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.