Korea

Using the international arbitration process to resolve commercial disputes is a widely acknowledged global trend. In line with this phenomenon, Korean companies, both multinational and domestic, are increasingly shifting their approach when it comes to reaching resolution of conflicts with foreign companies – from engaging almost exclusively in litigation to seeking resolution via international arbitration – as evidenced by the rising number of arbitration cases involving Korean companies. In response, Korea has made a concerted effort to invigorate the arbitration system in myriad respects. The main purpose of this article is to delineate such efforts as well as provide some signposts for potential changes in arbitration practice in Korea that will prove useful for practitioners. First, the Korean Commercial Arbitration Board (KCAB), the major arbitration institution authorised to administer domestic and international arbitrations in Korea, overhauled its International Rules in September 2011. The sweeping changes were meant to address the increasing international caseload in Korea by establishing rules consistent with international standards. Second, the Ministry of Justice commissioned a special committee charged with proposing amendments to the Arbitration Act of Korea (the Arbitration Act) to keep pace with rapid developments in arbitration practice. The special committee is currently considering, among others, the 2006 UNCITRAL Model Law, and expects to offer recommendations in 2014. Third, in May 2013, the Seoul Metropolitan Government, the Seoul Bar Association, and the KCAB opened the Seoul International Dispute Resolution Centre (SIDRC), a venue equipped with cutting-edge technology to host arbitration hearings seated in the region. Finally, Korean courts, by and large, have continued a long tradition of demonstrating an arbitration-friendly attitude. This is evident in their rulings, especially those with respect to the enforcement of arbitral awards. This article will set forth in more detail recent court rulings related to the recognition and enforcement of arbitral awards and the measures taken recently to ensure that arbitration practice in Korea is aligned with international expectations.

The 2011 amendments to the KCAB’s International Arbitration Rules

In September 2011, the KCAB adopted significant amendments to its international arbitration rules. The changes were precipitated by the increase in international arbitration demand that the KCAB witnessed, as well as by the KCAB’s internal discussions regarding the best practices of leading international arbitration institutions based abroad.

To understand the 2011 amendments, it is important to be aware that the KCAB separates arbitration cases under its administration into two general categories. If all the relevant parties have their principal offices or permanent residences in Korea, the case is subject to the domestic arbitration process and the KCAB Domestic Arbitration Rules (Domestic Rules). If, on the other hand, the place of business of one party to the arbitration is located in a foreign country, the case is deemed an international arbitration case, subject to the international arbitration process of the KCAB, and the KCAB International Arbitration Rules (International Rules). Before the 2011 amendments, however, even if one party was foreign, the International Rules would only apply if the parties expressly opted in to the International Rules in the arbitration agreement. Since the 2011 amendments, however, even without the express agreement of the parties regarding the International Rules, so long as one party is foreign (or where the designated venue of arbitration lies outside Korea), the arbitration is considered an international arbitration case, and the International Rules automatically apply.¹

In addition to welcoming this change in the International Rules, practitioners have also embraced the fact that parties can now select arbitrators outside the designated KCAB panel (the vast majority of whom are South Korean). The International Rules further provide that when the secretariat has to appoint an arbitrator, it may consult the KCAB’s international arbitration committee (composed of prominent domestic and foreign arbitration practitioners) as to the most suitable candidates. Moreover, in situations where the secretariat is required to make a decision regarding the challenge, removal or replacement of an arbitrator under the International Rules, the secretariat is required to consult the committee. Another improvement made to the International Rules is the more accommodating position regarding fees. Specifically, administrative fees are now capped at 150 million won, and the previously fixed maximum amount of arbitrator fees has been repealed so that the pool of arbitrators would widen, and arbitrators in international cases would be adequately compensated for their work.

Another change seen as an improvement to the International Rules is the introduction of expedited procedures for international cases in which the amount sought, in either a claim or a counter-claim, does not exceed 200 million won or, alternatively, where the parties agree to be subject to the expedited procedures. In an expedited proceeding, unless otherwise agreed by the parties or deemed necessary by the secretariat, the default rule is that the secretariat shall appoint one arbitrator. Moreover, in principle, if the amount claimed does not exceed 20 million won, the dispute shall be resolved on the basis of documentary evidence alone, curtailing the length of the proceedings.² In addition, the award in a case governed by the expedited procedure must be made within three months from the date of the arbitral tribunal constitution. Finally, in case of an arbitration involving a claim valued at less than 200 million won, there is no required filing fee, and the administrative costs and remuneration of arbitrators have been lowered.³

In keeping with the trend even before the 2011 Amendments were adopted, the number of international arbitration cases filed with the KCAB has risen: there were 53 in 2005; 77 in 2011; and 85 in 2012. Moreover, the amount in dispute in international arbitration cases have concurrently increased, rising by 386.4 per cent from 2011 to 2012. Finally, the subject areas of the disputes are more varied than in the past, currently spanning the range of subjects from construction to technology to international trade to maritime affairs.

Amendments to the Arbitration Act currently under consideration

The Arbitration Act of Korea (the Arbitration Act), governing all arbitration proceedings seated in Korea and applicable to domestic and international arbitrations alike, came into force in 1966. Less than a decade later, in 1973, Korea acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), with two declarations and reservations: first, Korea would only recognise and enforce awards made in other states that were parties to the Convention; and second, the Convention would be applied exclusively to differences arising out of legal relationships, whether contractual or not, that were considered commercial under Korean law. In the decades that followed, Korea’s economy and participation in international commerce grew at a rapid clip, and the need to update the Arbitration Act to be consistent with developing international practice became clear. Thus, in 1999 the Arbitration Act was completely revised, broadly tracking the UNCITRAL Model Law on International Commercial Arbitration of 1985 (the 1985 Model Law). Under the 1999 amendments to the Arbitration Act, the grounds for a court to decline to recognise and enforce a foreign arbitral award were narrowed to more closely track the New York Convention and the 1985 Model Law. Since the international arbitration market has continued to expand markedly, and Korea is increasingly the centre of global trade and transactions, the Ministry of Justice recently commissioned a special committee to discuss possible amendments to the Arbitration Act. A special committee comprised of practitioners, scholars and officials are currently reviewing various clauses of the Arbitration Act, including the requirement under article 8 that an arbitration agreement must be in writing, eg, a document signed by all parties in the form of letters exchanged between the parties. Specifically, the special committee is debating whether and how to relax the Arbitration Act’s current writing requirement to something along the lines of article 7 of the Model Law, adopted by the UNCITRAL in 2006 (the 2006 Model Law), which explicitly allows for an ‘electronic communication’ to meet its writing requirement and which broadly provides that an arbitration agreement is ‘an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not’. Options under consideration include either expressly including electronic communication within its writing requirement or, alternatively, discarding the writing requirement in toto.

The other amendments currently under discussion deal with a wide variety of issues, such as possible expansion of the arbitral tribunal’s power to grant interim measures,⁴ whether to mandate protective measures for consumers or employees who agree to arbitration clauses, the introduction of more streamlined enforcement procedures to expedite the enforcement of arbitral awards (such as allowing for awards of foreign countries that are parties to the New York Convention to be summarily enforceable in Korea), whether to expand the scope of disputes subject to arbitration beyond commercial disputes, more detailed guidance as to how (and the extent to which) courts may assist the arbitration proceedings by facilitating an evidentiary investigation, and whether the court that has jurisdiction over an arbitration-related issue should be at the district court level or at the appellate court level, given that arbitration is meant to provide an expeditious and cost-effective means to settle disputes.

It is anticipated that formal recommendations concerning amendments to the Arbitration Act will be made in 2014. Despite obvious uncertainty about which of the discussed amendments will be subsequently enacted, there is little doubt that any new amendments to the Arbitration Act will be aimed at keeping in line with modern international arbitration practice.

The Seoul International Dispute Resolution Centre (SIDRC)

The opening of the SIDRC is a response to an increasing number of South Korean companies resolving disputes with foreign companies through arbitration. For example, ICC statistics show that South Korean claimants filed 340 cases under ICC rules between 1998 and 2010, more than the number filed by parties from China or Japan. To address the level of interest in international arbitration, the Seoul metropolitan government, the Seoul Bar Association and the KCAB jointly built the SIDRC, which was granted a public service corporation licence from the Ministry of Justice. On 27 May 2013, the SIDRC opened, with a capacity of 510 square metres in the Seoul Global Tower Building, located in the centre of Seoul. The SIDRC has eight sizeable conference rooms that accommodate up to 50 people each, equipped with a state-of-the-art video conferencing system and other technology. In other words, the SIDRC provides a convenient and suitable venue for complex international arbitration cases.

Global international arbitration institutions, such as the London Court of International Arbitration (LCIA), the International Chamber of Commerce (ICC), the Singapore International Arbitration Centre (SIAC), the Hong Kong International Arbitration Centre (HKIAC) and the American Arbitration Association (AAA)/International Centre for Dispute Resolution (ICDR), have located liaison offices in the SIDRC. In addition, the International Centre for Settlement of Investment Disputes (ICSID), an autonomous institution funded by the World Bank, has expressed its intention to utilise the hearing rooms in the SIDRC.

The modern capability and size of the SIDRC’s arbitration facilities demonstrate Korea’s commitment to arbitration as a vehicle of dispute resolution and its expectation that more international arbitration cases will be seated in Korea.

Korean court decisions regarding the enforceability of arbitral awards

Traditionally, Korean courts have shown great regard for the national policy behind the Arbitration Act to restrict court intervention in the arbitration process (following the UNCITRAL Model Law approach), and practitioners have seen minimal court interference in the arbitration process. For example, Korean courts generally respect the parties’ decision to settle disputes by way of arbitration and tend to readily recognise the validity of an arbitration agreement, even when the agreement is not worded in a clear, specific manner. In one domestic arbitration case, a party challenged the existence of an arbitration agreement, arguing that the language (‘in case of non-execution of the above agreement, the dispute shall be immediately subject to arbitration by a third-party institution’) was too vague to create an arbitration agreement, but the Supreme Court disagreed. The Supreme Court declared:

To the extent that there is an express intent to resolve potential disputes through arbitration, the requirements for a valid arbitration agreement are met, despite lack of specification of the institution, the governing law, or the seat of arbitration, considering that an arbitration agreement subject to the Arbitration Act is an agreement between the parties to resolve, through arbitration, a dispute between such parties, in part or in its entirety, that has already arisen or will arise in the future from certain legal relations, regardless of whether or not the dispute is related to the contract.⁵

The Supreme Court has also shown a tendency to interpret the scope of an arbitration agreement broadly. For example, a Supreme Court decision held that once an arbitration agreement is recognised, it is appropriate to assume that the parties concerned have agreed to resolve, through the arbitration process, any and all disputes arising from or in connection with legal relations between them, absent special circumstances, such as a clear and express limitation of the scope of the arbitration agreement.⁶ In addition to demonstrating deference toward the choice of parties to enter into arbitration, Korean courts tend to recognise arbitral awards, and decline to recognise and enforce an award only if such interference is expressly permitted under the Arbitration Act. Grounds for setting aside domestic arbitral awards (governed by article 36(2) of the Arbitration Act) are very similar to the grounds for refusing to enforce foreign arbitral awards subject to the New York Convention (governed by article 39(1) of the Arbitration Act). Consonant with the policy underlying the New York Convention and the Arbitration Act, Korean courts generally reject requests to review the merits of the arbitral awards or to correct errors in fact or law in awards. For example, the Supreme Court held that courts cannot exercise judicial control over the arbitration process unless otherwise permissible under the Arbitration Act, such as in cases where one party to the arbitration may seek court intervention on the grounds that the arbitration agreement does not exist or that it exists but is invalid or otherwise ineffective.⁷

Under article 39(1) of the Arbitration Act, the enforceability of foreign arbitral awards follows, by and large, the New York Convention (articles V(1) and V(2)), providing that foreign arbitral awards shall be recognised and enforced unless there are specific and narrowly defined grounds to decline to confirm them.

Korean courts have generally demonstrated respect for the narrow grounds set forth in the Arbitration Act and the New York Convention. For example, with respect to article V(1(b)) of the New York Convention (providing that lack of proper notice of the arbitration proceedings may serve as a ground to decline to enforce the arbitral award) and article 36(2) of the Arbitration Act, the Supreme Court ruled that article V(1(b)) of the New York Convention does not apply to cases in which a party’s right to present its defence is infringed in an insignificant way, and that article V(1(b)) is only applicable to the limited instances in which a party’s right to defend itself is violated to the extent that it cannot be tolerated.9 In light of the reasoning of this Supreme Court decision, in 2008 the Seoul Central District Court rejected the respondent’s argument that it should not be held subject to the arbitral award because it had failed to respond to the arbitration process in a timely manner due to the fact that it had not received the arbitration form by e-mail and therefore pleaded ignorance of the arbitration proceedings. The Seoul Central District Court ruled that since the arbitration form was sent to the respondent’s correct e-mail account the notice requirement had been met, regardless of whether the respondent had actually read the notice. Thus, the Seoul Central District reasoned that the arbitral award could stand as the respondent’s rights had not been violated in an intolerable manner.⁸

With respect to article V(1(d)) of the New York Convention and article 36(2) of the Arbitration Act (providing for refusal to recognise and enforce an arbitral award if the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties), Korean courts have similarly shown a reluctance to interfere with the arbitration process. For example, in a case before the Seoul Central District Court, the respondent argued that although the arbitration agreement specified three arbitrators, the arbitration process had been wrongfully handled by two arbitrators for the majority of the time, and the third arbitrator was appointed a mere two days before the arbitral award was issued, thereby establishing grounds for the court to refuse to recognise the award. However, the Seoul Central District Court disagreed and enforced the award. The Court based its decision on the following factors:

• the final arbitral award was rendered by three arbitrators;
• the applicable arbitration rules provide that two arbitrators may render an arbitral award without a third arbitrator, so long as the two arbitrators agree on the issues; and
• no hearing related to the substantive issues was held prior to the appointment of the third arbitrator.

In other words, only a significant defect in the arbitration proceedings that would be likely to affect the outcome of the hearing would be sufficient grounds for setting aside the arbitral award.⁹

With respect to article V(2(b)) of the New York Convention (providing that refusal to recognise and enforce an arbitral award may be based on public policy grounds) and article 36(2) of the Arbitration Act, the Supreme Court held that the overarching intention of the article is, first, to protect the fundamental morals and social order of the country where the enforcement is sought, and second, to suppress any disturbance of public order arising from enforcing certain arbitral awards. According to the Supreme Court, the decision of whether or not to refuse to recognise an arbitral award pursuant to article V(2(b)) of the New York Convention, should, therefore, take into consideration both domestic circumstances and the stability of international trade, and such recognition should be refused only in limited circumstances.¹⁰

Thus, while arguments to the effect that recognition of an award would violate Korea’s fundamental morals and social order (ie, public policy) are frequently raised in Korean courts, they are rarely accepted. For example, in 2007, the Seoul Central District Court rejected the respondent’s argument that enforcing the arbitral award would contravene Korea’s public policy because the tribunal had refused to consider the respondent’s evidence, and had rendered its decision relying solely on the claimant’s evidence. The Court held that the respondent’s evidence had not been submitted in time to be considered by the tribunal, and that enforcing such an arbitral award was not against public policy because the judiciary, pursuant to the Korean Civil Procedure Act, similarly does not have to take into consideration evidence that a party fails to submit on a timely basis.¹¹

In 2003 practitioners saw a rare instance of a Korean court declining to recognise an arbitral award. In this case, the respondent had paid the claimant damages in the intervening period between the date the arbitral award was rendered and the date the court was asked by the claimant to recognise and enforce the award. Based on this fact, the Supreme Court refused to enforce the award and declared that it was basing its decision on the circumstances that existed as of the date of the court’s hearing (ie, after the respondent had made payment to the claimant) and not as of the date the award was rendered.¹²

With notably rare exceptions, Korean courts have demonstrated a pro-enforcement policy for arbitral awards. Such minimal court interference in arbitration proceedings, combined with the opening of the SIDRC and the updated International Rules of the KCAB, as well as the forthcoming amendments to the Arbitration Act, highlight Korea’s growing potential as a seat of international arbitration.

1. The International Rules also apply where the parties have agreed in writing to refer their disputes to arbitration under the International Rules.
2. The International Rules provide, however, that parties may request the tribunal to decide to hold a hearing, or that tribunal may decide this on its own initiative. Also, the tribunal, if deemed necessary, can hold more than one hearing.
3. Undoubtedly drawn to the cost-effective, efficient nature of the expedited procedures, since the 2011 Amendments to the International Rules came into effect on 1 September 2011, approximately 60 per cent or 30 out of the 52 international arbitration cases have been conducted under the expedited procedures.
4. The Arbitration Act authorises a court to grant interim measures before and during an arbitration, upon the request of a party (article 10) and similarly empowers the arbitral tribunal to grant interim measures, including the posting of security (article 18).
5. Korean Supreme Court Decision 2005Da74344 (rendered 31 May 2007).
6. Korean Supreme Court Decision 2010Da76573 (rendered 22 December 2011).
7. Articles 6 and 7 of the Arbitration Act govern the extent to which courts may intervene in arbitration, setting forth seven instances which permit court action:
   • appointment of an arbitrator;
   • challenge to an arbitrator;
   • determination of an arbitrator;
   • review of an arbitral tribunal’s ruling on jurisdiction;
   • challenge to an expert appointed by the arbitral tribunal;
   • taking evidence upon request by the arbitral tribunal; and
   • applications to set aside an award under article 36(1), or to enforce an arbitral award under article 37 to 39.
8. See Korean Supreme Court Decision 2003Da5634 (rendered 25 June 2004).
9. Korean Supreme Court Decision 89Daka20252 (rendered 10 April 1990).
10. Seoul Central District Court Decision 2008 Na 20361 (rendered 15 October 2008).
11. Seoul Central District Court Decision 2006Gahap97721 (rendered 7 March 2008).
12. Korean Supreme Court Decision 2001Da20134 (rendered 11 April 2003).
13. Seoul Central District Court Decision 2005Gadan273965 (rendered 26 July 2007).
14. Korean Supreme Court Decision 2001Da20134 (rendered 11 April 2003). A recent, more controversial instance in which a Korean district court declined to recognise an arbitral award was decided earlier this year. In the so-called Skylife case, the respondent argued that the Seoul Southern District Court should treat the arbitral award as if it were a court judgment, and, therefore, the court must abide by all provisions of the Korean Civil Procedure Act and Civil Execution Act when considering the execution of the award. The Seoul Southern District Court agreed with the respondent’s argument and, on the basis that execution of the award would violate the Civil Execution Act, declined to enforce the award. However, practitioners should bear in mind that this decision is not final and is currently on appeal to the Seoul High Court, which will review the award de novo. Seoul Southern District Court Decision 2012Gahap15979 (rendered 31 January 2013).