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Oct 20, 2010

Doing Business in Asia: Due Diligence, Agreements, Attorneys and Street Smarts

International attorneys mention in blogs, speeches, journal articles and in the press, frequently, that doing business in Asia is different and much more risky than in the West. Maybe we are not getting the word out clear enough.
Understand, we are not trying to sell you anything you don’t need ----LISTEN UP - Get someone who works locally to execute these deals, get a carefully drafted agreement and engage in a little due diligence. If not, we love litigation, winding-up joint ventures and filing criminal complaints. These are the things that require a good deal more time than drafting and negotiating agreements.

For example, a client involved in a USD 600,000 breach of contract/fraud case (option to purchase industrial machinery) with a Korean manufacturer recently contacted use with another issue in Korea.

The client (I know you are reading this and we love you guys) concluded a deal with a bare-bones PO and invoice. As I mentioned in a previous post, “[i]f you plan on just dealing through a purchase order (PO) in Korea, you are heading down a path that will invariably lead to a kick in the tail.” Korean Outsourcing: Legal Basics and other articles such as Korean Joint Ventures: Bare Essential of a JV in Korea


The client sent a substantial amount of money as a deposit on a piece of used industrial machinery and some spare parts. After sending the money, the Korean seller unilaterally changed the terms by making more demands. This is a common tactic. The seller now has your money and has the upper-hand in now renegotiating better terms for himself.

The Korean seller noted that some of the parts would cost more money, he required an additional 20% deposit, he can’t deliver the machinery FOB and a slew of other bull that all related to trying to obtain a better deal. The client already quoted the final sale price and terms to his final customer and thus was stuck between a customer and a jerk.

We settled the matter for the client after a good deal of time and long heated conversations with the Korean seller. The client gained a couple of more grey hairs, a sizeable legal bill, a smaller margin in his deal and another lesson in doing business with Koreans (the same risk applies to most Asian nations)

Please. Please. Listen.

First, Due Diligence. Due Diligence. Due Diligence. Due Diligence means at least doing an asset check before sending someone money. The Korean company proclaimed on its website that it was a medium-size corporation. However, the company was a sole-proprietorship without any assets. Don’t forward money to strangers.

Second, L/Cs add a degree of safety to a deal for buyers and sellers. A seller that doesn’t want to utilize a L/C is a seller that we must scrutinize. A solvent seller will normally be able to easily obtain credit on the L/C. In this case, the seller was unwilling to utilize an L/C for a variety of non-sense reasons relating to his total lack of commercial sense. Therefore, we established (will establish) a joint bank account with the power to release the funds in the hands of our law firm.

Thirdly, an agreement shouldn’t be only one page long. Numerous risks come-up in these types of deals. Get someone to assist that has partaken in litigation and has worked with international transactions in Korea. In Asia, a lawyer is recommended, since often the attorney awakens the fear in the belly of the beasts (my partner is a former Korean judge and he loves this part of his role) and the attorney will often understand better than anyone else the risks of doing business in Asia (my group has dozens of pending breach of contract cases based on agreements that left much to be desired- some were drafted by less-than qualified “international” and Korean attorneys).

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SeanHayes@ipglegal.com