SOUTH KOREA

Hyunyang Koo and Vaishali Sharma.

A. LEGISLATION AND RULES

South Korea has adopted a pro-arbitration legal framework that governs both domestic and international proceedings. International arbitration continues to be governed by the Korean Arbitration Act, which is based on the UNCITRAL Model Law. In 2016, the Korean legislature enacted long-awaited amendments to the Korean Arbitration Act and adopted many of the 2006 Amendments to the UNCITRAL Model Law. The revised Act has been well-received in the arbitration community, and the legislature has not enacted any additional amendments since then.

The Arbitration Industry Promotion Act is another important legislation for international arbitration in Korea. Through the Arbitration Industry Promotion Act, the Korean legislature has mandated governmental support for efforts to make Korea an attractive arbitral seat, to cultivate experts and arbitration professionals, and to further develop the arbitration industry in Korea. There have been no legislative amendments since the law came into force in 2017.

A.2      Institutions, Rules and Infrastructure

The international arbitration industry is continuing to expand in Korea. In recent years, various stakeholders have undertaken initiatives to ensure that Korea is arbitration-friendly and these initiatives have only grown in scope and number in 2019.

On 17 December 2019, KCAB International officially opened its overseas liaison office in Hanoi, Vietnam and this made KCAB International the first foreign arbitral institution approved to open an overseas office in Vietnam. KCAB International expects to use its overseas office to promote KCAB’s services as well as arbitration and alternate dispute resolution in Vietnam. KCAB International has taken more of such steps to promote arbitration and alternate dispute resolution in Korea and other countries by entering into Memorandum of Understanding with prominent foreign arbitration centers, e.g. with the Singapore International Mediation Centre (August 2019), the Arbitration Center at the Russian Union of Industrialists and Entrepreneurs (October 2019) and the Abu Dhabi Global Market Arbitration Centre (November 2019). Further, KCAB’s first initiative “KCAB Next,” a professional development group launched in 2018, has since its inception successfully organized many networking as well as training and development events in aid of fulfilling its wider goal of fostering a strong arbitration community in Korea.

In addition to broadening its services, the KCAB has expanded its hearing room facilities by consolidating with the Seoul International Dispute Resolution Center (SIDRC). In September 2019, KCAB signed a Cooperation Agreement with the Hong Kong International Arbitration Centre (HKIAC) to promote the use of SIDRC’s and HKIAC’s facilities for hearings in Seoul and Hong Kong, respectively.

B. CASES

Many contracts that involve an international transaction between Korean companies and foreign companies include an arbitration agreement. Naturally, many of the disputes which arise between the Korean companies and foreign companies are resolved through arbitration. In 2019, there were a number of disputes where the parties challenged the existence and scope of arbitration agreements as well as the arbitration award itself in the Korean courts. As a renowned arbitration-friendly jurisdiction, the Korean courts rendered decisions that are in line with international practice. The following sections discuss recent decisions of the Korean courts which are worth noting in this regard.

B.1      Threshold under the Korean law to ascertain whether an arbitral award should be set aside for not providing the reasoning of its award

In July 2019, the Seoul Central District Court rejected a party’s challenge to an arbitral award. The claimant had asserted that the arbitral award should be set aside as it failed to provide its reasoning for its decision and therefore was in breach of article 32.2 of the Korean Arbitration Act.[1] However, the Seoul Central District Court held that the arbitral award met the required threshold for providing its reasoning and grounds for the award, and rejected the claimant’s challenge.[2]

The said dispute arose between two companies, contractor and supplier, regarding a rental contract for SP-STRUT method connecting materials and steel plates for the purposes of a building construction project in Busan, Korea. Under the contract, the contractor was required to pay a rental fee after receiving the materials from the supplier. When the contractor failed to pay the rental fee, the supplier made a request for arbitration at the Korean Commercial Arbitration Board, in accordance with the arbitration agreement, in order to claim the unpaid rental fee. The arbitral tribunal accepted supplier’s arguments and rendered an award ordering the contractor to pay the whole amount of the rental fee. However, the contractor refused to pay and argued in the Seoul Central District Court that the arbitral award should be set aside as it failed to provide its reasoning or grounds in relation to the four arguments that were made by the contractor during the arbitration, which are namely that (i) the contractor has no obligation to pay for the rental fee as contractor had returned the materials, (ii) the rental fee should be reduced as the claimant returned the oversupplied materials back to the respondent, (iii) the claimant incurred damages due to respondent’s breach of contract and (iv) the manufacturing fee of the bracket and cutting fee of the steel plate should be deducted from the rental fee.

 The Seoul Central District Court first pointed out that article 32.2 of the Korean Arbitration Act provides that “an arbitral award shall provide its reason which forms a ground for its award” and that article 36.2.1(d) provides that “an arbitral award may be set aside when the arbitration procedure is found to be not in accordance with the parties’ agreement, unless it is against the mandatory provisions or when the arbitration procedure is not in accordance with the Act if such agreement between the parties does not exist.” Thus, the Seoul Central District Court acknowledged that if an arbitral award does not provide its reasoning for its grounds for the award, and when there is no explicit agreement between the parties that it is not required to do so, such arbitral award may be set aside.

However, according to the Seoul Central District Court, the failure to provide reasoning or grounds of the award is considered to have occurred in the following circumstances only: (i) when such arbitral award does not state or provide any reasoning, or (ii) when the reasoning provided in the award is not clear enough to determine the factual or legal findings which the award is based on, or (iii) when the reasoning provided is contradictory. Therefore, according to the Seoul Central District Court’s decision, it is not required for the arbitral tribunal to provide a clear and detailed view of the underlying legal relationship. As long as the arbitral award provides certain reasoning and if such reasoning can show how the arbitral tribunal reached its decision and such decision does not clearly lack common sense or is not in contradiction to the reasoning, it is sufficient. An arbitral award being unfair or incomplete does not mean that the arbitral award failed to provide its reasoning.

Based on the above principle, the Seoul Central District Court found that the arbitral award provided enough reasoning to show how the arbitral tribunal reached its decision. More importantly, the Seoul Central District Court emphasized the principle that even if there is a certain unfairness or incompleteness in the arbitral award, it should not be considered that the arbitral award failed to provide its reasoning.

This decision firmly establishes that there is a high threshold to meet in order for an arbitral award to be set aside on the ground that such arbitral award failed to provide its reasoning. Further, this case follows a long line of arbitration-friendly court decisions in Korea in which setting aside an arbitral award is considered exceptional and only granted in rare circumstances.

B.2      Set-off is a ground to raise an objection against the execution of arbitral awards under the New York Convention, article 5.2(b)

Through the years, Korean courts have been well known for taking an arbitration-friendly position in relation to many aspects of arbitration, including enforcement of an arbitral award. Accordingly, Korean courts have taken a strict view in determining whether enforcing an arbitral award would be considered against the public order of Korea and therefore should not be enforced under the New York Convention, article 5.2(b). However, recently in March 2019, the Seoul Central District Court held that a set-off after the award is an exceptional case which is considered as a valid ground to object to the enforcement of the arbitral award.[3]

The dispute arose between two parties in a joint venture agreement, under which the respondent was to transfer 37% of the shares of a Chinese company to the claimant in return for a certain amount. The joint venture agreement contained an arbitration clause which provided that any dispute that cannot be amicably settled between the parties shall be resolved in the Arbitration Commission of Qingdao in China.

The claimant requested for arbitration arguing that the respondent breached the joint venture agreement and therefore should return the payment for shares that were transferred. The arbitral tribunal accepted the claimant’s arguments and rendered an award in the favor of the claimant. Thereafter, the claimant requested the execution of the arbitral award in the Seoul Central District Court.

Respondent raised several objections to claimant’s application for the execution of the arbitral award, including that the arbitral award should not be executed under article 5.2 of the New York Convention as the respondent had rightfully set-off claimant’s claim arising out of the arbitral award, with its monetary claim against the claimant.

The Seoul Central District Court agreed that a rightful set-off against the claimant’s claim arising out of the arbitral award is a valid ground to raise an objection against the execution of such arbitral award. The court relied on a Korean Supreme Court decision which held that if there is a ground to raise an objection under the Korean Execution Act against the arbitral award after it was rendered, and it is found that executing such arbitral award is against a fundamental principle of the Korean law, then the Korean court may refuse to execute such arbitral award under article 5.2(b) of the New York Convention.[4]

Further, in relation to set-off, the Seoul Central District Court was guided by a Korean Supreme Court decision regarding the general principle of set-off under the Korean law which provided that set-off is only effective when a respondent notifies its intention to set-off claimant’s claim with its own claim against the claimant. Therefore, if the respondent notified its intention to set-off after the court has rendered its decision, then it is considered a valid ground for objection to execution of the court’s decision under article 505.2 of the Korean Civil Procedure Act, regardless of whether the respondent was aware of its claim against the claimant during the trial.[5] Based on the above, the Seoul Central District Court held that the arbitral award should not be executed in the current case as the claimant’s claim, arising out of the arbitral award, was validly set-off by respondent’s claim against the claimant.

What is noteworthy in this case is that the Seoul Central District Court decided that executing an arbitral award when claimant’s claim arising out of such award is considered to be set-off by respondent’s claims after the arbitral award is rendered, is against the fundamental principle of the Korean law and is therefore considered as a ground to object to the execution of the arbitral award under article 5.2(b) of the New York Convention.

While it remains true that Korean courts adopt a strict view in relation to granting an objection to executing an arbitral award, this case is considered as an exceptional case where the parties may rely on post-award set-off in raising objection to the execution of an arbitral award in the Korean courts.

 

[1] Article 32.2 of the Korean Arbitration Act states: “An arbitral award shall state the reasons upon which it is based. However, it shall not apply if the parties have agreed otherwise or the award is an arbitral award on agreed terms under article 31.”

[2] Seoul Central District Court Decision No. 2019GaHap526250 dated 24 July 2019

[3] Seoul Central District Court Decision No.2017GaDan5224688 dated 21 March 2019

[4] Korean Supreme Court Decision No. 2001Da20134 dated 11 April 2003

[5] Korean Supreme Court Decision No.93Da25344 dated 24 November 1998