Jin Hae Seo v. Republic of Korea, HKIAC Case No. HKIAC /18117
On September 27, 2019, a Hong Kong International Arbitration Centre (HKIAC) tribunal dismissed, on jurisdictional grounds, the expropriation claims brought by Jin Hae Seo, a U.S. citizen, against the Republic of Korea (Korea) under the United States–Korea FTA (KORUS FTA) and UNCITRAL rules.
Background and claims
The claimant had owned a two-story house in Seoul since 2001. In 2007, the Korean government designated the area where the house was located as a redevelopment area in order to improve living conditions. Owners of property in the area were given the choice to either buy their redeveloped property or opt for a cash settlement.
The claimant initially applied to buy the property but later withdrew her application. Korean authorities enforced an eviction order against her in 2016, and she later rejected the compensation offered by the local authority.
In 2016, the claimant had the land registry amended to reflect her U.S. nationality. After vacating the property, she brought expropriation claims against Korea under the KORUS FTA.
Korea’s jurisdictional objection
Korea argued that the claimant did not make an investment under the KORUS FTA because none of the three characteristics of an investment under KORUS FTA was fulfilled and because the Salini criteria were not present. In turn, the claimant maintained that her property qualified as an investment, because it met the three characteristics in the exhaustive list contained in the KORUS FTA and because the Salini criteria would be inapplicable. The disputing parties further disagreed whether the property qualified as a “covered investment” under the FTA.
According to the tribunal, an asset qualifies as an investment under KORUS FTA only when it has the “characteristics of an investment.” The tribunal looked at the three characteristics expressly mentioned in Art. 11.28 of KORUS FTA: “the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.” It noted that the phrase “including such characteristics as” before them denotes that the list is non-exhaustive, and that “or” between them denotes that not all three must necessarily be present cumulatively and that none is indispensable (paras. 93–94). Further, the tribunal held that “or” also negated Korea’s assertion that all four Salini criteria should be present.
The tribunal rejected Korea’s argument that the plural of “characteristics” meant that at least two of them must be present, reasoning that the drafters did not include this requirement in the FTA (para. 95). Thus, the tribunal held that there should be a global assessment of characteristics, with the ones mentioned as the starting point, given that the drafters deemed them particularly important.
Further, it did not apply the Salini test, noting that it was developed in the context of the ICSID Convention, which does not define investment, while the KORUS FTA expressly defines it (para. 98). However, it noted that the non-exclusive definition in the FTA permits consideration of the Salini criteria.
“Commitment of capital” need not necessarily be foreign but should be significant
Rejecting Korea’s assertion, the tribunal held that Art. 11.28 does not necessarily require commitment of foreign resources as the definition. It also held that the requirement of a foreign element, which is implied by KORUS FTA’s preamble, is satisfied by other substantive requirements: “investor of the Other Party” or “an investor of a non-party” (para. 103).
Agreeing with Korea, the tribunal held that the commitment of capital is relevant, as the preamble mentions, “to raise living standards, promote economic growth and stability, create new employment opportunities, and improve the general welfare in their territories by liberalizing and expanding trade” (para. 104). However, while it held that individual investments cannot be expected to single-handedly achieve the treaty’s objectives, an investment that is so small as to be unable to make a meaningful contribution to the host state’s economy would not enjoy protection under the treaty. In this case, the tribunal held the claimant’s commitment of USD 300,000 was not “insignificant,” and would have unequivocally passed the “significant” threshold if the purpose of the investment was “clearly commercial in nature,” such as the purchase of an office or a factory (para. 106).
The predominant purpose at the time of the property’s acquisition—and not the purpose for which the profit is used—determines whether an “expectation of gain or profit” exists.
The tribunal held that the presence of an expectation of gain or profit depends on the predominant purpose of the investment at the time of the acquisition of property (para. 125), which should be profit-making rather than, in this case, a private dwelling, and should not be for a different purpose that is subsequently changed to profit-making (para. 127).
The tribunal agreed with the claimant that the purpose for which the profit is used is irrelevant to determine if the characteristic exists (para. 109); therefore, the fact that the claimant’s transferred the money made from renting the property to her parents was irrelevant. It held there is no requirement for engaging in commercial activity for the “expectation of gain or profit” to exist, as that requirement is inherent in “assumption of risk” (para. 110).
The tribunal noted that, as argued by Korea, the claimant purchased the property as a private dwelling and did not rent it for the first two years; only one unit unoccupied by her parents was rented out. It also noted that the claimant did not allege that she tried to find tenants and that she began renting the property shortly before moving to the United States. Accordingly, the tribunal concluded that as the predominant purpose of the property at the time of the acquisition was as a private dwelling and not as an income-generating investment (para. 126), it was reluctant to accept the presence of this characteristic.
The characteristics of an investment, including an “assumption of risk,” must go beyond inherent aspects of an asset to qualify as an investment under KORUS FTA Art. 11.28.
The claimant argued that she undertook four risks: (1) the decline of property value after purchase, (2) the risk of the property’s expropriation, (3) the fact that the property is subjected to the host state’s laws, and (4) the non-materialization of predicted rental income.
Agreeing with Korea, the tribunal held that risks (1), (2) and (3) alone were not sufficient to constitute an “assumption of risk,” noting that such risks exist for any property owner. For the tribunal, the required characteristics of an investment, including an assumption of risk, must go beyond the features that any asset automatically has; otherwise, the requirement of “characteristics of an investment” would be meaningless (para. 130). Further, the tribunal noted that if one acquires an asset in another state, then risks (2) and (3) are inevitable (para. 132).
The tribunal was ready to accept risk (4) as a criterion of an assumption of risk, as whenever there is an expectation of profit, there is a risk of it being frustrated. However, it noted that, since the expectation of gain or profit was doubtful, the risk that it would not materialize was equally weak.
“Covered investment” under the KORUS FTA
Though concluding that the claimant’s property did not qualify as an “investment,” the tribunal nevertheless analyzed whether it could qualify as a “covered investment,” by its “establishment” or “expansion” after KORUS was entered into force.
In the context of this analysis, the tribunal rejected the claimant’s assertion that she established her purported investment when her U.S. nationality was registered in the land registry, for three reasons. First, she had her citizenship reflected in the land registry only after the alleged expropriation (para. 148). Second, her nationality is relevant to her personal status only as an “investor of the other party” and is irrelevant to the investment (para. 149). Third, only acts bringing an asset into existence would have “established” an investment, for example, building a factory or registering an IPR. Considering she only made small additional commitments and insignificant changes to the property—including fencing it, paving the car park, and changing the wallpaper—the tribunal held that the claimant did not “expand” the investment.
Moreover, the tribunal held that “covered investment” under the KORUS FTA seeks to exclude cases in which the investor did not have an involvement equivalent to holding, acquiring, or establishing the investment (para. 163). According to the tribunal, the claimant’s change in nationality or the small changes to her property was not the required level of involvement.
Decision and costs
Dismissing all claims against Korea for lack of jurisdiction, the tribunal ordered each party to bear its own legal fees and expenses, and half of the fees and expenses of the tribunal and of HKIAC.
Notes: The tribunal was composed of Bruno Simma (presiding arbitrator, appointed by the co-arbitrators as per HKIAC rules), Benny Lo (claimant’s appointee) and Donald McRae (respondent’s appointee). The award of September 27, 2019, is available at https://www.italaw.com/sites/default/files/case-documents/italaw10880.pdf
Yashasvi Tripathi is an Associate at Nishith Desai Associates, New York. She holds an LL.M. in international arbitration and litigation from New York University School of Law and a B.A.LL.B (Hons.) from National Law University, Delhi.