[Exclusive] Another Loss to Lone Star, Ministry of Justice Spent 65.2 Billion Won Only on ISDS Lawsuits

Lone Star, Schindler, Elliott in Ongoing Lawsuits
Final Defeat Could Worsen Public Fund Losses

The Ministry of Justice confirmed that it has spent a total budget of approximately 65.265 billion KRW so far related to the ‘Investor-State Dispute Settlement (ISDS)’ cases filed by foreign investors, including the US-based private equity fund Lone Star, which lost in the second trial on the 5th.

This amount excludes the potential payments if the ongoing lawsuits involving Schindler, Dayani, and Lone Star end in final defeat. Considering the costs of Lone Star’s tax refund lawsuit amounting to around 160 billion KRW (which lost in both the first and second trials), there are concerns that an astronomical amount of ‘public tax money’ could evaporate.

According to data received by Cha Gyu-geun, a member of the National Assembly’s Budget and Accounts Special Committee from the Ministry of Justice on the 9th, the total budget executed by the Ministry of Justice related to ISDS from 2013 to September 1 of this year amounts to 65.2 billion KRW. The Ministry’s ISDS-related budget execution increased sharply from 4.7 billion KRW in 2013 to 10.5 billion KRW and 22.3 billion KRW in 2014 and 2015, respectively, and has maintained a level of 2 to 5 billion KRW since 2020.

(Source: Office of Assemblyman Cha Gyugeun of the Party for National Innovation and the Ministry of Justice) Data as of September 1.

ISDS is a system that allows foreign investors who have suffered damages due to the laws or policies of the host country or because the host country violated treaty obligations or contracts to apply for arbitration against the host government, rather than the invested company, to receive compensation. South Korea introduced ISDS provisions starting with the Korea-US Free Trade Agreement (FTA) in 2012. Countries that apply political logic to the economy or have significant state intervention in the private economy are more likely to face ISDS claims.

According to Ministry of Justice data, there have been a total of 10 ISDS cases filed against the South Korean government in the past 10 years. Of these, 7 cases are either ongoing or have some confirmed losses. First, a lawsuit amounting to approximately 770 million pounds filed by the Iranian Dayani family over unpaid compensation is ongoing (filed in October 2021). An ISDS claim amounting to approximately 5.37 million USD filed by a US investor regarding the Busan City Local Land Expropriation Committee’s real estate expropriation is also in progress (filed in May 2021).

The Swiss elevator manufacturer Schindler filed an ISDS claim worth 220 million USD in October 2018, alleging that Hyundai Elevator’s paid-in capital increase to unfairly defend management rights caused damages due to inadequate supervision by the Korean Financial Supervisory Service. The US hedge funds Elliott and Mason have filed ISDS claims of 770 million USD and 200 million USD, respectively, citing pressure exerted on the Ministry of Health and Welfare and the National Pension Service to vote in favor of the Samsung C&T merger; cancellation lawsuits are currently underway.

(Source=Office of Assemblyman Cha Gyugeun, Party for National Innovation, Ministry of Justice) Data as of September 1.

On the other hand, the government has won only 2 cases and 1 case was withdrawn. The government won an ISDS case worth 3 million USD filed by a US investor in 2018 over housing expropriation by the Ministry of Land, Infrastructure and Transport. The government also won a 190 million USD lawsuit filed by a Chinese investor in 2020, who claimed damages due to the execution of collateral rights by Woori Bank and unfair trials in civil and criminal courts.

The ISDS case filed by Abu Dhabi International Petroleum Investment Company (IPICI) and its subsidiary Hanocal against domestic tax authorities, claiming that the imposition of corporate tax during the sale of Hyundai Oilbank shares was unfair, was resolved after they expressed their intention to withdraw the lawsuit.

An international arbitration lawyer from a law firm said, “ISDS investment-related provisions have very stringent actual conditions, so investors cannot easily file claims against the host country. Since this is more about disputing liability for compensation and assessing South Korea’s credibility as an investment destination, the government needs to devise a more agile strategy to respond to ISDS lawsuits.”