Government Wins Lawsuit Challenging Elliott Arbitration Award... UK Court Rules "National Pension Service Is Not a State Organ"

UK Court Rules in Favor of Korean Government, Case Remitted to Arbitration
Prevents 160 Billion Won Outflow of Public Funds...Possibility of Zero Compensation

The government has won a lawsuit challenging an investor-state dispute settlement (ISDS) award ordering it to pay about 160 billion won to U.S. hedge fund Elliott Management. With this ruling that the National Pension Service is not a state organ, many assess that the legal principle has now been established in the international arena that future investment activities such as the exercise of voting rights cannot be the subject of ISDS claims.

Jo Ara, Director of the International Investment Disputes Division at the Ministry of Justice, held a briefing on the morning of the 24th at the Gwacheon Government Complex in Gwacheon, Gyeonggi Province, explaining the background of the victory in the UK court's lawsuit to annul the ISDS arbitration award brought by Elliott. Photo by Choi Taewon

The Ministry of Justice announced this at a briefing held on the morning of the 24th at the Gwacheon Government Complex in Gwacheon, Gyeonggi Province, stating that it had prevailed in a lawsuit in the UK courts seeking annulment of the ISDS arbitral award in the case brought by Elliott. Jo Ara, Director of the International Investment Disputes Division at the Ministry of Justice, said, "If we had lost, the investment activities of the National Pension Service could have been regarded as government measures, which would have made them highly likely to become potential targets of ISDS claims," adding, "In that case, investment could have been dampened and even profitability could have deteriorated."

The key issue in the lawsuit was whether the National Pension Service is a "state organ." Under Article 11.1 of the Korea-U.S. Free Trade Agreement (FTA), ISDS is a dispute resolution mechanism that foreign investors may invoke when they suffer loss or damage as a result of measures taken by a "state organ" of the host state. Only if this requirement is met can an arbitral tribunal proceed to hear the merits.

In response, the government argued that the National Pension Service (i) has a legal personality separate from the government, (ii) manages a public pension that is different from core state functions such as public security and national defense, and (iii) makes decisions that are not completely subordinate to the government, and the UK court accepted these arguments.

Once the National Pension Service is found not to be a state organ, the previously asserted causal link between the Korean government's measures and Elliott's losses is severed. Because this makes it difficult to maintain the existing arbitral award, the position of the UK court is that the case should be remitted to the arbitral tribunal so that causation can be reassessed.

As a result of the victory, the government's obligation to pay approximately 160 billion won in damages is temporarily put on hold. Depending on the outcome of the resumed arbitration proceedings, the amount may be partially reduced. If the causal relationship between the government's measures and Elliott's losses is completely rejected, there remains the possibility that the compensation amount will ultimately be reduced to zero won.

The government plans to make thorough preparations on remaining issues such as the specific scope of annulment and the allocation of litigation costs. It is also preparing for a possible appeal by Elliott. To this end, the Ministry of Justice will disclose as much relevant information as possible, to the extent permitted under applicable laws and regulations. At the same time, it intends to respond to the remaining procedures in close cooperation with relevant ministries, external experts, and domestic and foreign counsel representing the government.

Meanwhile, in 2023 the Permanent Court of Arbitration (PCA) ordered the Korean government to pay Elliott approximately 156.6 billion won (about 107.82 million dollars). On the basis of the Korea-U.S. FTA provisions, the government filed an annulment action with the UK courts at the seat of arbitration, but the case was dismissed. However, in August last year, the UK Court of Appeal, acting as the second-instance court, remitted the case to the High Court, which had heard it at first instance. After re-examining the matter, the High Court ruled in favor of the Korean government.