KOREA OUTBOUND INVESTMENT GUIDE – Investment protection strategy post-FTAs in Vietnam
When investing in Vietnam, there are many things that South Korean investors take into consideration such as cheap and educated labour, the domestic market and benefits under international trade agreements. In this regard, it seems the investment protection mechanism provided to investors under various investment protection agreements (IPAs) is easily overlooked.
Consequently, after investment disputes arise with the government, investors are not able to fully enjoy the benefits of the investor-state dispute settlement (ISDS) mechanism.
This article introduces some of the factors that South Korean investors should take into account before and during their investment in Vietnam, and provides an analysis of some ISDS cases.
Before the investment
IPAs between South Korea and Vietnam. There are currently three IPAs in effect between South Korea and Vietnam, namely the Korea-Vietnam Bilateral Investment Treaty (2003) (KVBIT), the Asean-Korea Investment Agreement (2009) (AKIA), and the Korea-Vietnam Free Trade Agreement (2015) (KVFTA).
All of them provide basic substantive rights for South Korean investors and permit them to claim for damages through arbitration against the government of Vietnam if a government agency – including all three branches of the government: legislative, executive and judicial – or in certain circumstances, a Vietnamese state-owned enterprise (SOE) interferes with any of these rights.
However, among the three IPAs, the KVBIT, as an old-generation treaty, appears to be the most favourable for South Korean investors, thanks to its broad and less qualified obligations for the government. Some examples include:
Definition of investment. Under the KVBIT, investment is defined broadly as every kind of asset invested by an investor. The other two IPAs further require certain characteristics that the investment must meet to be protected, such as the commitment of capital, the expectation of profits, the assumption of risk, and the pre-existing investment on or after the dates of entry into force. Failure to meet any such characteristics might enable the host state to successfully deny its investment protection obligations.
Most-favoured nation or national treatment. The AKIA and KVFTA require South Korean investors, or their covered investments, to be “in like circumstances” to those from Vietnam or other countries to accord these treatments. This requirement, however, does not appear under the KVBIT, which means that South Korean investors may rely on any cases in which other domestic or foreign investors in Vietnam are treated more favourably than them to invoke these treatments.
Fair and equitable treatment. The KVBIT has no limitation other than the Vietnamese government’s obligation to accord fair and equitable treatment to South Korean investors. On the other hand, the AKIA makes a reference to “the obligation not to deny justice”, and the KVFTA further refers to the “principle of due process”, which are higher legal standards that South Korean investors must prove in ISDS cases.
Under all three IPAs, South Korean investors may only initiate ISDS within three years from the date they first acquired knowledge of the events that gave rise to the dispute. Such a time limit may prevent investors from being flexible in the negotiation and arbitration process.
Investor nationality
Since Vietnam has entered into many IPAs with most of the world’s major economies including the US, EU, China and Japan, South Korean investors, especially multinational corporations, have a wide range of options for structuring their investment nationality before investing in the country. For example, a South Korean company can choose to be a US investor by using its US subsidiary for its investment.
Each of these IPAs offers different terms and scopes for investment protection, some of which provide better protection than the IPAs signed between South Korea and Vietnam. For instance, the Iceland-Vietnam IPA does not set a time limit to commence ISDS proceedings, and it also contains broad and less qualified wording, and is thus more advantageous when compared to the KVBIT. South Korean investors should thoroughly consider these terms and conditions and choose the most appropriate nationality for their investment.
During the investment
Generally speaking, an investment made illegally would not be protected under the ISDS mechanism. Often ISDS tribunals reject their jurisdiction over disputes because claimant investors fail to meet this legality requirement. South Korean investors should be mindful of this requirement.
The three IPAs between Vietnam and South Korea do not have explicit legality requirements. While the AKIA and KVFTA define “covered investments” as those “admitted according to [the contracting states’] laws”, the KVBIT is completely silent on this matter. However, many ISDS tribunals ruled that even in the absence of an express legality requirement clause in an IPA, illegal investments will not be protected.
The general principle is that a claimant guilty of illegal conduct is deprived of the necessary ius standi to complain of corresponding illegalities by the state, namely breaches of investment protection commitments.
The issue then arises as to what would be corresponding illegalities of investors in comparison to state illegalities. Many ISDS tribunals opine that a minor illegality is not intended by the drafters of IPAs to exclude investors from the ISDS. ISDS tribunals normally disregard illegality in the course of investment. Their focuses have been made on the illegality when making the investment. Nonetheless, the respondent states are barred from raising the defence of illegality made during the making of the investment if they have elected to tolerate such illegalities.
Thus, minor illegality and illegality during the operation of the investment may be disregarded under the ISDS mechanism. However, it is highly likely that significant illegality during the making of an investment would prevent investors from succeeding in the ISDS (e.g., the investor’s corruption). In that circumstance, investors should wait for a certain period before bringing in the ISDS in order to argue for the state’s tolerance of such illegality. It is also a good practice to rectify such illegality, and wait again for a while if investors decide to bring in the ISDS.
ISDS cases
Shin Dong Baig v Vietnam. Under the Law on Land of Vietnam, land recovery can take place for national defence or security purposes, or socio-economic development purposes, if it is for the national or public interest. Investors’ claims for illegal expropriation of land use rights are one of the most commonly disputed issues in the country.
Some of the noticeable ISDS cases pursued against Vietnam related to real estate disputes include: Trinh Vinh Binh and Binh Chau Joint Stock Company v Vietnam; Michael McKenzie v Vietnam; and the most recent case, Shin Dong Baig v Vietnam.
Shin Dong Baig, a South Korean investor, brought an arbitration against Vietnam in 2018 for the allegedly unlawful cancellation of the land use rights by the local government. Although the award was not published, it seems that the case was ruled in favour of Vietnam.
DWS Star Bridge (DWS) v Vietnam. In 2007, a Vietnamese SOE and two South Korean investors were licensed to establish a project company in Vietnam to develop a commercial or residential project in Ho Chi Minh City.
In 2015, the South Korean Court declared bankruptcy of the two investors and ordered them to transfer their shares in the project company to the creditor, DWS Star Bridge, a new South Korean investor. DWS Star Bridge subsequently tried to register their share ownership in the project company, but it was objected to by the Vietnamese SOE on the grounds that certain documents had been forged or fraudulently made. This matter was submitted to the Vietnamese court, and the court ruled in favour of the Vietnamese SOE. Recently, DWS served official notice of intent regarding the potential ISDS action against Vietnam.
This case illustrates why South Korean investors should pay close attention to the legality of their investment, especially during the “making” phase. Not properly conducting the investment procedures will expose investors to the danger of losing their entire investment. Furthermore, this factor would certainly be an obstacle for investors during the ISDS.
In conclusion, to fully utilise the investment protection mechanism, investors are advised to consider the above-mentioned factors before and during their investment, and consult with experienced lawyers in this field.
