Korea

A Review of the Korean Supreme Court Cases of Arbitration Issues

In the past, arbitration was not actively used to resolve international disputes in Korea due to a lack of confidence in the arbitration system and low awareness of its significance. However, the Korean government and legal professionals in Korea have made efforts to strengthen the human resources and material infrastructure relating to arbitration, and as awareness of the need for efficient dispute resolution has increased, international arbitration has been increasingly considered the most important method of resolving commercial disputes in Korea and, as a result, is becoming increasingly popular.

During this process of refining the arbitration system by broadening the awareness of arbitration and strengthening the human resources and material infrastructure relating to arbitration, the Korean courts aim to ensure that the efficiency of the arbitration system is not overlooked. Developments in the overall awareness of the arbitration system on the part of the Korean courts, as demonstrated in cases regarding the cancellation and enforcement of arbitral awards, are directly linked to the development of arbitration in Korea.

Korean courts have been in step with the international development of arbitration by recognising a relatively broad scope of validity with respect to arbitration agreements while recognising the separability of arbitration clauses, by taking a generous approach in evaluating the grounds for arbitration awards, and further by introducing the concept of international public policy through their rulings in major cases. This article will review the overall position of the Supreme Court of Korea with regards to issues such as arbitration agreements, governing laws, arbitration tribunals and the cancellation, recognition and enforcement of arbitral awards in connection with international arbitrations.

Arbitration agreements

Validity of arbitration agreements

Whether an arbitration agreement exists between the parties to a dispute may be controversial in practice due to problems such as ambiguities in the proper construction of an arbitration agreement clause. The Supreme Court takes the following position in the event that there is disagreement on the proper interpretation of a contract between the parties concerned, to the point that the proper construction of the parties’ intentions in that contract is ambiguous. One must comprehensively consider the detailed circumstances, such as the concept of arbitration under the relevant governing law of such arbitration, the contents of the arbitration clause in view of the characteristics and the method of the arbitration agreement, and the background of the arbitration agreement between the parties, in determining the validity of such arbitration agreement under the specific arbitration clause, while applying the general rules of construction of contract (eg, that the contents of wordings, the motive and backgrounds of the relevant contract, the intended purpose of the relevant contract and the parties’ actual intentions should be comprehensively considered and reasonably construed from an empirical perspective).

In Supreme Court Decision 2004DA67264 rendered on 13 May 2005, with respect to the issue of the validity of an arbitration clause stating that:

In the case of dispute resolution, both parties shall be subject to the arbitral awards issued by the Busan branch of the Korean Commercial Arbitration Board under the Arbitration Act, and the relevant lawsuit, if any, shall be submitted to the court having jurisdiction over the domicile of the Defendant, the contractor [...]

The Supreme Court held that:

This arbitration clause cannot be deemed as an optional arbitration clause but rather shall be construed as an exclusive arbitration agreement, in light of the background of drafting of the relevant arbitration provision under the aforementioned legal principles. In the meantime, ‘the relevant lawsuit, if any’ in the above clause shall be construed as that both parties agreed on the forum of lawsuits relating to the procedural aspect of the arbitration and the arbitral award.

This indicates that the Supreme Court tends to recognise a broad scope of applicability of arbitration as a means for dispute resolution, upon the comprehensive review of the contents of the relevant dispute resolution clause and the background of the parties agreeing to such clause, in connection with whether the parties concerned have agreed to resolve a dispute through arbitration.

The Supreme Court takes a rather cautious approach to cases where ‘implicit agreement’ is deemed to be established if a party argues the existence of a valid arbitration agreement in the written application for arbitration and the other party does not contest it, even when no written arbitration agreement existed prior to the filing of the application for arbitration.

In Supreme Court Decision 2004DA20180 rendered on 10 December 2004, there was no written arbitration agreement between a Korean company and a Vietnamese company before they entered into arbitral proceedings on a dispute between them. The arbitration was referred to the Vietnamese Commercial Arbitration Board, the relevant arbitral proceedings commenced, and both parties produced the application for arbitration and the relevant answers without any objection. Thereafter, the arbitral award was made on that dispute and the Vietnamese company accordingly brought a lawsuit seeking recognition and enforcement of such arbitral award against the Korean company before the Korean courts. In this case, the Supreme Court held that:

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ‘1958 New York Convention’) requires that the arbitration agreement under Article IV(1) be an ‘agreement in writing’ stated in Article II and further requires in Article II(2) that that written arbitration agreement shall be ‘an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.’ Accordingly, even when the Plaintiff, the Vietnamese company, filed an application for arbitration at the Vietnamese Commercial Arbitration Board and then the Defendant, the Korean company, did not file any objection thereto and an implicit agreement was made consequently, this implicit agreement shall not constitute a valid arbitration agreement under Article II of the 1958 New York Convention unless there are special circumstances that the arbitration agreement is confirmed through business or arbitration documents exchanged between the two companies prior to or after the application of the relevant arbitral proceedings.

Validity of optional arbitration agreements

The Supreme Court takes a cautious approach in dealing with cases involving the issue of the validity of ‘optional arbitration agreements’, which are designated as one of the optional methods together with other methods of dispute resolution in the arbitration clause, as opposed to being designated as the sole dispute resolution method.

In this regard, in Supreme Court Decision 2003DA318 rendered on 22 August 2003, where a dispute resolution clause under the supply agreement stated that ‘the dispute shall be referred to adjudication/arbitration in accordance with the laws of the Purchaser’s country’ and the respondent continued to assert that there had been no arbitration agreement when arbitral proceedings commenced, the Supreme Court held that:

The above optional arbitration clause is eventually effective as an arbitration agreement to the extent that (i) a party to that supply agreement opts not for court decision but for arbitral proceedings against the other party and requests dispute resolution in accordance with such proceedings and (ii) the other party responds to the such proceedings without any objection, and therefore if the other party strongly argues non-existence of arbitration agreement in the answer and objects to resolution by arbitration when one party files an application for arbitration, this clause shall not be deemed to be effective as an arbitration agreement.

The Supreme Court eventually held that an optional arbitration clause is valid to the extent that the other party engages itself in arbitral proceedings and does not file any other objections. Accordingly, if a party, as the respondent in arbitral proceedings, desires to resolve the dispute by means other than arbitral proceedings, such party needs to strongly argue the non-existence of an arbitration agreement (in its own answer) in the course of the arbitral proceedings and oppose dispute resolution by arbitration.

Separability of arbitration agreements

As the Arbitration Act acknowledges the principle that an arbitration agreement is separable from other provisions if such arbitration agreement is stated in the form of an arbitration clause (article 17(1) of the Arbitration Act), the Arbitration Act expressly recognises the ‘separability of an arbitration clause’.

In connection with this issue, in Supreme Court Decision 93DA53054 rendered on 14 February 1995, when the defendant in a lawsuit seeking enforcement of a foreign arbitral award argued that it was no longer a party to the relevant contract or the arbitration agreement became invalid as the main (master) contract that contains such arbitration agreement was comprehensively transferred to a third party, the Supreme Court held that:

Judgment on whether an arbitration agreement is invalidated or not is inseparably linked to the merits of the case, and it should be determined in accordance with the decision of arbitrators (arbitration tribunal) pursuant to the decision made on the merits of the case.

In view of the above decision, for the purpose of persuading the Korean courts to accept the invalidation of an arbitration agreement it is necessary to argue that the arbitration agreement was invalidated by its governing law rather than there being grounds for invalidating or cancelling a main contract.

Governing law (substantive law applicable to arbitration agreement during the stage of approval and enforcement of arbitral awards)

The 1958 New York Convention sets forth that recognition and enforcement of an award may be refused if the relevant arbitration agreement is invalidated by the governing law designated by the parties or, in the case of non-designation, under the law of the country where such award was made (article V(1)(a) of the 1958 New York Convention).

In connection with this issue, in Supreme Court Decision 89DAKA20252 rendered on 10 April 1990, relating to governing law, a sale and purchase contract stated on its reverse that:

The validity, interpretation and performance of this Agreement shall be governed by the laws of England, and any dispute arising out of or in connection with this Agreement, including such validity, interpretation and performance, shall be subject to arbitration in accordance with the rules of the London Court of International Arbitration as of the date of execution of this Agreement.

The plaintiff sought execution of the arbitral award pursuant to the award made by the London Court of International Arbitration, and the defendant argued that the relevant arbitration agreement was withdrawn and no longer effective. The governing law became the key issue in determining whether or not withdrawal of the arbitration agreement was available.

In this case, the Supreme Court held that withdrawal of the arbitration agreement eventually relates to the effectiveness of such arbitration agreement. It considered that article V(1)(a) of the 1958 New York Convention states that such withdrawal shall be determined by the governing law designated by the parties in the first place, or the law of the country where such arbitral award was made in the case of non-designation of governing law, and furthermore that the sale and purchase contract in question stated on its reverse that ‘… any dispute arising out of or in connection with this Agreement, including such validity, interpretation and performance, shall be subject to arbitration in accordance with the rules of the London Court of International Arbitration as of the date of execution of this Agreement.’ Thus, it was deemed that the parties concerned designated the law of England as the governing law.

As examined above, pursuant to article V(1) of the 1958 New York Convention, the Supreme Court deems the substantive law of an arbitration agreement for the recognition and enforcement of arbitral awards to be the governing law as agreed by the parties concerned and, if the parties did not designate a governing law, that the arbitration agreement shall be subject to the law of the country where the arbitral award was issued.

Revocation, recognition and enforcement of arbitral awards

Cancellation of arbitral awards due to infringement of the defence right or violation of other due process

Under the Arbitration Act, arbitral awards shall have the same effect on the parties concerned as the final decision of the court (article 35 of the Arbitration Act). If a party intends to protest against an arbitral award, such party may file a suit seeking revocation of the relevant arbitral award before the court, within a certain period and only on certain prescribed grounds (article 36 of the Arbitration Act).

In particular, issues arise as to when an arbitral award may be set aside on the grounds that a party filing a suit for revocation of that arbitral award did not receive due notice of arbitral proceedings or was unable to defend itself on the merits of the relevant case due to other reasons, which would constitute infringement on the defence right or violation of due process (article 36(2)(i)(b)).

In Supreme Court Decision 89DAKA20252 rendered on 10 April 1990, the losing party did not receive the notice of arbitral proceedings, and failed to participate in such arbitral proceedings, but was aware of the progress of such arbitral proceedings and had sufficient time to prepare for them. The Supreme Court held that:

Where ‘the party against whom the award is invoked was not given proper notice of appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his or her case,’ stated as the reason for refusing recognition and enforcement in article V(1)(b) of the 1958 New York Convention (of which the Republic of Korea is also a signatory), indicates that not all of the cases that infringe on the defense right due to such reasons shall be refused of its recognition and enforcement but only those cases where the degree of infringement of the defense right are too serious shall be refused.

Accordingly, in order to set aside arbitral awards due to infringement of the defence right, the fact that there was such an infringement or a violation of due process is insufficient; the degree of such infringement should be so serious as to warrant the refusal of recognition or enforcement of such arbitral award. The level of seriousness of the degree of infringement on defence rights that warrants refusal shall be determined on a case by case basis.

Recognition and enforcement of foreign arbitral awards relating to public policy

Under the Arbitration Act, recognition and enforcement of a foreign arbitral award that is subject to the 1958 New York Convention shall be governed by the same Convention (article 39 of the Arbitration Act), and such recognition and enforcement may also be refused if the competent authority in the country where recognition and enforcement is sought has found that such recognition or enforcement would be contrary to the public policy of that country (article V(2)(b) of the 1958 New York Convention).

In connection with this issue, in Supreme Court Decision 93DA53054 rendered on 14 February 1995, the Supreme Court, with regards to the argument that the effective 30-year period of the relevant arbitral award under the laws of the Netherlands Antilles is longer than the mandatory provision under the Civil Act and against Korean public policy and therefore enforcement of such effective period should be refused, held that:

Since the purpose of recognition or enforcement of a foreign arbitral award is to protect the enforcing country’s fundamental moral and social order by preventing them from being damaged by such foreign arbitral award, approval of the foreign governing law in a foreign arbitral award shall not be forthwith refused even when such foreign governing law violates a mandatory provision under our positive law, and will be refused only to the extent that such approval consequently is against the public policy of Korea.

The Supreme Court further rendered that this case was not against the public policy of Korea.

When international commercial disputes arise it is vital to resolve such disputes, particularly by means of one-time efficient and professional arbitration proceedings in view of the nature of international transactions. Considering that Korea is also a member country of the 1958 New York Convention, which was introduced for effective recognition and enforcement of foreign arbitral awards in international commerce, and that it is commonly agreed that, in principle, foreign arbitral awards subject to this convention shall be in accordance with the principle of res judicata, the re-examination of the arbitrator’s evaluation of facts and legal judgment shall be prohibited and the party challenging an arbitral award shall bear the burden of proof for arguing and proving the grounds for refusing the relevant recognition or enforcement.

Article V(2)(b) of the 1958 New York Convention provides that ‘contrary to the public policy’ shall be a ground for refusing the recognition and enforcement of foreign arbitral awards, however, the meaning of ‘public policy’ refers to ‘international public policy’ and is a narrower concept than ‘domestic public policy.’ Although it is commonly agreed that the public policy set forth in article V(2)(b) covers acquisition of arbitral awards by ‘fraud’, this notion may conflict with the principle of res judicata if fraud is interpreted broadly, because re-examination of whether fraud existed in the arbitral proceedings may amount to re-examination of the arbitral award in violation of the principle of res judicata. In connection with this issue, the Supreme Court has already rendered a judgment providing an extremely restrictive interpretation regarding the grounds for refusing recognition and enforcement due to fraud.

Specifically, the Supreme Court took a position that foreign arbitral awards made in connection with international commerce envisage dispute resolution by an impartial and professional arbitrator who is appointed by the parties. It also considered that, as (i) foreign arbitral awards are more autonomous than foreign court decisions, which are subject to foreign procedures; (ii) the 1958 New York Convention under which requirements are more lenient than those under the civil procedure laws was entered into as part of efforts to encourage recognition and enforcement of foreign arbitral awards; and (iii) the principle of impartiality, in place of uniform judgment pursuant to laws, may apply to arbitral awards to some degree,¹ foreign arbitral awards shall not be more broadly interpreted in determining the grounds for the refusal of enforcement than the approval and execution of foreign court decisions.

In this respect, Supreme Court Decision 2006DA20290 rendered on 28 May 2009 is one of the most important of the Court’s decisions relating to international arbitration.² In this case, the Supreme Court rendered a judgment declaring the first legal principle with regards to this issue³ by taking an active position in principle over whether the competent court has to issue a ruling pursuant to the adjudication stated in the foreign arbitral award, where a corporate rehabilitation proceeding was commenced against a party to such arbitration after the issuance of the foreign arbitral award, followed by a lawsuit seeking affirmation of the reported rehabilitation claims pursuant to such foreign arbitral award. Furthermore, this decision explains the meaning of the phrase ‘the recognition or enforcement of the award would be contrary to the public policy…’ set forth in article V(2)(b) of the 1958 New York Convention, as well as the strict standards of interpretation of legal principles in connection with the judgment of the above provision.⁴

In addition, the Supreme Court maintained a very strict, restrictive approach in the interpretation of the issue relating to fraud in the above case. In this regard, this Court held that:

The competent court in the country where an arbitral award is executed shall not wholly re-consider the rights and wrongs of substantive judgment, such as the arbitrator’s evaluation of facts and application of law, for deciding whether the relevant foreign arbitral award was obtained by fraud, and then refuse to execute such award on the ground that this arbitral award has been obtained by fraud. However, the court may forthwith refuse to execute a foreign arbitral award without any other procedures to set aside or suspend such award to the extent that such award satisfies all the following requirements: (i) objective evidence with obvious proof clearly demonstrating that a party filing a motion to execute such foreign arbitral award has engaged in fraudulent acts that should be penalized in the course of arbitral proceedings; (ii) the other party was not aware of the above fraudulent acts of the filing party without negligence and as a result was not able to attack or defend them in the arbitral proceedings; and (iii) such fraudulent acts are related to the key issues of the arbitral proceedings.’

The Supreme Court’s interpretation and approach in the above decision are very reasonable and significant in terms of international standards.

Time of decision on revocation of arbitral awards, grounds for refusing recognition and enforcement of arbitral awards and existence of grounds for an objection to a claim

Generally, the setting aside of an arbitral award is adjudicated at the conclusion of the pleading or hearing (as in the case of recognition and enforcement of an arbitral award), and where there are any grounds for an objection to a claim after an arbitral award is made, the key issue is whether recognition or enforcement of such arbitral award may be set aside due to such grounds.

In Supreme Court Decision 2001DA20134 rendered on 11 April 2003, the Supreme Court held that:

Since there is a ground for objection to a claim under the law relating to execution, such as extinguishment of debts, after the arbitral award is established, and as a result it is revealed in the course of pleading in the trial that compulsory enforcement procedures pursuant to the written arbitral award are against the basic principle of our laws, the court may hold that such case is deemed contrary to public policy under Article V(2)(b) of the 1958 New York Convention and may refuse to execute the relevant arbitral award accordingly.

The Supreme Court takes the position that the above interpretation is more consistent with judicial economics, rather than commencing a separate litigation after final determination of the judgment of execution, and is more reasonable in light of the Korean judicial system, which requires judgment of execution to be rendered after pleading sessions.

Statement of grounds for arbitral awards

Unless there is an agreement to the contrary between the parties, arbitral awards shall basically state the grounds for such awards (article 32(2) of the Arbitration Act), and failure to state such grounds does not fall under the grounds for setting aside arbitral awards (article 36 of the Arbitration Act). Accordingly, issues may arise where grounds for arbitral awards are not stated, or the stated grounds are so ambiguous that it is impossible to figure out what the arbitral awards are based on and whether such arbitral awards may be set aside for such reasons.

In Supreme Court Decision 2007DA73918 rendered on 24 June 2010, the Supreme Court held that:

Article 32(2) of the Arbitration Act states that ‘each arbitral award shall state the reasons upon which it is based; provided, however, that this shall not apply if the parties have agreed that no reasons are to be given or the award is a settlement award on agreed terms under Article 31,’ and under Article 36(2)(i)(d) of the Arbitration Act, an arbitration award may be set aside by the court if the party making an application for setting aside an arbitral award furnishes proof that ‘the composition of the arbitral tribunal or arbitral proceedings were not in accordance with agreement of the parties, unless such agreement was in conflict with any mandatory provision of this Act from which the parties cannot derogate, or failing such agreement, were not in accordance with this Act.’ Therefore, on the assumption that an arbitral award may be set aside if such arbitral award does not state its ground even without agreement thereupon by the parties, the situation when an arbitral award does not state its grounds refers to a situation (i) where there is no ground stated in a written arbitral award or (ii) even where such ground is stated they are so unclear that the factual or legal judgment of the relevant arbitral award cannot be identified or (iii) such ground is contradictory. If a ground is set forth in the written arbitral award, it is justifiable that such judgment is based on equity regardless of the rules of law. Also, such ground needs to simply show how the arbitrator has reached such judgment and does not have to provide clear, specific judgment on the rights and relations of the relevant case. Furthermore, unless such judgment is obviously senseless or contradictory, any unreasonableness or incompleteness in that judgment does not constitute non-statement of a ground for arbitral award.

Accordingly, where there is no ground stated in a written arbitral award, or where such ground is stated but is so unclear that the factual or legal judgment of the relevant arbitral award cannot be identified, or where such ground is contradictory, the arbitral award may be set aside. However, even in these situations, as long as a ground is set forth in the written arbitral award, it is justifiable that such judgment is based on equity regardless of the rules of law and such ground needs to simply show how the arbitrator has reached such judgment and does not have to provide clear, specific judgment on the rights and relations of the relevant case. Unless such judgment is obviously senseless or contradictory, any unreasonableness or incompleteness in that judgment does not constitute a ground for setting aside such arbitral award.

Availability of preliminary injunction for suspension of arbitral proceedings and filing of a declaratory action for affirmation of unlawfulness of arbitral proceedings

The current Arbitration Act does not contain any provision regarding whether a party who argues non-existence or invalidation of an arbitration agreement may seek a preliminary injunction or file a declaratory action for affirmation of the unlawfulness of the arbitral proceedings before the court for the purpose of suspending the arbitral proceedings prior to or in the course of such arbitral proceedings.

In connection with the issue of availability of a preliminary injunction for suspension of arbitral proceedings for unlawfulness, in Supreme Court Decision 96MA149 rendered on 11 June 1996, the Supreme Court held that:

In view of the purport of Article 10 of the Arbitration Act stating that when a party argues that arbitral proceedings are not permissible, the arbitrator may proceed with arbitral proceedings and issue an arbitral award, even if the relevant arbitral proceedings are not permissible, it is not permitted to forthwith seek a preliminary injunction of such arbitral proceedings before the court on the ground of the unlawfulness of such arbitral proceedings, without referencing to such party’s right to file a declaratory action against the other party for affirmation of the unlawfulness of such arbitral proceedings before the court or a suit seeking cancellation of the arbitral award after the issuance of the arbitral award on the grounds of such unlawfulness.

Meanwhile, in connection with the issue of availability of a right to file a claim for suspension or a declaratory action for affirmation of unlawfulness of the arbitral proceedings before the court, in Supreme Court Decision 2003DA5634 rendered on 25 June 2004, the Supreme Court held that:

Even when there is no arbitration agreement, the court shall not exercise its judicial control over arbitral proceedings unless otherwise permitted by the Arbitration Act, and the declaratory action for affirmation of unlawfulness of the arbitral proceedings shall constitute a method of such judicial control and in turn shall not be permitted under Article 6 of the Arbitration Act.

Notes

1. Supreme Court Decision 2004DA67264 rendered on 13 May 2005 and Supreme Court Decision 98DA901 rendered on 10 July 1998.
2. In this case, the author filed an appeal before the Supreme Court for and on behalf of the plaintiff, or the losing party, and the Supreme Court accepted the author’s argument and reversed the lower court’s decision.
3. ‘If corporate rehabilitation proceedings under the former Corporate Reorganization Act commence against a party to a foreign arbitral award, which is subject to the 1958 New York Convention, after such foreign arbitral award is made, and an objection is filed against the claims reported on such foreign arbitral award as of the date of investigation of claims, and a suit seeking affirmation of rehabilitation claims as filed, the competent court shall finally determine rehabilitation claims and the voting rights in accordance with the adjudication stated in that foreign arbitral award unless grounds for refusing recognition and enforcement set forth in Article V are acknowledged.’
4. Article V of the 1958 New York Convention lists grounds for refusing recognition and enforcement of arbitral awards within the limited scope and paragraph (2)(b) of this article provides that, when such recognition or enforcement is contrary to public policy, the competent court in the country where the relevant arbitral award is enforced may decline such recognition or enforcement. Since the purpose of this provision is to protect the enforcing country’s fundamental moral and social order by preventing them from being harmed by recognition or enforcement of foreign arbitral awards, this provision shall be limitedly construed in view of domestic circumstances as well as stable, international commercial order, and the above recognition or enforcement may be refused only to the extent that its enforcement results in an effect in contravention of the public policy of the Republic of Korea.