Government Files Correction Request for Lone Star Case Ruling... "Principal and Interest of $480,000 Miscalculated"

A Separate Procedure from the 'Cancellation Request of Judgment' Under Review by the Ministry of Justice

Minister of Justice Han Dong-hoon is holding a briefing on the ruling of the Lone Star international investment dispute (ISDS) case at the Ministry of Justice building in Gwacheon-si, Gyeonggi Province on August 31. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Choi Seok-jin, Legal Affairs Specialist] The government submitted a correction request to the International Centre for Settlement of Investment Disputes (ICSID) on the 15th (local time on the 14th) regarding the ruling in the Lone Star international investment dispute (ISDS: Investor-State Dispute Settlement) case, in which it was ordered to pay $216.5 million (approximately 312.3 billion KRW based on an exchange rate of 1,440 KRW/USD) plus interest, citing errors in the calculation of the compensation amount.

On the same day, the Ministry of Justice stated, "The government confirmed that there were 'errors and mistakes' such as excessive calculation of the principal compensation amount and double counting of interest in the Lone Star case ruling announced on August 31, and thus submitted a correction request."

Article 49, Paragraph 2 of the ICSID Convention allows for a correction request within 45 days from the date of the arbitration award for omissions, errors, or mistakes. This is a separate procedure from the 'application for annulment of the award' currently under review by the Ministry of Justice.

Previously, on August 31, the arbitral tribunal ruled that our government must compensate Lone Star $216.5 million plus interest from December 3, 2011, until the principal is fully paid (calculated based on the monthly maturity U.S. Treasury bond rate).

The Ministry of Justice judged that there were two errors in the process of calculating this compensation amount.

First, the principal compensation amount of $216.5 million includes interest of $201,229 from May 24 to December 2 of the same year, which is before the damage occurrence date specified by the arbitral tribunal as December 3, 2011, the date of the final sales contract between Hana Financial Group and Lone Star, resulting in an excessive principal calculation.

Additionally, the Ministry of Justice found that the principal compensation amount already includes interest of $280,089 from December 3, 2011, to September 30, 2013, meaning the interest was double counted.

The Ministry of Justice stated that if the government's correction request is accepted, the principal compensation amount will be corrected from the previous $216.5 million to $216,018,682, reducing the principal by $481,318 (approximately 700 million KRW).

The Ministry of Justice added, "The government will do its best until the last moment to ensure that taxpayers' money is not wasted, and will promptly inform the public about the progress of subsequent procedures to guarantee the public's right to know."

The deadline for applying for annulment of the arbitration award is '120 days after the award is rendered,' but if a correction request is made, the period starts after a decision on that request is issued.

In this Lone Star international investment dispute case, the government and Lone Star clashed over four major issues: jurisdiction, finance, taxation, and damages.

The arbitral tribunal found that the government violated its duty of fair treatment only in the claim regarding the delay in the sale to Hana Financial Group, among two claims by Lone Star concerning the failed sale of shares to Hongkong and Shanghai Banking Corporation (HSBC) and the delay in the sale to Hana Financial Group.

Lone Star argued that our financial authorities unjustly delayed the approval process to lower the sale price of Korea Exchange Bank. The majority opinion of the arbitral tribunal also held that the financial authorities violated the duty of fair and equitable treatment by adopting a 'Wait and See' policy, arbitrarily withholding approval until the sale price was lowered.

However, the arbitral tribunal recognized that Lone Star was also at fault for the price reduction due to its criminal conviction related to stock price manipulation of Korea Exchange Card, and thus applied a 50% contributory negligence offset. Consequently, the tribunal recognized the government's liability to compensate half of the reduced sale price of $433 million, i.e., $216.5 million.

In conclusion, the arbitral tribunal partially accepted Lone Star's financial claims and ordered the government to pay $216.5 million (approximately 280 billion KRW based on 1,300 KRW/USD at the time of the ruling) plus interest calculated at the monthly maturity U.S. Treasury bond rate from December 3, 2011, until full payment. On the other hand, the tribunal dismissed Lone Star's other financial and tax claims, confirming no jurisdiction or international law violations as argued by the government.

Looking at the amounts alone, Lone Star won on $216.5 million (about 280 billion KRW) out of its claim of approximately $4.68 billion (about 6.1 trillion KRW), while the government won on the remaining $4.46 billion (about 5.8 trillion KRW), meaning the government won 95.4% of the claim and lost 4.6%.

Although the compensation amount recognized compared to Lone Star's claim suggests the government effectively won, some legal circles argue that since Lone Star's original demand of 6 trillion KRW was absurdly high, the 280 billion KRW seems relatively small. However, when including interest and litigation costs, the amount is not insignificant, and since it must be covered by taxpayers' money, it is difficult to regard this as a victory.

The Ministry of Justice is currently reviewing the annulment application for the award.

Basically, international investment dispute arbitration cases proceed as a single instance. However, the arbitration parties may apply for annulment of the award once within 120 days after receiving the award to the ICSID Secretary-General if one or more of five grounds apply: excess of powers by the arbitral tribunal, omission of reasons in the award, serious violation of procedural rules, etc. In such cases, a separate annulment committee (three members) is immediately formed to decide on annulment. It usually takes at least one year to get a result.

The annulment application is accepted in about 10-15% of cases, mostly due to 'serious violation of procedural rules' or 'jurisdiction issues,' so even if the government applies for annulment, the likelihood of significantly reducing or avoiding compensation is low. If the government applies for a stay of enforcement along with the annulment application and it is accepted, enforcement can be suspended until the annulment committee's decision, but interest continues to accrue during the suspension period, adding to the burden.