Kap-You (Kevin) Kim, John P Bang and Matthew J Christensen, Bae Kim & Lee LLC
On 31 December 2019, the local arbitration community will celebrate the 20th anniversary of Korea’s adoption of the UNCITRAL Model Law on International Commercial Arbitration (Model Law). This important milestone in the growth and development of arbitration in Korea offers a timely occasion for a brief retrospective on the rise in Korea of arbitration as the predominant mechanism for resolving international commercial disputes. In this narrative, Korea’s adoption of the Model Law in 1999 functions as a kind of watershed moment in the process of bringing the law and practice of arbitration in Korea into full conformity with international standards. In this article, we briefly consider the run-up to that event as well as its broader impact in the subsequent two decades before ending with a few concluding thoughts on its overall significance.
As in many other Model Law jurisdictions, the roots of arbitration in Korea are assumed to reach back to time immemorial, when farmers and merchants alike would have relied on the wisdom of village or clan elders for resolution of their civil disputes and disagreements. Yet the modern history of international arbitration in Korea may be traced to the adoption of Korea’s first systematic arbitration legislation. This Arbitration Act of 1966 was approved by the National Assembly of Korea on 31 December 1965 and entered into force on 16 March 1966. That year was the final year in the first of a series of “five-year plans” for economic development adopted by the Korean government between the 1960s and 1990s. The adoption of an arbitration law at this early, foundation-building stage in Korea’s push for rapid economic development reflected a perspicacious realisation that a reliable regime for the arbitration of international commercial disputes had an important role to play in the more outward-looking, export-oriented national economic development strategy that the five-year plans were designed to achieve.
Two additional developments soon followed that completed the foundations of Korea’s arbitral infrastructure. The first of these was the establishment of an independent Korean arbitration institution. The Arbitration Act (1966) had included provisions authorising the Korea Chamber of Commerce to issue rules of arbitration and to administer both domestic and international arbitrations. It was subsequently decided that those functions should be performed by a separate purpose-built institution, which led in time to the establishment of the Korea Commercial Arbitration Association in 1970. The name of this organisation was changed to the Korean Commercial Arbitration Board (KCAB) in 1979.
The second major development was Korea’s accession to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Korea did so as the 43rd Contracting State with effect from 9 May 1973 subject to the reciprocity and commercial reservations.
Considering that arbitration’s popularity with users grew steadily in the three decades following the enactment of the Arbitration Act of 1966, it would be wrong to overlook the contributions of that statute to the early development of arbitration in Korea. As of 1998, for example, the number of new arbitration cases filed with the KCAB had increased from negligible levels in the early 1970s to as many as 192.
There were, however, a number of provisions in the 1966 Act that proved unworkable in practice or that were seen as imposing unreasonable restrictions on party autonomy. For example, absent party agreement as to the number of arbitrators and their selection, each party was to appoint one arbitrator, an approach that could easily lead to stalemate in practice. The Act also restricted party autonomy in the selection of arbitrators by specifying various grounds for challenging an arbitrator that lacked any obvious relationship to the arbitrator’s impartiality or independence. For example, the fact that a candidate had been subject to restrictions on his or her civil rights (eg, as a political dissident) was an accepted ground for challenging his or her right to serve as arbitrator. Finally, the Act included certain controversial grounds for challenging an arbitral award, including that it did not deal with material issues that could significantly affect the result of the award. In light of these and other perceived deficiencies, the Arbitration Act of 1966 was increasingly viewed as inadequate to the needs of the domestic and international business community.
Starting in the early 1990s, a movement began to take shape within the local arbitration community advocating the adoption of the UNCITRAL Model Law on International Commercial Arbitration 1985 as a way of bringing Korea’s arbitration regime into conformity with prevailing international standards. These efforts were spurred and supported by the Korean government’s enthusiastic embrace of “globalisation” as the central theme of its economic development policy in the 1990s. The 1996 adoption of the Model Law by Germany – traditionally regarded as the primary source of Korea’s civil law system – provided further impetus to this project. In December 1998, a separate subcommittee was established within the Ministry of Justice (MOJ) and tasked with drafting an amended arbitration act incorporating the Model Law. The resulting statute was approved by the National Assembly on 2 December 1999, and entered into effect on 31 December 1999. In the process, Korea became the first jurisdiction in North East Asia to adopt the Model Law.
While the Korean Arbitration Act of 1999 can, in general, be regarded as a faithful adoption of the Model Law, it does reflect a few departures, including in scope of applicability. Although the 1999 Act adopts the “territorial criteria” under article 1(2) of the Model Law, it does not further limit its scope of application to “international” or “commercial” arbitrations as under article 1(1). Hence, the Korean experience demonstrates that the Model Law can be successfully adopted as a unitary regime, applicable to domestic as well as to international arbitrations, and to all disputes under private law, whether or not such disputes would qualify as “commercial” under the Model Law.
With its adoption of the Model Law, Korea finally had a modern arbitration law that was fully consistent with international standards. This could not have come at a better time as a wave of major disputes was soon to come courtesy of the 1997 Asian Financial Crisis.
In November 1997, battered by the effects of the Asian financial crisis and with its foreign currency reserves depleted, the Korean government was forced to seek a bailout package from the IMF. The IMF imposed onerous conditions on its assistance, including extensive restructuring of the debt-laden corporate sector. Consequently, all of the major Korean conglomerates were forced to restructure and improve their balance sheets through such measures as selling off non-core businesses, downsizing subsidiaries, and inducing foreign capital. In the process, scores of Korean companies entered into “big deal” M&A transactions with foreign counterparties. A significant number of these M&A transactions eventually gave rise to large-scale legal disputes, and these were typically resolved through arbitration under an established set of institutional rules, such as the ICC Rules of Arbitration.
The resulting wave of arbitration cases continued throughout the ensuing decade. That Korean parties were among the most active users of ICC arbitration in East Asia during the first decade following Korea’s adoption of the Model Law is confirmed by ICC statistics for the period. These show that among East Asian parties participating in ICC arbitrations filed between 1998 and 2009, a total of 317 parties were from Korea, 242 were from Japan, 213 were from mainland China, and 135 were from Hong Kong. KCAB statistics for the period also show steady growth in domestic and international case filings.
Over the course of that decade, the Korean business community and its Korea-based legal advisors alike came to accept international arbitration as the default mechanism for resolving cross-border disputes. A few of these legal advisers used their experience in this early wave of major arbitration cases as a springboard to developing specialised arbitration practices. Two of the authors of this article, Kevin Kim and John Bang, were fortunate to have been able to establish Korea’s first dedicated international arbitration team at BKL in 2002, but specialised arbitration teams soon followed at a few other Korean firms. By the time the third author of this article, Matthew Christensen, joined BKL in 2007, a small but vibrant community of specialised international arbitration practitioners had taken root in Korea. In the years that followed, many hardworking and dedicated arbitration practitioners in Korea would earn the respect of leading arbitrators and arbitration practitioners throughout the world even as Korean firms began to feature regularly in the GAR 100 list of the world’s most active arbitration practices. Korea-based practitioners would also serve in important positions in leading arbitral institutions and organisations including the ICC, SIAC, HKIAC, LCIA, AAA, and ICCA, to name a few.
From the perspective of subsequent developments over the following decade, it would not be unreasonable to regard Korea’s adoption of the Model Law in advance of the wave of major disputes that followed the IMF bailout as among the most well-timed interventions in modern Korean legal history. Indeed, if the Arbitration Act of 1966 had remained in effect during this critical period, it is highly questionable whether arbitration ever could have gained the confidence of the Korean business community as a reliable method of resolving international disputes. In this sense, Korea’s experience with the Model Law serves as a useful reminder that one of the greatest benefits of timely adoption of international best practices is not having to worry about what might have been.
The past decade has witnessed the maturation of arbitration in Korea to a level that matches other developed arbitral jurisdictions. Among many significant developments, the following are especially deserving of note.
First, Korea is now generally regarded internationally as a safe jurisdiction in which to seat an international arbitration. That hard-earned reputation rests upon the foundation stone of a modern arbitration law that is consistent with international standards and fully supported by local courts. As noted above, the Arbitration Act of 1999 has long provided a reliable and consistent legislative framework for the conduct of arbitration in Korea, with no provisions that are unduly restrictive of party autonomy, that undermine the enforceability of arbitral awards, or that conflict with prevailing international best practices. In 2016, the Arbitration Act was amended to incorporate the most important of the 2006 amendments to the Model Law, such as a relaxation of the formal requirement for an arbitration agreement and more detailed provisions regarding the power of the arbitral tribunal to order interim measures. Yet the legislative process, which involved extensive participation by members of the local arbitration community, did not stop there but also included some significant new innovations. For example, the definition of “arbitration” has been broadened so as to include disputes relating to the private effects of intellectual property and fair trade laws. Furthermore, whereas recognition and enforcement of arbitral awards under the 1999 Act required a court judgment, the process now requires only a court order, which is expected to expedite the recognition and enforcement process considerably. At the same time, Korea’s lex arbitri has been supported by a strong system of national courts staffed by professional judges who understand their role in the arbitral process. Korean courts have generally shown reliably pro-arbitration tendencies, declining to interfere with arbitration proceedings in the presence of a valid and binding arbitration agreement, and respecting the narrow grounds for refusing the recognition and enforcement of foreign awards under the New York Convention.
Second, the KCAB has matured into a strong and independent arbitral institution that enjoys great prestige in Korea and is also well regarded internationally for its consistent adherence to international standards in the administration of cases. This process began with the issuance of a separate set of rules for international arbitration cases in 2007 (subsequently revised in 2011 and 2016), and has culminated with the creation of KCAB International in 2018 as an independent division of the KCAB for handling international disputes. The opening of overseas offices in Los Angeles and Shanghai underscores the depth of the KCAB’s commitment to becoming a truly international arbitral institution.
Third, Seoul has emerged as the leading arbitration center in North East Asia, and an attractive alternative to Hong Kong and Singapore, particularly for disputes governed by civil law. This has been made possible by a confluence of mutually reinforcing factors. These begin with the factors that make it a safe seat – a confidence-inspiring lex arbitri supported by reliably pro-arbitration courts – but also include other factors such as an experienced community of arbitrators and arbitration practitioners, state-of-the-art hearing infrastructure at the Seoul IDRC, and a convenient location at the cross-roads of North East Asia.
Fourth, the Korean government has assumed the mantle of providing long-term planning and financial support for the continued development of arbitration in Korea under the Act on the Promotion of the Arbitration Industry of 2016. This statute provides a legal basis for the issuance of five-year plans by the MOJ, the establishment and operation of dispute resolution institutions, training of arbitrators and arbitration practitioners, and support for research and international exchanges, among other things. Importantly, the Act also guarantees the autonomy and independence of related institutions and individuals.
At a time when globalised institutions seem to be falling into disfavour throughout the world, it is instructive to recall that Korea’s 20-year experience as a Model Law jurisdiction has been overwhelmingly positive. Looking forward, the future remains bright as all of the key stakeholders continue to play active roles in promoting the continued growth and development of arbitration in Korea.
In this vein, the MOJ’s issuance of its first Master Plan for Promotion of the Arbitration Industry (2019-2023) in December 2018 is particularly noteworthy. While the details of its content are not unimportant, we are struck instead by how well it symbolises the rise of arbitration in Korea. From its modern origins as a bit player in the government’s first five-year plan for economic development, the Korean arbitration system has grown to be regarded as an essential partner in the resolution of disputes and administration of justice, and as an industry of sufficient national importance as to merit a five-year plan of its own.
So as we prepare to ring in the New Year on 31 December 2019, we will be remiss if we do not also raise a glass to celebrate the 20th anniversary of Korea’s adoption of the Model Law, and all the good that has come from it.