Seoul’s Prospects as a Regional Seat for International Arbitration

I.  INTRODUCTION

South Korea[1] has a long history with international commercial arbitration. In 1966, Korea enacted its first Arbitration Act, which inter alia established a commercial arbitration committee. In 1970, the commercial arbitration committee became a separate legal entity – the Korean Commercial Arbitration Board (KCAB).[2] In 1973, Korea ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In 1999, comprehensive amendments to the Arbitration Act (Korea) were made based on 1985 UNCITRAL Model Law. In 2013, the Seoul International Dispute Resolution Centre, which has adopted a similar model to Singapore’s Maxwell Chambers, was established.[3] In 2015, the Ministry of Justice of Korea announced its intention to amend the Arbitration Act (Korea) so as to adopt the 2006 UNCITRAL Model Law.[4]

Despite this apparently international-arbitration-friendly history of Korean legislation, Korea is seldom perceived as a popular seat for international arbitration.[5] This article briefly examines various strengths and weaknesses of the Korean framework in facilitating international arbitration.

<br>

II. KOREA’S STRENGTHS AS A SEAT

A. Korea’s Unique Blend of Common Law Practices with Civil Law Traditions

International arbitration, as the name suggests, typically involves disputes between parties from different jurisdictions and legal systems. It is often perceived as an attempt to adopt “best curial practices” from across legal systems. In this regard, Korea’s adoption of certain common law provisions despite its civil law roots is arguably one of its strengths. For instance, unlike other civil law jurisdictions (e.g. Switzerland and Germany),[6] Korea has cross-examination in the court procedure. When the Japanese occupation ended in 1945, the U.S. government took a trusteeship of South Korea under the United Nations for three years. During this time a number of legal principles were introduced by the U.S. and cross-examination in civil procedure was one of them.[7]

Another example of a common law tradition adopted by Korea which would facilitate its attractiveness as a seat of international arbitration is Attorney-Client Privilege. Korean lawyers must not disclose any confidential matter that they have learned in the course of performing their duties under article 26 of the Attorney-At-Law Act (Korea). However, with respect to the scope of this duty, the Korean Supreme Court (the highest court of Korea) in 2012 held that the duty does not apply to the daily consultations which do not involve any potential court proceedings.[8] There were heavy criticisms on this judgment as Supreme Court’s interpretation had brought adverse effect to the client.[9] In response to these criticisms, in 2013 the National Assembly Research Services proposed to amend article 26 of the Attorney-At-Law Act (Korea) by adopting common law concept of Attorney-Client Privilege.[10]

<br>

B. Economic and geographical advantages

Increasing participation of Korean corporations in international arbitration

According to ICC statistics of international arbitration cases involving Asian and Pacific parties during the period from 2008 to 2012, Korea (151 cases) is placed second behind India (288 cases), but ahead of China (144 cases) and Japan (101 cases).[11] This is somewhat surprising because in terms of the size of economy, Korea is only 14 and 31 per cent of China and Japan respectively.[12] One possible reason why Korean corporations are very active in international arbitration is that Korea heavily depends on international trade and investment, being a relatively small country with virtually no natural resources. This highly international nature of Korean economy lends itself to a reliance of foreign investment, which in turn leads to a proliferation of international disputes, of which a significant portion is resolved by international arbitration.[13] It is also worth noting that Korean companies’ commercial bargaining power is rising.[14]

Geographical proximity to Asian powerhouses

From the perspective of bolstering Korea’s status as a seat for international arbitration, it is fortunate that the country is located at the heart of East-Asia, surrounded by major economic powers such as China, Japan and Russia. This geographic location has led Korean corporations to invest in a variety of jurisdictions and partner with an equally diverse variety of corporations.[15] Arguably, from a geographical perspective, Korea (Seoul) is the natural choice for a seat of arbitration for disputes between Chinese and Japanese parties.

<br>

C. Internationalization of Korean society

Asian financial crisis – a valuable training opportunity

The international arbitration industry is described as a small and tight-knit community of law firms and elite arbitrators that is difficult for outsiders to penetrate.[16] In this regard, the Asian financial crisis in 1998 was quite an opportunity for Korean law firms. During this time, Korean companies, banks and real estate assets were sold to western investors under sales contracts with arbitration clauses. When disputes arose a few years later from these contracts, Korean companies did not know how to proceed and thus ‘just knocked on the doors of Korean law firms’.[17] Korean law firms seized on this opportunity to rapidly gain experience in conducting significant international arbitration proceedings.[18]

 

Increasing numbers of highly educated/qualified Koreans overseas

Participation in international arbitration proceedings typically requires proficiency in English, the lingua franca of cross-border business in the culturally diverse Asia-Pacific region. There is an influx of Koreans pursuing high level of education including law, business and finance in top English-speaking universities and institutions outside and within Korea itself. Today it is not difficult to find Korean nationals who are qualified lawyers in multiple foreign jurisdictions. This internationalization of the Korean legal society has put Korean law firms in a better position to compete in international arbitration.[19]

<br>

III. KOREA’S WEAKNESSES AS A SEAT

A. Exclusive effects of the Foreign Legal Consultant Act (Korea)

Under the KCAB International Arbitration Rules (2011), any person is permitted to represent in international arbitration in Korea.[20] On the other hand, article 109 of the Attorney-At-Law Act (Korea) prevents any persons, other than Korean lawyers, to practice in any legal area (including arbitration) in Korea. Thus, technically speaking, overseas-licensed lawyers are not permitted to represent their clients at the KCAB even though the KCAB’s own rules allow them to do so. Even though in practice, it has been commented that overseas-licensed lawyers are in fact allowed to represent parties in international arbitration in Korea,[21] this technical mismatch continues to cause some confusion and should be corrected.

In addition to the aforementioned problem, a more fundamental problem lies in the Foreign Legal Consultant Act (Korea). The Act essentially restricts lawyers who are registered as foreign legal consultants to advising on arbitrations that are governed by their home jurisdiction’s law.[22] Lawyers from jurisdictions which have FTAs with Korea are subject to more restrictions and regulations than lawyers from jurisdictions which have no FTAs with Korea because the Foreign Legal Consultant Act (Korea) applies only to the former.[23] As a result, the Foreign Legal Consultant Act (Korea) is arguably highly damaging to Seoul’s ambitions of becoming an attractive seat for international arbitration.[24]

<br>

B. Unfriendly stance / lack of expertise of Korean courts

It has been believed that Korean courts generally take international-arbitration-friendly stances in relation to recognition and enforcement of foreign arbitral awards and that they have expert knowledge as to international arbitration principles and practices.[25] This belief was strengthened by the Korean Supreme Court’s decisions in 1990s.[26] However, two recent lower courts’ decisions have raised some doubt in this regard.

The first case involved a contract dispute between a British company, NDS Group Ltd (NDS) and a Korean company, KT. An arbitration award (seated in Seoul) was issued in favour of NDS to terminate the contract and to order KT to cease using NDS’s software.[27] However, Seoul Southern District Court refused to enforce the arbitral award on the grounds that the arbitral award was not specific enough to be a final and conclusive judgment of the court in accordance with article 35 of the Arbitration Act (Korea).[28] Fundamental problems with this decision are (i) that the District Court did not make any reference to the exclusive grounds for setting aside an arbitration award under article 36(2) of the same Act and (ii) that the District Court interpreted article 35, which was clearly intended to strengthen the binding force of arbitral awards, in a manner which undermined enforceability of arbitral awards.[29]

The second case which a lower Korean court refused to enforce an arbitral award involved a dispute between the state-owned Korean Resolution and Collection Corporation and Lone Star, an American private equity fund.[30] Enforcement of an award in favour of Lone Star was refused by Seoul Central District Court on the grounds that it was contrary to public policy because it breached Korean law on asset-backed securitization.[31] It might be relevant to this case that Lone Star has been subject to huge criticisms in Korea as its ‘eat and run’ strategy has damaged Korean economy.[32]  It is interesting to note that an arbitration between Lone Star and Korean government with respect to another investment dispute is ongoing in Washington, USA.[33]

In relation to Korean courts’ lack of expertise in international arbitration principles and practices, one of the most eminent Korean scholars of international arbitration has criticized that there are only a few judges in Korean courts who have expertise in international commercial arbitration and further argued that in order for Seoul to be a preferred seat of arbitration the judicature should train selected judges to be experts in international commercial arbitration.[34] Arguably, a special court system or a separate list of judges well-versed in arbitration practice should be designated to handle such cases arising from arbitral awards.

<br>

C.  The KCAB’s low remunerations for arbitrators

It is commonly known that ‘an arbitration is no better than the arbitrators’ or that ‘the arbitrator is the sine qua non[35] of the arbitral processes’.[36] Therefore, an arbitration institution will be judged by the quality of arbitrators which it secures.[37] However, the KCAB has been criticised for having difficulties in maintaining well-qualified arbitrators on its roll due to its inadequate level of arbitrator remuneration.[38] International commercial arbitrations frequently involve complicated legal and factual disputes and take a long period of time. Thus it is unlikely to attract internationally competent arbitrators who are willing to invest his time and expertise with low remuneration. The arbitrator’s fee in the KCAB used to be less than 20 per cent of arbitrators of the ICC Court of Arbitration.[39] Although recently the KCAB increased its arbitration’s remuneration, it is still only 70 per cent of ICC arbitrator fees.[40]

<br>

IV.  CONCLUSION

According to a press release of the Ministry of Justice of Korea with regard to its announcement of intention to amend the Arbitration Act (Korea),[41] if Korea can attract as many international arbitration cases as Singapore does, its effect on Korean economy will be about 600 million USD per year.[42] It is a correct move for the Ministry of Justice to amend the Arbitration Act (Korea) in a manner which follows current standards of international arbitration. Having the right law in place, however, is merely a necessary condition, and hardly sufficient in itself to achieve Seoul’s lofty ambitions.[43] Without addressing the aforesaid issues, Seoul will never be an alternative choice to Hong Kong or Singapore as it hopes to be.

---

This article may be cited as follows: Seungmok Oh, “Seoul’s Prospects as a Leading Regional Seat for International Arbitration ” International Arbitration Asia (13 March 2016) <http://www.internationalarbitrationasia.com/Seoul_Prospects_as_a_Leading Regional_Seat_for_International_Arbitration>.