Korean Supreme Court Opposing ISDS in KorUS FTA

When the KorUS FTA was negotiated from 2006, the Korean Supreme Court delivered its opinion against ISDS to the Korean government twice in 2006 and 2007. Ridiculously, the opinion of 2006 was disappeared for unknown reason. Here is the opinion of 2007. English translation was made by the Korea National Assembly in May 2012 upon request of the lawmaker Joosun Park (currently the Deputy-Speaker). Original Korean text is found here, and PDF file of the official English translation is here.

Review Opinion on the Investor-State Dispute Resolution Procedure under the Korea-US Free Trade Agreement

January 12, 2007

National Court Administration, [Supreme Court]

I. Key details of the procedure for Investor State Dispute Settlement (ISDS)

1. Introduction of the “Investor state dispute settlement system”

• The “investor state dispute settlement system” has been introduced to allow an individual investor of one party to a treaty to bring a claim directly against the government of another party to a treaty before an international panel of arbitrators to seek compensation for or reparation of damages or losses suffered due to a breach by the other party to a treaty of its obligations under the treaty provisions concerning investment or state-run businesses.
• Prerequisites

- The investor should file his/her claim within three years of the date when he/she was informed or could be informed of the first instance of the breach and the occurrence of damages or losses attributable to such breach.
- The parties to the dispute are required to attempt to settle the dispute through consultation or negotiation first before filing the dispute with the arbitration panel.
- The individual investor filing the claim is required ① to agree to arbitration under the treaty in writing and ② to waive his/her right to commence or continue remedy procedures with an administrative tribunal or law court in relation to the claim.

• Procedure

- The claimant investor should notify the state, the party to the dispute of his/her intention to file his/her claim with the arbitration panel in writing 90 days in advance.
- The claimant investor may file his/her claim with the arbitration panel only after six months have elapsed from the date of the dispute.
- Arbitration agency: As both Korea and the USA have joined the convention on International Centers for Settlement of Investment Disputes, the arbitration agency shall be the World Bank International Center for the Settlement of Investment Disputes (ICSID) founded under the provisions of the convention.

2. Substantive provisions provided

• Substantive provisions have been provided for the ISD mechanism (‘Investment’ of the draft agreement, Article 6, Annex B.)

- Prerequisites or limitations concerning expropriation

- Compensation for expropriation

• The scope of expropriations entitled to compensation is limited to ‘measures equivalent to expropriation or nationalization’.

※ NAFTA ambiguously defined the scope of expropriation by

providing ‘measures tantamount to expropriation or nationalization’, resulting in various controversies in connection with its interpretation, including an unlimited extension of the scope of expropriation.

• Compensation reflecting the fair market value should be made for direct expropriation (title transfer or confiscation or forfeiture) or indirect expropriation (actions which bring about effects identical to that of title transfer or direct expropriation).

• Whether a government act falls under indirect expropriation or not is determined by case-by-case review with consideration of the following:

- The nature or economic impact of the government action; and

- The degree of infringement of reasonable expectations by the investor.

• With the exception of extraordinary cases, indirect expropriation is not constituted by a legal and non-discriminatory action that a treaty state has taken to achieve the purpose of public benefits or welfare, including public health, safety and environment.

II. Review Opinion

1. On the investor state dispute settlement (ISDS) mechanism

a. Meaning

• An investment dispute settlement procedure between direct foreign investors and host states (Investor State Dispute Settlement Mechanism) has apparently been introduced in addition to the procedure for dispute settlement between FTA-contracting states in order to remedy infringements of foreign investors’ rights in cases where the private assets invested by them in a host state suffer damages because of unfair discrimination by that host state, considering that 1) the domestic law court of the host state may pronounce a judgment that is unilaterally disadvantageous to the investor and 2) dispute settlement through inter-governmental negotiations may not ensure substantial compensation or reparation of damages as such negotiations are often affected by priority diplomatic considerations.
• The “investor state dispute settlement mechanism” is a new dispute settlement procedure that has only recently emerged in the field of international investment disputes. It is not designed to exclude judicial review of investment disputes by domestic courts of the host state, but rather to provide foreign investors with an additional option in connection with the forum for seeking remedy of their rights.

b. Merits

• Possibility of securing fair dispute settlement

- Disputing investors may have doubts concerning the fairness of a

domestic court review or its decisions when filing a claim with a host state law court concerning a dispute they have with that host state.

- An outward or superficial fairness may be secured at the very least, as an investment dispute settlement is sought in an international tribunal instead of a domestic law court.

• Likelihood of promoting foreign direct investment and protecting nationals

- A state may protect its nationals who invest in other countries. The ISD mechanism may contribute to the inducement of foreign

investment in the host state.

• The ISD mechanism may adequately control the political or diplomatic ripples caused or costs incurred by existing state-to-state dispute [settlement procedures].

c. Problem

(1) Possible infringement of sovereignty

• It has been pointed out that the ISDS mechanism may infringe the sovereignty or judicial power of a state as there will be no room for its domestic law courts to intervene in disputes concerning foreign direct investment, while the international arbitration tribunal will interfere in the various policies or regulatory actions taken by the host state.

- Some consider that the state has exercised its sovereign right by

selecting the option, as the state voluntarily consents to such restrictions through such procedures as that of ratification of the treaty.

• The point has also been raised that the ISDS mechanism may infringe the right to equal treatment (so-called reverse discrimination against a state’s own nationals) as foreign investors may have more rights than the nationals [under the terms of the treaty].

- Developing countries in Latin America or other regions adopted an opposing view to the extension of the domains subject to international law in the past. At present, however, advanced countries like the USA and Canada are leveling such criticism at reverse discrimination.

- In 2002 the US Federal Congress legislated the Trade Promotion

Authority (TPA), which provides a restriction on the federal government’s negotiation of investment agreements, by preventing it from granting any greater rights to foreigners than those given to US citizens.

(2) Problem of domestic court decisions being subject to claims filed for arbitration

• Legal instability or unrest may be caused as decisions by domestic law courts may be subject to arbitration under the ISDS mechanism.
• There have been cases where US litigation proceedings or judgments are subject to arbitration under the NAFTA ISDS procedure (i.e., Loewen v. United States and others).

- Following the Loewen case, some US NGOs or Congress members have expressed their concern that the dispute settlement agency under NAFTA may pass judgment on decisions made by US state courts.

• It is necessary to examine ways of excluding judiciary decisions from, or limit matters that can be referred to, the treaty arbitration by clearly specifying them as an undesirable result that may be brought about, including judiciary decisions which may be subject to the treaty arbitration indiscriminately.

(3) Problem of distorting public policies of a state

• Under the ISDS mechanism, the international arbitration tribunal may assess or review various government policies or regulatory measures taken by the host state. Concerns have been raised that government policies may be distorted or national confusion may be caused as government policies are judged by the international arbitration tribunal rather than by a domestic law court.
• As such concerns were recently raised in the United States concerning the NAFTA investment dispute settlement procedure, the US Congress introduced some restrictions on the US federal government’s authority concerning the contracting of future FTAs. Accordingly, the FTA concluded between the USA and Chile introduced a provision according to which no indirect expropriation can be constituted by government policies on public health, safety or environment.

※ USA-Chile FTA: “Except in extraordinary cases, indirect expropriation shall not be constituted by a legal and non-discriminatory action that a treaty state has taken to achieve the purpose of public benefits or welfare, including public health, safety and environment.”

• As a provision identical to that provided under the USA-Chile FTA is provided under the draft Korea-USA FTA, the problem of possible distortion by the FTA of state public policies will be removed to some extent.

(4) Issue of arbitration procedures transparency

• It has been pointed out by many observers that the NAFTA investment dispute settlement procedure is not transparent (including the non-disclosure of written or oral proceedings).
• Consequent to such criticism, the issue of transparency in NAFTA arbitration procedures has been significantly resolved as the treaty member states have agreed to disclose decisions or review proceedings by the arbitration tribunal.
• Among the matters recently discussed in connection with the issue of transparency in FTA arbitration procedures are third-party participation in proceedings and the issue of appeal.
• The US-Chile FTA provides various devices designed to ensure the transparency of arbitration procedures.

- Third parties are granted authority to present their legal opinions.

- Systems have been introduced to enable the parties to expel or recuse arbitrators.

- Review proceedings and all documents submitted will be disclosed.

- The treaty member states will commence consultation on whether to found an appeal agency or equivalent organ with the remit of judging decisions taken by the arbitration tribunal.

• As a provision identical to that provided under the USA-Chile FTA is provided under the draft Korea-USA FTA, the transparency and fairness of arbitration procedures will be secured to a certain extent.

(5) Others

• It has also been pointed out that the ISDS mechanism will function as a protective device mainly for US investors in view of the amounts invested by Korean and US investors.

d. Review

• Since March 2006, the USA has bilateral investment agreements currently enforced with 40 different countries, while it has negotiated bilateral agreements with a total of 47 countries. No claim has so far been filed by any of the 40 countries under the ISDS mechanism. All ISDS claims have been filed by Canadian investors against the USA under NAFTA only.
• The reason why few claims have been filed by investors from other treaty states is that the majority of the bilateral investment agreements were signed with developing countries whose investors make little direct investment in the USA.
• In view of such a situation, it is expected that US investors will file more claims for arbitration against the Korean government under the Korea-US FTA ISDS procedure. It is feared that the Korean government will face a substantial burden due to such arbitration claims. As seen in the USA example, certain side-effects will definitely arise, including serious legal confusion, if the judiciary rulings are not excluded from ISDS arbitration.
• On the other hand, the ISDS mechanism will help the Korean government to better protect foreign direct investment by Korean nationals while foreign direct investment will be induced into Korea more actively. It is necessary for us to consider the fact that the majority of FTAs concluded among states around the world have introduced the ISDS system.
• In conclusion, we believe that the issue of whether or not Korea-US FTA should introduce the ISDS system needs to be judged by collecting opinions from the general public while inclusively reviewing the merits, problems, scale and status of transactions between Korea and the USA, and examples of FTAs signed by other countries.
• Even when the ISDS system is introduced, it is also necessary to preemptively prevent disputes concerning the interpretation of the subject matters subject to and prerequisites for arbitration claims by specifying them, including exclusion of judiciary decisions from matters subject to arbitration. It is also necessary to examine ways of providing reasonable devices to ensure that all dispute settlement procedures instigated under the ISDS system are implemented in a fair and transparent manner.

2. About Substantive Provisions

• The draft agreement provides such substantive provisions for the ISDS system, including the types, requirements, and limitations of expropriation or nationalization, and the criteria for and methods of compensation for expropriated assets.
• Various example treaties provide both direct and indirect expropriations that are subject to compensation. The compensation for indirect expropriation is already reflected in the majority of bilateral investment agreements Korea has signed, as well as in the FTAs Korea has signed with five countries, including Chile, Singapore and EFTA. 
• In particular, the draft Korea-US FTA agreement restricts the scope of expropriations that are subject to compensation and also provides a more specific scope or requirements for expropriation [subject to ISDS], including the exclusion of various regulatory actions from expropriation, including those concerning public health, safety and environment.
• Based on reflective consideration that various problems have arisen because of the abstract nature of certain provisions of the NAFTA signed among North American countries, including too broad a scope of expropriation, the scope or requirements of expropriations [subject to arbitration or compensation] have been provided in more detail under the FTAs signed later between the USA and Chile and the USA and Singapore, thereby partially alleviating the state’s accountability in disputes between foreign investors and a host country.
• Though insufficient to constitute specific detailed criteria for determining indirect expropriation [subject to arbitration or compensation], these later FTAs include a provision reading, “The legitimate and non-discriminatory actions which a treaty state takes to achieve the purposes of public welfare, including public health, safety and environment, should not constitute an indirect expropriation.” This is believed to comply with existing precedents of international arbitration tribunals or with theories advocated by scholars. It is also believed to be a progressive move. However, it should be made clear that the above illustrates only parts of the purposes of public welfare.
• The above-discussed draft FTA between Korea and the USA does not appear to have any particular problems as it includes a provision that is almost identical to the improvement provisions included in the US-Chile and the US-Singapore FTAs, which reflect an improvement over the NAFTA provisions.
• Yet, as the scope of expropriations subject to compensation will be broadened by the proposed Korea-US FTA, an in-depth study is necessary as to how the broadened scope can be harmonized with the Korean system of compensation of expropriations in the future.

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