[Attorney Kwon's Legal Guide] Episode 75: Types of Disputes in Cosmetic OEM (Original Equipment Manufacturing) Contracts

*This content was translated by AI.

We will examine the types of disputes that are not uncommon between the ordering party and the manufacturer after a contract for commissioned production of cosmetics is signed.

Issues can arise regarding the handling of remaining inventory. In one case, where the supplier shipped leftover products to an overseas seller after the termination of the contract, the court ruled that there was a possibility the goods had been produced during the contract period. If so, it would be difficult to find any falsity in the party bearing manufacturing responsibility having identified itself as the manufacturer.

From the brand's perspective, this meant there was no basis to prevent its products from being distributed outside of its control.

The same applies to business partners. In a case involving a special clause prohibiting direct transactions, the court recognized that both the manufacturer's termination without notice and the direct transaction with the business partner constituted breaches of contract. However, the conclusion was a dismissal of the claim for damages. The reason was that it was difficult to acknowledge any damage had occurred, given that the ordering party had already agreed to terminate its contract with that business partner. In other words, they won on the clause but did not receive any money. This is precisely why penalty clauses or pre-determined amounts for damages are necessary.

Disputes over the production of similar products after a contract can be even more turbulent. After termination, when both sides released similar products, a representative from one side posted an article on OnLINE disparaging the other's product. The result was a fine of 7 million won for defamation and obstruction of business. It was as if they paid for failing to specify the ownership of formulations in the contract with an emotional response. While the frustration is understandable, the appropriate response should be through preliminary injunctions and litigation.

Termination itself can also come without warning. Established legal precedent holds that a continuing contract may be terminated if there are significant grounds such that the relationship of trust has been destroyed and its continuation cannot be expected (Supreme Court decision 94da17826, pronounced on the 24th, 1995). This means the other party can pull out this card at any time. Therefore, as the ordering party, one should enumerate the grounds for termination and include a restriction stating that termination during the contract period is not permitted for reasons other than those listed.

Intellectual property rights must also be settled upon termination. Representative examples include ownership of exclusive container molds, the return of labels and packaging materials, and the prohibition on post-contract use of formulations. In one goods supply contract, there was an incident that led to a report to the Fair Trade Commission over the circumstances surrounding the inclusion of a clause that could be interpreted as assigning recipe rights to the ordering party. This indicates just how sensitive these items are.

Writing the end of a contract in advance is not about suspecting the relationship, but about establishing a method for settling it. Additionally, settlement of remaining raw materials and components, the duration of confidentiality obligations, and the scope of non-compete restrictions should also be included in the termination clause. These items amount to only about one page in terms of volume. The final page of a contract should be written when the relationship is good, because after things have gone wrong, neither side will make concessions.

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*This content was translated by AI.