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ICC Award on Interpretation of Non-Compete Clause Under the PPP Project Concession Agreement

2020.06.22

Kim & Chang represented a Korean infrastructure company founded for the purpose of constructing and operating a bridge that was built as a Public-Private Partnership (“PPP”) project under Korean law in an ICC arbitration against the South Korean Government (“Government”). 

The case required the interpretation of a concession agreement and analysis of legal issues of public law contracts and the evolving Korean public policy towards PPP projects.  Further, technical analysis including the prediction of future traffic on the Bridge with and without the new bridge and review of the financial structure of PPP projects were necessary. 

The arbitration case was related to a dispute arising from a certain concession agreement that regulates the construction and operation of a bridge connecting an island to the mainland of Korea (the “Bridge”) and also the investment and Government assistance thereof.  Pursuant to the non-compete and loss compensation provision (the “Non-compete provision”) that was specified to protect the concessionaire of the Bridge (the “Concessionaire”) (i) should a new competing traffic facility (e.g., competing bridge) be opened and operated by Government’s participation or assistance after the Bridge starts to operate, and (ii) consequently cause significant decrease in the traffic volume of the Bridge, the Government is obliged to compensate loss in the toll revenue of the Bridge to the Concessionaire.  During the operation period of the Bridge, whether the Government’s loss compensation obligation is triggered by construction of a new, potentially-competing bridge (the “3rd Bridge”) was a key issue.  The parties differed in the interpretation of the Non-compete provision and thus the appropriate interpretation of the Non-compete provision was disputed in the arbitration proceeding.  The Concessionaire argued that the 3rd Bridge, if built, was expected to significantly reduce the traffic volume of the existing Bridge and thus the Government is obliged to compensate pursuant to the Non-compete provision.  The Government resisted the claims arguing that the relevant provisions should be interpreted to deny or strictly limit the obligation of the Government given the public nature of the concession agreement and the PPP project.

The final award was issued at the end of June 2020, favoring most of the arguments submitted by Kim & Chang that represented the Concessionaire.  The Tribunal ruled that the interpretation of Government to deny or strictly limit the obligation of the Government had no grounds under the Concession Agreement, and that the concession agreement shall be interpreted based on the language agreed by the parties pursuant to the principle of contract interpretation under Korean law.  It also ruled that the investors’ rights, in principle, cannot be limited by “public interest” that is not stipulated under the contract. 
 
The outcome of the arbitration has significance in that it confirmed under Korean law that (i) the rights and obligations of a contractual party should be protected as agreed between the parties under the contract even in large scale social infrastructure projects where public interest is considered, and that (ii) in principle, it is not permitted to limit the rights and obligations of the investor agreed under the relevant investment agreement on the ground of “public interest.”  Therefore, this case may have important implications to future investors participating in social infrastructure projects in Korea.  Also, it is expected to have an impact on the interpretation of concession agreements involving Korean PPP projects with similar non-compete and/or loss compensation provisions.

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