Arbitration Yearbook Korea

By: Sean Lim,1 Yewon Han2 and Saemee Kim3

A. Legislation, Trends and Tendencies

A.1 Legislation

International arbitration in Korea continues to be governed by the Korean Arbitration Act (the “Arbitration Act”), to which no legislative amendment was made in 2015.

A.2 Trends and Tendencies

A summary of the proposed amendments to the Arbitration Act was provided in the 2014-2015 International Arbitration Yearbook (the “Proposed Amendments”). Since that update, the Proposed Amendments have been submitted to the National Assembly for approval. Another significant development in Korea worth highlighting in this report is the Korean Commercial Arbitration Board (KCAB)’s proposal to amend its international arbitration rules (the “KCAB International Rules”).4 These revised rules are expected to come into force in the first half of 2016. Below are the main features of the proposed revisions.

Implementation of the Emergency Arbitrator Procedure

In line with the international trend of arbitral institutions providing for the appointment of an emergency arbitrator, the KCAB proposes to implement an Emergency Arbitrator Procedure in its rules. These rules aim to enable parties to seek urgent interim measures prior to the constitution of an arbitral tribunal. Under the proposed rules, a party seeking conservatory and interim measures may, concurrent with or following the submission of a request for arbitration (but before the constitution of the arbitral tribunal), apply for interim measures by an emergency arbitrator. Upon receipt of the application, the KCAB’s Secretariat must make efforts to appoint an emergency arbitrator within two business days. Once appointed, the emergency arbitrator must issue an order within 15 days of his or her acceptance of the appointment, unless all parties agree or if the case is complex or any other compelling reason exists. The KCAB proposes to incorporate a detailed Emergency Arbitrator Procedure in Appendix 3 of the KCAB International Rules, which will provide for, among other things, the appointment of an emergency arbitrator, as well as timelines and scope of the emergency arbitrator’s powers. The applicant is required to pay an administrative fee of KRW3 million (approximately US$2,600 at the exchange rate current as of this writing). The amount of remuneration for the emergency arbitrator will be KRW15 million (approximately US$12,900 at the exchange rate current as of this writing) under the proposed rules.

Increased Threshold Amount for Expedited Procedure

The KCAB also proposes to increase the threshold amount for the default application of the Expedited Procedure from KRW200 million (approximately US$170,000 at the exchange rate current as of this writing) to KRW500 million (approximately US$425,000 at the exchange rate current as of this writing). The KCAB took the view that the current threshold amount of KRW200 million is too low.

New Provision on Joinder

The current KCAB International Rules do not provide for any provision on joinder. The proposed amendments to the KCAB International Rules include a new provision on under what circumstances a third party may join the arbitration. The proposed provision on joinder permits joinder of a third party upon the application of a party if: (i) the parties and the additional party have all agreed in writing about the joinder; or (ii) the additional party has agreed in writing to be joined in the arbitration where all claims are made under the same arbitration agreement. The arbitral tribunal has discretion to refuse joinder of an additional party where there is a reasonable ground to do so, such as a delay of the arbitral proceedings.

Single Arbitration under Multiple Contracts and Consolidation

The KCAB also proposes to include a new provision on single arbitration under multiple contracts. Under this new rule, the Secretariat may allow the claimant to submit claims arising out of multiple contracts within one request, provided that (i) the Secretariat is prima facie satisfied that all of the contracts provide for arbitration under the rules; (ii) the agreements’ compatibility is recognized; and (iii) the claims arise out of the same transaction or series of transactions. The KCAB has also introduced a new provision on consolidation, expressly allowing the arbitral tribunal to, at the request of a party, consolidate claims made in a separate but pending arbitration if such arbitration is also under the KCAB International Rules and between the same parties.5 These provisions are intended to maximize the ability of the KCAB and/or arbitral tribunals appointed under the KCAB International Rules to handle multiparty and multicontract disputes.

Changes to Procedures for Appointment of Arbitrators

The KCAB’s proposed revisions also aim to enhance the procedures for appointment of an arbitrator or arbitrators by: (i) requiring an arbitrator to sign and submit the statement of acceptance and the statement of impartiality and independence in the form provided by the Secretariat;6 (ii) subjecting the appointment of an arbitrator made by a party, by parties, or by arbitrators to confirmation by the Secretariat of the KCAB;
7 and (iii) giving the other party an opportunity to comment on a party’s request to the Secretariat to appoint a sole arbitrator or chairman of the arbitral tribunal whose nationality is different from the nationalities of the parties.

B. Cases

In 2015, Korean courts reviewed a total of six international arbitration cases concerning the enforcement of foreign awards, which were all found enforceable in whole or in part under the New York Convention. This supports the consistent reputation of the Korean courts as having an arbitration-friendly tendency when applying the refusal grounds provided in the New York Convention. Selected noteworthy decisions are described below.

B.1 Supreme Court Overturns High Court’s Refusal of Enforcement8

A dispute arose out of a commitment letter between a joint investment company and a Korean company (the “Commitment Letter”), which did not include a dispute resolution clause. The joint investment company filed an arbitration based on an ICC arbitration clause contained in a shareholder agreement (the “Shareholder Agreement”) entered into by the joint investment company and certain shareholders, including the Korean company. The arbitral tribunal founded its jurisdiction on this arbitration clause and rendered an award in favor of the joint investment company. When the joint investment company sought enforcement of the arbitral award in the amount of US$35 million against the Korean company in Korea, the Seoul Central District Court refused to enforce the award, ruling that the enforcement of the award would be contrary to public policy. On appeal, the Seoul High Court took a different view in refusing to enforce the award. It found that the joint investment company was not a party to the arbitration agreement contained in the Shareholder Agreement and that as the dispute was not related to the Shareholder Agreement, the arbitration agreement it contained did not govern the dispute arising out of the Commitment Letter.

On 29 October 2015, the Supreme Court remanded the case to the Seoul High Court, concluding that the Seoul High Court had erred in holding that a valid arbitration agreement did not exist. The Supreme Court found that the joint investment company was also a party to the Shareholder Agreement. Further, the Supreme Court stated that as the Commitment Letter was simply a follow-up letter to the Shareholder Agreement, it was fair to say that the dispute was in connection with the Shareholder Agreement based on a reasonable interpretation of the parties’ intention. The Supreme Court based its decision on the principle of “one-stop adjudication,” adopting a broad interpretation of the arbitration agreement.

B.2 Set-off Claims Arising After Award9

In a decision issued on 15 May 2015, the Seoul Central District Court rejected the defendant’s attempt to set off its claims against the amount awarded against it in an arbitral award. The plaintiff, a Korean manufacturer of automobile components, entered into a distributorship agreement with the defendant, a US entity, to distribute and promote the sales of the product in the United States, under which the parties agreed to resolve all disputes arising out of the agreement through the KCAB arbitration. When the defendant defaulted on the payment of the sales profits owed to the plaintiff, the plaintiff commenced an arbitration requesting the payment of the unpaid sales profits, and the defendant, in turn, filed a counterclaim requesting to set off the outstanding remuneration amount accrued until 30 May 2013 under the distributorship agreement from the plaintiff’s claim amount. The arbitral tribunal found that both claim and counterclaim were valid and awarded the plaintiff part of its claim. In the enforcement proceedings, the defendant argued that additional remuneration had accrued from the date of the award until the date of the set-off notice, which exceeded the total amounts awarded against it in the arbitral award. The defendant further argued that enforcement of the award would violate public policy, as it would not be under any payment obligation after the additional set-off. The Seoul Central District Court found that the question of the accrued remuneration amount from the date of the award should be determined by a fresh arbitral tribunal and not by the enforcing court, since the parties agreed to resolve any dispute related to the distributorship agreement through arbitration.

C. Costs in International Arbitration

C.1 Allocation of Costs

The current Arbitration Act is silent on issues of cost allocation and recovery. The Proposed Amendments to the Arbitration Act include a new provision addressing this issue. The proposed provision, when enacted, will give the arbitral tribunal express authority to allocate arbitration expenses between the parties, unless the parties agree otherwise.

Under Article 45(2) of the KCAB International Rules, the parties are jointly and severally liable for arbitration costs, and Article 47 of the KCAB International Rules provides that the arbitration costs are, in principle, to be borne by the unsuccessful party. However, it also states that the arbitral tribunal has discretion to allocate the costs between the parties, taking into account the circumstances of the case.

In fact, arbitral tribunals seated in Korea usually apply the “costs follow the event” rule and award most of the fees and/or costs to the prevailing party. Unlike Korean court proceedings, where the scope of recovery of the legal costs is relatively limited, there are no practical or legal limitations in arbitration in terms of allocation of costs. In 2014, the Changwon District Court enforced an ICC award directing the losing party to pay all arbitral costs in the case of a partial defeat.10 The court held that the arbitral award was rendered in accordance with the ICC Rules and in line with public policy in Korea.11

C.2 Security for Costs

The Arbitration Act does not deal with the general concept of ordering provision of security for costs in arbitration, but only provides for security for costs in terms of interim measures. Under Article 18(2) of the Arbitration Act, the arbitral tribunal may order the party requesting the interim measure to provide appropriate security, and the Korean courts also have authority to order the requesting party to provide security for interim measures pursuant to Articles 280 and 301 of the Civil Execution Act. As Article 10 of the Arbitration Act provides that the arbitral tribunal has discretion to request assistance from the court regarding interim measures, both the courts and arbitral tribunals may order the requesting party to provide appropriate security for interim measures.

C.3 Recovery of Costs

As the Arbitration Act does not provide for any limits on the kind and amount of costs that are considered recoverable, parties to an arbitration seated in Korea are generally entitled to recovery of legal fees or costs.

Under the KCAB International Rules, not only filing fees, administrative fees and arbitrator fees/expenses, but also all other costs incurred by a party, such as attorney’s fees or costs for experts, interpreters and/or witnesses are included in the costs of the arbitration. It should be noted that, in practice, in-house counsel’s fees are generally not included in the costs of the arbitration. However, given that the arbitral tribunal has wide discretionary power in allocating the costs and the Arbitration Act and the KCAB International Rules do not exclude in-house counsel’s fees, their time charges may be recovered at the tribunal’s discretion.

However, the KCAB’s domestic arbitration rules (the “KCAB Domestic Rules”) do not include legal fees within the defined category of “arbitration costs.” As a result, the Korean court has also held that legal fees incurred in arbitration under the KCAB Domestic Rules are not recoverable in a cost award absent a separate agreement between the parties.12

Costs submissions for arbitration seated in Korea are similar to those in other international arbitrations. There is no strict requirement to provide supporting evidence for the schedule of costs. Further, the parties are not required to state that they have actually paid the costs. There is also no requirement to disclose third party funder or contingency arrangements.

  1. Sean Lim is a partner and co-head of the International Dispute Resolution Practice Group at Lee & Ko Seoul, Korea.
  2. Yewon Han is an associate in Lee & Ko’s International Dispute Resolution Practice Group. Prior to joining Lee & Ko, she was an associate at Baker & McKenzie’s Singapore office.
  3. Saemee Kim is an associate in Lee & Ko’s International Dispute Resolution Practice Group.
  4. The proposed revisions to the KCAB International Rules were publicized on 26 March 2015.
  5. The current rules do not contain provisions dealing with consolidation.
  6. Under the current rules, a prospective arbitrator is required to disclose in writing to the Secretariat only when there are circumstances likely to give rise to justifiable doubts as to his impartiality or independence.
  7. Under the proposed amendments, an arbitrator is not empanelled until the KCAB confirms the party’s nomination. This proposal recognizes the KCAB as the final authority on the arbitral tribunal’s composition, giving the Secretariat discretion to refuse to confirm the appointment of an arbitrator if it finds the appointment clearly inappropriate.
  8. Supreme Court Case No. 2013Da74868 dated 29 October 2015.
  9. Seoul Central District Court Case No. 2014GaHap537477 dated 15 May 2015.
  10. Article 101 of the Korean Civil Procedure Act provides that depending on the circumstances, the court may charge either of the parties with the whole of the costs in the case of a partial defeat.
  11. Changwon District Court Case No. 2013 GaHap31441 dated 23 January 2014.
  12. Seoul District Court Case No. 98KaGi10876 dated 11 November 1998.