A. LEGISLATION AND RULES
A.1 Legislation
International arbitration in South Korea is governed by the Arbitration Act,[1] which governs both domestic arbitration and international arbitration. The Arbitration Act was adopted in 1966, but was substantially revised in 1999 to incorporate most of the provisions of the UNCITRAL Model Law. In 2016, the Act was revised again, this time to incorporate the 2006 amendments to the UNCITRAL Model Law. The Act was most recently amended in 2020.
A.2 Institutions, rules and infrastructure
The leading arbitration institution in Korea is the Korean Commercial Arbitration Board (KCAB), which was established in 1970. The KCAB is an independent institution partially subsidized by the Korean government. For many years, the KCAB had a single set of rules for both domestic and international arbitration known as the Commercial Arbitration Rules. In 2007, the KCAB published separate international rules, which were modeled on the then-existing rules of several of the world’s leading arbitral institutions. The KCAB International Rules were updated in 2011 and again in 2016, and at that time KCAB International was formed as an independent division within the KCAB to administer its international cases.[2] In recent years, KCAB International has opened overseas offices in Los Angeles, Shanghai and Hanoi.
The most notable development in 2022 was to organize a Revision Committee to review and update the international rules. The Revision Committee is chaired by Professor Joongi Kim of Yonsei University, and includes attorneys representing a mix of local and international law firms that are active in the Korean international arbitration community. The key objective of the revisions under discussion is to make the rules more efficient and to promote the speedier resolution of disputes, in line with the global trend among other arbitration institutions.
KCAB International appointed a new Secretary General in April 2022. Mr Steve Kim succeeded Ms Sue Hyun Lim, who returned to private practice after serving in the position for almost three and a half years. Mr Kim was formerly the Director of the International Centre for Dispute Resolution of the American Arbitration Association in New York. He now presides over the KCAB’s international arbitration case management process. Professor Hi-Taek Shin departed as Chairman of KCAB International in 2022, and the KCAB is currently seeking to recruit his successor.
B. CASES
There were two notable lower court cases in 2022. One case confirmed that parties have an obligation to raise an objection to jurisdiction in a timely manner. The other upheld an arbitration clause appearing in standardized terms in a contract governed by foreign law. Both cases were consistent with previous Korean court precedents.
B.1 Timeliness of jurisdictional objection based on agreement to arbitrate[3]
B.1.1. Facts of the case
Two Chinese companies filed a lawsuit in the Korean court against a Korean company, claiming for payment of the purchase price for goods supplied under two separate supply contracts. Each of these contracts contained an arbitration clause providing that any disputes arising thereunder shall be submitted to arbitration at the China International Economic and Trade Arbitration Commission (CIETAC). Notwithstanding the arbitration clause, both sides actively participated in the court proceedings. Both sides made multiple written submissions on the merits and attended several court hearings. At the fourth hearing date, the defendant objected to the court’s jurisdiction for the first time, invoking the contractual arbitration agreements.
B.1.2. The ruling of the court
In considering the defendant’s jurisdictional objection, the Seoul Southern District Court stated that as an initial matter, there indeed had been a valid arbitration agreement between the parties and that they should have looked to resolve their dispute through CIETAC arbitration. Under article 9(1) of the Arbitration Act (“Act”), a court shall dismiss a case when the defendant raises a jurisdictional objection based on the existence of an arbitration agreement. However, under article 9(2) of the Act,[4] any defendant who objects to the court’s jurisdiction on the basis of an arbitration agreement must raise the objection no later than the “first statement on the substance of the dispute.” Citing an existing Korean Supreme Court precedent on article 9(2), the court emphasized the need to protect the plaintiff’s expectations and the interest in seeking to resolve disputes with due regard to judicial economy.[5] Consequently, the court held that a defendant has an obligation to raise a jurisdictional objection before making submissions on the substantive merits of the case.
Here, as the defendant had only objected to jurisdiction in written submissions following the fourth hearing, the court dismissed the jurisdictional objection concluding that the objection was untimely under article 9(2) of the Act. This was consistent with previous court decisions that applied article 9(2), where belated jurisdictional objections were dismissed. In one earlier case, the Seoul High Court rejected the jurisdictional objection that was raised only after merits arguments had been raised in the court of first instance.[6] In another case, the court of first instance dismissed a jurisdictional objection that was raised at the fourth court hearing date, well after the defendant had already submitted and orally pleaded its merits arguments in the previous hearing.[7]
B.1.3. Thoughts and implications
The Seoul Southern District Court’s ruling underscores that any jurisdictional objection based on an arbitration agreement must be raised in a timely manner. In particular, the objection should be made before the court hears arguments on the merits of the case. The Korean Supreme Court precedent cited in the District Court’s decision explains that a respondent or a defendant must make a jurisdictional objection pursuant to an arbitration agreement before its “first statement on the merits of the matter in dispute.”[8] Relatedly, the Arbitration Act is broadly aligned with the wording of the UNCITRAL Model Law. Article 8(1) of the UNCITRAL Model law similarly provides that a court ‘shall’ refer the parties to arbitration “if a party so requests not later than when submitting their first statement on the substance of the dispute.” Any party named as a defendant in Korean litigation must therefore decide at the outset of the case whether to object to jurisdiction on the basis of an arbitration agreement – before it makes any argument of a substantive nature on the merits of the case.[9]
B.2 The validity of arbitration clauses contained in general terms and conditions[10]
B.2.1. Facts of the case
A Korean company (A) entered into a contract for the supply of goods with a Saudi Arabian company (B), wherein the contract provided that Company A would acknowledge receipt and acceptance of Company B’s purchase orders by replying with “notes of acceptance.” Thereafter, in accordance with the contract, Company B sent a purchase order that included a form with Company B’s general terms and conditions. The general terms contained an arbitration agreement, which stipulated that “all disputes which may arise in relation to the purchase order” shall be determined by arbitration pursuant to the ICC arbitration rules. The standardized terms also provided that the law governing the contract would be the law of England and Wales.
Company A sent a note of acceptance and supplied the goods to Company B. The note of acceptance included the seal of a representative of Company A, along with a signature. Company B did not pay amounts due under the contract, so Company A filed a claim in the Korean court for payments due.
Company B timely objected to the court’s jurisdiction on the basis of the arbitration agreement in the general terms. In response, Company A argued that the arbitration clause was invalid because it violated article 14 of the Act on the Regulation of Terms and Conditions (“Terms and Conditions Act”), a Korean statute that regulates the enforceability of standardized terms. Under the Terms and Conditions Act, standardized terms will be regarded as null and void if they are unreasonably disadvantageous.[11]
B.2.2. Court’s ruling
The Changwon District Court found that both the purchase order and the attached standardized terms formed the contract for the supply of goods. As the general terms contained an arbitration agreement, the court determined that it lacked jurisdiction to rule on Company A’s claim for payment.
The court also considered whether article 14 of the Terms and Conditions Act would apply and invalidate the arbitration agreement. Article 14 provides that a standardized clause that governs a party’s right to file a lawsuit is null and void if it puts customers at an “unfair disadvantage.”[12] The court held that arbitration agreements can be construed as a “clause which prohibits customers from filing a lawsuit” within the meaning of article 14. This is because an arbitration agreement effectively confers jurisdiction to an arbitral tribunal, and consequently precludes either party from resorting to litigation in national courts.[13] In that sense, the Terms and Conditions Act would apply, and could potentially affect the validity of the arbitration clause in cases where the governing law of the arbitration agreement is Korean law.
In this case, the court first observed that the general terms provided that the governing law of the contract was the law of England and Wales. The court noted that the Terms and Conditions Act, a Korean statute, did not automatically apply to contracts governed by foreign law. Although the court suggested that the Terms and Conditions Act might apply depending on the circumstances, the court did not elaborate to explain what these circumstances might be.[14] In making its ruling, the District Court cited an earlier Korean Supreme Court case[15] in which the court adopted similar language when holding that the Terms and Conditions Act does not automatically apply to all contracts where the governing law is foreign law. The Supreme Court based its considerations on the fact that the Act on Private International Law provided for separate mandatory provisions for consumer protection in article 27 (now article 42 of the most recent version of the Act), which states that protection given by mandatory provisions of the jurisdiction where the consumer resides still applies to the contract even if the parties have selected a different applicable law. The Supreme Court also noted that the legislative purport of the Terms and Conditions Act indicated that there was no legislative intent to apply the statute to all contracts governed by foreign law.
B.2.3. Thoughts and implications
Before this decision there had been some discussion within the Korean legal community over whether the Terms and Conditions Act should be treated as a mandatory rule within the meaning of article 20 of the Act on Private International Law[16] — which would mean that it would apply irrespective of the parties’ choice of law.[17] The predominant view was that such a broad application would unreasonably interfere with party autonomy, and could have the effect of discouraging parties from entering into such contracts.
The Changwon District Court’s ruling applies to contracts with an arbitration clause in the general terms, and where the governing law is the law of a foreign jurisdiction. The judgment reaffirms the Supreme Court’s position that an arbitration clause of a contract which is not governed by Korean law will not be rendered invalid under the Terms and Conditions Act simply for the reason that it was agreed upon by the parties in the form of general terms and conditions.
In cases where the substantive governing law is Korean law, there are no court decisions where a court has ruled that an arbitration clause in standard terms was “unreasonably disadvantageous” to the party under the Terms and Conditions Act. That being said however, interested observers may refer to a Seoul Central District Court case[18] which concerned the set-aside of a domestic arbitral award on a contractual dispute where the substantive governing law and the law of the seat was Korean law. The decision of the court in that instance was ultimately overturned by a higher court, but signified that the Terms and Conditions Act could apply and potentially render arbitration agreements invalid.
In that case, the Seoul Central District Court applied the Terms and Conditions Act and found that the arbitration agreement was invalid, but for a reason other than the article 14 prohibition on limitations to the right to bring a lawsuit that are unreasonably disadvantageous.[19] Instead, the District Court found the arbitration clause invalid under article 3(2), which requires the party providing the standardized terms to clearly state the relevant terms in the manner generally expected for that type of contract, and to deliver a copy of the standardized terms to the counterparty. The contract at issue in the litigation was an agency contract in the form of standardized terms and conditions. The defendant, a company in the business of the sale and purchase of medical equipment, invited the plaintiff, a sales agent, to agree to the standardized terms in the agency agreement. The court found that this obligated the defendant to explain the details of the relevant terms and conditions to the plaintiff pursuant to article 3(2) of the Terms and Conditions Act,[20] which included the arbitration clause. As the defendant failed to furnish proof that it had explained the details of the arbitration clause to the plaintiff, the court directly applied article 3(2) and held that the arbitration agreement was invalid based on the failure to comply with the article 3(2) requirement.
While the Seoul High Court later overturned the Seoul Central District Court’s decision, it did so on the grounds that the plaintiff had failed to establish that the requirements to invalidate the arbitration agreement had been satisfied.[21] In particular, the High Court focused on the facts that (i) the terms and conditions (containing the arbitration agreement) had been separately negotiated, and thus constituted a distinct, not standardized, agreement; (ii) the defendant had explained the contents of the arbitration clause to the plaintiff; and that (iii) an agreement referring the dispute to the KCAB was not “unfairly disadvantageous” in the meaning of article 14 of the Act. Accordingly, parties who enter into agreements with standardized terms and conditions, including arbitration agreements, should be aware that the arbitration clause could be scrutinized under the Terms and Conditions Act. If the agreement is governed by Korean law, the Terms and Conditions Act may apply with the possibility that individual clauses (such as an arbitration clause) may ultimately be declared unenforceable. Though no court has yet found an arbitration clause to be invalid under the Terms and Conditions Act, the Korean Fair Trade Commission (KFTC) ruled that a supply contract consisting of standard terms and conditions was invalid under article 14 of the Act as “customers are generally unfamiliar with dispute resolution by arbitration,” and as “it is unlikely that a customer would have fully understood the meaning behind resorting to arbitration when agreeing to an arbitration clause.”[22] Ultimately, the KFTC recommended that the company in question take corrective measures to amend or delete the clause in question.
[1] Act No. 16918, partially amended and in enforcement as of 4 February 2020.
[2] The 2016 Rules apply to ‘international arbitration’ cases, which are proceedings where (i) at least one of the Parties to the arbitration agreement has its place of business in a state other than Korea, (ii) or the place of arbitration set out in the arbitration agreement is in a state other than Korea.
[3] Seoul Southern District Court Judgment No. 2020GaDan224498 dated 6 October 2022.
[4] Arbitration Act, article 9 (Arbitration Agreement and Substantive Claim before Court): “(1) A Court before which an action is brought in a matter which is the subject of an arbitration agreement shall dismiss the action when the defendant raises as a defense the existence of an arbitration agreement[…] (2) The defendant shall raise a defense under paragraph (1) by not later than when submitting their first statement on the substance of the dispute.”
[5] Korean Supreme Court Judgment No. 2013Ma2408 dated 25 April 2014.
[6] Seoul High Court Judgment No. 2020Na2015414 dated 15 October 2020; Seoul Central District Court Judgment No. 2020Na52292 dated 9 June 2021.
[7] Seoul Central District Court Judgment No. 2019GaHap523749 dated 24 October 2019.
[8] Korean Supreme Court Judgment No. 2013Ma2408 dated 25 April 2014.
[9] ‘Preparatory briefs’, such as the answer to a plaintiff’s claim, must be argued verbally during a court hearing date in order for the argument to have effectually been made to the court. As long as the jurisdictional objection is made on the same hearing, the court recognizes the timeliness of the objection. See Cheongju District Court Jecheon Branch Judgment No. 2021GaDan21711 dated 16 February 2022.
[10] Changwon District Court Masan Branch Judgment No. 2018GaHap100830 dated 26 January 2022.
[11] Act on the Regulation of Terms and Conditions, article 14 (Prohibition, etc. of Filing Lawsuits): “A clause in terms and conditions relating to the filing, etc. of lawsuits, which falls under any of the following subparagraphs, shall be null and void: 1. A clause which puts customers at an unfair disadvantage by prohibiting the filing of lawsuits or by entering into an agreement on trial jurisdiction.”
[12] Under the Terms and Conditions Act, the term “customer” is defined as “a party to a contract who has been offered terms and conditions from a business person as the content of the contract.” “Business person[s]” are defined in turn as “a party to a contract who offers terms and conditions to the other party as the content of the contract.” See article 2, subparagraphs 2-3 of the Terms and Conditions Act.
[13] While there is some disagreement as to whether article 14 determines the legality of the arbitration clause or goes to its validity, the predominant view is the latter. See Consumer Protection in the Consumer Arbitration in the International E-Commerce Context Kim – Focusing on the Arbitrability and the Validity of the Arbitration Agreement, Hyo-Jung Kim,Korean Forum on International Trade and Business Law, vol. 27, no. 2, 2018, pp. 129-130.
[14] The court did not specifically mention or provide examples of such circumstances where the Terms and Conditions Act would apply to contracts where the governing law was not Korean law.
[15] Korean Supreme Court Judgment No. 2012Da118846, 118853 dated 20 March 2015.
[16] Article 20 (formerly article 7) of the Act on Private International Law: “In the light of the purpose of legislation, irrespective of the applicable laws, the mandatory provisions of the Republic of Korea shall govern the corresponding legal relations even if foreign laws are designated as applicable laws thereof under this Act.”
[17] The Protection of the Franchisee of the International Franchisee of the International Franchise Contract and the Governing Law in the Litigation, Seungsoo Han, Seoul National University Law Journal, Vol. 58, No. 3, pp. 93-94.
[18] Seoul Central District Court Judgment No. 2016GaHap528323 dated 17 March 2017.
[19] In the decision, the district court did not review the argument based on article 14 of the Terms and Conditions Act although the plaintiff had argued that the arbitration agreement was also invalid pursuant to the same provision as it had already concluded that the agreement was invalid under the article 3(2) of the Act.
[20] Terms and Conditions Act, article 3(2): “When entering into a contract, a business person shall clearly state to their customers the details of the relevant terms and conditions in a way that is generally expected for the type of contract in question and shall, upon the request of the customer, deliver a copy of the terms and conditions to the customer to help the customer understand them[…]”
[21] See Seoul High Court Judgment No. 2017Na2022139 dated 20 October 2017.
[22] See Korean Fair Trade Commission Resolution No. 2010 YakGwan0478 dated 25 February 2010. It is not clear whether this ruling became the subject matter of court proceedings.
