South Korea: controversy over free trade agreement
By Phil Taylor
Fierce arguments over dispute resolution clauses in the recently ratified South Korea-US free trade agreement threaten to weaken South Korea’s image as a country under the rule of law, say lawyers.
At issue are the agreement’s investor-state dispute (ISD) clauses which essentially allow for disputes to be heard, in closed session, by a panel of arbitrators in a third country.
Such clauses are by no means unusual: they date back to the time of the North American Free Trade Agreement and are found in countless other global free-trade agreements (FTAs) and bilateral investment treaties (BITs) worldwide.
They can be used by a disgruntled private investor from one of the states which is party to the agreement to seek damages for actions by the other state which are inconsistent with the terms of the agreement.
Opponents in Korea have claimed that the clauses will violate the country’s legitimate sovereign rights, with one left-wing lawmaker going as far as setting off tear gas during the vote over FTA ratification.
‘I think what happened is that opposition politicians seized on this as something they could manipulate – something they could characterise in the way that they wanted because the general public didn’t know much about it – and it seems to have worked,’ said Benjamin Hughes, senior foreign attorney and co-chair of the international dispute resolution practice group at Shin & Kim.
‘...[i]t will be interesting to see whether and how the international investment arbitration landscape adapts to the criticisms being voiced.'
Frances van Eupen
Allen & Overy, Hong Kong
‘The image of tear gas being let off in the National Assembly does not reassure investors that they are going to get a fair shake in Korea,’ he continued. ‘Protesters who break the law to make their point are really undermining their own argument that Korea is a place with the rule of law.’
The legal basis to the protest appears weak at best: specialists IBA Global Insight spoke to said the new FTA is more favourable to Korea than most of the others the country has signed (the total stands at more than 90 BITs and at least 10 FTAs), and no one was aware of the country being sued under any of them to date.
Late last year, as the FTA continued to grow more unpopular in Korea, a group of Korean judges made a public statement to the effect that the ISD clause of the FTA undermines Korea’s national sovereignty and requesting that a judicial commission be set up to review the clauses.
‘Their statement was not very informed but it was very emotional. I think it was a bit irresponsible for them to make that kind of statement,’ Hughes said. (The Supreme Court clearly agreed, as it later reprimanded the group concerned.)
A wider problem
Although much of the anti-ISD rhetoric in Korea appears politically-motivated and excessively emotive, it seems to reflect a wider dissatisfaction among sovereign states with investment arbitration in general.
In April 2011, Australia announced it would no longer require investor-state arbitration provisions in its international FTAs and BITs with developing countries; early in 2012, and more dramatically, Venezuela became the latest country to indicate its intention to denounce ICSID (the World Bank’s International Centre for Settlement of Investment Disputes), during a televised interview by the country’s oil minister.
Frances van Eupen,
Allen & Overy, Hong Kong
‘This is not a new phenomenon … But it will be interesting to see whether and how the international investment arbitration landscape adapts to the criticisms being voiced,’ said Frances van Eupen, a consultant at Allen & Overy in Hong Kong.
In some cases, objections to ISD clauses are understandable. In the past, developed countries which did not have sufficient faith in the legal system of their counterparty would include such clauses to allow for independent arbitration in a third country.
For a country such as South Korea, which offers a mature and trustworthy legal system, the implications inherent in the writing-in of ISD clauses by the US could cause offence.
On the other hand, such provisions are still extremely common and very few cases are ever brought against Asian host states (particularly when compared with regions such as Latin America).
Khawar Qureshi, QC,
International commercial arbitration practitioner
According to Khawar Qureshi, QC, an international commercial arbitration practitioner, the nationality and background of arbitrators in investor-state disputes is also becoming a focus of attention, despite arbitration clauses being of a standard nature in most existing bilateral investment treaties.
‘There has been a rise in the number of challenges to arbitrators, largely based upon perceived conflict of interest due to nationality, links with parties or law firms involved, the stance taken in previous cases or academic writings which express an opinion unfavourable to a position being advanced by a party,’ he told IBA Global Insight.
As Qureshi notes, the IBA is now undertaking work – begun by the Council of Bars and Law Societies of Europe (CCBE) – to develop its guidelines for ethics in arbitration following suggestions that more stringent safeguards are needed to uphold arbitrator independence and impartiality.
Phil Taylor is a freelance writer and editor. He can be contacted at firstname.lastname@example.org