It has emerged that the reason the Korean government was able to score a complete victory in an investor-state dispute settlement (ISDS) case that has continued for 13 years against a U.S. private equity fund is that the original 2022 award adopted incorrect evidence.
On the 19th, the Ministry of Justice analyzed the decision by the annulment committee of the International Centre for Settlement of Investment Disputes (ICSID) in the Lone Star ISDS case that ruled in favor of the government and announced these findings.
◇ In July 2023 Lone Star filed, and in September the Korean government filed, for annulment of the award
Earlier, in 2012, Lone Star filed an ISDS with ICSID seeking $4.68 billion (about 6.9 trillion won) in compensation from the government. It argued that when selling Korea Exchange Bank, acquired in 2003, to Hana Financial Group, the government (Financial Services Commission (FSC)) delayed the approval process to lower the price and should compensate for the damage.
In 2022, the ICSID tribunal found that while the government delayed sale approval so Hana Financial could buy Korea Exchange Bank cheaply, Lone Star had been convicted in a case involving manipulation of Korea Exchange Bank Card's stock price, which affected the sale price of Korea Exchange Bank. It therefore held that Lone Star should bear 50% of the damages itself. Accepting part of Lone Star's claims, it ordered the government to pay $216.5 million and interest. At the current exchange rate, that is about 400 billion won.
In July 2023, Lone Star filed an application with ICSID to annul the 95.4% portion it lost. In September the same year, the government filed an application to annul the 4.6% portion it lost.
On the 18th (local time), the ICSDI annulment committee dismissed all of Lone Star's annulment requests and upheld the government's annulment request. As a result, the government's obligation to pay 400 billion won under the original award has disappeared, and it can receive 7.3 billion won in litigation expense from Lone Star.
◇ Lone Star said at the ICC there was "no FSC pressure," but at ICSID said "there was pressure"
The government filed for annulment, viewing as erroneous the part of the original award that found that "the FSC's delay in approving the sale to Hana Financial amounted to an arbitrary exercise of authority to lower the price."
Previously, in Aug. 2016, Lone Star filed international commercial arbitration with the International Chamber of Commerce (ICC) against Hana Financial. At the time, Lone Star argued, in effect, that "pressure from the FSC to lower the sale price of Korea Exchange Bank did not actually exist, but Hana Financial deceived them and forced them to lower the sale amount."
At a briefing at the Government Complex Gwacheon in the afternoon, Jeong Hong-sik, head of the Ministry of Justice's international legal affairs bureau, said, "In the ISDS arbitration, Lone Star has claimed that it had no choice but to lower the sale price due to improper pressure from the FSC," and explained, "It made contradictory claims."
In 2019, the ICC ruled against Lone Star in the commercial arbitration, finding that the FSC likely intervened in lowering the price of Korea Exchange Bank. Director General Jeong said, "The ICC arbitration was a dispute between Lone Star and Hana Financial, and the Korean government did not participate in that proceeding as a party," and noted, "It was a presumptive finding."
Lone Star then sought to cite the ICC's finding that "the Korean government intervened in lowering the price of Korea Exchange Bank" in the ISDS case filed with ICSID. The government argued that the Lone Star ISDS tribunal should not consider the separate ICC award, but it was ultimately recognized as a key ground for acknowledging the government's liability for compensation.
◇ The government did not participate in the Lone Star–Hana Financial ICC commercial arbitration… violation of due process
Two years later, the ICSID annulment committee found the original arbitration award to be wrong. It recognized that adopting and relying on the ICC commercial arbitration award between Hana Financial and Lone Star as key evidence, and thereby hastily recognizing the FSC's illegal act and state responsibility, constituted a serious violation of the principle of due process, a fundamental procedural rule under international law.
Because the original tribunal recognized the FSC's illegal act and state responsibility based on evidence that violated due process, it ruled that the parts recognizing the FSC's illegal act, state responsibility, causation, and Lone Star's damages must all be annulled in a chain.
The principle of due process means that all acts of the state must be based on proper laws and carried out according to proper procedures. It is a legal-philosophical principle reflected in the legal systems of many countries around the world.
Because the government did not participate as a party in the ICC arbitration award, citing that award would deprive Korea of its procedural rights. The Ministry of Justice said of this annulment decision, "There is significance in clarifying the principle that 'evidence obtained in violation of the principle of due process under international law cannot be used as evidence to recognize state responsibility.'"
◇ Lone Star may also file for arbitration again before a new tribunal
However, it cannot be concluded that the dispute between the government and Lone Star is completely over. Under the ICSID Convention, arbitration may be sought even after an award is annulled. Director General Jeong said, "We cannot rule out the possibility that Lone Star will file a second arbitration with a new tribunal to litigate from scratch the issues that were annulled this time."
He continued, "Whatever procedure Lone Star pursues going forward, the Ministry of Justice will do its utmost to respond based on the expertise accumulated so far," and said, "The government will continue to respond thoroughly to international investment disputes."