Defense Industry

The defense industry encompasses the entire industry that researches, develops, produces, imports and exports, and maintains various defense materials such as weapons, equipment, components, and software for national security.

This is not mere manufacturing but a strategic industry directly tied to national security, and it is regarded as a key element of international military diplomacy and industrial competitiveness.

The domestic defense industry is subject to control under various statutes and subordinate regulations, including the Defense Acquisition Program Act, the Act on Contracts to Which the State Is a Party, and the Foreign Trade Act.

The companies, research institutions, outsourcing firms, supplier firms, civilian military employees, and military personnel engaged in this industry all bear heavy legal responsibility under criminal, administrative, and civil law.

In particular, as defense-industry-related corruption, technology leakage, supply of defective equipment, and budget waste have recently caused significant social repercussions, the trend is toward strengthened legal regulation of the defense industry and government management and oversight.

The defense industry is emerging as a promising industry that may support the growth of the Korean economy.

CNN of the United States reported that Korea has become a "major leaguer in the defense industry," and Forbes of the United States noted that "Korea has quietly become one of the world's largest arms suppliers."

Reuters of the United Kingdom also reported that "Korea is exploring ways to shift the focus of its defense industry from domestic demand to exports," giving significant coverage to Korea's defense industry development strategy and arms export trends.

The new government, aiming to make Korea one of the "four major defense powers," also instructed officials to review the establishment of a control tower for defense industry development and the regularization of a defense export promotion strategy meeting.

It also stated that a public-private ecosystem should be built so that small, medium, and venture enterprises can gain opportunities to participate in the defense industry, which large corporations dominate to the extent of 90% of sales.

This pointed to the fact that, as of 2022, large corporations accounted for 90% of total defense industry sales, mid-sized enterprises 8 to 9%, and small and medium enterprises 1 to 2%.

Depending on the government's position, opportunities for small and medium enterprises to participate in the defense industry are expected to increase.

The following are the main characteristics of the defense industry.

-A state-controlled industry: Weapons systems are classified as strategic goods, so their export and any technology transfer abroad must receive strict government approval.

-Security and technology restrictions: Defense technologies are often designated as national core technologies, and their leakage abroad may give rise to a violation of the National Security Act.

-Directly tied to national finances: Most defense contracts take the form of direct contracts with the government or indirect contracts with a prime defense contractor, and issues of budget execution and improper solicitation may also arise.

Defense industry issues have particular characteristics that differ from ordinary private business, so it is advisable to obtain advice from an attorney. However, you can prepare an initial response on your own through the following basic measures.

1. Bidding and contract disputes

-Objection to unfair bidding or exclusion from award:

You can thoroughly review the announcement, evaluation criteria, and bidder qualifications on the electronic procurement systems of the Public Procurement Service and the Defense Acquisition Program Administration, and if you receive an unjust evaluation or a notice of disqualification, you may file an administrative appeal or apply for a stay of execution.

-Notice of contract cancellation or termination:

Where the grounds for the notice are unclear or the notice is given unilaterally, you may raise an objection through an official document and give notice of refusal to perform, thereby securing a basis for legal response.

2. Responding to penalty surcharges and sanction dispositions

-For designation as an ineligible operator or the imposition of a penalty surcharge, you may organize fact confirmation statements, inspection results, and contract performance records in documentary form, and after receiving the advance notice, you may submit a written opinion and request a hearing.

3. Technology leakage and security violations

-If an allegation of leaking confidential materials is raised, you should first prepare an internal investigation report on whether and how the leak occurred, and secure digital evidence such as stenographic records and data management histories.

-If there are indications that confidential materials were transmitted externally, you may voluntarily report to the competent authorities, such as the Ministry of Trade, Industry and Energy and the Defense Acquisition Program Administration, and submit a plan to implement supplementary measures.

4. Nonperformance of contract and damages issues

-For contract performance guarantees and penalties, you should review the payment criteria and the possibility of reduction under the contract, and establish a basis for allocating the proportion of liability depending on whether the cause of nonperformance is attributable fault or force majeure.

5. Import and export regulations and violations of international norms

-If a problem arises in connection with the import or export of defense materials, you should first obtain a determination from the Korea Strategic Trade Institute as to whether the items are strategic goods.

Defense industry cases go beyond ordinary civil and criminal procedures and are a field in which multiple layers of law apply, including the State Contracts Act, munitions procurement regulations, security regulations, and international regulations.

Accordingly, the practical points of defense can be organized as follows.

1. Separate analysis of contract principles and procedural violations

-In disputes over contract termination or cancellation, the key is first to examine the procedural requirements of the State Contracts Act and contract regulations, and then to determine whether the requirements for terminating the contract have been met.

-When a performance guarantee is forfeited or a penalty is claimed, a specific legal review is needed of the clarity of the attributable grounds, the legitimacy of the circumstances of nonperformance, and the possibility of applying reduction criteria.

2. Support in responding to sanction dispositions

-Where the Defense Acquisition Program Administration, the Public Procurement Service, or a similar body gives notice of designation as an ineligible operator, the legality of the advance notice and hearing procedures preceding the notice should be confirmed.

-When submitting a written opinion, the excessiveness of the sanction disposition should be rebutted on the basis of contract performance records, matters discussed during the bidding process, and whether a prior warning was given.

3. Emphasizing whether a control system for technology and security issues was in operation

-In cases of technical data leakage, a strategy of emphasizing that an internal corporate security system was in operation may be used to reduce the level of punishment.

-The scope of confidential information and whether it was so designated, as well as the record of implementing access restrictions, can be used as grounds for mitigation or exemption.

4. Reviewing key risks and preventing disputes in M&A between defense contractors

-In mergers and acquisitions, the target company's history of nonperformance under government contracts, the status of its technical data protection, and its record of maintaining security classifications are essential items to review.

-When drafting the contract, it is necessary to include provisions on the allocation of liability for subsequent administrative sanctions, government approval conditions after acquisition, and a plan to implement security requirements.