A. LEGISLATION AND RULES
A.1 Legislation
South Korea has adopted a pro-arbitration legal framework that governs both domestic and international proceedings. International arbitration proceedings continue to be governed by the Korean Arbitration Act, which is based on the UNCITRAL Model Law. In 2016, the Korean legislature enacted long-awaited amendments to the Korean Arbitration Act and adopted many of the 2006 Amendments to the UNCITRAL Model Law. A minor amendment was added in 2020 to article 40, which bestowed upon the Ministry of Justice the joint authority to designate a private organization promoting domestic and international arbitration as eligible for a subsidy. Such authority had previously been limited solely to the Ministry of Trade, Industry, and Energy.
The Arbitration Industry Promotion Act is another important legislation for international arbitration in Korea. Through the Arbitration Industry Promotion Act, the Korean legislature has mandated governmental support for efforts to make Korea an attractive arbitral seat, cultivate experts and arbitration professionals, and to further develop the arbitration industry in Korea. There have been no legislative amendments since the law came into force in 2017.
A.2 Institutions, rules and infrastructure
The primary arbitral institution in South Korea is the Korean Commercial Arbitration Board (KCAB), which was founded in 1966. For decades, the KCAB commercial arbitration rules were modeled on the structure of Korean domestic litigation proceedings. Starting in 2007, the KCAB issued separate arbitration rules for domestic and international proceedings, with the newly issued international rules modeled on the best practices of other international arbitration institutions. The most recent versions of the domestic rules and the international rules were published in 2016.
In 2018, KCAB International was established as an independent division of the KCAB, with its own Chairman and Secretariat. KCAB International is also guided by the International Arbitration Committee, a committee comprised of 19 leading international arbitration practitioners in Korea and abroad. The Secretariat consults with the International Arbitration Committee on issues relating to the appointment, challenge, replacement, and removal of arbitrators.
In 2019, KCAB Next was established under the auspices of KCAB International as an independent networking and professional development organization for international arbitration practitioners. KCAB Next operates independently of, but with support from, KCAB International. The organization is guided by a steering committee of 12 practitioners based in Korea and abroad.
KCAB International continues to expand and promote international arbitration in Korea. The KCAB has opened overseas offices in Los Angeles, Hanoi and Shanghai. It has also entered into numerous Memoranda of Understanding with prominent foreign arbitration centers. Most recently, the KCAB has entered into memoranda with the Thailand Arbitration Center (January 2020),[1] Ilustre Colegio de Abogados de Madrid (March 2020),[2] China Guangzhou Arbitration Commission (June 2020),[3] Benchmark Chambers International & Benchmark International Mediation Center (August 2020),[4] and Japan International Dispute Resolution Center (December 2020).[5] The KCAB has also established a collaborative relationship with Korean organizations such as the Korean Federation of Small and Medium Business (September 2020).[6] It has also been active in its promotion of diversity in international arbitration, launching the Women’s Interest Committee in November 2021.[7]
In March 2020, the KCAB released the Seoul Protocol on Video Conferencing in International Arbitration (“Seoul Protocol”), which proved to be timely as it was released at the very outset of the global COVID-19 pandemic, which necessitated a significant increase in remote and virtual hearings. First introduced at the 7th UNCITRAL Asia Pacific ADR Conference, held in Seoul on 5 and 6 November 2018, the Seoul Protocol sets out a standard set of protocols that counsel and arbitrators may turn to for guidance on logistical challenges presented by conducting remote international arbitration hearings through video-conferencing.
The key features of the Seoul Protocol are the basic parameters and standards, particularly for remote witness examinations and remote hearing venues, including technological and logistical requirements. For instance, article 1 requires witnesses to present evidence while sitting at an empty desk or standing at a lectern, and article 2 requires that on-call technical staff be available during the hearing, and also have certain cybersecurity measures in place. Article 5 specifically stipulates minimum technical requirements that the hearing venues should satisfy in order to ensure audio and video transmission, such that transmission speeds would not be less than 256 kB/second and 30 frames/second. While the parties and the tribunal would need to carefully consider logistical and technological details that are particular to the hearing at hand, the Seoul Protocol has served as useful guidance and starting point for arranging remote and virtual conferencing while ensuring effective, fair and efficient arbitrations. According to the most recent annual report issued by the KCAB, the Seoul IDRC, the KCAB’s multi-purpose hearing center, hosted thirteen virtual hearings in 2020 using the Seoul Protocol.[8]
In April 2021, the KCAB International re-appointed Chairman Hi-Taek Shin, Professor Emeritus of Seoul National University School of Law and ICCA Governing Board member, as Chairman in April 2021 for another three-year term. Chairman Shin has become a member of the Twenty Essex Chambers as of May 2021.[9]
B. CASES
B.1 Supreme Court provides guidance on franchise law challenge to arbitration agreement
In November 2020, the Korean Supreme Court affirmed a lower court decision upholding the validity of an arbitration clause in an international franchise agreement, despite the franchisee’s objections that the arbitration clause violated mandatory provisions in the Fair Transactions in Franchise Business Act and the Civil Act and was contrary to public order and good morals.[10]
The dispute arose with respect to a franchise agreement between a restaurant franchisor headquartered in the Netherlands, and a Korean individual as the franchisee. Although the franchise agreement contained an arbitration clause providing that disputes should be resolved by arbitration in New York administered by the International Centre for Dispute Resolution, the Korean franchisee commenced a lawsuit in the Seoul Central District Court on the ground that the arbitration clause was voidable as it violated mandatory provisions in Korean law. The franchisee argued that these statutes protecting franchisees operating in Korea should apply, notwithstanding that the franchise agreement was governed by Dutch law. The franchisee also argued that it was unreasonably burdensome to compel a Korean individual to arbitrate disputes in New York.
The Seoul Central District Court relied on article V.1.(a) of the New York Convention to determine that the law governing the validity and enforceability of the arbitration agreement is Dutch law, the law agreed upon by the parties as the governing law of the franchise agreement. A previous Seoul High Court decision similarly maintained that the governing law of an agreement containing an arbitration clause also governs that arbitration agreement.[11]
The court then turned to Dutch law, which is the governing law of the case, and specifically to articles 1020 and 1021 of the Dutch Civil Code which provide the requirements for a valid arbitration agreement, and found that all of the requirements were met in this case. The court then examined the franchisee’s alternative arguments:
- Korean mandatory provisions should apply regardless of governing law under article 7 of the Act on Private International Law, which provides that certain mandatory provisions should apply irrespective of applicable law in light of the purpose of the legislation.
- Dutch law should not apply under article 10 of the Act on Private International Law, which requires courts to refrain from applying a foreign law if it would evidently violate the social order and good customs of Korea.
The court rejected both of the franchisee’s arguments, finding:
- There was no evidence of legislative intent in the mandatory provisions referred to by the franchisee to intervene in international transactions. Rather, these provisions could be construed as regulating domestic franchise businesses and protecting domestic consumers.
- Applying Dutch law would not result in a violation of public policy or good customs of Korea as the arbitration agreement contemplated resolving disputes on a documents-only basis unless one party requested a hearing, and even such a hearing could be conducted by teleconference.
It is possible, though unlikely, that the Supreme Court might have arrived at a different conclusion had it evaluated the validity and enforceability of the arbitration agreement under Korean law. The validity of arbitration agreements in standardized terms and conditions, especially if sought to be enforced against individual consumers or entrepreneurs, remains an unsettled issue. However, the decision has provided some guidance on the level of difficulty that franchisees may potentially face in resisting the enforceability of arbitration agreements by relying on mandatory provisions in Korean law.
B.2 Supreme Court upholds award challenged on grounds of unfair treatment and incorrect determination of the merits
Throughout 2021, the Korean courts continued to issue arbitration-related judgments that consistently reaffirmed the pro-arbitration stance of the Korean courts. One of these decisions is a Supreme Court decision examined below.
In April 2021, the Supreme Court upheld the lower court decision dismissing an application to set aside a KCAB arbitration award. In this case, the plaintiff, a Korean individual and a member of a joint venture which was established to distribute Korean television programs in the People’s Republic of China, had filed a request for arbitration and subsequently a request to set aside the award against another member of the joint venture (a Chinese individual) and the joint venture itself. In the arbitration proceedings, the plaintiff sought its share of profits from the joint venture, the return of the loan that the plaintiff loaned to the joint venture, and a confirmation that the plaintiff owns a 50% share of the joint venture. The plaintiff’s claims were either dismissed or rejected.[12]
The plaintiff attempted to challenge the award on each of the following grounds:
- The arbitral tribunal dismissed the plaintiff’s application to have documents that were in possession, custody, and control of a third party (an affiliate of a Korean broadcasting company) produced and considered, which the plaintiff asserted was necessary to determine the revenue and profit of the joint venture, thus failing to treat the parties equally under article 19 of the Arbitration Act.
- The arbitration award was based on evidence solicited by the arbitral tribunal in breach of the arbitration schedule agreed upon by the parties.
- The arbitral tribunal wrongly concluded that the defendants were entitled to terminate the joint venture agreement, violating article 32 of the Arbitration Act, which requires an award to state the reasons upon which it is based.
The Seoul Central District Court referred to the following established principles:
- The court’s review of the merits of the case determined in the arbitration award must take place under exceptional and limited circumstances, and a complete reexamination of the arbitral tribunal’s decision on the merits is prohibited.[13]
- An award cannot be construed as not having stated the reasons upon which it is based unless there is absolutely no statement of the reasons in the award, the reasons stated are unclear so that it cannot be determined on which factual or legal determination the award relies, or the reasons stated are clearly irrational and contradictory.[14]
Based on these principles, the District Court dismissed the plaintiff’s application, while noting that an award cannot be set aside on grounds of procedural deficiency unless the degree of infringement on the parties’ procedural rights under the arbitral proceedings is so grave as to be unacceptable[15] and that the plaintiff had failed to demonstrate a serious (or any) breach of its procedural rights.
The Seoul High Court reinstated the reasoning of the District Court and added that the Arbitration Act and the KCAB International Rules confer upon arbitral tribunals the power to determine the admissibility and relevance of any evidence, and therefore the tribunal in this case had not erred by admitting and relying on the evidence with which the plaintiff took issue.
The 2021 Supreme Court decision upholding the above lower court decisions, along with other lower court decisions which dismissed applications to set aside arbitral awards on similar grounds or grounds relating to public policy,[16] demonstrate the continued position of the Korean courts in remaining arbitration-friendly and restrictive against setting aside or refusing to enforce arbitral awards.
[1] KCAB, [Press Release] KCAB INTERNATIONAL and THAC sign MoU, 20 January 2020, http://www.kcabinternational.or.kr/user/Board/comm_notice_view.do?BD_NO=169&CURRENT_MENU_CODE=MENU0025&TOP_MENU_CODE=MENU0024&BBS_NO=540
[2] KCAB, [Press Release] KCAB INTERNATIONAL and ICAM sign MoU, 17 March 2020, http://www.kcabinternational.or.kr/user/Board/comm_notice_view.do?BD_NO=169&CURRENT_MENU_CODE=MENU0025&TOP_MENU_CODE=MENU0024&BBS_NO=545
[3] KCAB, [Press Release] KCAB INTERNATIONAL and CGAC sign MoU, 22 June 2020, http://www.kcabinternational.or.kr/user/Board/comm_notice_view.do?BD_NO=169&CURRENT_MENU_CODE=MENU0025&TOP_MENU_CODE=MENU0024&BBS_NO=570
[4] KCAB, [Press Release] KCAB INTERNATIONAL and BCI & BIMC sign MOU, 11 September 2020, http://www.kcabinternational.or.kr/user/Board/comm_notice_view.do?BD_NO=169&CURRENT_MENU_CODE=MENU0025&TOP_MENU_CODE=MENU0024&BBS_NO=603
[5] KCAB, [Press Release] KCAB INTERNATIONAL signs MoU with Japan International Dispute Resolution Center, 3 December 2020, http://www.kcabinternational.or.kr/user/Board/comm_notice_view.do?BD_NO=169&CURRENT_MENU_CODE=MENU0025&TOP_MENU_CODE=MENU0024&BBS_NO=651
[6] KCAB, [Press Release] KCAB and KBIZ sign MoU, 3 September 2020, http://www.kcabinternational.or.kr/user/Board/comm_notice_view.do?BD_NO=169&CURRENT_MENU_CODE=MENU0025&TOP_MENU_CODE=MENU0024&BBS_NO=600
[7] KCAB, [Press Release] KCAB INTERNATIONAL Launches its Women’s Interest Committee (“WIC”), 10 November 2021, http://www.kcabinternational.or.kr/user/Board/comm_notice_view.do?BD_NO=169&CURRENT_MENU_CODE=MENU0025&TOP_MENU_CODE=MENU0024&BBS_NO=847
[8] KCAB International, 2020 KCAB Annual Report.
[9] KCAB, [Press Release] Professor Hi-Taek Shin is Re-appointed as Chairman of KCAB INTERNATIONAL and Joins Twenty Essex Chambers, 4 May 2021, http://www.kcabinternational.or.kr/user/Board/comm_notice_view.do?BD_NO=169&CURRENT_MENU_CODE=MENU0025&TOP_MENU_CODE=MENU0024&BBS_NO=676
[10] Supreme Court Decision 2020Da225442 dated 5 November 2020. The Supreme Court’s judgment was limited to an affirmation of the lower court’s judgment (Seoul Central District Court Decision 2018Na63343 dated 1 April 2020), on which this article also relies in discussing the factual background and legal analysis of the case. This decision was made by a three-member panel, which reviewed and upheld an earlier Seoul Central District Court decision dismissing the plaintiff’s case for lack of jurisdiction based on the arbitration agreement.
[11] Seoul High Court Decision 2012Na88930 dated 16 August 2018.
[12] Supreme Court Decision 2021Da201894 dated 29 April 2021. The Supreme Court’s judgment was limited to an affirmation of the lower courts’ judgments (Seoul High Court Decision 2020Na2020386 dated 1 December 2020 and Seoul Central District Court Decision 2019GaHap512 dated 19 June 2020), on which this article also relies in discussing the factual background and legal analysis of the case.
[13] The court referred to Supreme Court Decision 2006Da20290 dated 28 May 2009.
[14] The court referred to Supreme Court Decision 2007Da73918 dated 24 June 2010.
[15] The court referred to Supreme Court Decision 2017Da238837 dated 22 December 2017.
[16] See Seoul Central District Court Decision 2020GaHap536840 dated 16 June 2021, among others.
