressly stipulate the purpose, price, time period for performance, performance bond, risks and delay penalty.

Cost allocation

How are costs allocated between the contractor and government within a contract?

While the allocation of costs is generally negotiable, the common practice is that the contractor bears the costs of execution. The DAPA’s general terms and conditions stipulate that the contractor shall be responsible for:

  • the administrative costs, bank charges and other related expenses (such as postal charges) incurred in performing its contractual obligations;
  • the costs in obtaining government approval for exports; and
  • delivery costs.

 

Disclosures

What disclosures must the contractor make regarding its cost and pricing?

The contractor must make the following disclosures when bidding for a ‘weapons system’ procurement contract:

  • the total price;
  • sub-system prices;
  • parts prices and cost factors;
  • cost accounting standards and the exchange rate used to convert the contract price from US dollars to Korean won;
  • detailed quotation prices for each component;
  • proposed prices based on the work breakdown structure; and
  • annual operation and maintenance costs.

 

Audits

How are audits of defence and security procurements conducted in this jurisdiction?

In Korea, audits of defence and security procurements are conducted by the Board of Audit and Inspection. The Board audits DAPA and each armed force involved in a procurement. Where appropriate, the Board also engages administrative agencies to conduct daily audits known as ‘prior consulting’.

The DAPA conducts audits of its own too. Its special inspector general for defence acquisition examines each stage of the procurement procedure. The DAPA’s auditor’s office or its ombudsman, established pursuant to the DAP Act, inspect allegations of misconduct or complaints related to the procurement of defence and security articles.

IP rights

Who gets the ownership rights to intellectual property created during performance of the contract? What licences are typically given and how?

In a ‘weapons system’ procurement contract, the seller, in principle, retains the intellectual property rights in the same manner as in contracts for the purchase of general goods. However, the seller may choose to transfer technology to the government using a defence offset agreement. In such cases, the relevant technology, equipment and tools are transferred free of charge, and the government receives ownership or a license to use the technology, equipment and tools.

On the other hand, licensing agreements may be concluded with respect to IP rights. For example, the government may obtain a licence to use the technical data and software provided by the contractor within the scope of the purpose of the contract.

The Act on Promotion of Innovation of Science Technology for National Defence states that IP rights arising from national defence research and development projects conducted under contracts or agreements executed by the state with companies, universities and research institutes, etc may be shared between the state and the research and development institute, or other participating institutes, subject to such contracts or agreements, and that a licence may be granted to the relevant companies, universities or research institutes to state-owned IP rights. The act will be implemented on 1 April 2021.

Economic zones

Are there economic zones or other special programmes in this jurisdiction commonly utilised by foreign defence and security contractors for financial or other procurement related benefits?

The Korean government provides free trade zones or free economic zones to foreign defence and security contractors. These zones grant tax cuts and financial support to foreign entities domiciled in them. However, only a few foreign contractors have moved into these zones to date.

Forming legal entities

Describe the process for forming legal entities, including joint ventures, in this jurisdiction.

A company is formed in accordance with the mandatory procedures stipulated in the Korean commercial law. The procedure for establishing a company by a foreigner is generally identical to that used by a Korean citizen. Additional requirements for foreign nationals include submitting a foreign investment notification and registering the company as a foreign-invested enterprise with the Ministry of Trade, Industry and Energy. This notification is also required for joint ventures between a foreign investor and a domestic investor.

A foreign national who intends to acquire shares or newly issued shares in a company that operates as a defence contractor must obtain permission in advance from the Minister of Trade, Industry and Energy. Violating this obligation is punishable by imprisonment of no more than one year or a fine not exceeding 10 million won.

Access to government records

Are there statutes or regulations enabling access to copies of government records? How does it work? Can one obtain versions of previous contracts?

Public access to government records is permitted under the Public Records Management Act and the ACSP. The records are prepared, integrated, used and maintained by the DAPA, which records every defence procurement under progress from their beginning to end. Bidding announcements, progress and results are available for viewing on the Defence E-Procurement System website, although access to competitors’ bids is not permitted.

Supply chain management

What are the rules regarding eligible suppliers and supply chain management and anti-counterfeit parts for defence and security procurements?

Contractors participating in bidding must register as ‘procurement contractors’, in accordance with the Guidelines on Procurement Contractor Registration Information Management. The DAPA manages suppliers and supply chains using an integrated management system.

Brokers or agents acting on behalf of a foreign contractor must register as munitions sales agents, and report brokerage fees they receive from foreign companies to the DAPA, which enables the DAPA to effectively manage the supply chain.

To protect against counterfeit parts, the government works with the Korea Customs Service to verify original manufacturer’s certification documents at every stage of delivery inspection. In the case of domestic procurements, an integrated test report management system is in place to prevent tampering with test reports. Contractors in domestic procurements are also required to check the authenticity of the test reports on products supplied by subcontractors.

Law stated date

Correct on

Give the date on which the information above is accurate.

14 December 2020.

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