KT Corp. v. ABS Holdings, LTD., No. 1:17-cv-07859 (S.D.N.Y. Apr. 10, 2018) [click for opinion]

KT Corp. (“KT”), a Korean firm, and ABS Holdings (“ABS”), a Bermuda company doing business in Hong Kong, entered into a purchase agreement providing that KT would sell a geostationary satellite to ABS known as the KOREASAT-3 (“KS-3”). The Purchase Agreement stated that KT was obligated to “obtain all necessary licenses, consents and approvals for the sale of the Satellite and the Baseband Equipment.” KT was also “responsible for obtaining and maintaining . . . all governmental and regulatory licenses and authorizations required.” Title would pass to ABS only if “any necessary approvals and licenses, including the U.S. State Department approval and the approvals and consents required for and during the Orbital Slot Use Period, have been received.” Two years after the transaction closed, the Korean Ministry of Science, ICT and Future Planning (“MSIP”) issued an order, declaring the contract null and void and in violation of the Korean Foreign Trade Act (“FTA”) because KT has failed to obtain an FTA permit. The MSIP cancelled KT’s allocation of the spectrum for the satellite and directed KT to return the satellite to its original operating condition.

Arbitration regarding title to KS-3 followed in New York. In a 116-page award, the tribunal found that title had transferred to ABS in 2011 when all the contractual conditions precedent to transfer were satisfied. The tribunal further held that no Korean mandatory law was violated when the title passed in 2011 because (1) no Korean regulatory authority had questioned or required an FTA permit of the prior purchase and sale between ABS and KT of the KS-1 and KS-2 satellites; (2) no Korean authority mentioned any approval requirement in 2011 when the highly publicized transfer of KS-3 occurred; (3) the parties were unaware of any requirement for Korean approval in 2011; and (4) the MSIP Order was not issued until two years after title to KS-3 had passed. The tribunal observed: “It cannot forever be open to a government agency to discovery new ‘mandatory rules’ . . . and invoke them long after the fact as a basis for invalidating a contract already fulfilled by the parties . . . thereby rendering any such agreement illusory.”

The award declared that ABS held title to KS-3 and the related baseband equipment, ordered KT not to interfere with the ongoing operation of KS-3, and ordered KT to deliver to ABS the related baseband equipment and all associated flight data related to the operation of KS-3. KT thereafter filed a petition in the U.S. District Court for the Southern District of New York to vacate the award, and ABS filed a cross-motion to confirm the award.

KT asserted two grounds for vacatur: (1) that the tribunal exceeded its authority by holding that the MSIP order was unauthorized and unconstitutional; and (2) that the panel acted in manifest disregard of the law by failing to recognize mandatory Korean law, and disregarding New York law concerning transfer of title and illegal contracts. The court held that KT had failed to carry its significant burden of showing either.

The court first held that the panel did not exceed its authority. The parties had submitted the title issue for arbitration, and neither party had questioned the tribunal’s authority to resolve that issue. Nor did the tribunal’s principal holding depend on an interpretation of the MSIP order. The tribunal applied New York law to determine that title had passed to ABS in 2011, and that a post facto regulation or decree—whether valid or not—did not reverse the completed passage of title. The panel had held only in the alternative that, even if Korean law governed, the MSIP order was unauthorized. Thus, because the principal holding was squarely one of construing and applying the contract, it was within the scope of the arbitration provisions in the parties’ agreements.

The court held further that the award was not based on a manifest disregard of the law. An award may be vacated due to manifest disregard of the law only if: (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether; and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. The court found that the panel did not ignore Korean law. Rather, it held that the MSIP order was not a “governing legal principle” because it could not be applied retroactively. The MSIP order was also not “clearly applicable to the case” at the relevant time, because the order did not then exist, nor was it even contemplated, when KT transferred title to the satellite. The decision not to apply the order retroactively was thus not in manifest disregard of well defined, explicit and clearly applicable governing law. And even if it were, such disregard occurred only in reaching a secondary and alternative basis for the award, and would not undermine the principal justification for the outcome reached.

Finally, the court determined that KT had not carried its burden of establishing a “public policy” defense to ABS’s cross-motion to confirm the award. KT had argued that that the award violated the public policy of “American courts to respect a valid foreign decree.” The court held that (1) the MSIP order was administrative, not judicial, and therefore deserved less deference; (2) MSIP issued the order without prior notice to ABS; and (3) KT refused ABS’s request to appeal the MSIP order in the Korean courts after it was issued and KT instead asserted that the issue was to be conclusively determined in arbitration. KT could not therefore argue that the arbitrators were bound by the MSIP order because that would have the effect of leaving ABS with no means to protect or assert its rights. Consequently, the court granted ABS’s cross-motion to confirm the award.

A version of this post originally appeared in the September 2018 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.