South Korea has won a complete victory in a second investor-state dispute settlement (ISDS) case brought by Iran's Dayyani family, following earlier wins against Lone Star, Schindler and Feng Zhenmin. The ruling rejects the damages claim filed by the Dayyani side, preventing an outflow of about 770 billion won ($555 million) from state coffers.
The Ministry of Justice said on the 30th that it had won entirely, by unanimous decision of the tribunal, in the second ISDS case filed against the government in October 2021 by six members of the Iranian Dayyani family.
The ruling dismissed the Dayyani side's entire claim for 770 billion won in damages and allows the government to recover 4 billion won, or 75% of the legal costs it spent, as well as the full 800 million won in arbitration administrative costs.
The Dayyani family founded and controls Entekhab, Iran's largest home appliance and petrochemical conglomerate. In 2010, through its subsidiary D&A, the family pursued an acquisition of Daewoo Electronics, then under a debt workout, and paid about 57.8 billion won in contract deposits to creditors. The dispute began when the creditors terminated the contract, citing failure to submit a letter of investment commitment among other reasons, and confiscated the entire deposit.
The Dayyani side filed its first ISDS case against the Korean government in September 2015, arguing that the confiscation violated the Korea-Iran investment protection treaty. In June 2018, the tribunal ordered the government to pay about 73 billion won plus interest. A suit the government filed with a British court to annul the award was dismissed in December 2019.
The payment process then became entangled with U.S. economic sanctions on Iran and seizure issues arising from domestic litigation. After obtaining approval from the U.S. Treasury Department's Office of Foreign Assets Control (OFAC), the government paid about 62.2 billion won of the roughly 85.8 billion won in combined damages and interest to the Dayyani side in April 2022. The remaining 23.6 billion won was deposited with a court in December of that year, under a court seizure and collection order stemming from a goods-payment suit between Winia Electronics and Reza Dayyani.
The Dayyani side, however, filed the second ISDS case in October 2021, before the damages were paid, arguing that the government's non-payment violated the investment treaty. It continued the dispute even after the government's payment and court deposit, seeking 770 billion won in damages for profits it said it could have earned by investing the money elsewhere had it received the award immediately.
The tribunal found that the government had not breached its obligations under the investment treaty in the course of paying the award. It held that obtaining OFAC approval was a legitimate decision in light of U.S. sanctions on Iran and the international economic order, and did not amount to unfair discrimination against an Iranian investor. It also found that filing an annulment suit under English law and depositing funds with a court in accordance with a lawful order from a domestic court could not be regarded as arbitrary or unfair treatment.
The tribunal also rejected the claim that the government had violated its obligation to guarantee investors' free transfer of funds. That obligation is intended to prevent a government from improperly blocking an investor from moving assets out of the country, and does not apply to the payment of an award in which the government itself remits foreign currency, it said. The tribunal further noted that allowing another ISDS case on the grounds of non-compliance with an existing arbitral award runs counter to the purpose of the investment treaty.
The government said the ruling puts a brake on so-called chain ISDS attempts, in which enforcement of damages from an earlier ISDS award is relitigated through separate arbitration. It said the decision blocks attempts to demand additional damages by taking issue with delays in negotiations, lawful seizures by domestic courts or court deposits by the government, and sets a precedent for enforcing awards in line with international norms.
The Justice Ministry has been winning a string of international investment disputes involving large damages claims. The run began with a victory last November in annulment proceedings against U.S. private equity firm Lone Star, followed in February by a suit to annul an ISDS award of about 160 billion won won by Elliott, and in March by a 320 billion won ISDS case filed by Schindler. On the 12th, the government also prevailed in an ISDS case brought by a Chinese investor who lost pledged shares after failing to repay a loan from a Korean financial institution, protecting hundreds of billions of won in state funds.
"Korea has received international recognition that it has faithfully carried out its obligations regarding foreign investment," a Justice Ministry official said. "We will continue to work closely with relevant ministries, experts and government counsel firms at home and abroad, respond thoroughly to follow-up measures and do our utmost to protect the national interest."
