Derains & Gharavi International

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June 2018

Derains & Gharavi secures a US$ 68 million award against the Republic of Korea

Derains & Gharavi secured a US$ 68 million award (KRW 57 billion plus interest and costs) against the Republic of Korea in PCA Case No. 2015-38, Mohammad Reza Dayyani, et al. v. The Republic of Korea (UNCITRAL). This is the first known investment treaty award rendered against the Republic of Korea. The firm’s victory was reported in Global Arbitration Review (GAR), in an article dated 8 June 2018, in the following terms:

Bruising loss for South Korea at hands of Iranian investors

In what has been reported as the first loss for South Korea in an investment treaty case, the family behind an Iranian consumer electronic group has been awarded US$68 million – 99% of the total sum sought – for South Korea’s termination of a deal for the purchase of the bankrupt Daewoo Group.

In a 187-page UNCITRAL decision which GAR has seen, a tribunal composed of Bernard Hanotiau of Belgium, Philippe Pinsolle of France and Gavan Griffith QC of Australia this week upheld claims brought by the Dayyani family, finding South Korea to have breached its 1998 bilateral investment treaty with Iran.

The tribunal found that through its specialised debt resolution agency, the Korea Asset Management Company or KAMCO – which it characterised as a state organ under Article 4 of the International Law Commission Articles on State Responsibility – Korea had abused its “puissance publique” [public power] and “interfered with the contractual rights of the parties to the share purchase agreement in order to promote its own sovereign interests.”

This represented a breach of the treaty’s fair and equitable treatment guarantee and meant the Dayyanis’ claim was successful, the tribunal said, making it unnecessary for it to rule on further alleged breaches of the treaty.

The tribunal ordered Korea to make restitution of a deposit the Dayyanis had paid for the sale in Korean won (at the time equivalent to US$50 million, now US$54 million) and pay simple interest at a rate of LIBOR + 2% from April 2011 until the date of restitution, which to date amounts to roughly US$12 million.

It also ordered the state to pay nearly US$2 million to cover the Dayyanis’ legal costs and the costs of the arbitration. The family’s attempt to recover a success fee that it had agreed to pay its counsel was denied.

Commenting on the decision, Hamid Gharavi of Derains & Gharavi in Paris, a French-Iranian arbitration specialist who was lead counsel to the Dayyanis with Moshkan Mashkour of Sanglaj International Consultants in Tehran, tells GAR that the tribunal is to be praised for “calling a spade a spade”. It held that Korea’s conduct in terminating the deal fell short of good faith and that the state “cheated in the arbitration by failing to disclose material documents that they were ordered to produce and relying on evasive testimony from witnesses,” he says.

Gharavi also says the award is “timely” in terms of its discussion of the impact of Korean and international sanctions against Iran, which will be covered later in this article.

 South Korea was represented in the arbitration by a team from Freshfields Bruckhaus Deringer led by the firm’s former head of international arbitration Lucy Reed (now of the National University of Singapore) and partner Nicholas Lingard in Singapore and Tokyo. Both have been approached for comment but have yet to respond.

A “pretextual” termination

Based in the central Iranian city of Isfahan, the Dayyani family are behind the Entekhab Industrial Group, an Iranian holding company that invests in a wide range of industries, including in the manufacture and distribution of middle to high-end home appliances in Iran and the Middle East. Since 2008, it has been selling products manufactured by Daewoo in Iran.

Following the Asian Financial Crisis of 1997, Daewoo went bankrupt and underwent a restructuring overseen by a committee of creditor financial institutions that included many state banks, with the Korean government eventually instructing KAMCO to purchase the group and resell it at a profit.

KAMCO ended up taking a 57% controlling stake in Daewoo and, after three unsuccessful attempts at selling its electronics arm, accepted a bid from the Dayyanis to buy it for US$560 million.

The Dayyanis entered into a share purchase agreement with Daewoo’s creditors, paid the deposit and created a Singaporean special purpose vehicle to carry out the purchase without falling foul of sanctions against Iran. They also submitted letters confirming that the vehicle had funds to make the purchase.

However, the sellers rejected the letters as unsatisfactory and, in December 2010, terminated the contract and forfeited the deposit.

An amended agreement was reached but again terminated by the sellers, in March 2011.

In its findings, the tribunal said that the “pre-emptory and summary” termination of the deal and forfeiture of the deposit was attributed by the sellers to the Dayyani’s failure to provide satisfactory letters.

In fact, the tribunal found this was a mere pretext and the real reason the sellers terminated the deal was a condition precedent in the sale purchase agreement that required them to obtain consent to the sale from leading Daewoo customers such as Bosch and GE. They realised they would not obtain this, putting them in breach of the condition precedent and enabling the Dayyanis’ special purpose vehicle to rescind the agreement and recover the deposit.

By the time the amended share purchase agreement was formed, the tribunal said the sellers had admitted to the Dayyanis that they could not comply with the condition precedent. It held they terminated this agreement rather than agree to an “entirely reasonable” price drop the family had requested as a result of the lack of customer support for the purchase.

The tribunal said all these actions were attributable to Korea, as the extent of its voting rights meant KAMCO “was in a position to indirectly control” any decision taken by Daewoo’s creditors in relation to the sale.

Adverse inferences

The tribunal repeatedly said that it had reached its conclusions in the absence of an alternative explanation for the collapse of the sale from Korea – leading it to draw adverse inferences on some matters.

It said, for example, that it would have “appreciated an opportunity” to examine reports of Korea’s Public Fund Oversight Committee, one of several bodies monitoring the sale, from December 2010 and March 2011 and had ordered the state to produce them.

The tribunal said it was “not convinced” by Korea’s assertion that such reports do not exist and found it “extremely unlikely” given the committee’s close monitoring of events leading up to the sale. Hence it drew the adverse inference, that, had they been produced, the reports would not have supported the state’s case.

Later, the tribunal noted the lack of on-the-record evidence of the sellers’ deliberations before they terminated the deal, commenting that it would have expected to see “an abundance of internal memoranda, meeting minutes and emails evidencing the sellers’ weighing of the different options before them and making a final decision”.

It concluded that either no meetings had taken place or the minutes had been withheld because they were adverse to Korea’s case.

Similarly, the tribunal said it was surprised that those documents it had seen in relation to the sale contained little mention of the supposedly unsatisfactory letters the Dayyani family had provided confirming their ability to pay. Had this been “the significant issue” that the sellers argued, the tribunal said it would surely have been “discussed and analysed at length by the various supervisory authorities that were monitoring the sale.

The tribunal further noted the “vague”, “contradictory” and “unreliable” testimony provided by some of Korea’s witnesses, including employees of Woori Bank (Daewoo’s principal creditor) and PricewaterhouseCooper.

In light of all of this, the tribunal inferred that the sellers had decided to terminate the first agreement because of the “looming anticipatory breach” on their part, and the amended agreement because it was clear that the Daayanis “would not waive the condition precedent.” It said the behaviour of the parties during the first quarter of 2011 “unequivocally” demonstrated that the first termination “was primarily a negotiating ploy on the part of the sellers”.

The tribunal added that the absence of documentation and “detailed narrative” from South Korea meant no inferences could be made in the state’s favour. Indeed, it suggested that further evidence would have provided additional confirmation of KAMCO’s control of the sellers, which Korea had sought to deny.

The impact of sanctions

As well as the first investment treaty award against South Korea, this is believed to be the first such award in favour of Iranian investors – and raises issues regarding the international sanctions regime to which Iran has for many years been subject owing to its uranium enrichment programme to build nuclear capability.

During the arbitration, the Dayyanis presented a 2010 US Congressional Report to the tribunal indicating that, shortly before it terminated the deal, Korea had succumbed to pressure from US president Barack Obama by imposing sanctions on Iran that went above and beyond those imposed by the United Nations.

The tribunal did not explicitly comment on the report and say whether it regarded Korea’s actions as influenced by a shift in policy on sanctions. However, during its reasoning on the alleged breach of the fair and equitable treatment standard of the BIT, it said it was satisfied that Korea was “fully apprised” that sanctions would complicate the Daewoo deal before any agreement was executed.


The Public Fund Oversight Committee had raised this concern in several reports and even suggested aborting the deal for this reason, the tribunal said. And it was in response to this complication that the Dayyanis had agreed to form a Singapore special vehicle to make the purchase.

Given this attention to the impact of sanctions, the tribunal held that KAMCO and the sellers would have been aware of the risk that some Daewoo clients or their backers would make an issue of the company being sold to an Iranian group. They opted to accept the Dayyanis’ deposit and proceed with the transaction anyway – a finding that presumably influenced the tribunal’s conclusion that Korea had acted in bad faith.

Commenting on the tribunal’s approach to sanctions, Gharavi says the ruling shows that sovereign states that “bend” to international pressure and terminate deals on spurious pretexts “will be held liable, with their acts and omissions recorded in international awards that will leave an embarrassing legacy for these countries.”

He adds that the award is “timely” given the pressure that has been applied to other countries by the US and Saudi Arabia to end ties with Iran. These include Bahrain, which he argues in two other cases filed last year came up with pretexts to expropriate the assets of two Iranian banks and an insurance company.

One of the arbitrators ……

The case against Korea was filed six months after a notice of dispute in 2015, with Jan Paulsson and Griffith (appointed by the Dayaanis and Korea, respectively) as the original party-appointed arbitrators. In 2016, Paulsson resigned from the tribunal, probably owing to Korea’s instruction of his former firm, Freshfields, as counsel, and was replaced by Pinsolle.

Paulsson is now acting for Bahrain in the two cases mentioned, in which Gharavi argues that the state mistreated Iranian investors because of pressure from the US and Saudi Arabia and expropriated their investments.

Although there is no formal dissent to the award against Korea, it states in relation to several key findings that one tribunal member took another view, without making clear who that arbitrator was and whether it was the same one in all instances.

The initial disagreement comes in the section of the award on jurisdiction, with one arbitrator saying it was not enough to find that the Dayyanis’ special purpose vehicle was an investor with a protected investment, but that they must be seeking to remedy a “personal harm”. The arbitrator nevertheless accepted that the tribunal had jurisdiction over the family’s claim.

Later, the award records some disagreement in relation to what constitutes a breach of the fair and equitable treatment standard of the BIT. One arbitrator held that what had occurred in this case was a “simple breach of contract” by KAMCO in its capacity as a private entity and that “only sovereign conduct, ie conduct that is carried out in the exercise of an element of puissance publique” is capable of constituting a breach.

One arbitrator also held that, though Korea was a party to the share purchase agreement through KAMCO, its obligations in this regard were “of an entirely different nature” from the obligations of the fair and equitable treatment standard. This holds that a sovereign should not “abusively or arbitrarily interfere with rights established under a contract” but need not “ensure that contractual obligations are performed according to their terms,” the arbitrator said.

The arbitrator added that he had seen no evidence that Korea directed KAMCO to vote against returning the contract deposit, giving rise to a breach of the standard.

Finally, the award records that one arbitrator would have awarded the Dayyanis only a portion of its costs, in light of his view that they had not demonstrated they were entitled to the sum claimed.

Successful – but no success fee

Despite their success in the claim, the Dayyanis were unable to convince the tribunal to make an order awarding them a success fee negotiated with Derains & Gharavi and Sanglaj International – giving the firms 5% of all amounts awarded, including interest and costs, in addition to a lump sum payment of €1 million.

The Dayyanis argued that to allow recovery of the fee would be “standard and reasonable” and in line with arbitral jurisprudence, as well as a fair reflection of the time spent by their counsel on the case. However, the tribunal said the notion that the claimants should be able to recover “all or a portion” of a success fee raised “difficult issues” and it was not convinced it could order it without “shifting the risk allocation agreed between [the] claimants and their counsel onto [the] respondent, which is not the purpose of awarding costs.

Three claims… one loss

According to Business Korea, which reported the outcome of the dispute today, Korea has been sued by foreign companies in three investor-state cases, including this one.

The first case relates to a sale in the bank sector and was filed by Lone Star in 2012 under the Belgium- Korea BIT. Administrated by ICSID, it is expected to reach an award this year.

The second case was filed by Hanocal, a Dutch subsidiary of a UAE state-owned investment fund, in 2015 over taxation on its purchase of a 50% stake in Hyundai Heavy Industries. The claim ended in 2016, when Hanocal discontinued its action.

Business Korea also reports the Korean government’s response to its first loss, stating that it will closely analyse the award in favour of the Dayyanis and decide whether to apply for “cancellation of the verdict.”

The award in the case is not yet public. GAR will update this article if comment is received from counsel to Korea.

Mohammad Reza Dayyani, Abbas Dayyani, Mohammad Hossein Dayyani, Ali Dayyani, Fatemeh Dayyani and Kosar Dayyani v Republic of Korea

Tribunal
- Bernard Hanotiau (Belgium) (Chair)
- Philippe Pinsolle (France) (appointed by the Dayyani family)
- Gavan Griffith QC (Australia) (appointed by Korea)

Counsel to Dayyani family
- Derains & Gharavi: partner Hamid Gharavi with associates Julie Spinelli and Stefan Dudas, Paris
- Sanglaj International Consultants: partner Moshkan Mashkour in Tehran

Counsel to South Korea
- Freshfields Bruckhaus Deringer: partner Nicholas Lingard in Singapore and Tokyo, counsel Robert Kirkness, senior associate Lexi Menish and associates Kate Apostolova, Emily Stennett, Monika Hlavkova and Samantha Tan in Singapore
- Lucy Reed of National University of Singapore
- Yulchon: partners Sae Youn Kim and Hyung Keun Lee with associate Jae Hyong Woo in Seoul

Expert witnesses
- Professor Sang Gon Han
- Professor Lee Won Woo
- Associate Professor Kim Yon Mi