LSF-KEB Holdings v Korea - ICSID Case No. ARB/12/37 - Decision on Stay of Enforcement - 15 December 2023
Country
Year
2023
Summary
Source: icsid.worldbank.org
DECISION ON STAY OF ENFORCEMENT OF THE AWARD
Members of the ad hoc Committee
Prof. Lawrence Boo, President
Prof. Doug Jones, AO, Member
Ms. Eva Kalnina, Member
15 December.
Table of Contents
I. INTRODUCTION AND THE PARTIES
II. PROCEDURAL BACKGROUND
III. THE PARTIES' POSITIONS
The Law Applicable
(1) Applicable Legal Standard
a. The Applicant's Position
b. The Claimants' Position
(2) The Burden of Proof
a. The Applicant's Position
b. The Claimants' Position
The Trends on Decisions by ad hoc Committees on Stays of Enforcement of Awards
a. The Applicant's Position
b. The Claimants' Position
Whether the Circumstances of the Present Case Require a Stay
(1) Both Parties have filed Applications for Partial Annulment of the Award
a. The Applicant's Position
b. The Claimants' Position
(2) Prejudice to the Claimants
a. The Applicant's Position
b. The Claimants' Position
(3) Whether the Applicant is Likely to Comply with the Award
a. The Applicant's Position
b. The Claimants' Position
(4) The Risk of Non-Recoupment
a. The Applicant's Position
b. The Claimants' Position
Whether Stay Should Be Conditional if Ordered
(1) The Applicant's Position
(2) The Claimants' Position
IV. THE COMMITTEE'S ANALYSIS
The Applicable Law
(1) Applicable Legal Standard
(2) Burden of Proof
Observations on the Trends on Decisions by ad hoc Committees on Stay of Enforcement
The Circumstances of the Present Case
(1) Both Parties have filed Applications for Partial Annulment of the Award
(2) Prejudice to the Claimants
(3) Whether the Applicant is Likely to Comply with the Award
(4) Risk of Non-recoupment
Whether a Stay should be Conditional, if Ordered
V. DECISION.
1. This Decision addresses the Republic of Korea's request (the "Request") for the continuation of the stay of enforcement of the ICSID award rendered on 30 August 2022 (the "Award") by the arbitral tribunal (the "Tribunal") in LSF-KEB Holdings SCA and others v. Republic of Korea (ICSID Case No. ARB/12/37) (the "Arbitration").
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III. THE PARTIES' POSITIONS
THE LAW APPLICABLE
(1) Applicable Legal Standard
a. The Applicant's Position
22. Korea refers to Article 52(5) of the Convention and Rule 54(2) of the ICSID Arbitration Rules, which confer on the Committee the authority to stay the enforcement of the Award during the pendency of the annulment proceeding. Article 52(5) states that "[t]he Committee may, if it considers that the circumstances so require, stay enforcement of the award pending its decision."2 Rule 52(4) similarly enables the Committee to stay the enforcement of the Award.
23. Korea submits that the practice of granting stays of enforcement is consistent with the object and purpose of Article 52 of the Convention.4 As recognised by the ad hoc committee in Tenaris v. Venezuela, a party cannot be expected to perform a "pecuniary obligation of an award voluntarily, when it considers it fundamentally flawed, unless an ad hoc committee has rejected its consideration and upheld it."5
24. The ad hoc committee in RREEF v. Spain similarly reasoned that "[p]ermitting a stay is in reality a further step to preserve the Award's eventual finality so that if affirmed by the annulment process, there could be no doubt as to its universal finality and enforceability."6
b. The Claimants' Position
25. The Claimants submit that the word "require" in Article 52(5) of the Convention indicates that the applicable law sets a high bar for Korea's Request for the continuation of the stay of enforcement.7 The Claimants place reliance on Total v.
Argentina:
[T]he ICSID Convention does not use other less categorical verbs, such as "recommend", "deserve", "justify" or similar words, but resorts to the imperative verb "require"...[T]o order the continuation of the stay of enforcement of the Award, the Committee has to be satisfied that the circumstances of the particular case so require. It is for the party seeking the stay to show that such circumstances exist, and thus, the stay of enforcement of the award should be continued.
26. The Claimants submit that even if the Committee finds that circumstances require the continuation of the stay, the Committee retains the discretion to decide otherwise.
(2) The Burden of Proof
a. The Applicant's Position
27. Korea relies on the case of Watkins v. Spain,10 where the ad hoc committee observed that each party bears the burden of proving any positive allegation that it raises. As such, Lone Star bears the burden of proving its case of the risks that Korea will not comply with the Award if annulment is denied.
b. The Claimants' Position
28. The Claimants underscore that Korea bears the burden of proving that the circumstances require continuation of the stay of enforcement. As such, Korea must provide concrete evidence showing that a stay is required; general assertions and speculation are not sufficient.12 In this regard, the Claimants cite Albaniabeg v.
Albania, in which the ad hoc committee provided a two-step analysis on stay of enforcement:
The first step requires the [applicants] to establish the existence of particularized circumstances requiring the continuation of the stay, which the Committee agrees is an exceptional remedy, and in doing so the [applicants] must substantiate their allegations with evidence... In the event that the [applicants] are able to establish the existence of such circumstances, the Committee would proceed to the second step and assess whether, having regard to all the relevant circumstances and facts, a continuation of the stay should be granted.
29. From this test, the Claimants submit that a stay of enforcement is exceptional and justified only when the circumstances, proven by particularized evidence, so require
THE TRENDS ON DECISIONS BY AD HOC COMMITTEES ON STAYS OF ENFORCEMENT OF AWARDS
a. The Applicant's Position
30. Korea submits that the historical practice of ad hoc committees demonstrates a trend in favour of a stay of enforcement of the Award.15 It relies on statistics, updated in 2023, which support that ad hoc committees have granted stays of enforcement in approximately 70 percent of publicly available decisions on enforcement.16 It cites the observation of the ad hoc committee in Tenaris v. Venezuela that it:
subscribe[d] to the mainstream jurisdiction of committees that exercise their discretion and grant stays when annulment of an award has been requested in good faith and neither with the abusive intention to escape the obligation to abide by its terms nor as a demonstration of its refusal to accept the obligation under the ICSID Convention to comply with the award.
b. The Claimants' Position
31. The Claimants disagree with the Respondent that current practice reflects a tendency toward granting stays of enforcement. The Claimants cite Infrastructure Services v.
Spain, in which the ad hoc committee stated that it "does not accept that there is a prevailing practice amongst ICSID annulment committees which supports the existence of a presumption, whether de jure or de facto, in favour of granting a stay."18
32. The Claimants have also presented statistics illustrating this point: e.g., between
and 2020, ad hoc committees decided 38 requests for a stay, but only 13 of those
requests were granted (8 of which were conditional on some form of guarantee or
undertaking).
WHETHER THE CIRCUMSTANCES OF THE PRESENT CASE REQUIRE A STAY
(1) Both Parties have filed Applications for Partial Annulment of the Award
a. The Applicant's Position
33. Korea highlights that the Claimants are also seeking partial annulment of the Award, even as it seeks in parallel to enforce the Award before the United States Court. Korea refers to Continental Casualty v. Argentina, where the ad hoc committee observed:
Nevertheless, in the Committee's view, it would not in general be appropriate for an award to be enforced in circumstances where neither of the parties considers the award to be final with extant applications for Annulment having been made for the entire Award.
34. For Korea, the above reasoning applies with greater force as, unlike Continental Casualty, both Parties have requested annulment of the Award. The Parties' respective applications cover virtually all aspects of the Award (jurisdiction, merits, and damages).21 Both Parties have requested the annulment of the damages which Lone Star is seeking to enforce.22 It is thus uncertain as to "whether Korea ultimately will have any pecuniary obligations under the Award at all."23
35. As such, Korea argues that it is not appropriate for the Award to be enforced where
both Parties agree that the Tribunal's damages decision is fundamentally flawed
Korea highlights that the Claimant has commenced an enforcement action in the
United States Court for the damages ordered in the Award--USD 216,018,682 plus
interest--even though enforcement of the Award was provisionally stayed by the
ICSID Secretary-General.
36. Korea says that if the provisional stay is lifted, Lone Star will continue to aggressively pursue enforcement of the Award, as demonstrated by its conduct before the United States Court26 even after the ICSID Secretary-General informed the Parties of the provisional stay. An aggressive enforcement phase while both Parties are seeking to annul the Award would be "inappropriate and prejudicial to Korea."27
37. At the Hearing, Korea referred the Committee to the case of Dominion Minerals v.
Panama,28 wherein Dominion, the award creditor, had sought to annul both the award on damages and the award on costs.29 The ad hoc committee found that obliging Panama to pay damages or costs on a basis which was challenged by Dominion on annulment strongly militated in favour of staying the enforcement of the award.
38. Korea disagrees with Lone Star's assertion that Continental Casualty v. Argentina did not establish a principle that a stay is required where both parties have sought annulment of the award. Instead, Korea submits that Continental Casualty has affirmed the general legal principle that a party should not approbate and reprobate.
b. The Claimants' Position
39. The Claimants submit that there is no rule that the fact that the Parties have filed cross-annulments is a circumstance in favour of continuance of the stay of enforcement and a specific inquiry into determining whether a stay is mandatory.
40. The Claimants highlight that their approach in seeking enforcement of the Award is not inconsistent with its request for partial annulment. Lone Star's annulment application only seeks to challenge the Tribunal's determination of contributory fault and its reduction of the damages awarded by 50% such that the sums awarded are only USD 216 million.33 If the Claimant's request for partial annulment is successful, the damages award will remain intact, and it may then collect any additional damages.
41. The Claimants observe that the case of Continental Casualty did not establish a principle that a stay is appropriate where both parties have sought annulment of the Award. The ad hoc committee in that case based its decision on the specific circumstances before it, as the amount of damages awarded was relatively small.
42. Lone Star submits that the pursuit of enforcement of an arbitral award "is the expected course of action" and is not a circumstance justifying the continuation of the stay of enforcement of the Award. Article 53(1) of the Convention explicitly recognizes that an award creditor has a right to demand compliance with an award absent a stay. It states in relevant part, "[e]ach party shall abide by and comply with the terms of the award except to the extent that enforcement shall have been stayed pursuant to the relevant provisions of this Convention."36
43. Lone Star further rejects Korea's suggestion that it improperly pursued enforcement in the United States Court37 as it had acted transparently and complied with the Convention, the ICSID Arbitration Rules, and the provisional stay.38 The enforcement action was initiated prior to the Respondent's Application and the present Request, and the United States Court was informed by the Claimants that the enforcement of the Award might be provisionally stayed.39 Any steps taken after the provisional stay was in force were to effectuate service on Korea.
(2) Prejudice to the Claimants
a. The Applicant's Position
44. Korea also submits that the Claimants will not suffer any prejudice or hardship resulting from the stay as they (i) will be compensated for a delay in enforcement through the payment of post-Award interest in the amount of above USD 1 million a month up to the date of payment, should the Award not be annulled,41 which creates a strong deterrent and fully compensates Lone Star;42 and (ii) the principal amount of the ICSID Award of USD 216 million represents only 6% of Lone Star's proceeds from the sale of the KEB stake to Hana Bank.
b. The Claimants' Position
45. According to the Claimants, they will be unduly prejudiced by the continuation of the stay, as the events giving rise to this case occurred as early as 2007 and the Arbitration commenced in 2012. The Claimants observe that it took a decade to resolve the Arbitration, and a year has passed since the Award was rendered. The Claimants say that they should not be forced to wait any longer to collect the damages awarded.
46. Furthermore, even if the Claimants would be compensated via post-Award interest for a delay in enforcement, the running of interest is not a circumstance that justifies a continuation of the provisional stay as confirmed by the committee in SolEs v. Spain.
(3) Whether the Applicant is Likely to Comply with the Award
a. The Applicant's Position
47. Korea observes that ad hoc committees have balanced any prejudice that could be suffered by the award creditor in the event the stay remains in place, such as a risk that the applicant State will not comply with the Award.
48. Korea submits that there is no credible risk that it "would refuse or fail to comply with its pecuniary obligations under the Award, if it were not annulled."47 Korea further states that it "respects international law, complies with its international obligations, and has excellent credit ratings."48 In this regard, it also points to its fulsome participation in the Arbitration, including its payment of all advances on costs requested by ICSID.
49. As for the Claimants' argument that Korea has sought to set aside two UNCITRAL awards and its citation of articles which the Claimants say demonstrates Korea's hostility towards the Award, Korea submits that these instances only prove that when Korea has identified defects in awards, it has exercised its right to post-award remedies.
50. With respect to the Claimants' argument that Korea would not comply with the Award based on the parallel proceedings in which Korea's Supreme Court had determined that the Korean National Tax Service had wrongfully assessed taxes and it ordered the refund of such taxes, and such amounts remained outstanding, Korea denies that it failed to repay the funds but points out that the Parties are still undergoing domestic litigation. Korea further submits that this demonstrates a risk of delay, and not a risk of non-compliance, which is balanced by the accrual of post-award interest.
b. The Claimants' Position
51. The Claimants deny Korea's assertion that there is no reason to believe that Korea would not honour the Award should its annulment request prove unsuccessful and point out that Korea has not pledged to honour the Award if its annulment application is unsuccessful.
52. The Claimants contend that there are "serious concerns" about Korea's willingness to comply with the Award, as evidenced from 6 public statements made by Korean officials with respect to this case demonstrating hostility towards the Award,53 Korea's history of frustrating awards in previous cases, and Korea's track record of delaying payments owed to Lone Star.
53. Lone Star highlights that Korea has no history of compliance with ICSID awards.
Lone Star further emphasises Korea's past practice of non-compliance, based on publicly available information. Korea has received two other adverse investor-State arbitration awards and has sought to set aside both awards. In Mohammad Reza Dayyani, et al. v. Republic of Korea (I), PCA Case No. 2015-38 (UNCITRAL), Korea's attempt to set aside the award was unsuccessful and it has yet to pay the award to the claimants, who have initiated a second arbitration alleging that Korea's failure to pay amounts to a breach of the applicable treaty.
54. The Claimants further refer to a parallel proceeding wherein Korea's Supreme Court had ordered in 2017 that the Korean National Tax Service refund to Lone Star at least KRW 194 billion (about USD 172 million) in taxes and penalties that it wrongfully assessed. Korea has only refunded less than 15% of that sum, and Lone Star has brought further legal action in Korea to recuperate the sums due.57 As such, there is every expectation that Korea will similarly delay or obstruct payment to LSF-KEB for as long as possible.
(4) The Risk of Non-Recoupment
a. The Applicant's Position
55. Korea submits that it would suffer significant prejudice if the stay were not granted59 as there is a serious risk that it would not be able to recoup the sums paid to Lone Star in the event that the relevant part of the Award is annulled.60 In support of its argument, Korea refers to RREEF v. Spain wherein the ad hoc committee stated that the "possibility of recoupment is...one of the main factors to be considered."61
56. Korea submits that Lone Star is a private equity fund that "historically has focused on investing in distressed or undervalued assets, and later selling those assets for a profit."62 Should the Award be enforced, Korea posits that, the Claimants would "promptly distribute back to its upstream investors any proceeds earned on the investments of holding companies like LSF-KEB."63
57. Korea relies on (i) the testimony of [....] in the Arbitration, which confirms that Lone Star has a fiduciary duty to distribute the proceeds back to its investors,64 (ii) a 7 January 2020 letter to the ICSID Tribunal, and (iii) a presumption that 171 percent total net return on LSF-KEB's investment in KEB was promptly distributed to upstream investors.65 As such, the Award proceeds would be "impossible" to recoup.
58. Korea further submits that the risk of non-recoupment is compounded by the substantial quantum of damages ordered against it, which would require an earmarked budgetary allocation by the Korean Government.
b. The Claimants' Position
59. Lone Star submits that the risk of non-recoupment does not assist Korea to discharge its burden of proof with respect to its Request, and relies on Masdar v. Spain, where the committee noted that "any risk of recouping amounts recovered under awards that are later annulled is a normal consequence of the design and structure of the ICSID Convention" and stated that risk of non-recoupment is "not a factor in deciding whether the circumstances require a stay."
60. The Claimants further submit that LSF-KEB does not pose a high risk of non- recoupment as it is not an individual, is not a shell company with a sole controlling individual or no assets, and it is not at risk of bankruptcy.69 Moreover, Lone Star affirms that it has a track record of compliance with adverse judgments.
61. Lone Star further contends that the distribution of funds to investors is not a sufficient circumstance to warrant a stay and submits that it would be irresponsible for LSF-KEB to distribute these proceeds while the Respondent's Application is pending.71 Lone Star further indicates its willingness to provide a written undertaking with respect to the sums obtained during the pendency of annulment proceedings:
If the ad hoc Committee has any concerns in this regard, Claimants would be willing to enter into a written undertaking stating that the parent entities in Lone Star's Fund IV (which held the investment in LSF-KEB) will not distribute any amounts obtained through enforcement proceedings during the pendency of the annulment proceedings to their investors, so that such funds are available to be returned in the event Korea's Annulment Request is granted (or such proportional amount as may be appropriate, based on which portions of the Award may be annulled).
62. As for Korea's assertion that it would require an earmarked budgetary allocation, the Claimants refer to OI European Group v. Venezuela, where the ad hoc committee stated that if an award debtor could avoid payment of the award simply on grounds that the money would need to come from public funds, then "Article 52(5) of the ICSID Convention and Arbitration Rule 54(1) would be dead letter provisions."73 Lone Star further highlights that such a budgetary allocation would not result in irreparable harm to Korea as it is a high-income country,74 a point which the Claimants say is conceded by Korea.
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V. DECISION
100. For the reasons set forth above, the Committee hereby:
(1) Grants Korea's Request and orders that the stay of enforcement of the Award is continued and remains in effect, without security or other conditions, until the Committee renders its decision on the Parties' annulment applications; and
(2) Reserves its decision on costs to the Committee's decision on the Parties' annulment applications.
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Footnotes omitted.