The government won a suit seeking to overturn an international investment dispute (ISDS) award that ordered it to compensate U.S. hedge fund "Elliott Management." Given that only 3% of arbitration award annulment requests are granted, the outcome is considered unusual.
The government avoided a burden on the treasury of about 160 billion won and will be able to recover litigation expense as well. What proved decisive was the court accepting the government's argument that "the National Pension Service is not a state organ."
Cho Ara, Director of the international investment disputes division at the Ministry of Justice, said at a briefing at the Government Complex Gwacheon on the 24th, "We succeeded in annulling the arbitration award the day before (on the 23rd)," adding, "There is a remand arbitration process remaining, but we will do our best until the end."
She went on, "Through this victory, we made it clear in international law that the National Pension Service is not a state organ," adding, "We have laid the groundwork for the National Pension Fund—made up of pension premiums, the precious retirement (funds) paid by the people—to be operated more independently and autonomously."
◇ "State capture probe" as the trigger… Elliott files ISDS
Elliott was a shareholder of Samsung C&T at the time of the 2015 merger between the former Samsung C&T and Cheil Industries. It opposed the merger carried out as part of Samsung Electronics Chair Lee Jae-yong's succession process, judging that the merger ratio was unfavorable to Samsung C&T. The National Pension Service, a major shareholder, supported the merger.
In July 2018, Elliott filed an ISDS claim under the Korea-U.S. Free Trade Agreement (FTA). The trigger was the Park Geun-hye administration "state capture" investigation. At the time, the special counsel team led by Park Young-soo investigated allegations that the National Pension Service supported the merger due to pressure from the Blue House and others.
Former Minister of Health and Welfare Moon Hyung-pyo and former National Pension Service Chief Investment Officer Hong Wan-sun were indicted on charges of abuse of authority and received final sentences of two years and six months in prison at the Supreme Court.
Elliott argued that the National Pension Service's decision to support the merger was the result of improper government interference and claimed it suffered losses in the 1 trillion won range. It then sought compensation from the government.
◇ Government: "The National Pension Service's exercise of voting rights is not a state measure"
On June 20, 2023, a tribunal at the Permanent Court of Arbitration (PCA) partially accepted Elliott's claims and ordered Korea to pay about 69.0 billion won plus delayed interest. The government pointed out a calculation error and reduced the award to 59.3 billion won, but the total comes to about 160 billion won when including delayed interest.
On July 18 of the same year, the government filed an action in the courts of the United Kingdom, the seat of arbitration, to annul the award. It argued that the National Pension Service's support for the merger was not an act of a state organ and could not be subject to ISDS under the Korea-U.S. FTA.
The logic was that the PCA exceeded its jurisdiction and the award must be annulled. At the time, Minister of Justice Han Dong-hoon also said, "It is unreasonable for the arbitral tribunal to artificially introduce a concept not contemplated by the Korea-U.S. FTA and to recognize the Korean government's liability."
A U.K. court dismissed the case in Aug. 2024, but the government appealed. In July last year, the England and Wales Court of Appeal overturned the first-instance ruling and remanded the case, finding the government's annulment grounds to be proper. In the remanded first instance, the government had the case sent back to arbitration. The Ministry of Justice said, "The previous arbitration award recognizing the government's liability for compensation can no longer stand."
◇ Korea-U.S. FTA Article 11.1 acknowledged... "The National Pension Service is not a state organ"
The government focused on explaining Article 11.1 (scope of application) of the Korea-U.S. FTA, which limits measures subject to arbitration to those taken by a "party."
The U.K. court accepted the government's arguments that ▲ the National Pension Service has a legal personality separate from the government ▲ management of a public pension fund does not fall under core state functions such as public order and defense ▲ unilateral decision-making by the National Pension Service is not completely subordinated to the government.
Accordingly, the government succeeded in annulling the portion of the prior arbitration award that assumed the National Pension Service is a state organ. Director Cho said, "We were able to clarify under international law that Korea-U.S. FTA Article 11.1 functions as a 'gateway clause.'"
However, the remand court found that acts by the Blue House and the Ministry of Health and Welfare to intervene in the National Pension Service's decision-making process regarding the Samsung C&T–Cheil Industries merger constituted "relevant measures" under Korea-U.S. FTA Article 11.1. On the premise that the National Pension Service is not a state organ, the case was remanded to arbitration to determine whether the acts of the Blue House and the Ministry of Health and Welfare alone caused Elliott's losses.
Meanwhile, in Nov. last year, the government also won its suit to annul the ISDS arbitration award related to Lone Star's sale of Korea Exchange Bank. The issue then was whether due process was violated. The court accepted the government's argument that relying on an International Chamber of Commerce (ICC) arbitration award in which the government did not participate was a procedural violation. As a result, the government avoided liability for compensation totaling 400 billion won.