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With explosive growth in international trade and commerce, Korea has become a country heavily dependent upon international transactions. Accordingly, disputes and conflicts with regard to such international transactions have greatly increased over time and such environment has made it extremely important for Korean companies as well as their worldwide business counterparts to resolve transaction-related disputes as quickly and efficiently as possible. Many statistics prove that arbitration has become the most preferred method of dispute resolution in Korea for business-related cases, both international and domestic, and the legal system in Korea has shown some impressive improvements with regard to arbitration, corresponding to the development of norms generally accepted in the international arbitration arena.
The Arbitration Act in Korea has been amended to adopt most of the provisions in the UNCITRAL Model Law on International Arbitration. Korea has also been a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) since 1973. Korean courts, in particular, including the Supreme Court of Korea, have maintained a position that is very friendly to arbitration in interpreting and applying arbitration-related laws.
Judgments rendered by Korean courts have consistently exhibited pro-arbitration tendencies in deciding the validity of arbitration agreements or arbitral awards, both domestic and foreign. Especially with regard to arbitration agreements, the Supreme Court of Korea has shown, over time, more proactive views in recognising the validity of arbitration agreements and such views became more obvious even in cases where the governing law of the arbitration agreement is a foreign law. Further, Korean courts have also interpreted arbitration clauses in order to expand the scope of arbitration agreements, which may potentially result in benefiting multiple parties engaged in a single of series of international transactions.
As a starting point of review on arbitration in Korea, it would be meaningful to study the various aspects of the arbitration agreement, which not only provide the basis for the initiation of arbitration but also shall be deemed as fundamental instrument, to which all the parties and arbitrators will be referring during the entire process of arbitration as well. The purpose of this article is to provide practical tips regarding arbitration agreements in connection with Korea-related transactions, by analysing the relevant laws of Korea and decisions rendered by the courts of Korea.
Significance of the arbitration agreement under the Arbitration Act
Article 3(2) of the Arbitration Act of Korea (the Act) defines an arbitration agreement as ‘an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them out of defined legal relationships, whether contractual or not,’ and article 35 of the Act provides that the arbitral award shall have the same effect on the parties as a final and conclusive judgment of a court. As can be concluded from such clauses of the Act, arbitration proceedings cannot be initiated and that the arbitral awards, which have been issued despite of non-existence of the arbitration agreement, could be cancelled if it is found later that in the absence of the parties’ clear stipulation to arbitrate.
Nevertheless, like in most countries, the following issues are frequently argued before a court or arbitral tribunal and considered as primary causes for delay in arbitration proceedings.
The existence or validity of an arbitration agreement
In general, a civil action which should have been the subject of arbitration is brought before a court under the following three circumstances: arbitration agreement exists but is not valid and effective; arbitration agreement exists but is not expansive enough to cover the subject matter of the case in question; and arbitration agreement exists and is valid but one of the parties decides to disregard and litigate anyway. The same issues may be posed even after an arbitral award has already been rendered, in which case the award may be subject to cancellation or refusal of the recognition and enforcement by a court if it turns out that an arbitration agreement does not exist or is not valid.
The scope of an arbitration agreement
It is not uncommon in international transactions for parties to execute multiple agreements. Unfortunately, however, dispute resolution clauses in the respective agreements, for various reasons mostly out of lack of attention at the drafting stage, are not aligned to cause all the disputes arising under the multiple agreements to be referred to a single dispute resolution mechanism. Likewise it is not uncommon in international transactions for multiple parties to execute various agreements in a series of transactions in unrelated projects. These situations inevitably force the parties to be engaged in contention and challenge on the scope of the arbitration agreement.
The so-called optional arbitration clause
A dispute resolution clause in various form contracts in Korea frequently used by many industrial associations include a so-called optional arbitration clause, under which either parties could opt for an arbitration or a civil action before the court as means of resolving disputes arising between or among the parties. The validity of this so-called optional arbitration clause by itself has been the source of dispute.
The paragraphs below will discuss specific provisions of the Act and decisions by Korean courts with respect to each of the foregoing issues.
The existence or validity of an arbitration agreement
Relevant articles of the Act
Dismissal of a civil action on the ground of an arbitration agreement
As briefly introduced above, according to article 9(1) of the Act, a court, before which a civil action is brought regarding a matter that should have been the subject of an arbitration agreement, shall dismiss the civil action when the respondent raises a defence on the ground of the existence of an arbitration agreement. However, if the court finds out that the alleged arbitration agreement does not exist, is null and void, has become invalid, or is incapable of being performed, the court shall not dismiss the civil action and instead shall proceed to decide the case on the merits. The Act in principle is applied to arbitrations seated in Korea, but it applies to all arbitrations, regardless of where they are seated, in case of article 9 (article 2(1) of the Act), ie, when the respondent raises a defence on the ground of the existence of an arbitration agreement.
Cancellation of an arbitral award - in case of domestic awards
In case of domestic arbitral awards, the award may be set aside by a court if the arbitration agreement is not valid under the law by which the arbitration agreement is agreed to be interpreted by the parties, or in case the parties have not indicated such law, under the laws of Korea (article 36(2)(1)(a) of the Act). Such arbitral awards subject to be set aside by a court shall also not be recognised or enforced (article 37(1) of the Act).
Recognition and enforcement in Korea - in case of foreign awards
Arbitral awards rendered in foreign countries shall be recognised and enforced in Korea only when they have been confirmed by the judgment of a court (article 37(1) of the Act). Article 39 of the Act categorises foreign awards into two categories: foreign awards subject to the New York Convention and ones not subject to the New York Convention. According to the same article, the recognition and enforcement of the former type of awards shall be governed by the New York Convention and those of the latter type of awards shall be governed by the general provisions under Korean Civil Procedure Act and Civil Execution Act regarding the recognition and enforcement of decisions by foreign courts. The foregoing articles of the Act, articles 37 and 39, are two other exceptional clauses to the principle that the Act applies to arbitrations seated in Korea.
In the case of foreign arbitral awards to which the New York Convention applies, the Korean courts give strong deference to the findings of the tribunal or foreign court on the validity of the arbitration agreement on which such awards are based acts at the time of the decision on the recognition and enforcement of foreign awards, because article 5(1)(a) of the New York Convention stipulates that ‘recognition and the enforcement of the award may be refused when the said agreement is not valid under the law by which the arbitration agreement is agreed to be interpreted by the parties or, failing any indication thereon, under the law of the country where the award was made.’
The same principle applies to foreign awards not subject to the New York Convention.
Prerequisites for a valid arbitration clause
It is clear from articles 1 and 3 (1) of the Act that the subject of arbitration is limited to disputes in private laws. All disputes in connection with private laws, whether civil or commercial, may be subject to arbitration under a valid arbitration agreement. However, disputes relating to public laws, ie, rights recognised under criminal procedure or laws regarding enforcement, are not the subjects of arbitration agreement, thus will be excluded from the subject matter of arbitrability.
Agreement in writing
Article 8 of the Act requires arbitration agreements to be in writing, and suggests an agreement in the form of a separate agreement or in the form of an arbitration clause in a contract as principle methods of such written agreement. However, taking under consideration the specific circumstances, the Act also recognises the following as written agreement: when an agreement is contained in a document signed by the parties; when an agreement is contained in an exchange of letters, telegrams, telex or other means of telecommunication which provide a record of the agreement; and when an agreement is contained in an exchange of statements of claim and defence in which the existence of an agreement is alleged by one party and not denied by another. Further, article 8(4) of the Act recognises as valid agreement when there is reference in a contract to a document containing an arbitration clause.
In a case where it stated in the front of an agreement ‘Please supply in accordance with the conditions to be specified in the reverse side of this contract’ and there was an arbitration agreement in the reverse side, the Supreme Court of Korea held that such agreement was deemed as a valid arbitration agreement of which both parties had full understanding on (Judgment of April 10, 1990, 89DaKa20252 (Korean Supreme Court)). A recent case also held that arbitration agreement is recognised to be valid not only when it is stipulated as a part of a main agreement but when the main agreement cites other documents including an arbitration clause, such as standardized provisions, as well (Judgment of October 12, 2001, 99Da45543 (Korean Supreme Court)).
Mandatory details to be included in an arbitration agreement, as recommended by the KCAB
The KCAB (Korean Commercial Arbitration Board), which serves as a predominant institution handling arbitrations related to commercial disputes, recommends inclusion of details in the arbitration agreement mandates such as the manifestation of agreement to arbitrate by both parties, the arbitration institution, the place of arbitration and the arbitration rules.
In any case, an arbitration agreement becomes effective when it contains the manifestation of agreement to arbitrate and the arbitration institution, if the parties so opt for institutional arbitration. The Supreme Court of Korea held that an arbitration agreement stating ‘when a party fails to perform the foregoing agreement, then the dispute shall be resolved by an arbitration by a third institution’ was valid, on the grounds that ‘arbitration agreement is valid when it shows clear intention of both parties to be subject to arbitration, even without the articulation of an arbitration institution, governing law or the place where arbitration shall be seated.’ (Judgment of May 31, 2007, 2005Da74344 (Korean Supreme Court))
Separability of an arbitration agreement
Article 17(1) of the Act deals with the separability of the arbitration agreement from the main body of a contract by providing ‘an arbitration clause which forms a part of a contract shall be treated as an agreement independent of the other terms of the contract.’ Thus, whether the main contract is void or subject to be set aside does not affect the validity of an arbitration agreement.
General standard established by the Korean courts on the validity of an arbitration agreement
An arbitration agreement is null and void when it does not satisfy any of the prerequisites set forth above. The Supreme Court of Korea has proposed a very general standard for the determination of the validity of arbitration agreements as follows: ‘Arbitration agreement is valid when the parties have agreed in writing to resolve the disputes in private laws which arose or will arise between them not by the judgment of a court but by arbitration. In order for an arbitration agreement to be valid, such specific matters shall be taken under consideration for the decision, as the substances of the arbitration agreement and the accounts leading to such agreement, established based on the information on the meaning of arbitration as defined by Arbitration Act and the characteristics or forms of the arbitration agreement.’ (Judgment of May 13, 2005, 2004Da67264 (Korean Supreme Court))
Decisions by Korean courts in specific cases
The foregoing general standard is supplemented by a number of court decisions in specific cases on which the Korean courts applied a variety of standards on the nullification, non-existence, invalidity and incapability of performance, in order to decide on the dismissal of actions that should have been the subject of arbitration, cancellation of arbitral awards, and recognition and enforcement of foreign arbitral awards.
Following are the cases decided on the existence or lack of the valid existence or effectiveness of arbitration agreement as referred to under the Act.
Non-existence or loss of validity of an arbitration agreement
In a case decided by the Supreme Court of Korea in 1990, where an arbitration agreement was written in a bill of lading while the entity indicated in the bill of lading as consignee was holding the bill of lading for the mere purpose of securing the payment of an L/C, the Supreme Court ruled, pursuant to the laws of England recognised as the governing law of the arbitration agreement, that when the consignee was indicated for such purpose only, then the arbitration agreement contained in the bill of lading cannot be binding upon the consignee (Judgment of December 13, 1990, 88DaKa23735 (Korean Supreme Court)).
In another case, regarding the invalidity of an arbitration agreement, the Supreme Court held that a prior arbitration agreement between the parties cannot be viewed as invalidated merely by the fact that the parties subsequently agreed to resolve disputes by mutual consultation (Judgment of May 13, 2005, 2004Da67264,67271 (Korean Supreme Court)).
The above two cases strongly demonstrate that the Korean courts require arbitration agreements to be in writing and to be executed by the person allegedly bound by the agreement and further, that an arbitration agreement, once executed by the parties, will retain its validity until it is clearly rescinded by the parties.
Incapability of performance of an arbitration agreement
In a case where a designated arbitrator refused to perform his duties (Judgment of April 12, 1996, 96Da280 (Korean Supreme Court)) and a case where the parties agreed to resolve future disputes by arbitration by Korea Chamber of Commerce And Industry, which is not an official arbitration institution (Judgment of June 26, 1980, 80Na535 (Seoul High Court)), the courts of Korea held that the arbitration agreement in the respective cases were incapable of being performed, thus making it possible for a court to decide on the merits of the cases.
However it must be understood that the courts of Korea generally endeavours to interpret arbitration agreement to be capable of being performed, as long as the arbitration agreement clearly stipulates the parties’ agreement to arbitrate and thus does not permit reasonable construction to the contrary.
For instance, the Seoul District Court held that even if an arbitration agreement designated more than one place of arbitration by stating the place of arbitration to be ‘the KCAB and The Japan Shipping Exchange Inc’, the expression should be interpreted as meaning the KCAB ‘or’ The Japan Shipping Exchange, which made the arbitration agreement still performable (Judgment of April 12, 1984, 83GaHap7051 (Seoul District Court)). Another decision by a lower court viewed an arbitration agreement as capable of being performed even when one of the parties to the agreement was under composition procedure, for the reason that such fact did not influence the party’s legal capacity or capability to dispose of its property (Judgment of July 5, 2002, 2001GaHap6107 (Seoul District Court)).
Decision on the validity of an arbitration agreement related to foreign arbitral awards
As discussed earlier, under the Act, arbitral awards rendered in foreign countries shall be recognised and enforced in Korea only when they have been confirmed by the judgment of a court. As for the foreign awards subject to the New York Convention in particular, in order for the awards to be recognised and enforced, the arbitration agreement on which such awards are based upon shall be recognised to be valid under the law by which the arbitration agreement is agreed to be interpreted by the parties or, when the parties have failed to indicate such law, under the law of the country where the arbitration proceeding is seated.
The Korean courts retain the authority to examine if the arbitration agreement, based upon which the arbitral award in question has been rendered, is valid pursuant to the governing laws set forth in the arbitration agreement. Korean courts, as specified in cases introduced below, are believed to take a relatively liberal approach in interpreting the validity of arbitration agreements at the time of reviewing a petition to enforce foreign arbitral awards, resulting in facilitating the recognition and enforcement of such awards in Korea.
One of the decisions displaying such position of Korean courts is a judgment rendered by the Supreme Court in 2000 (Judgment of December 8, 2000, 2000Da35795 (Korean Supreme Court)). The facts of the case are as follows: plaintiff, a fish-importing company in China, and defendant, a merchant in Korea purchasing fish from the plaintiff, agreed in their purchase and sale contract that they would ‘resolve future disputes by arbitration in China’ and that the arbitral award would be final and binding on both parties. When a dispute actually occurred, an arbitral award was rendered by CIETAC (China International Economic and Trade Arbitration Commission) and plaintiff requested a Korean court to confirm the award for its enforcement in Korea. Upon presentation of the defendant’s defence that the arbitration agreement was void under the law of China, the governing law of the arbitration agreement, because the agreement did not bear any specification regarding matters to be arbitrated and arbitration institution, the Supreme Court decided for the plaintiff, ruling that ‘the arbitration agreement is fully valid even without the articulation on governing laws or an arbitration institution when there is a written agreement to resolve disputes by arbitration.’
However, the Supreme Court denied the validity of an arbitration agreement when there was no written agreement in the first place, ie, the agreement was not made in written form. The Supreme Court clarified that the mere fact that the parties did not raise any objection to arbitration procedure did not validate the arbitration agreement lacking the writing requirement (Judgment of December 10, 2004, 2004Da20180 (Korean Supreme Court)).
The scope of an arbitration agreement
Relevant articles of the Act
Article 3(2) of the Act, which defines an arbitration agreement as ‘an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them out of defined legal relationships, whether contractual or not,’ does not limit the scope of disputes to be settled by arbitration to the ones arising under the contract and opens the possibility of expanding the scope to disputes arising in connection with contractual performance or torts related to such performance.
Such phrase of article 3(2) was newly adopted when the Act was amended in 1999 in order to correspond to the related clauses of the UNCITRAL Model Law on International Arbitration. It is not specified in the Act, however, which types of related disputes come under the scope of arbitration agreements, which leaves the interpretation of such scope to a court.
Decisions by Korean courts in specific cases
A lower court decision limited the scope of the arbitration agreement by interpreting that ‘related disputes, other than disputes arising directly under the main contract, are under the scope of an arbitration agreement only when such disputes were foreseeable by the parties.’ (Judgment of July 23, 1987, 86GaHap6660 (Seoul District Court)) However, the interpretation in recent judgments, including some by the Supreme Court, has shown development regarding the expansion of the scope of arbitration agreements.
Five years later, though, the Supreme Court in 1992 provided a standard of carving out the scope of arbitration agreements entirely different from that suggested by the above decision by Seoul District Court. It held that ‘the scope of arbitration agreements is not limited to the main body of contract in which the agreement is included, but may be expanded to the disputes closely related to the formation, performance and effectiveness of the contract.’ In this case, the plaintiff transferred his business, including a factory, to the defendant and the two parties agreed to resolve the legal disputes related to the business transfer contract by arbitration. After the transfer, the factory exploded and the employees of defendant were killed or injured by the accident. Arbitration was initiated upon a request by the defendant, an arbitral award in favor of the defendant was rendered, and the plaintiff filed a suit claiming the award be set aside because the dispute regarding the explosion was not in the scope of the arbitration agreement. The Supreme Court, applying the standard set forth above, held that the arbitration agreement applied to such disputes as well (Judgment of April 14, 1992, 91Da17146, 17153 (Korean Supreme Court)).
In another case where the Supreme Court applied the same principle (Judgment of January 21, 1992, 91Da7774, 7781 (Korean Supreme Court)), the plaintiff (buyer) and the defendant (seller) inserted an arbitration clause in their purchase and sale agreement. When the plaintiff refused to pay the defendant because of a defect found in the product, the defendant excluded the plaintiff from a bid process it was holding and the plaintiff requested for an arbitral award. The Supreme Court ruled that such dispute was closely related to the performance of the original contract and thus was under the scope of arbitration agreement, because whether it was legitimate for the defendant to exclude the plaintiff from the bid would depend on whether the plaintiff breached the original contract by not paying the defendant.
The so-called optional arbitration clause
Types of optional arbitration clauses
An optional arbitration clause is an agreement between the parties to resort to either arbitration or litigation in case a dispute shall arise. Optional arbitration clauses are generally understood to include a parallel optional clause, where the parties may choose from arbitration or litigation and one of the two methods chosen by an aggrieved party could be selected as a means of dispute resolution, provided the other party agrees thereto, and a step-by-step optional arbitration (or hybrid) clause where a priority shall be given to one of the two methods of resolution and the remaining one shall be requested only after the process regarding the first method has finished and one of the parties is dissatisfied.
In the case of a step-by-step optional arbitration clause, there may be three types of agreement in terms of the resolution methods the parties may choose from: a clause where the parties agree to resolve disputes by mutual consultation or mediation before resorting to arbitration; a clause where the parties agree to arbitrate first, and then bring an action before a court in case one or both of the parties do not agree with the arbitral award; a clause where the parties agree to litigate first, and then arbitrate in case one or both of the parties do not agree with the court decision.
The foregoing situations require the court to examine if the parties have agreed or intended to clearly utilize the arbitration process to the exclusion of litigation proceedings before a court as their dispute resolution mechanism. Such issue is more obvious in parallel optional clauses where the intention of the parties is more likely to be vague.
Decisions by Korean courts in specific cases
The Supreme Court of Korea has not declared all optional arbitration clauses to be void. It applied the same general standard of deciding the validity of ordinary arbitration agreements to optional arbitration clauses. So far, it seems that one of the most important factors considered by the Supreme Court in determining the validity of an optional arbitration clause is the stage of the arbitration proceedings at the time that the case is brought before the court, in order to discern if the parties have manifested their clear intention to refer the dispute to arbitration instead of litigation. By ruling that ‘an optional arbitration clause is valid only when one of the parties have chosen to request for an arbitral award, instead of a judgment by a court, and the other party has not objected to such request,’ (Judgment of May 27, 2005, 2005Na12452 (Korean Supreme Court)) the Supreme Court shows the position that an optional arbitration clause is valid if the arbitration has proceeded considerably upon request by a party and the other party has not objected, either by silence or active reaction. The Supreme Court applied the same standard to both parallel optional clauses (Judgment of August 22, 2003, 2003Da318 (Korean Supreme Court)) and preliminary optional clauses (Judgment of November 11, 2004, 2004Da42166 (Korean Supreme Court)).
Summary of the decisions by Korean courts regarding an optional arbitration clause
The foregoing principle of the Korean Supreme Court regarding optional arbitration clauses can be applied to each type of optional arbitration clauses as follows.
In case of a parallel optional clause:
- If the case is brought before a court by one of the parties after or during the arbitration proceedings, the court will determine the validity of the optional arbitration clause and the arbitration proceeding which was initiated before the litigation depending on the stage of arbitration proceeding at the time of litigation.
- If the case is brought before an arbitral tribunal by one of the parties after or during the trial by a court, the tribunal is likely to determine the validity of the optional arbitration and the litigation process that began before arbitration in the same way that the court deals with the matter, as elaborated above.
In case of a step-by-step optional clause:
- A clause where the parties agree to resolve disputes by mutual consultation or mediation before resorting to arbitration will be determined to be valid at all times, because such clause shows clear intention of the parties as to the priority given to the listed resolution methods.
- The validity of a clause where the parties agree to arbitrate first, and then litigate in case one or both of the parties do not agree with the arbitral award will be decided in the same way as parallel optional clauses, as elaborated above.
- The validity of a clause where the parties agree to litigate first, and then arbitrate in case one or both of the parties do not agree with the court decision will be decided in the same way as parallel optional clauses, as elaborated above.
The regulatory regime in Korea relating to international and domestic arbitration is up to par with the system currently applicable in G20 countries. At the same time the judiciary in Korea has been very receptive to and in favour of arbitration as compared to litigation. As such the judiciary in Korea has been considering various factors, such as structure and specific wordings of arbitration agreements, transaction history between the parties, circumstances leading to specific dispute, reaction or inaction of the counterparty and the stage of the progress of the dispute resolution method, when a challenge or contention to the arbitration agreement is presented in an effort to search for existence, nonexistence, retraction, cancellation of the manifestation of the parties’ clear and unequivocal manifestation of the intention to refer certain disputes to the arbitration.
We expect that the above trend that has been exhibited by the judiciary in Korea will continue and be augmented in the future. Nevertheless we would like to emphasise again the importance of drafting an arbitration agreement, wherein the parties’ intention to refer to the arbitration is clearly expressed. This is the only method for the parties to save time and effort in obtaining the judiciary’s subsequent confirmation or invalidation of the arbitration agreement.