Business Korea | 8 June 2018
Korea suffers first defeat in ISD case
By Michael Herh
The Korean government was ordered to pay about 73 billion won to an Iranian investor who filed an investor-state lawsuit, claiming that he suffered losses in the process of participating in an auction for Daewoo Electronics in 2010.
This marked the first time the South Korean government lost an ISD lawsuit filed by a foreign investor.
The Financial Services Commission announced on June 7 that the International Arbitration Tribunal ordered the Korean government to pay about 73 billion won to Mohammad-Reza Dayyani, the owner of Entekhab Industrial Group in Iran, who claimed a total of 93.5 billion won in compensation for his losses.
In 2010, KAMCO (Korea Asset Management Corporation) selected Entekhab as the preferred bidder in the process of selling Daewoo Electronics, and received a contract deposit of 57.8 billion won from it, 10% of the price of Daewoo Electronics, after signing the main contract in November.
But in May of 2011, the creditors of Daewoo Electronics terminated the contract, saying that Entekhab submitted an investment agreement whose funding plan was 154.5 billion won short of the sum required to acquire the Korean electronics company.
But Entekhab filed a lawsuit in the Korean court in February 2012 and the court decided to dismiss the injunction application, upholding the creditor’s termination of the contract.
In response, Dayyani filed an international arbitration lawsuit against the Korean government with the goal of taking the contract money back according to the arbitration regulation of the United Nations Commission of International Trade Law. He claimed that the Korean government broke the acquisition contract with Iranian investors in a violation of the fair and equitable treatment principle in the Korea-Iran Bilateral Investment Treaty (BIT).
The International Arbitration Tribunal ordered the Korean government to pay about 73 billion won in compensation.
The Korean government will closely analyze the arbitration decision and decide on whether or not it will apply for cancellation of the verdict under the UK Arbitration Act.
There are three cases in which the Korean government has been sued by foreign companies in ISD cases.
The first ISD case was Lone Star’s filing a five trillion won ISD lawsuit based on the Korea-Belgium BIT in November 2012. Lone Star tried to sell KEB to HSBC in September 2007, but the sale was canceled as the Korean government did not approve the deal. As a result, KEB was sold off to the Hana Financial Group in 2012, but demanded compensations for a fall in the price of KEB due to the delay in the sale. This matter is expected to be finalized this year.
The second ISD case was a lawsuit filed by Hanocal, a Dutch subsidiary of IPIC, a state-owned oil investment company in Abu Dhabi in 2015. Hanocal purchased a 50% stake in Hyundai Oilbank in 1999 and sold off the stake to Hyundai Heavy Industries for 1.8 trillion won in 2010. At that time, as the Korean government slapped tax on the sale, Hanocal brought the lawsuit, claiming that the tax was not fair according to the double taxation agreement between Korea and the Netherlands. The lawsuit was finalized in 2016 as Hanocal discontinued the ISD action.