South Korea escapes W264.1b liability as ICSID rejects Chinese investor's annulment bid

A Chinese investor's attempt to hold the South Korean government liable in an international investment dispute has been definitively rejected, with an annulment committee dismissing the claimant's bid to overturn the original arbitral award. The decision frees the government from a potential liability of about 264.1 billion won ($197 million) and entitles it to recover roughly 1.5 billion won in legal costs from the annulment proceedings.

The Ministry of Justice said Saturday that the International Centre for Settlement of Investment Disputes annulment committee rejected all grounds of the annulment application filed by claimant Feng Zhen Min at 5:25 a.m. Saturday Korean Standard Time.

The committee also ordered Feng to pay the South Korean government approximately 1.51 billion won in legal costs from the annulment proceedings, plus interest.

The dispute stems from a loan Feng obtained from domestic financial institutions to acquire and develop the Huafu Building in Beijing.

Feng established Pie Korea in South Korea in October 2007 and raised 380 billion won through a project financing loan arranged and guaranteed by Woori Bank.

When Pie Korea defaulted on the loan, Woori Bank — which had taken over the loan receivables — sold the company shares it held as collateral. Feng challenged the sale in civil court but lost a final ruling at the Supreme Court in July 2017.

Feng also faced a criminal investigation and trial over allegations that he had promised or provided money and other benefits to Woori Bank executives and employees in connection with the loan. A guilty verdict was finalized in March 2017.

Feng subsequently filed an investor-state dispute settlement claim in August 2020, arguing that the bank's share sale and South Korea's civil and criminal judicial proceedings violated the Korea-China investment treaty. The initial claim sought about 2 trillion won in damages, but the amount was reduced to approximately 264.1 billion won as the proceedings advanced.

The original arbitral tribunal found in May 2024 that Feng's establishment of the company and acquisition of shares were part of an unlawful scheme to secure financing by bribing financial institution executives and employees.

On that basis, the tribunal ruled that the investment was not protected under the Korea-China investment treaty, declared it lacked jurisdiction, and dismissed all of Feng's claims. It also ordered Feng to pay the South Korean government approximately 4.91 billion won in legal costs, plus interest.

Feng applied for annulment in September of that year, arguing that the original tribunal had misinterpreted the investment treaty and domestic law, had failed to guarantee him adequate opportunity to present his case, and that the award contained omissions and contradictions in its reasoning.

The annulment committee rejected all three grounds, finding that the tribunal's interpretation of the treaty was reasonable, that Feng had been given sufficient opportunity to argue his case, and that the reasoning in the award was clearly set out.

Unlike an appeal, which allows a full re-examination of facts and legal conclusions, the ICSID annulment process can set aside an award only on limited grounds — such as a manifest excess of the tribunal's powers or a serious departure from a fundamental rule of procedure.

"This decision reaffirms the principle that investments made in violation of domestic law are not entitled to protection under investor-state dispute settlement proceedings," the Ministry of Justice said, adding that it would work to recover litigation costs and, in consultation with the claimant's side, make the annulment decision public to the greatest extent possible.

The government has recently secured a string of favorable outcomes in ISDS annulment proceedings, reducing its exposure in the Lone Star and Elliott cases as well.

In the Lone Star case last November, the portion of the arbitral award finding the government liable was annulled, eliminating a repayment obligation of about 400 billion won in principal and interest at the time.

In February this year, the government prevailed in annulment proceedings over the arbitral award in the Elliott case concerning the merger of Samsung C&T and Cheil Industries. A British court found the original award could not stand, provisionally extinguishing a liability of approximately 160 billion won.