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A request by the South Korean government to overturn a ruling against it in an investor-state dispute settlement (ISDS) concerning a Daewoo Electronics merger/acquisition was rejected by the UK’s High Court of Justice on Dec. 20. The decision finalizes the ruling made by an arbitration tribunal in June 2018.

“The United Kingdom’s High Court of Justice did not accept the South Korean government’s request to overturn the arbitration ruling in a suit demanding the overturning of an arbitration ruling in the case of Iran’s Dayyani family versus the Republic of Korea,” the Financial Services Commission (FSC) announced.

The South Korean government had claimed that the Dayyanis’ arbitration request was not subject to arbitration according to the South Korea-Iran investment promotion and protection agreement because it concerned a legal dispute with Daewoo Electronic creditors rather than the South Korean government. But the High Court of Justice applied a broad interpretation of the “investment” and “investor” concept to conclude that the Dayyanis were “investors in the Republic of Korea” who were within their rights to file suit, the FSC explained.

In June 2018, a United Nations Commission on International Trade Law arbitration tribunal ruled that 73 billion won (US$62.75 million) in contract deposit funds and interest on the delayed return should be paid to the Dayyanis, owners of an appliance company in Iran, due to “errors” by South Korean creditors during the 2010 sale of Daewoo Electronics. The South Korean government responded by filing suit in July 2018 with the High Court of Justice in Great Britain, the place of arbitration, to have the decision overturned.

The issue first arose in April 2010 when the Dayyanis attempted to purchase Daewoo Electronics through D&A, a company they had established in Singapore. The Dayyanis paid 57.8 billion won (US$49.67 million) as a deposit to the creditors, who ultimately cancelled the contract and confiscated the deposit, citing an “inadequate letter of commitment (LOC)” on the grounds that the LOC was 154.5 billion won (US$132.77 million) short of the necessary total funds. The Dayyanis requested the return of the 57.8 billion won deposit they had paid, but the creditors refused, claiming the Dayyanis were responsible for the contract’s cancellation. In response, the Dayyanis filed for investor-state dispute settlement in 2015, citing the South Korea-Iran investment promotion and protection agreement to demand payment of 93.5 billion won (US$80.35 million) for the deposit plus interest.

The arbitration tribunal sided with the Dayyanis in its ruling -- marking the South Korean government’s first defeat in an ISDS case filed by an overseas company.

The South Korean government requested that the ruling be overturned, claiming that the Dayyani’s arbitration request was not subject to the ISDS system because it concerned a legal battle with the Daewoo Electronics credits (39 financial institutions) rather than the South Korean government itself. It also claimed that KAMCO, one of the creditors, could not be viewed as a Republic of Korea state institution and the Republic of Korea could not be held responsible for its actions.

Additionally, it claimed that the Dayyanis could not be seen an investors according to the South Korea-Iran investment promotion and protection agreement because their investment had been in the Singapore-based corporation D&A rather than South Korea. At root, its argument that the mere fact that D&A had signed a Daewoo Electronic sale contract and paid a deposit could not be viewed as an act of investment according to the South Korea-Iran investment promotion and protection agreement.

But the High Court of Justice applied a very broad interpretation of the “investment” and “investor” concepts in the South Korea-Iran investment promotion and protection agreement, concluding that the Dayyanis were within their rights to conclude that South Korea had been an investor and file suit accordingly.

South Korea has been potentially subject to ISDS suits since first establishing a bilateral investment treaty with West Germany in 1964. But since receiving a request for over 5 trillion won (US$4.3 billion) from Lonestar in December 2012, the South Korean government has faced one ISDS case in 2015 (involving the Dayyanis), one in 2016 (involving Hanocal), and four in 2018 (one involve a US national surnamed Seo, one involving Elliott Management, one involving Mason Capital, and one involving the Schindler Group). Two more notices of intent were received in the first half of this year, involving a Canadian national surnamed Kim and Gale International. Cumulatively, the requests exceed 9 trillion won (US$7.73 billion).

After the political opposition criticized the ISDS system as a “toxic clause” ahead of the National Assembly’s ratification of the South Korea-US Free Trade Agreement in 2011, the Ministry of Strategy and Finance (now the Ministry of Economy and Finance) published promotional materials claiming that “the likelihood of lawsuits is effectively nonexistent in cases where government measures are legitimate and non-discriminatory to US investors” -- a claim that is now appearing less tenable.

The FSC said the South Korean government plans to “conduct a careful analysis of the judgment with the relevant ministries before pursuing the necessary follow-up measures.”

“Once all of the procedures are completed, we will work to disclose information in detail to the extent that it does not violate related laws,” the FSC added.

By Park Hyun, staff reporter

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