Deals & Cases

International 2019-07-16
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DR & AJU Successfully Obtains a Judgement With the Effect of Setting Aside an Arbitral Award Despite Res Judicata Argument

Company A was a contractor for a construction project with regards to a branch of a university in Libya. Company A obtained the contract from the Libyan government in 2010 during the time when Libyan government was under the rule of Muammar Gaddafi. Company A subsequently sub-contracted equipment work to Company B, a Korean company, and paid B KRW 2.4 billion. However, in February of 2011, a civil war in Libya broke out and the construction project had been subsequently suspended. The civil war continued until 2015, thus in May of 2015, the sub-contract above was terminated. As a result, Company A initiated an arbitration proceeding against the Company B seeking the refund of the entire payment, based on the Supreme Court case law holding that the amount to be deducted from the prepayment amount is not the amount that has been expended by the contractor but the amount of work completed by the contractor (Supreme Court 91Da42630 Decision rendered on March 31, 1992). However, the arbitral tribunal held that, contrary to the Supreme Court’s holding and based on the principles of equity, the expenditures of KRW 1.2 billion as alleged by Company B based on its own internal calculations shall be covered and not refunded even though there had been no work completed whatsoever by Company B. Tribunal awarded only KRW 1.2 billion to be refunded to Company A.

With the above background, DR & AJU strategized based on the fact that under the Korean civil proceeding and case law, the res judicata of a ruling against the principal debtor does not affect its guarantor, and acted for Company A to initiate a law suit against the guarantor of Company B, Company C, seeking its guaranty liability for the entire amount of KRW 2.4 billion, despite the arbitral award finding for KRW 1.2 billion.

Company C argued that, (i) Company B’s liability was confirmed through arbitration in the amount of KRW 1.2 billion which had been fully paid by Company B, thus Company A does not have any legal claim against Company B which means Company C as the guarantor does not bear any further liability, (ii) the arbitral award against Company B also affects the guaranty liability of Company C therefore this action before the Korean court should not differ from that of the arbitral award, and (iii) the refund obligation was triggered due to the Libyan civil war, which falls under a cause for indemnification.

DR & AJU successfully won the court’s judgment for Company C to pay the amounts deducted in the arbitration award as well as the damages claim caused by the delay in repayment in its entirety by making the following arguments: (i) even though the arbitration involved the issue of the amount to be deducted from the amount owed, the tribunal determined the facts not based on the evidence presented but determined that a company (i.e. Company B) can on its own determination set the amount to be reserved from repayment (such as 10%, 50%) as if the issue was regarding a tort or comparative negligence matter. This was based on principles of good faith and equity and not on legal principles that the principle debt was extinguished or reduced, thus, the Company C who bears the joint and several liability cannot rely on the theory of the appendant nature of guaranty liability. (ii) DR & AJU further argued that the res judicata of the arbitration does not affect the case at issue because the parties differed in these matters, and in any event under the Korean civil proceedings the reflective effect is not acknowledged, but there is a reasonable logic behind this current system in place as judges are capable of making judgements in prevention of contradictory results. (iii) DR & AJU also argued that the guaranty accident under the guaranty agreement does not refer to the refund obligation but the non-performance thereof, thus the Libyan civil war is not relevant to the indemnification cause for the guaranty accident.

This case was significant in that it provided the client with an alternative plan by achieving in effect a cancellation of an arbitral award. Additionally, this case was important in that it was a judgement deciding on some very important and material issues of the principles of the Korean Civil Act, such as concept of guarantee accident, interpretation of guarantee insurance terms about a force majeure event, reflective effect of a judgement and theory of the appendant nature of guaranty liability, etc.