Tribunal annuls $216m award over procedural violations, but Lone Star prepares to relaunch claim
The South Korean government scored a significant victory in its decadelong arbitration dispute with US private equity firm Lone Star, overturning a multimillion-dollar payout order after successfully arguing that the original tribunal violated fundamental procedural rules.
Seoul officials announced Tuesday that the International Center for Settlement of Investment Disputes — a World Bank arbitration body — had annulled its 2022 ruling ordering Korea to pay Lone Star $216.5 million in damages over the controversial sale of Korea Exchange Bank. The annulment marks a major turning point in the highest-profile investor-state dispute in the nation’s history.
While the government did not disclose the tribunal’s full reasoning behind the overturn, officials confirmed that the decision hinged on procedural flaws in the 2022 award that, they argued, undermined Korea’s right to a fair hearing.
A rare reversal
In its 2022 decision, the ICSID tribunal partially accepted Lone Star’s claim that Korean financial regulators interfered in its attempt to sell KEB, causing the firm substantial financial losses. The tribunal relied heavily on a separate arbitration award issued by the International Chamber of Commerce in a dispute between Lone Star and Hana Financial Group, the ultimate buyer of KEB — a proceeding in which the Korean government was not involved.
Seoul contended that the ICSID tribunal’s decision to admit the ICC award as evidence constituted a serious departure from due process. Because Korea had not been a party to that arbitration, it had no opportunity to present arguments related to the ICC findings. The government argued that allowing such evidence deprived it of its basic procedural rights and exceeded the tribunal’s authority under ICSID rules.
In the following year, Seoul filed to annul the decision on these grounds, asserting that the 2022 award violated fundamental procedural standards and amounted to a manifest excess of powers. An ad hoc committee later agreed, ruling that the flaws were serious enough to nullify the award in its entirety — an outcome that legal scholars describe as both rare and consequential.
“The ICSID has been relatively more open to annulment compared to other international arbitration institutions. Still, it remains rare for the ICSID to fully overturn its own decision. This marks a significant victory for Korea,” said a lawyer specializing in international disputes, who requested anonymity.
Full annulments at ICSID are uncommon: Out of hundreds of annulment applications, only about 1.6 percent have led to a complete cancellation of the award. The committee also ordered Lone Star to reimburse 7.3 billion won ($5 million) of Korea’s legal costs within 30 days, fully siding with the Korean government.
Prime Minister Kim Min-seok welcomed the outcome during an emergency briefing, calling the decision an “important precedent” that enhances international confidence in Korea’s regulatory and legal systems. He emphasized that the ruling affirms the government’s longstanding position that the original award was procedurally flawed.
Lone Star not letting go
Despite the setback, Lone Star made it clear the fight is not over. In a statement, the firm said the annulment “does not change the underlying fact that Korean regulators improperly blocked and interfered” with its efforts to sell KEB.
“Lone Star looks forward to presenting its case again before a new tribunal,” the spokesperson said.
Because the ICSID committee annulled the award rather than dismissing the case, the dispute is now expected to be subject to a newly constituted tribunal, essentially restarting a process that has already run for more than a decade. The ICSID Convention states that an annulled award could be submitted before a new tribunal at the request of a single party.
Yet, the lawyer viewed that it would not be easy for Lone Star to make its case after having already failed to substantiate its arguments.
“Because of claim preclusion, it will be difficult for Lone Star to succeed after previously failing to prove its point. Besides, Lone Star has already exhausted every possible argument in the arbitration — what more could it do?” the lawyer said.
Lone Star’s entanglement with Korea dates back to 2003, when the firm acquired the then state-run KEB at a time when the Korean financial sector was still recovering from the Asian financial crisis. In 2007, Lone Star attempted to sell the bank to HSBC, but the deal unraveled as Korean regulators withheld approval amid prosecutorial investigations and market manipulation allegations involving the fund.
Lone Star eventually offloaded its 51.02 percent stake in KEB to Hana Financial Group for 3.9 trillion won — almost three times what it paid in 2003. Yet questions over the bank’s valuation, the government’s regulatory decisions and the failed HSBC sale quickly escalated into a protracted legal battle. The 2012 ICSID filing soon emerged as one of the most scrutinized investor–state arbitration disputes involving Korea.
In 2012, Lone Star filed a $4.67 billion investor-state dispute settlement claim against the Korean government, arguing that regulators deliberately delayed approval for its planned 2007 sale of KEB to HSBC. The delay, it claimed, caused the HSBC deal to collapse and forced a later sale at a lower price, resulting in financial losses that it argued Korea should compensate it for.
silverstar@heraldcorp.com
