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Kim & Chang Wins an Arbitration Case by Obtaining Adverse Inference from the Arbitral Tribunal on the Counterparty’s Incomplete Document Production

2020.04.03

Kim & Chang successfully represented a Korean client (“Company A”), an IT company specialized in online games, in an international arbitration case involving royalties against an overseas company (“Company B”) by arguing that Company B’s refusal to submit adverse evidence amounted to violation of document production under the international arbitration procedures.  The arbitral tribunal acknowledged the existence of adverse evidence against Company B and finally made an arbitral award in favor of Company A. 

In this case, by a license agreement entered into between Company A and Company B, Company A agreed to allow Company B to use its intellectual property in China, and Company B developed a new game using the intellectual property.  Pursuant to the license agreement, Company B was obliged to pay royalties for the sales generated from the game in China.

Company B, however, failed to fulfill its obligations to pay royalties and to provide daily and monthly reports on the sales of the game.  Accordingly, Company A commenced arbitration proceedings against Company B pursuant to the license agreement and claimed the royalty payment for all estimated sales amount amounting to approximately KRW 80 billion and accrued interest as well.  

Company A argued that, since Company B had refused to produce relevant documents in the arbitration, its calculation of the outstanding royalties based on the limited evidence available should be accepted by the tribunal.  In this connection, Company A further claimed that, even if the sales estimates above are less substantiated or supported by documentary evidence, an adverse inference should be drawn upon against Company B who owned relevant documents but did not comply with the general practice of international arbitration proceedings regarding document production obligations.  The tribunal ultimately accepted the entire arguments made by Company A and acknowledged that Company B was in breach of the license agreement.  In the arbitral award, the tribunal ordered Company B to pay the entire amount of the outstanding royalties, amounting to approximately KRW 80 billion, as well as interest accruing on a monthly basis until the date of the payment.    

As most IP license agreements, including those of the online game industry, calculate royalty payments based on the amount of sales, obtaining accurate sales data is especially important.  Moreover, it is often difficult to obtain such evidence from the counterparty in a dispute arising in developing countries.  This case, in which our firm represented the claimant, is particularly meaningful in that it shows that international arbitration can be a useful tool for pursuing claims against a counterparty refusing to provide important information, in breach of its obligations, and overcoming an imbalance of evidence resulting therefrom.

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