Seoul, South Korea. Photo: Shutterstock.com

Herbert Smith Freehills has successfully defended the South Korean government on an arbitration claim under the Korea-U.S. free trade agreement (KORUS FTA) – the first arbitration award of its kind.

The claim was brought by Jin Hae-seo, a Korea-born U.S. citizen, who argued that the Korean government's expropriation in 2016 of a property she owned violated the seven-year-old KORUS FTA. The claim largely hinged on whether the property, which includes two houses, can be considered a U.S. investment in Korea under the KORUS FTA. The case marked the first time an arbitral tribunal interpreted what constituted an investment under the KORUS FTA.

A three-arbitrator tribunal sided with the Korean government and dismissed Jin's claims, stating that she was unable to show that she made an investment within the meaning of the KORUS FTA.

"By winning the claim at this early stage, the [Korean] Ministry of Justice will save considerable time and money," Mike McClure, Herbert Smiths Freehills' Seoul disputes head who led the firm's arbitration team on the claim, said in a statement. "Also, with so many close and historic ties between the two countries and their citizens, any other outcome could have led to a rush of similar claims under an agreement designed for international trade rather than individuals' investments."

The dispute centred on what constitutes an investment under the KORUS FTA. The tribunal emphasised three characteristics the FTA used to define a U.S. investment in Korea: commitment of capital or other resources; the expectation of gain or profit; or the assumption of risk. The tribunal noted that the claimant did commit capital (of $300,000 to purchase the property), but did not sufficiently show the other two characteristics.

The tribunal decided the claimant likely did not expect to gain or profit from the property because it believes she first purchased the property as a private dwelling for her family, which includes her husband and their children as well as her parents. The tribunal noted that the claimant did not rent out any part of the houses other than to her parents for the first two years after purchasing the property in 2001. And because the argument that the claimant expected to gain or profit from the property was weak, the assumption of risk was equally doubtful, the tribunal noted.

The tribunal consisted of Judge Bruno Simma of the Iran-U.S. Claims Tribunal in The Hague, who was the presiding arbitrator. The claimant appointed Hong Kong-based Des Voeux Chambers barrister Benny Lo as arbitrator, while the respondent appointed Donald McRae of the University of Ottawa's faculty of law. The hearing was held in Seoul from July 31 to August 2 and was administered by the Hong Kong International Arbitration Centre.

In addition to McClure, the Herbert Smiths Freehills team included Hong Kong partner Justin D'Agostino, the firm's executive partner of its global disputes practice. The firm worked with Korean firm Yoon & Yang, whose team included managing partner Junsang Lee, partners Sungbum Lee and Jeongju Jahng and senior foreign attorney Myung-ahn Kim.

The claimant was advised by Washington, D.C.-based arbitration lawyer Charles Verrill and Korea firm Dodam Law Firm foreign attorney Kim Ik-tae.