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Is Korea on its way to become a new arbitration hub for Asia?

As one of the most trade-dependent and export-oriented economies, Korea has experienced a surge and diversification in cross-border trade and investment over the past few decades, largely driven by the nation’s conglomerates, such as Samsung, Hyundai Group and LG Corporation. Reflecting robust outbound economic activities of such major Korean contractors, the number of Korean cross-border transactions has increased and so has the number of disputes involving Korean entities.

This has led to Korean parties becoming prominent players in the international arbitration scene. In 2017, Korea ranked ninth, the second highest in Asia after China, in terms of the nationalities of parties involved in the arbitration cases filed with the International Chamber of Commerce (ICC). [1] Korea has also maintained a strong presence in other major arbitral institutions, ranking seventh in the Hong Kong International Arbitration Centre (HKIAC) in 2018 and eighth in the Singapore International Arbitration Centre (SIAC) in 2017 by the same criterion. [2]

The Korea Commercial Arbitration Board – the only authorised arbitration institute in Korea

While the majority of arbitration cases involving Korean parties are seated outside of Korea, Korea as the seat of arbitration has shown a steady quantitative and qualitative growth over the past several years. This is demonstrated in the statistics on the arbitration cases administered by the Korea Commercial Arbitration Board (KCAB), the only statutorily authorised arbitral institution in Korea. [3]

Among others, the number of cases is on the rise. In 2017, the KCAB received a total of 385 requests for arbitration, 78 of which were international cases. The total number of cases in 2017 was up approximately 20 per cent from 316 in 2010 while the number of international cases has shown a sharper 50 per cent increase from 52 in 2010.

The claim amount presents a steeper growth. The total sum in dispute for the KCAB arbitration cases in 2017 amounted to over US$810 million, representing approximately a 50 per cent increase from US$535 million in 2010. Notably, over the same time frame, there was also a 50 per cent increase in the number of high-value cases with the claim amount of US$10 million or more.

Despite such growth in number and size, with the latter most likely accompanying an increase in complexity of the matters in dispute, the duration of proceedings of arbitration cases administered by the KCAB remains rather constant. On average, it took 169 days to complete a domestic arbitration proceeding and 256 days for an international one in 2017. In contrast, it took 139 days and 218 days, respectively, in 2010. These numbers demonstrate that the KCAB has been striving to offer prompt and cost-
effective dispute resolution services to its users.

Such efficiency can reasonably be explained, at least in part, by the wealth of experience and expertise accumulated by the KCAB as one of the oldest arbitral institutions in the region, combined with an increasing pool of qualified arbitrators it has been striving to retain. As of 31 December 2017, the KCAB maintains a panel of 1,225 arbitrators, up from 1,091 in 2013. This pool of arbitrators covers over 22 different jurisdictions encompassing most parts of the globe. Among this panel, 262 arbitrators are exclusively committed to KCAB international arbitration proceedings and 151 arbitrators conduct both domestic and international proceedings, thereby providing a total of 413 experts capable of arbitrating in international disputes. In addition, the KCAB panel of arbitrators is comprised of select individuals with expertise and experience in a variety of fields including those from the legal profession, academia, public organisations, certified public accountants, patent attorneys and numerous other industries.

While the nationality of the parties to the KCAB arbitration cases appears to be rather unvaried from 2010 to 2017, with the United States and China consistently ranked the top two countries of origin, there was a gradual increase in the number of parties from Southeast Asian countries such as Vietnam and Malaysia as well as certain Middle East countries including Turkey and Iran. This trend is presumably illustrative of growing economic presence of Korean entities in the above regions via, among others, investment and participation in construction projects.

There is also a wide variety of industries that constitute the background of KCAB arbitration cases. Construction consistently stands first in terms of the number of cases and, combined with trade and domestic commercial transaction, accounts for more than half of the arbitrations filed with the KCAB. For instance, out of the total 385 KCAB arbitration cases in 2017, there were 126, 60 and 48 cases categorised as construction, trade and domestic commercial transaction disputes, respectively.

The most remarkable change from the period of 2010 to 2017 was a surge in the number of information technology, entertainment and finance cases, indicating the changing industrial landscape in Korea. The number of information technology cases more than doubled from 20 to 41; that of entertainment cases went from a statistically meaningless number, if not nil, to 21; and finance-related cases grew more than fivefold from three to 17 over this period.

There has also been a notable shift in causes of action for KCAB arbitration cases. While claims concerning contractual interpretation sharply decreased from 90 cases in 2010 to 28 cases in 2017, disputes over delayed shipment or non-performance of obligations rose more than fivefold from 19 to 101 over the same time frame. It presumably suggests growing complexities of the matters in dispute brought to the KCAB. This may partially be due to conventional, purely jurisprudential issues being increasingly prearranged between contracting parties with the accumulation of precedents and standardisation of contracts; thus, no longer becoming an issue and giving way to more sophisticated and fact-specific disputes.

Korean courts and jurisprudence – support for arbitration

There are certain elements that enabled and will continue to stimulate development of Korea as an arbitration-friendly jurisdiction. Many of these elements concern conceptual aspects such as judiciary stance and legal frameworks, while certain aspects relate to infrastructural or physical features.

Above all, Korean courts, by and large, seem to maintain an affirmative attitude towards arbitration. Representative of such stance is enforcement of arbitral awards. Two of the court decisions, both of which concern enforcement of a foreign arbitral award, deserve attention in this regard.

In a case where an investment company incorporated by a US-based private equity fund won an award in the amount of US$35 million against a subsidiary of a Korean public institution in an ICC arbitration and sought enforcement of the arbitral award in Korea, the existence and scope of an arbitration agreement between the disputing parties became an issue. The Seoul High Court of Korea refused to grant an enforcement order, citing a lack of valid arbitration agreement. The court further noted that, even if there was such agreement, the plaintiff was not meant to be a party to the arbitration clause. [4] The Supreme Court reversed the decision of the lower court by taking a broad and flexible approach to the construction of the language used in the arbitration clause in terms of the scope of its application and parties subject thereto, deducing that there was a reasonable intent among the parties to resolve all disputes arising out of a particular juristic relation by arbitration, thereby effectively granting enforcement. [5]

In another case where a UK-based software provider commenced enforcement proceedings against a Korean broadcasting company in Korea after obtaining an award from an arbitration conducted under the UNCITRAL Rules, the Seoul Southern District Court dismissed the enforcement application on the basis that the arbitral award was not sufficiently specific as to the nature of the obligation to be performed by the defendant. The court stated that, for an arbitral award to be enforced, it must clarify certain details including the type, content and scope of the obligation to be performed, the court found that the award failed to specify or elaborate on the scope or target of the obligation. [6] However, the Seoul High Court reversed the district court decision and granted the application for enforcement, recognising that there exists legal interest to request an enforcement order on the arbitral award notwithstanding the fact that it was not specific enough to be enforced. The high court further noted that an enforcement order on an arbitral award is understood not only to vest it with enforceability but also to protect it from claims of its annulment and that, regardless of the enforceability of the arbitral award, there is a practical necessity to confirm the obligation set out in the arbitral award and facilitate resolution of the dispute between the parties by inducing voluntary performance of the obligor. [7] This appellate court decision serves as a notable precedent as it held that an enforcement order is not necessarily strictly tied to enforceability when it comes to arbitral awards.

In a different case where a Korean investor filed a claim for damages against a Chinese company with a Korean court, the defendant resisted the claim by arguing that the Korean court lacked jurisdiction, citing an arbitration clause in the shareholders’ agreement between the parties. The issue was whether the arbitration clause that read ‘the damaged party may seek resolution by way of arbitration’ constituted an exclusive arbitration agreement while the articles of association of the investee company provided that ‘unless settled by negotiations, an arbitration proceeding will be conducted in a mutually agreed third country based on the international practice and the arbitration rules of the International Chamber of Commerce’. The Seoul High Court held that the arbitration clause was optional given the language that the party ‘may’ seek arbitration. [8] However, the Supreme Court found otherwise, noting that the same language used in the arbitration clause, combined with the relevant provision in the articles of association, seemed to indicate the intention of the parties that arbitration was the only and ultimate method of dispute resolution the damaged party could resort to in case negotiations failed. [9]

In sum, the overall stance of the Korean judiciary is reasonably understood to consistently represent a non-interventionist and pro-arbitration approach, with regard for the intent of the parties to resolve disputes by arbitration.

Legislative support for arbitration

In line with the generally arbitration-friendly attitude of the judiciary, Korea has launched legislative support for its arbitration sector. One of such efforts to strengthen the legal framework governing arbitration was the amendment to the Korean Arbitration Act in 2016 to further incorporate the UNCITRAL Model Law regime. Some of the key improvements under the amended Arbitration Act are as follow.

  • Expansion and clarification of arbitrable subject matters. While the pre-amendment Arbitration Act confined the subject matters of arbitration to ‘disputes under private laws’, the new version expands the subject matter jurisdiction of arbitration to cover ‘disputes over property rights or reconcilable disputes over non-property rights (that is, non-monetary disputes)’. [10] This amendment has resolved potential controversy as to whether public law disputes such as investor-state disputes are subject to arbitration under the act.
  • A broader, more lenient definition of ‘written’ arbitration agreement. The earlier Arbitration Act provided that an arbitration agreement would be deemed a written one ‘where a document signed by the parties contains arbitration agreement’, but the amended act now deems an arbitration agreement made written ‘where terms and conditions of an arbitration agreement have been recorded, regardless of whether such agreement was made orally, by conduct or by any other means’. [11] The new act also specifically notes that intentions communicated by ‘email’ will also constitute a written agreement. [12] These eased requirements are likely perceived as a significant change in practice as they have effectively broadened the gateway to arbitration with a more lenient definition of a valid arbitration agreement.
  • Interim measures. The amended act has diversified interim measures by specifying their types as maintenance of status quo or restoration, prevention of present or imminent danger or impact on arbitral proceedings or prohibition of measure that may endanger or influence arbitral proceedings, preservation of assets subject to enforcement and preservation of relevant and important evidence. [13] The new act also specifies requirements for interim measures, allows alteration, suspension or revocation of interim measures and states that the arbitral tribunal may order the party requesting interim measures to provide security. [14] Most notably, the amended act now provides a statutory basis for court recognition and enforcement of interim measures rendered by the arbitral tribunal. [15] The implication is that parties may now seek a court-granted enforcement of certain measures prior to the final arbitral award to implement a more attractive and effective remedy.
  • Streamlined procedures for the recognition and enforcement of arbitral awards. Before the amendment, recognition and enforcement of arbitral awards could be rendered only by a court ‘judgment’, but the amended act now only requires a court ‘order’ with relatively simplified procedures compared to a judgment. [16] For example, unlike a court judgment that necessarily involves an oral hearing and a written, signed and sealed verdict by the judge, a court order takes effect once it is notified to the parties as appropriate without requiring a written verdict and relevant proceedings proceed at a much swifter space. Either party may file an immediate complaint against a court order to enforce an arbitral award, but such complaint does not suspend enforcement in principle unless the competent court orders otherwise. [17] These changes are expected to reduce the time and cost associated with arbitral enforcement process.
  • Strengthened court assistance for evidence examination. The amendment now allows arbitrators or parties to attend the evidence examination conducted by the court with permission of the judge. [18] Under the amended act, when the arbitral tribunal requests the court to cooperate in evidence examination, the court may order witnesses, document holders and others to appear before or submit documents to the tribunal. [19]
  • Penalty interest to be imposed by the arbitral tribunal. While it had been unclear as to whether a post-award penalty interest is to be imposed by the domestic enforcement court or the arbitral tribunal, the new act clarifies that the tribunal may order either party to pay penalty interest as appropriate when it renders an award. [20]

As described, the 2016 amendment to the Arbitration Act presents a prompt and effective set of procedures along the overall arbitration stage, starting from the request for arbitration, interim measures, hearing to enforcement and will thus offer benefits to prospective users of the Korean arbitration regime.

Yet there was another major change in legal landscape for the Korean arbitration industry in 2016 – the enactment of the Arbitration Promotion Act. As its title suggests, institutional efforts to promote arbitration in Korea are set out in the act. It mandates the Minister of Justice to establish and implement a five-year master plan for promotion of arbitration industry and prepare measures to develop a pool of professional arbitration manpower as well as policies to attract arbitrations of international disputes so that Korea serves as their arbitral seat or physical venue of hearing. [21] The act also authorises the minister to initiate projects for installation and operation of dispute resolution facilities, research and international cooperation to lay groundwork for promotion of arbitration industry and other necessary and prescribed activities to that end. [22]

Pursuant to the mandate of the Arbitration Promotion Act, the Minister of Justice has recently drafted and released the Master Plan for Promotion of Arbitration Industry for 2019–2023. The plan presents a detailed set of strategic measures including, among others, implementation of various training programmes, workshops and seminars home and abroad, the establishment of an arbitration-specialised educational institution under the KCAB, publication and distribution of arbitration newsletters, organisation of an advisory council composed of experts from arbitral institutions, academia and business circles and support for diversified promotional activities such as hosting international arbitration events and assistance to the opening and operation of the KCAB overseas offices. [23]

Finally, with the 2016 amendment to the Foreign Legal Consultant Act, foreign attorneys now being allowed to represent their clients in international arbitration proceedings without registering as foreign legal consultants, combined with a phased opening of the Koran legal market under the Korea–US and Korea–EU free trade agreements, better serve various needs of arbitral consumers in Korea. [24]

KCAB International Arbitration Rules

Along with such sweeping changes at the legislative level, the KCAB implemented revisions to its international arbitration rules in 2016. To name a few, the amended KCAB International Arbitration Rules adopt a process where the Secretariat may refuse to confirm the nomination of arbitrators if he or she finds it clearly inappropriate. [25] Another noteworthy change concerns joinder of additional parties where the arbitral tribunal may allow a third party to join the existing arbitral proceedings under certain conditions. [26] In addition, the new arbitration rules introduced ‘emergency measures by emergency arbitrators’ to cater to practical needs for urgent conservatory and interim measures in international arbitration settings. [27] The KCAB also promulgated the Code of Ethics for Arbitrators in 2016, highlighting independence, impartiality and duty of due diligence, fairness and confidentiality of arbitrators. [28]

KCAB International to support international disputes

In addition to the above-discussed conceptual elements constituting Korea as a pro-arbitration jurisdiction, it is worth noting that the country is striving to cater to the needs of arbitration users for physical infrastructure. Part of such efforts was establishment of Seoul International Dispute Resolution Center (Seoul IDRC) in 2013. This multi-purpose hearing facility is increasingly recognised for its state-of-the-art, fully-equipped conference systems and experienced staff.

In April 2018, the KCAB and Seoul IDRC consolidated and expanded their hearing facilities in Gangnam Business District, the heart of Seoul with exceptional transportation and accommodation services and the headquarters of some of the top Korean and transnational companies. With this consolidation and in response to growing demand for cross-border commercial dispute resolution, the KCAB also launched a new international division called KCAB International in 2018.

Concluding Remarks

It remains to be seen whether Korea will rise to a new arbitration hub in Asia. However, given the dynamic nature of its economy and growing awareness of arbitration among the business circles, it would hopefully not be premature to state that the country certainly offers an increasingly attractive alternative to more established arbitral seats such as Singapore and Hong Kong.


Notes

[1] 2018 ICC Dispute Resolution Bulletin, Issue 2.

[2] HKIAC 2018 Statistics (available at: http://www.hkiac.org/about-us/statistics); 2018 SIAC Annual Report.

[3] 2010–2017 Statistics on KCAB Claims and 2013-2017 KCAB Annual Reports.

[4] Seoul High Court Decision, Case No. 2012-Na-88930 (rendered on 16 August 2013).

[5] Supreme Court Decision, Case No. 2013-Da-74868 (rendered on 20 October 2015).

[6] Seoul Southern District Court Decision, Case No. 2012-Gahap-15979 (rendered on 31 January 2013).

[7] Seoul High Court Decision, Case No. 2013-Na-13506 (rendered on 17 January 2014).

[8] Seoul High Court Decision, Case No. 2013-Na-11463 (rendered on 30 August 2013).

[9] Supreme Court Decision, Case No. 2013-Da-71845 (rendered on 30 April 2014).

[10] Article 3, Paragraph 1 of the Korea Arbitration Act.

[11] Ibid, article 8(3), subparagraph 1.

[12] Ibid, article 8(3), subparagraph 2.

[13] Ibid, article 18(2).

[14] Ibid, article 18–2, 18-3 and 18–4.

[15] Ibid, article 18–7.

[16] Ibid, article 37(1)–(2).

[17] Ibid, article 37(6)–(7).

[18] Ibid, article 28(3).

[19] Ibid, article 28(5).

[20] Ibid, article 34–3.

[21] Articles 3, 6 and 7 of the Korea Arbitration Promotion Act (enforced on 28 June 2017).

[22] Ibid, article 4.

[23] Ministry of Justice, Master Plan for Promotion of Arbitration Industry for 2019–2023.

[24] Article 2, paragraphs 2–3, article 24, paragraph 3 and article 24–2 of the Korea Foreign Legal Consultant Act.

[25] Article 13.3 of the KCAB International Arbitration Rules.

[26] Ibid, article 21.1.

[27] Ibid, article 32.3 and appendix 3.

[28] KCAB Code of Ethics for Arbitrators.

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