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South Korea: The case for arbitration

South Korea: Building for the future

Arbitration for dispute resolution has many potential benefits over litigation for South Korean companies involved in complex, cross-border projects.

South Korean companies have been actively involved in international arbitration for some time, particularly in the construction sector, as they invest in and develop major infrastructure, oil and gas, and power projects across the Middle East, South East Asia and Latin America. There is no sign of this trend abating. If anything, practitioners and commentators predict a continued increase in the use of arbitration as the preferred method of resolving disputes where amicable settlement during a project proves difficult.

“The growth in the use of arbitration by South Korean companies is in many ways unsurprising,” says Aloke Ray, a White & Case partner in Singapore, who leads the Firm’s arbitration practice in Asia. “It reflects both the heightened levels of outbound economic activity that we have seen from major Korean contractors and the fact that this activity has been in sectors and emerging markets for which international arbitration has been consistently chosen ahead of litigation,” he says.

“The reality is that, on high-stakes, technically complex, international projects, it is commonplace for disputes to arise, with the only question being how best to resolve them. Given the greater enforceability of arbitral awards as compared to court judgments, and the greater input that parties have over the arbitral process, it follows that where, as in South Korea, companies are increasingly active in cross-border infrastructure work, so too will be their potential involvement in cross-border disputes, for which international arbitration remains the principal forum for redress,” Ray adds.


Use by South Korean firms

South Korean companies are far from unfamiliar with arbitration. According to a study by Joongi Kim, a professor at the Yonsei Law School in Seoul, among East Asian countries, South Korean companies only lag their Indian peers in the use of arbitration at the Parisbased International Chamber of Commerce’s International Court of Arbitration.


Advantage arbitration

South Korean companies have turned to arbitration for several reasons. The key one, perhaps, is the advantage it offers in terms of enforceability, especially where a counterparty is based in a country with a national court system unlikely to enforce a foreign court judgment. By contrast, arbitral awards are enforceable in the 155 contracting states of the New York Convention 1958, which includes most emerging economies.

Other reasons include the higher degree of party involvement in determining the process and the fact that the arbitration is private (and in most cases confidential). Going to court in a foreign jurisdiction can be risky because companies might be unfamiliar with the court system and face the risk of their disputes being litigated in the public eye, with the associated reputational damage that can follow.

The use of international arbitration by South Korean companies will continue to grow, particularly with the ratification by the EU and the United States of free trade agreements.

In the past, South Korean companies viewed arbitration as foreign-run and controlled. But that perception has faded as the fairness and effectiveness of international arbitration has been demonstrated in matters involving South Korean companies. And, as in-house departments in South Korean companies have grown in size and sophistication, so too have companies’ experience and understanding of the benefits of resolving cross-border disputes through arbitration.


Documentation is key

As a result, many South Korean companies nowadays insist on incorporating arbitration clauses into their commercial contracts, especially those that involve cross-border work. Ray explains that “in addition to the more routine considerations about which arbitration seat and which arbitral institution to choose when drafting arbitration clauses, South Korean companies are now increasingly aware of the need to get advice on the overarching legal structure of their investments, particularly into emerging markets, to avail themselves of protections under international law available under treaties, and to supplement the contractual protections they have been more used to negotiating for years.”

Once an arbitration begins, key witnesses may not be fluent in English and the evidence may be in a language other than Korean. Cultural differences and miscommunication may arise but, according to experts, differing culture and languages are not the single biggest factors in arbitration. What is important is documentation.

“South Korean companies tend to be extremely well organized. Ultimately, most commercial disputes turn on who said what to whom, when and why. Accurate and comprehensive record-keeping is often the decisive factor,” Ray notes. Close communication with counsel is also essential. As arbitration hearings may use unfamiliar procedures and be conducted in a foreign language, South Korean companies need to support and communicate with their lawyers more so than in a domestic South Korean dispute involving familiar protocols and language.


Future growth

“The use of international arbitration by South Korean companies will continue to grow,” according to White & Case partner Mark Goodrich, “particularly with the ratification of free trade agreements.” Goodrich adds, “Many South Korean–financed projects are now in the construction phase in Africa and Southeast Asia. It seems likely that these will give rise to disputes in due course that will be resolved through arbitration.”

South Korean companies are approaching international arbitrations with greater confidence and, while a successful outcome may not be guaranteed, these companies have proven that, with the right approach and focus, successful outcomes can indeed be achieved.


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