Why Jurisdiction Comes First: Insights from Korea v Elliott

Background

The case concerned the challenge of an arbitral award by Korea under section 67 of the Arbitration Act 1996 (the "Arbitration Act") which is a tool that can be used by parties to challenge an arbitral award given by an arbitral tribunal on the grounds of substantive jurisdiction.  Korea's application followed arbitration proceedings pursued by Elliot Associates L.P. ("Elliot Associates") and brought under the UNCITRAL (United Nations Commission on International Trade Law) rules.

Elliot Associates initiated arbitration proceedings against Korea in April 2018, alleging that the National Pension Service of Korea (the "NPS") (through the office of the President of Korea and the Korean Ministry of Health and Welfare) improperly interfered with a shareholder voting process resulting in a proposed merger between Samsung C&T Corporation ("Samsung CTC") and Cheil Industries Inc went through, in breach of the protections granted to investors in both the United States of America ("USA") and Korea under a free trade agreement dated 30 June 2007 (the "FTA"). Elliot Associates and NPS were both minority shareholders of Samsung CTC, and Elliot Associates argued that the merger was not in its interests.

Elliot Associates alleged that Korea's conduct summarised above amounted to a breach of the National Treatment Standards and Minimum Standards of Treatment as set out in Articles 11.3 and 11.5 of the FTA respectively. Korea disputed the claim on the grounds that the arbitral tribunal had no jurisdiction to hear the dispute as the claim fell outside the scope of Chapter 11 of the FTA. Korea argued that Article 11.1(1) of the FTA (copied below) was not engaged as there was no "measure" "adopted or maintained" by Korea that "relates to" Elliot Associates or its investment in Samsung CTC. Korea thus argued that there was no jurisdiction for the tribunal to hear a dispute.

"ARTICLE 11.1: SCOPE AND COVERAGE

1. This Chapter applies to measures adopted or maintained by a Party relating to: (a) investors of the other Party; (b) covered investments; and (c) with respect to Articles 11.8 and 11.10, all investments in the territory of the Party."

The tribunal favoured Elliot Associates' interpretation and found that Korea had breached Article 11.5 of the FTA, awarding Elliot Associates $53,586,931 but later revising that to $48,490,438 (the "Arbitration Award").

Jurisdictional Challenge

On 17 July 2023, Korea commenced a challenge to the Arbitration Award on the grounds that the tribunal acted outside its substantive jurisdiction as the arbitration claim did not fall within the scope of Chapter 11 of the FTA. It argued that the "Scope and Coverage" clause at Article 11.1(1) of the FTA amounted to jurisdictional pre-conditions to an offer to arbitrate and that the pre-conditions under Article 11.1(1) of the FTA could were not met.

At first instance, Foxton J dismissed Korea's challenge, finding that an offer to arbitrate under Article 11.16 of the FTA was freestanding: there was no requirement for the 'conditions' at Article 11.1(1) of the FTA to be met and therefore there was no right for Korea to challenge the jurisdiction permitted under section 30 of the Arbitration Act.

Appeal

Korea successfully appealed. In reaching its decision, the Court of Appeal maintained the well-established principle that the interpretation of a treaty needs to be undertaken in accordance with Articles 31 and 32 of the Vienna Convention on the Law of Treaties 1969 (the "VCLT").

Applying the principles of the VCLT, the Court of Appeal held that the ordinary meaning of "This Chapter" at Article 11.1(1) of the FTA is a reference to Chapter 11 of the FTA in its entirety rather than to that section of Chapter 11 alone (Chapter 11 having been divided into Section A, Section B and Section C, with the dispute resolution provisions contained in Section B).

Accordingly, the "Scope and Coverage" clause at Article 11.1(1) of the FTA did in fact create pre-conditions which, if not satisfied, potentially allow a party to challenge an arbitral award on the ground of jurisdiction under section 67 of the Arbitration Act. 

The case has been returned to the High Court for determination of Korea's challenge on its merits.

Summary

The Court of Appeal's decision re-emphasises its willingness to take a straightforward approach to interpretation of clauses particularly where the "whole point and purpose and effect of the [FTA] is that the approach to interpretation is to be applied equally and uniformly by courts of all signatory jurisdictions".  

Despite the ultimate success of Korea in this case, statistics show that the Commercial Court remains reluctant to interfere with arbitral awards and allow Section 67 challenges.[1]  In 2022-2023, of the seven Section 67 applications received, none were successful as they were either dismissed, discontinued, settled or withdrawn. In 2023-2024, there was a significant increase with a total of twenty-four Section 67 applications filed – although as at the date of the Commercial Court Report, thirteen remained pending, of the other eleven only one was successful with others being dismissed, discontinued or transferred out.