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Successful Setting Aside of an Arbitration Award in Korean Courts

10 Apr 2018

Members of Kim & Chang’s International Arbitration & Cross Border Litigation Practice (“Arbitration Team”) successfully set aside an arbitration award for violation of a Korean bank and a foreign party’s arbitration agreement.  The case was appealed, and the Korean Supreme Court issued the final memorable decision to set aside the award.


Under the arbitration agreement between the parties, they had agreed to arbitration under the auspices of the Korean Commercial Arbitration Board (“KCAB”).   


Background:


The KCAB has two sets of arbitration rules: one for domestic arbitration and one for international arbitration.  International arbitration rules apply when one of the parties has its principal place of business outside of Korea.  The two sets of rules have different procedures for the constitution of the arbitral tribunal.  In this case, as the parties were from different countries, international arbitration rules should have been applied with the tribunal constituted in accordance with the international rules. 


However, the Korean bank, as claimant, initiated the arbitration at the KCAB under the domestic arbitration rules, and the KCAB proceeded to constitute the tribunal under the domestic rules.  


Following the constitution of the arbitral tribunal, the foreign party, as respondent, submitted an answer to the claim (“Answer”), which included its objection to the jurisdiction of the tribunal, since it was constituted under the domestic rules in violation of the parties’ agreement to arbitration under the international arbitration rules.  


The arbitral tribunal rejected the respondent’s jurisdictional objection on the ground that the respondent had lost its right to make such an objection under article 50 of the then applicable KCAB international arbitration rules.  Article 50 provides that an objection to any procedure in violation of the arbitration agreement or rules need to be made immediately, and if no objection is made and the procedure goes on, the party loses its right to object.  The tribunal proceeded to decide on the merits of the case and issued an award against the respondent.  The respondent party then went ahead and applied to the Korean courts to set aside the arbitral award.


In the set-aside proceedings, the claimant also argued that under article 5 of the Korean Arbitration Act, a party loses the right to object if the procedure continues without the party making an objection without delay, once it is aware that the arbitral proceedings are in violation of the parties’ agreement or the arbitration act.  In representing the respondent, the Arbitration Team argued that the constitution of the tribunal was in violation of the parties’ agreement, and was thus a cause to set aside the award (under article 36 (2) 1. d. of the Arbitration Act).  Specifically, we pointed out that article 17 of the Arbitration Act provides that any objection regarding the jurisdiction of the tribunal must be raised no later than the submission of a party’s Answer to the merits of the dispute.  This meant that the respondent did not lose its right to make its objections by objecting at the Answer stage.  The Korean courts accepted this argument and set aside the arbitration award.  The other party appealed, but the Korean Supreme Court ultimately dismissed the appeal.  


Supreme Court’s Ruling:


In dismissing the appeal, the Supreme Court ruled that in arbitration proceedings, the constitution of the tribunal is a fundamental factor to the arbitration agreement and proceeding.  Further, if the constitution was in violation of the parties’ agreement, then the foundation of the tribunal’s authority is affected.  


The Court went on to rule that objection to the tribunal’s jurisdiction can be made in accordance with article 17 of the Arbitration Act (rather than under article 5 of the Arbitration Act or article 50 of the KCAB international arbitration rules).  Based on this, the Supreme Court decided that even if the tribunal determined that it had jurisdiction over the arbitration, a tribunal constituted in violation of the parties’ agreement was sufficient to set aside the award issued by such a tribunal.


Significance:


This case was challenging, because there were no precedents in the Korean legal system regarding the relationship and the interpretation of articles 5 and 17 of the Korean Arbitration Act or under article 50 of the KCAB international arbitration rules.  Also, the tendency of Korean courts to strictly limit the requirements to set aside an arbitral award made this case particularly difficult and unpredictable.    


The Arbitration Team supplemented the lack of Korean court precedent with interpretations of foreign arbitration acts and foreign cases, such as research and analysis of the UNCITRAL Model Law and other countries’ arbitration laws and cases.  


In doing so, the Arbitration Team ultimately persuaded the court, creating an important precedent in the highest Korean court that supports the autonomy of the parties to agree on the composition of the arbitral tribunal.  This decision also provides further clarity on the support for international arbitration from the Korean judiciary.