Arbitration in South Korea: A New Phase Begins

To mark the opening of Herbert Smith Freehills' new office in Seoul, we examine arbitration in South Korea.

Whilst the Korean Commercial Arbitration Board ("KCAB") has reported growth in the number of international arbitrations, South Korea is seldom considered as a seat of international arbitration and use of the KCAB's International Arbitration Rules has been limited so far (the "International Rules"). But is this about to change, and might it be heralded by the recent increase in foreign law expertise in Seoul? Peter Godwin, Dominic Roughton and David Gilmore provide some observations below.

An active arbitration market

South Korean companies are known to be active participants in international arbitration – their active use of International Chamber of Commerce (ICC)2 and Singapore International Arbitration Centre (SIAC) arbitration reflects South Korea's pursuit of export markets for international construction projects. In addition, many of the international investors who acquired South Korean assets in the Asian financial crisis of 1997 to 1999 are reported to have included arbitration clauses specifying the use of ICC rules in their purchase agreements.

South Korea's Arbitration Act of 1966 was updated in 1999, largely adopting the UNCITRAL Model Law on International Commercial Arbitration. Article 39 of that Act states that the New York Convention on the Recognition and Enforcement of Foreign Awards will be respected in South Korea, which, for the most part, it has been. The practical experience is that South Korean courts have been supportive of arbitral awards when these have been challenged and the Courts have generally refused to query the awards issued by arbitral tribunals.3

New elements, including liberalisation

Despite this positive legal framework and an active interest in international arbitration amongst South Korean parties, Seoul has not had the international profile of other well-known arbitral seats in the region.

Part of the reason may lie in Seoul's (historic) perceived lack of facilities, flight connections and international legal practitioners, as well as the fact that South Korean parties lacked the bargaining power to insist on "home-ground" dispute resolution processes in their contractual negotiations.

But another factor was the relative lack of awareness of the KCAB's International Rules, implemented in 2007. Unless parties specifically opted-in to the International Rules in their arbitration agreement, the dispute would be automatically governed by the KCAB's regular rules. The default provisions of these rules were difficult for non-Korean participants to accommodate given that they required the selection of an arbitrator from the KCAB panel (the vast majority of whom are South Korean) and mandated that all proceedings be conducted in Korean.

In response to the limited use of the 2007 version of the International Rules, September 2011 saw the release of an updated set of rules (the "New International Rules"), which included some key improvements:

• The New International Rules state that if a party is not South Korean, the default rules of the arbitration are the New International Rules and the parties are free to select an arbitrator(s) as they see fit.
• In addition, provisions for expedited procedures4 have been included, which permit arbitrators to impose limitations on procedural steps, reduce the need and time for oral hearings and impose time limits on arbitrators to make their award. While these procedures are far from perfect, they are certainly a step in the right direction.
• Significantly, the New International Rules also provide for higher fees for arbitrators, thereby helping to entice experienced international arbitrators to accept appointments.

It is still too early to know if the issuance of the New International Rules will itself lead to the development of South Korea as an international arbitral seat and the KCAB as a competitor to some of the more established arbitral institutions. While anecdotal evidence suggests that the number of arbitration clauses referring to the KCAB's New International Rules has increased recently, it may take several years before this trend can be confirmed. In the meantime, however, reasons exist, beyond improved infrastructure and transport links, to hope for South Korea's growth as an arbitral seat: 

• First, the commercial bargaining power of South Korean parties is rising – South Korean industrial groups have attained greater commercial status, and therefore wield greater influence, than ever before. Even if foreign counterparties may not accept the New International Rules, specifying Seoul as the seat may prove acceptable.
• Second, the KCAB and South Korean authorities have clearly studied the example of SIAC in Singapore and observed that official support for development of an arbitral centre can make a significant difference. This can be seen in the website, secretariat size and dedicated conference facilities of the KCAB. 5
• Third, from March 2012, foreign lawyers have been permitted to open offices in South Korea to practise foreign law, which is likely in the first instance to mean support for South Korean clients in their international arbitrations or corporate work outside South Korea. However, it also lays the base for foreign firms to participate in arbitrations in South Korea using the rules of international arbitral institutions and, eventually, the KCAB's New International Rules.

New phase possible

The decision to permit foreign lawyers to open offices in South Korea could prove to be the turning point in the development of its arbitration market. As well as increasing the level of international arbitration expertise, this liberalisation allows companies from all over the world to use international firms with whom they are familiar, which will in turn provide comfort when considering the prospect of arbitration in South Korea.

With support from the KCAB, and a non-interventionist stance from the South Korean courts, there is no reason that South Korea cannot seize the chance to increase confidence in and develop the size of international arbitration in South Korea.

We recognise this opportunity and, as part of our commitment to our clients, the Herbert Smith Freehills' Seoul office will be launched later this month. Our Seoul office will have strong disputes and transactional capabilities in the construction, energy, infrastructure, technology and natural resource sectors from the date of opening.

1 See www.kcab.or.kr.

2 The ICC's Statistical Report 2011, published in 2012, notes that 26 South Korean parties were involved in ICC arbitrations filed in 2011, behind India (53 parties), China (48), but ahead of Japan (24) and Singapore (13). However, only one ICC arbitration was seated in South Korea.  

3 A recent exception was seen in the Skylife case, heard by the Seoul Southern District Court. An arbitral award, issued by an eminent tribunal, was not enforced on the grounds that the award did not state with sufficient specificity what one party was to do upon termination of an agreement. We understand that this decision will be appealed and hence there is a possibility that the court's ruling will be overturned.

4 Where the amount in dispute is less than 200 million won (currently approximately US$180,000).

5 See www.kcab.or.kr for further details.