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\u2013Korea FTA<\/span> (KORUS FTA) and UNCITRAL<\/span> rules.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n Korea argued that the claimant did not make an investment under the KORUS FTA because\u00a0none of the three characteristics of an investment under KORUS FTA was fulfilled and because the Salini <\/em>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 <\/em>criteria would be inapplicable. The disputing parties further disagreed whether the property qualified as a \u201ccovered investment\u201d under the FTA.<\/p>\n According to the tribunal, an asset qualifies as an investment under KORUS FTA only when it has the \u201ccharacteristics of an investment.\u201d The tribunal looked at the three characteristics expressly mentioned in Art. 11.28 of KORUS FTA: \u201cthe commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.\u201d It noted that the phrase \u201cincluding such characteristics as\u201d before them denotes that the list is non-exhaustive, and that \u201cor\u201d between them denotes that not all three must necessarily be present cumulatively and that none is indispensable (paras. 93\u201394). Further, the tribunal held that \u201cor\u201d also negated Korea\u2019s assertion that all four Salini <\/em>criteria should be present.<\/p>\n The tribunal rejected Korea\u2019s argument that the plural of \u201ccharacteristics\u201d meant that at least two of them must be present, reasoning that the drafters did not include this requirement in the FTA (para.\u00a095). 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.<\/p>\n Further, it did not apply the Salini<\/em> test, noting that it was developed in the context of the ICSID Convention<\/span>, 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<\/em> criteria.<\/p>\n Rejecting Korea\u2019s assertion, the tribunal held that Art. 11.28 does not necessarily require\u00a0 commitment of foreign resources as the definition. It also held that the requirement of a foreign element, which is implied by KORUS FTA\u2019s preamble, is satisfied by other substantive requirements: \u201cinvestor of the Other Party\u201d or \u201can investor of a non-party\u201d (para. 103).<\/p>\n Agreeing with Korea, the tribunal held that the commitment of capital is relevant, as the preamble mentions, \u201cto 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\u201d (para. 104). However, while it held that individual investments cannot be expected to single-handedly achieve the treaty\u2019s objectives, an investment that is so small as to be unable to make a meaningful contribution to the host state\u2019s economy would not enjoy protection under the treaty.\u00a0 In this case, the tribunal held the claimant\u2019s commitment of USD 300,000 was not \u201cinsignificant,\u201d\u00a0 and would have unequivocally passed the \u201csignificant\u201d threshold if the purpose of the investment was \u201cclearly commercial in nature,\u201d such as the purchase of an office or a factory (para. 106).<\/p>\n 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).<\/p>\n 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\u2019s 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 \u201cexpectation of gain or profit\u201d to exist, as that requirement is inherent in \u201cassumption of risk\u201d (para.\u00a0110).<\/p>\n 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.<\/p>\n The claimant argued that she undertook four risks: (1) the decline of property value after purchase, (2)\u00a0the risk of the property\u2019s expropriation, (3) the fact that the property is subjected to the host state\u2019s laws, and (4) the non-materialization of predicted rental income.<\/p>\n Agreeing with Korea, the tribunal held that risks (1), (2) and (3) alone were not sufficient to constitute an \u201cassumption of risk,\u201d noting that such risks exist for any property owner. For the tribunal, the required characteristics of an investment, <\/em>including an assumption of risk, must go beyond the features that any asset automatically has; otherwise, the requirement of \u201ccharacteristics of an investment\u201d 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).<\/p>\n 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.<\/p>\n Though concluding that the claimant\u2019s property did not qualify as an \u201cinvestment,\u201d the tribunal nevertheless analyzed whether it could qualify as a \u201ccovered investment,\u201d by its\u00a0 \u201cestablishment\u201d or \u201cexpansion\u201d after KORUS was entered into force.<\/p>\n In the context of this analysis, the tribunal rejected the claimant\u2019s assertion that she established her purported investment when her U.S. nationality was registered in the land registry, for three reasons. First,\u00a0she 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 \u201cinvestor of the other party\u201d and is irrelevant to the investment (para. 149). Third, only acts bringing an asset into existence would have \u201cestablished\u201d an investment, for example, building a factory or registering an IPR. Considering she only made small additional commitments and insignificant changes to the property\u2014including fencing it, paving the car park, and changing the wallpaper\u2014the tribunal held that the claimant did not \u201cexpand\u201d the investment.<\/p>\n Moreover, the tribunal held that \u201ccovered investment\u201d 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\u00a0 (para. 163). According to the tribunal, the claimant\u2019s change in nationality or the small changes to her property was not the required level of involvement.<\/p>\n 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.<\/p>\n Notes<\/em>: The tribunal was composed of Bruno Simma (presiding arbitrator, appointed by the co-arbitrators as per HKIAC rules), Benny Lo (claimant\u2019s appointee) and Donald McRae (respondent\u2019s appointee). The award of September 27, 2019, is available at https:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw10880.pdf<\/a><\/p>\n Yashasvi Tripathi<\/strong> 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.<\/p>\nBackground and claims<\/h3>\n
Korea\u2019s jurisdictional objection<\/h3>\n
\u201cCommitment of capital\u201d need not necessarily be foreign but should be significant<\/h3>\n
The predominant purpose at the time of the property’s acquisition\u2014and not the purpose for which the profit is used\u2014determines whether an \u201cexpectation of gain or profit\u201d exists.<\/h3>\n
The characteristics of an investment, including an \u201cassumption of risk,\u201d must go beyond inherent aspects of an asset to qualify as an investment under KORUS FTA Art. 11.28.<\/h3>\n
\u201cCovered investment\u201d under the KORUS FTA<\/h3>\n
Decision and costs<\/h3>\n