Legal framework

Relevant legislation

What statutes or regulations govern procurement of defence and security articles?

The primary legislation governing defence and security procurements in Korea is the Defence Acquisition Program Act (DAP Act). The statute is further implemented by the Enforcement Decree and Enforcement Rules thereof. For matters not stipulated in the DAP Act, the Act on Contracts to Which the State is a Party (ACSP) generally applies along with the Enforcement Decree and Enforcement Rules thereof.

The Defence Acquisition Program Administration (DAPA), an executive agency of the Ministry of National Defence, has detailed administrative rules, such as the Defence Acquisition Program Management Regulation (DAPMR), Guidelines for Evaluation of Weapon System Proposals, and Offset Program Guidelines.

Identification

How are defence and security procurements identified as such and are they treated differently from civil procurements?

Among the articles owned and controlled by the government, the items managed by the Ministry of National Defence and its agencies, the joint chiefs of staff or the army, navy and air force are defined as ‘defence articles’. Defence articles are divided into:

  • weapon systems (ie, all weapons to exert combat power, including guided missiles, aircraft and naval ships, along with equipment, parts, facilities, software and other items necessary to operate such weapons); and
  • support systems (ie, equipment, parts, facilities, software and items other than those of weapon systems).

In principle, defence articles are procured by the DAPA. However, under the DAP Act, if it is efficient for the army, navy or air force to directly procure defence articles (eg, items with an annual procurement amount of less than 30 million won), such procurements can be carried out by each armed force. If the manufacturing and supply characteristics of a defence article are the same as those of a commercial product, and the item meets certain requirements (eg, value of more than 50 million won), the procurement of such item may be delegated to the Public Procurement Service, an executive agency under the Ministry of Strategy and Finance.

Conduct

How are defence and security procurements typically conducted?

Defence and security procurements are generally conducted to improve defence capacities or to manage military forces. Procurements for the improvement of defence capacity involve purchase, new development, performance improvement and research and development (research and development) of weapons, coupled with installation of accompanying facilities, to improve military capacities. Procurements for the effective management of military forces relate to the normal operations of the army, navy and air force.

Procurements for the improvement of defence capacities are carried out through the following procedures:

  • requests from each armed force;
  • decision of the joint chiefs of staff;
  • prior research;
  • establishment of project strategy;
  • adjustment to reflect the Mid-Term National Defence Plan;
  • budgeting;
  • bidding announcement; and
  • contract conclusion.

On the other hand, procurements for the management of military forces are conducted by the DAPA upon the request for specific items made by each armed force in compliance with the Procurement Planning Guidelines issued by the Ministry of National Defence.

Proposed changes

Are there significant proposals pending to change the defence and security procurement process?

Proposals currently pending in the National Assembly that would change the defence and security procurement process if passed include the following:

  • A proposal to clearly define defence projects as the projects of enhancing defence power, promoting the defence industry, and procuring military supplies as necessary for establishing a foundation for defence of the country.
  • A proposal to convert the concept of offset programme to that of ‘industrial cooperation’. With respect to the projects of purchasing weapons, equipment, and parts from abroad, this proposal seeks to convert offset programs adopted thus far, under which knowledge or technology is transferred from foreign counterparts of the contract concerned, or domestic weapons, equipment or parts are exported abroad, or otherwise certain considerations are provided in return for the weapons, equipment, and parts purchased from abroad, to ‘industrial cooperation’ under which weapons, equipment, parts or technology will be developed or produced jointly or joint investments therein will be made.
  • A proposal to monitor and check former public officials’ employment activities in the defence Industry, for 15 years after their retirement from the public office.
  • A proposal to authorise the Chairman of the Joint Chiefs of Staff to build the plans of testing and evaluating weapon systems and key technologies, instead of the Minister of National Defense, who has so far taken charge of such plans. According to this proposal, the Chairman of the Joint Chiefs of Staff should build the testing and evaluation plans and ensure such testing and evaluation results satisfies the respective needs of armed services.
  • A proposal to require the Minister of Defense Acquisition Program Administration to build monitoring plans to prevent the use of parts that are no longer available or counterfeited.
  • A proposal to authorise the government to request contract counterparts or potential suppliers to submit cost documents as necessary to calculate costs and execute contracts, such as the contracts for procurement of military supplies. According to this proposal, the contract counterparts or potential suppliers, if requested, should provide cost documents unless there is a justifiable reason to refuse such a request.
  • A proposal to revoke the status of a ‘defence contractor’ if the representative or officials or employees of the contractor acquired, used, or disclosed any defence technology or military secrets.
Information technology

Are there different or additional procurement rules for information technology versus non-IT goods and services?

As software that supports and operates a weapon system is inseparable from the main equipment (or hardware), it is generally required to be integrated into the main equipment (embedded software) or as a separate item (supporting software) through the procedures as discussed in question 3.

As heightened security and interoperability are required for IT goods and services compared with non-IT goods and services, a more rigorous process applies when verifying the reliability of procurements of IT goods and services.

Relevant treaties

Are most defence and security procurements conducted in accordance with the GPA or other treaty-based procurement rules, or does this jurisdiction commonly use the national security exemption to procure them?

Korea is a party to the Government Procurement Agreement (GPA) within the framework of the World Trade Organization. However, the GPA does not apply when it is necessary to protect significant national security interests in connection with defence procurements. As a general principle, defence articles manufactured domestically have preference over those manufactured overseas. Only those articles that are not domestically available can be purchased overseas by the government.

Korea has also entered into free trade agreements with ASEAN, Australia, Canada, Central America, Chile, China, Colombia, EFTA, the European Union, India, New Zealand, Peru, Singapore, Turkey, the United States and Vietnam. Government procurement provisions included in those free trade agreements also carve out exceptions that apply where necessary to safeguard significant security interests in connection with defence procurements.

Disputes and risk allocation

Dispute resolution

How are disputes between the government and defence contractor resolved?

Disputes between the government and a defence contractor over bidding or contract-related issues involved in defence and security procurements, such as bidding procedures, bidding outcomes or delay penalties, are settled through civil litigation.

In addition, in the case of defence and security procurements of more than a certain amount (3 billion won for a construction contract; 150 million won for a commodity contract; and 150 million won for a service contract), disputes between the government and a defence contractor may also be settled through the appeal process under the ACSP or through the mediation process by the State Contract Dispute Mediation Committee. A defence contractor may directly file a lawsuit in court without exhausting dispute resolution processes outside the court system. Alternative dispute resolution processes are not frequently used in practice.

On the other hand, if a defence contractor has committed unfair bidding, misstatement of cost, or breach of contract, the government (ie, the DAPA in the case of a contract administered by the DAPA, and the Ministry of National Defence in the case of a contract administered by the national defence authorities) may restrict the defence contractor’s eligibility to participate in bidding for a certain period of time. Disputes over such restriction are resolved by administrative appeal or administrative litigation.

To what extent is alternative dispute resolution used to resolve conflicts? What is typical for this jurisdiction?

The DAPA resolves disputes related to procurements of weapon systems through litigation or arbitration. In the case of domestic procurements, the parties generally stipulate in their contract to resolve disputes through litigation. In the case of overseas procurements, it is common to resolve disputes through arbitration. However, in some cases, disputes related to overseas procurements may also be stipulated to be resolved through litigation in Korea.

The arbitration clause included in the DAPA’s general terms and conditions stipulates that disputes shall be finally settled by arbitration conducted in Seoul, Korea in accordance with the Commercial Arbitration Rules of the Korean Commercial Arbitration Board. The arbitration clause may be modified depending on negotiations between the DAPA and the contractor.

Indemnification

What limits exist on the government’s ability to indemnify the contractor in this jurisdiction and must the contractor indemnify the government in a defence procurement?

There is no particular limitation on the scope of the government’s liability toward a defence contractor. Accordingly, where the government breaches the defence procurement contract, it shall be responsible for damages caused to the contractor in the same way as ordinary contracts - provided that a special clause about damages of delayed payment is included in the defence procurement contract to stipulate that the damages shall be calculated by multiplying the number of days of delay by the average lending rate of financial institutions for the given month.

On the other hand, if the contractor fails to perform the contract, it shall be liable to the government in accordance with general legal principles, unless otherwise specifically provided in the contract.

Limits on liability

Can the government agree to limit the contractor’s liability under the contract? Are there limits to the contractor’s potential recovery against the government for breach?

As a general principle, government contracts must be entered into in compliance with all relevant laws and regulations, and contracting officers generally have very little discretion in executing contracts. In other words, contracting officers are restricted from arbitrarily limiting the contractor’s liability under the contract.

On the other hand, the Enforcement Decree of the Defense Acquisition Program Act prescribes that under the contracts on the production of test products for research and development of weapon systems and key technologies or the contracts on the first mass production of the weapon systems designated as ‘defense material’, the liquidated damages should not exceed 10 per cent of the contract price, and the Enforcement Decree of the Act on Contracts to Which the State is a Party prescribes that the liquidated damages of other contracts should not exceed 30 per cent of the contract price.

The DAPA’s general terms and conditions for overseas procurements partially mitigate the liability of the contractor by limiting the total amount of delay penalty to 10 per cent of the contract price. In addition, depending on negotiations with the contractor, the government may further agree to limit the scope of product liability claims as suggested by the contractor.

Risk of non-payment

Is there risk of non-payment when the government enters into a contract but does not ensure there are adequate funds to meet the contractual obligations?

There is little risk that the Korean government will not meet payment obligations under procurement contracts. A weapon system is not procured without first securing a budget and the Korean government is responsible for executing payment obligations under government procurement contracts from the single national treasury, even if they are signed by an individual government agency such as the DAPA. The Korean government maintains a sound level of reserves to perform such payment obligations.

Parent guarantee

Under what circumstances must a contractor provide a parent guarantee?

A parent guarantee is not required in a government procurement contract. The contractor is directly required to pay a performance bond to cover the risk of potential damages at each stage of the conclusion and performance of the contract. In particular, in the case of overseas procurements, the government demands a performance bond of at least 10 per cent of the contract value within 30 days after opening a letter of credit or within a period specified in the contract. The performance bond must be paid in cash or by an irrevocable standby letter of credit. If the contractor fails to pay the performance bond within a specified period without justifiable grounds, the DAPA reviews and determines whether the contract should be terminated. Bond deposits are attributable to the Treasury when the contractor does not fulfil its contractual obligations.

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?

A contracting officer is statutorily required to ensure that a procurement contract expressly states the purpose of the contract, contract price, contract period, performance bond, risks and delay penalty. A contracting officer is also required to execute a procurement contract by signing it. The DAPA or a contracting officer executes a procurement contract using the general terms and conditions, and the contract form, as prescribed by administrative rules in advance.

In addition, the DAPA’s general terms and conditions for overseas procurements stipulate that the contract is governed by the laws of Korea in terms of its formation, validity and performance and that the provisions of the contract shall not be interpreted against the ACSP.

Cost allocation

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

Cost allocation varies depending on negotiations between the parties, but as a common practice, the contractor is responsible for the cost of contract execution. The DAPA’s general terms and conditions provide that the contractor shall:

  • bear administrative costs, bank charges and other related expenses (such as postal charges) incurred while fulfilling contractual obligations;
  • obtain the government approval required for export of contract articles at its own risk and expense; and
  • deliver contract articles at its own risk and expense.
Disclosures

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

In general, in the case of a weapon system procurement contract, in its proposal request, the DAPA requires data, prepared in a prescribed form, on:

  • the total price;
  • sub-system prices;
  • part prices and cost factors;
  • contract price conversion;
  • detailed quotation prices for each component;
  • proposed prices based on work breakdown structure; and
  • annual operation maintenance cost.

In accordance with this request for proposal, defence contractors must present their proposal with supporting materials related to the proposed price and cost calculation.

Currently, the government has submitted a proposed amendment to the Defense Acquisition Program Act to the National Assembly. Under the proposed amendment, the government may request the contract counterparts and potential suppliers to provide cost data as required to calculate costs for execution of military supplies procurement contracts. The contract counterparts and potential suppliers, upon receiving such a request, should provide such data unless there is any justifiable reason to refuse such request.

Audits

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

The Board of Audit and Inspection has a special audit department, which frequently or periodically conducts audits of the DAPA and each armed force concerning defence and security procurements. In addition, the DAPA’s special inspector general for defence acquisition examines each stage of the procurement projects. The auditor’s office or ombudsman of the DAPA, established pursuant to the DAP Act, also conduct inspections and audits of misconducts or complaints related to defence and security procurements.

IP rights

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

In the case of a weapon system procurement contract, in principle, the seller retains the intellectual property rights in the same manner as contracts for the purchase of general goods. However, technology may be transferred to the government through a defence offset agreement. In such cases, the relevant technology, equipment and tools must be provided to the government free of charge, and the government retains the ownership or licence of the technology, equipment and tools.

On the other hand, licensing agreements may be concluded with respect to intellectual property rights. Terms of such agreements vary from case to case. In some cases, the government retains the right to improve technical data and software provided by the contractor within the scope of the purpose of the contract.

Currently, the proposed Act on the Promotion of Innovations of National Defense Science is pending at the National Defense Committee of the National Assembly for deliberation. Under the proposed bill, any results of development created in the course of national defence research and development projects are subject to the joint ownership between the government and the research and development institute concerned or participating research and development institutes concerned.

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 has designated a free trade zone or a free economic zone, and grants benefits such as tax reduction and financial support to foreign-invested enterprises residing in such zones. However, very few foreign defence contractors have moved into free trade zones or free economic zones in Korea.

Forming legal entities

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

There are five types of company recognised by Korean laws:

  • partnership companies;
  • limited partnership companies;
  • limited liability companies;
  • stock companies; and
  • limited companies.

Most of the companies established in Korea are corporations. There are two ways of incorporation: promotion and subscription. In either way, the promoter who intends to incorporate a company prepares the company’s articles of incorporation. The promoter may acquire the entire shares by paying the full par value (incorporation by promotion), or acquire part of the shares, allowing other shareholders to subscribe the remaining shares (incorporation by subscription). Thereafter, the shareholders’ general meeting and the board meeting are held, incorporation of the company is registered and registration tax and other taxes are paid. The incorporation process is complete once the company is registered with the local tax office.

In the case of incorporation of a company by a foreigner, foreign investment notification is required before the registration of incorporation and the company needs to be registered as a foreign-invested enterprise after the registration of incorporation. Other than that, the procedures of establishing a company by a foreigner are identical to those by a Korean citizen. The notification applies when a foreign investor and a domestic investor form a joint venture.

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?

Documents related to government contracts are archived or disclosed as prescribed under the Public Records Management Act and the ACSP. The DAPA prepares records of all progress and actions taken in each defence procurement project from the time of filing the request to the end of the project, and maintains and uses such records by inputting them, with the exception of confidential documents, into the integrated project management information system. Such records, which include all documents relating to the contract, negotiations between the DAPA and the contractor and selection of the model, are kept permanently.

Through the Defence E-Procurement System, the DAPA discloses such records as prescribed by the ACSP, including records of bidding announcements, bidding progress and results of successful bidder decisions. The contractor can view or obtain copies of records of its own contract through the Defence E-Procurement System, but cannot access other companies’ contracts (past or current).

Supply chain management

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

The DAPA requires the companies that intend to participate in the bidding for procurements to register as procurement contractors in compliance with registration requirements (eg, registration in the Defence E-Procurement System, business licence) under the Guidelines on Procurement Contractor Registration Information Management. The DAPA also manages suppliers and supply chains through an integrated management system.

In general, the government screens for counterfeits by identifying the original manufacturer’s certification documents at the stage of delivery inspection or, if in doubt, confirming the documents related to the import and export in cooperation with the Korea Customs Service. In the case of domestic contracts, an integrated test report management system has been implemented to prevent tampering with test reports, while requiring the contractor to check the authenticity of the test report on the quality of the parts supplied by the subcontractor.

Currently, a proposed amendment to the Defence Acquisition Program Act, under which the Minister of Defense Acquisition Program Administration will build monitoring plans to prevent the use of parts that are no longer available or counterfeit, is pending at the National Assembly.

International trade rules

Export controls

What export controls limit international trade in defence and security articles? Who administers them?

The DAPA is the agency responsible for administering the export of defence and security articles. In order to export defence and security articles, the exporter must file a report with the DAPA as a defence article exporter or agent, and obtain approval of each export transaction from the DAPA.

The DAPA is cooperating with companies by establishing the Defense Export Promotion Center for management and development of the Korean defence industry’s exports.

Domestic preferences

What domestic preferences are applied to defence and security procurements? Can a foreign contractor bid on a procurement directly?

In defence and security procurements, the DAPA has an obligation to apply domestic preferences to defence and security articles manufactured domestically. Procurement of foreign articles is only allowed in exceptional cases where domestic articles are not available. Accordingly, if there are domestic defence articles with the same performance and price as foreign articles, the DAPA must purchase domestic articles over foreign ones. However, procurement of certain defence articles with low relevance to the national security interests can be carried out through international bidding, and foreign contractors can bid directly on such procurements.

Favourable treatment

Are certain treaty partners treated more favourably?

In principle, the Korean government does not treat any country more favourably than others regarding the purchase of defence and security articles from foreign contractors. The government has concluded treaties to cooperate with various countries concerning the defence industry. It is not bound by any treaty to apply preference to weapons of a specific country.

Sanctions

Are there any boycotts, embargoes or other trade sanctions between this jurisdiction and others?

According to the resolution of the United Nations Security Council, the Korean government does not engage in any transactions with North Korea concerning the defence industry or other related industries. It also bans the export of weapons to countries subject to arms embargo under international treaties, or countries threatening international peace and security, such as those assisting in international terrorism and drug supply, or countries that may develop or proliferate weapons of mass destruction.

Trade offsets

Are defence trade offsets part of this country’s defence and security procurement regime? How are they administered?

The Korean government promotes defence trade offsets when purchasing defence articles of more than US$10 million from overseas. However, defence trade offsets may not be used in certain circumstances. For example, they are not used:

  • when the government purchases repair parts, key parts for use in research and development for the development of core weapon systems in Korea or basic raw materials, such as oil;
  • when the government procures defence articles through a contract with a foreign government; and
  • when the Defence Acquisition Program Promotion Committee decides not to proceed with offset trades in consideration of national security and economic efficiency.

Defence trade offsets must:

  • secure the technology necessary for defence improvement projects;
  • secure logistics support capability for weapon systems to be procured;
  • allow the Korean government to participate in the development and production of weapon systems;
  • enable the Korean government to facilitate the export of domestic defence articles to foreign countries; or
  • secure maintenance of the weapon systems of the contracting partner.

They must also meet at least a certain percentage of the main contract amount. (Offset Program Guidelines can be found at the DAPA website.)

According to the proposed amendment to the Defense Acquisition Program Act that is pending at the National Assembly, offset programmes will be replaced with projects of industrial cooperation between the Korean defence industry and overseas defence industries.

Ethics and anti-corruption

Private sector appointments

When and how may former government employees take up appointments in the private sector and vice versa?

The Public Service Ethics Act restricts former government employees from taking up appointment in the private sector under certain circumstances. For example, the president, prime minister, cabinet members, members of the National Assembly, head of each local government, public officials of Grade 4 or higher, and officers over colonel or civil employees equivalent thereto may not take up employment, for three years following the termination of their public services, with a commercial private company of a certain size or above that is closely related to the work of the organisation or department to which they have belonged for five years.

In contrast, there is no specific regulation that restricts persons in the private sector from taking up appointments in the government.

Addressing corruption

How is domestic and foreign corruption addressed and what requirements are placed on contractors?

The Criminal Code, together with the Act on the Aggravated Punishment of Specific Crimes and the Act on the Aggravated Punishment of Specific Economic Crimes, punishes corruption of public officials, including:

  • the act of abusing their position or authority or violating laws for benefits of themselves or any third party in connection with their duties;
  • the act of causing damage to public institutions in using public budgets, or in acquiring, managing or disposing of public property, or in concluding and performing a contract to which a public institution is a party, in violation of laws and regulations; and
  • the act of forcing, recommending, suggesting or inducing the execution or concealment of any of the aforementioned acts.

In addition, any person who offers, or promises to offer, or indicates willingness to offer, bribery to foreign officials in connection with their duties for the purpose of obtaining improper profits in international business transactions will be punished by imprisonment or fines under the Act on Combating Bribery of Foreign Officials in International Business Transactions.

Furthermore, the Improper Solicitation and Graft Act (commonly called the Kim Young-ran Act), which was enacted in 2016, punishes public officials who demand, accept or promise to accept anything of value of 1 million won (per single occasion) or 3 million won (per year), regardless of whether it is connected with their duties.

As another measure to prevent corruption, representatives and executives of defence contractors (and their subcontractors) and defence trade agents are required to submit integrity pledges and then fully comply with them. Defence contractors, companies or research institutions that breach integrity pledges may be restricted in their eligibility to participate in bidding for up to five years.

Lobbyists

What are the registration requirements for lobbyists or commercial agents?

Except for lawyers, no one is allowed to lobby the government, public institutions or public officials on behalf of others for commercial purposes. The act of lobbying is interpreted as a lawyer’s job, and there is no separate lobbyist registration system.

However, a defence trade agent (ie, a person who intends to act as an intermediary or agent for a foreign company in the process of concluding and performing a contract between the foreign company and the DAPA) must be registered with the DAPA in advance.

Limitations on agents

Are there limitations on the use of agents or representatives that earn a commission on the transaction?

As a general rule, a foreign contractor is required to deal directly with the DAPA rather than through a defence trade agent in the procurement of more than US$2 million. However, when a foreign company inevitably needs to use a defence trade agent, it is commonly allowed to use one as long as there is no special issue.

As discussed above, a defence trade agent must register with the DAPA in advance. Acting as a defence trade agent without registration will lead to punishment.

Those who have been sentenced to imprisonment without forced labour, and where five years have not passed from the date when the execution of sentence was completed (or deemed to be completed), are not eligible to register as defence trade agents. For registration as a defence trade agent, a registration application must be filed with the DAPA accompanied by:

  • resumes of the representative and officers;
  • employment information such as numbers and names of total employees and employees related to the defence industry;
  • an integrity pledge; and
  • a security pledge.

Aviation

Conversion of aircraft

How are aircraft converted from military to civil use, and vice versa?

In connection with defence procurement programmes, the Korean government is pursuing not only the enhancement of military capability but also the promotion of defence science and technology as well as the overall development of the defence industry and other related industries. Accordingly, the government encourages the spin on, spin off and dual use of civilian-military combined technologies by strengthening research and development through technical cooperation between the military and civilian sectors, and expanding civilian-military mutual technology transfer through the standardisation of specifications.

The government may apply preference to the purchase of defence articles developed by civilian-military technical cooperation projects, and the procurement contract may proceed on a negotiated contract basis instead of competitive bidding. In the case of transferring defence technology to the private sector, the head of the central administrative agency concerned classifies technologies as military and non-military, prepares a list of technologies that can be mutually transferred, chooses technology transfer projects and makes relevant technologies available to the private sector.

Drones

What restrictions are there on manufacture and trade of unmanned aircraft systems or drones?

The Aviation Act governs the safe navigation of aircraft in accordance with the standards and methods adopted by the Convention on International Civil Aviation and Annexes thereto. The unmanned aircraft system is regulated as a type of aviation.

The manufacture and sale of unmanned aircraft are not prohibited or restricted, but the design, manufacture and maintenance of their physical frames are regulated through the certification or airworthiness that applies to aircraft in general. If the weight of the aircraft (excluding that of the fuel) is in the range of 12kg to 150kg, pilot certificate, owner notification and display of the notification number will be required. Aircraft with a weight of less than 12kg will not be subject to such requirements.

Unmanned aircraft or unmanned rotating wing aircraft of less than 25kg, and unmanned airships with a weight of less than 12kg (excluding that of the fuel) and a length of less than 7 metres are allowed to fly at altitudes less than the minimum flight altitude (150 metres) in an area that is not a controlled zone or no-fly zone without further permission. Even so, it is prohibited to fly such aircraft in densely populated areas.

Military unmanned aircrafts are required to obtain airworthiness certification conducted by the DAPA or the armed forces under the Military Aircraft Airworthiness Certification Act.

On 30 April 2019, the government enacted the Act on the Promotion of Utilization of Drones and the Establishment of Foundation Therefor, of which intent is to develop the unmanned aerial vehicle industry, designate a special area for deregulation of unmanned aerial vehicles, and set up a drone traffic management system. It plans to implement the act on 1 May 2020.

Miscellaneous

Employment law

Which domestic labour and employment rules apply to foreign defence contractors?

The parties to the employment agreement may choose the governing law of the agreement. However, despite the parties’ choice of governing law, the employee shall not be deprived of the rights and protections that the employee is entitled to under mandatory laws of the country where the employee routinely provides services. For instance, a Korean employee will be entitled to the rights and protections under Korean labour laws, even if the governing law of the employment agreement is determined to be the laws of a foreign jurisdiction that may not recognise the same rights and protections as provided by Korean labour laws.

Defence contract rules

Are there any specific rules that contractors, foreign or domestic, are bound by in defence contracts?

The DAP Act prescribes domestic procurement procedures and overseas procurement procedures. The details are further expanded upon in the DAPMR. The DAPA has established standardised special terms and conditions to be used in the case of domestic procurements. Unless there is a special reason, domestic procurement contracts are generally entered into using such terms and conditions. The DAPA has also established general terms and conditions for foreign procurements, and negotiates with foreign contractors based on such terms and conditions.

Do contractors avail themselves of these rules when they perform work exclusively outside of the jurisdiction?

Procurement contracts between the Korean government and a foreign contractor must comply with the provisions concerning conclusion of procurement contracts under the DAP Act, the ACSP and other relevant legislation. These laws will apply even where the contractor performs work exclusively outside Korea.

Personal information

Must directors, officers or employees of the contractor provide personal information or certify that they fulfil any particular requirements to contract with a government entity?

To participate directly in the procurement bidding, the contractor must register as an overseas source in the Defence E-Procurement System. For the registration, a registration application, notarised security pledge and business registration certificate must be submitted. In the case of the registration of a domestic branch or domestic defence trade agent of a foreign company, it must submit a domestic business registration certificate, corporate registry, security measurement results, integrity pledge and an agency agreement signed by the foreign company. Personal information of directors, officers or employees of the contractor is not required, and there is no particular qualification that they are required to satisfy. However, when a civilian (regardless of their nationality) needs to enter the DAPA or a military unit in connection with the execution of a defence procurement contract for more than one month, he or she may be required to provide personal information for a background check.

Licensing requirements

What registration or licensing requirements exist to operate in the defence and security sector in the jurisdiction?

To register as an overseas source, a foreign company must apply for registration in the Defence E-Procurement System. The application includes a notarised security pledge, business licence or business registration certification in the foreign jurisdiction, manufacturer’s certificate or supplier’s certificate to confirm the type of industry, and employment certificate of the signatory of the procurement contract. Upon the submission of all those required documents, the registration certificate will be issued to the foreign company, and will become eligible to participate in procurement bidding in Korea.

On the other hand, for a Korean branch or Korean defence trade agent of a foreign company to participate in procurement bidding, it must

  • register in the Korean Comprehensive E-Procurement System their eligibility to particulate in competitive bidding;
  • register with the Defence E-Procurement System;
  • obtain security qualification from the Defence Security Command; and
  • submit a document proving the relationship between the foreign company and its domestic branch or domestic defence trade agent.
Environmental legislation

What environmental statutes or regulations must contractors comply with?

Contractors operating within the territory of Korea must comply with obligations as prescribed by environmental laws and regulations of Korea in connection with their business activities, regardless of whether they are domestic or foreign entities. Korean environmental laws include the:

  • Framework Act on Environmental Policy;
  • Natural Environment Conservation Act;
  • Environmental Health Act;
  • Clean Air Conservation Act;
  • Soil Environment Conservation Act;
  • Marine Environment Management Act;
  • Occupational Safety and Health Act;
  • Chemicals Control Act;
  • Nuclear Safety Act;
  • Water Environment Conservation Act;
  • Malodour Prevention Act;
  • Environmental Impact Assessment Act; and
  • Environmental Dispute Adjustment Act.

Must companies meet environmental targets? What are these initiatives and what agency determines compliance?

Companies exporting products to Korea or operating within the territory of Korea must comply with environmental standards as prescribed by the Korean government, and may be subject to criminal penalties if they fail to comply with the standards. Environmental standards are established mostly by the Ministry of Environment in accordance with the aforementioned environmental laws. The Ministry of Environment has the authority to investigate whether a company has complied with environmental standards, and may file a criminal complaint with the prosecutor based on the results of the investigation.

The Ministry of Oceans and Fisheries has the authority to investigate and deal with pollution of the marine environment.

In addition, in the case of regulations on hazardous substances that affect not only the environment but also the working environment of employees, the Ministry of Employment and Labour determines risk standards.

Do ‘green’ solutions have an advantage in procurements?

The Act on the Promotion of Purchase of Green Products provides that the national government, government entities, local governments and public institutions must purchase products with greenhouse gas reduction technology, efficient energy utilisation technology, clean production technology, clean energy technology, resource circulation and environmentally friendly technology, and technology to minimise pollutant emission as long as such products are available. In addition, the Environmental Technology and Industry Support Act requires the Ministry of Environment to certify eco-friendly products or to get them certified by the Minister of Trade, Industry and Energy as products that conserve resources or promote recycling so that the government may purchase such products. Furthermore, in the case of domestic procurements, the eligibility to participate in bidding can be further restricted based on whether the defence article to be procured has been certified by an environment friendly product or environment technology by the Ministry of Environment.

Updates & Trends

Key developments of the past year

What were the key cases, decisions, judgments and policy and legislative developments of the past year

Key developments of the past year 41 What were the key cases, decisions, judgments and policy and legislative developments of the past year?

The upper limit of liquidated damages has been adopted to prevent the liquidated damages regarding test products or the first products manufactured in mass production from exceeding 10 per cent of the contract price, and the upper limit of contract deposits has also been prescribed not to exceed 20 per cent of the contract price if the products concerned are test products or the first products manufactured in mass production. Further, the organisation of the DAPA has been changed. In the past, project divisions and contract divisions were separated, but such divisions have been unified to project divisions so that projects and contracts can be managed and implemented on a consolidated basis to ensure the efficiency of the defence power enhancement projects and strengthen the responsibilities of the divisions concerned.