KCAB Arbitral Awards

KCAB
Arbitral Awards
Korean Commercial Arbitration Board

www.kcab.or.kr

Main office Busan Branch

43rd Floor, 511 Yeongdong-daero (Trade Tower, 176 Jungang-daero (Korea Express Building,
Samseong-dong), Gangnam-gu, Seoul Choryang-dong), Dong-gu, Busan

TEL: +82-2-551-2000/2021, FAX: +82-2-551-2020 TEL:+82-51-441-7032, FAX:+82-51-441-7039

Table of
Contents
1. Damages, etc 8. Contract Price, etc
Construction Company (Singapore) v. Power Company (Korea) 3 Engineering Company (Korea) v. Manufacturer (Italy) 144
2. Repayment of Contract Price, etc 9. Damages
Construction Company (Korea) v. Technology Company (USA) & Energy Company (Korea) 9 John Doe (Korea) v. Electronic Company (Vietnam) 165
3. Contract Price, etc 10. Liquidated Damages
Resources Company (Singapore) v. Power Company (Korea) 23 Aircraft Manufacturing Company (Indonesia) v. The Republic of Korea (Korea) 176
4. Damages, etc 11. Damages, etc
Wholesale Trade Company (Turkey) v. Component Manufacturing Company (Korea) 44 Cosmetic Company A (Israel) v. Cosmetic Company B (Korea) 193
5. Damages, etc
Construction Company (Korea) v. Power Company (France) 60
6. Damages, etc
Laboratories Ltd. (New Zealand) v. Softgel Ltd. (Korea) 109
7. Damages
Energy Company (Korea) v. Seller Company (Vietnam) 127

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Korean Commercial Arbitration Board
KCAB case no.1
Parties Claimant (Counter-Respondent) : Construction Company
(Singapore)
Respondent (Counter-Claimant) : Power Company (Korea)
Place of
Arbitration Seoul, Republic of Korea
Language Original in Korean & English
Subject matters - termination of contract
- calculation of damages
Facts
From a company contracted for construction of gas fields in Myanmar, the
Respondent obtained a subcontract to perform part of the project. The Respondent
in turn concluded the Subcontract for the project with the claimant. The claimant
had continuously fallen behind schedule set by the Subcontract in performing the
project. In response, the Respondent notified the Claimant that it was terminating
the Subcontract relying on Claimant’s failure to comply with the Respondent’s work
instructions and other defaults. The Claimant refused to accept the termination.
A dispute arose between the parties regarding the termination and the payments
of damages with respect to the Subcontract. By initiating arbitration the Claimant
sought damages of unpaid progress payments and unpaid additional construction
costs; early withdrawal costs; lost profits; and amounts withheld as a guarantee for
performance and defects liability. Disputing the Claimant’s arguments for damages,
the Respondent filed counterclaim to recover the balance due to the overpayment.
The Arbitral Tribunal found that the Respondent failed to prove giving a written
notice to the Claimant for termination under the Subcontract and the Claimant’s
abandonment of the project. Consequently, the Arbitral Tribunal was of the opinion
that the Respondent’s termination was not valid under the Subcontract. The Arbitral
Tribunal granted in part the Claimant’s claim for damages for progress payments
and additional construction costs and for amounts withheld as a guarantee, denied
the remainder of the claim and dismissed the counterclaim filed by the Respondent.
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Excerpt
I. TERMINATION OF SUBCONTRACT
[1] 
“Respondent relies on Article 24.2.1 of the Subcontract in asserting that its
termination of the Subcontract was valid. The Article provides as follows:
‘24.2 Termination by CONTRACTOR due to default of SUBCONTRACTOR
24.2.1 Without derogating from any other right or remedy to which
CONTRACTOR is entitled under the provisions of the Subcontract or at law,
CONTRACTOR shall be entitled to immediately terminate the Subcontract by
written notice to SUBCONTRACTOR for any of the following: [...]
(b) If SUBCONTRACTOR abandons the Subcontract Works or otherwise
plainly demonstrates the intention not to continue performance of his
obligations under the Subcontract; or
(c) If SUBCONTRACTOR fails to execute the Subcontract Works or
to perform any obligation under the Subcontract within seven (7) days
after being required in writing to do so by CONTRACTOR; or
(d) If SUBCONTRACTOR fails to take any and all necessary steps to
ensure that performance of the Subcontract Works will comply with the
provisions of the Subcontract within seven (7) days after being required
in writing to do so by CONTRACTOR; [...].’
[2] “First, the Tribunal examines the Respondent’s claim that its termination of the
Subcontract was valid due to Claimant’s failure to comply with Respondent’s
instructions regarding the Project.
Under clause (c) or (d) of Article 24.2.1, Respondent may immediately terminate
the Subcontract if it gives written notice of specific events of default to Claimant
and Claimant fails to cure the same within 7 days after being so notified.
… [S]uch requests, in order to serve as a valid ground for termination, must be
contained in a written notice expressly stating that Respondent will terminate
the Subcontract if Claimant fails to cure the default within 7 days of receipt of
the notice. It is only after such notice is given, and Claimant fails to cure the
relevant default within the 7-day period, that Respondent becomes entitled to
terminate the Subcontract immediately by written notice.
Korean Commercial Arbitration Board

In the present case, however, the evidence submitted by Respondent is II. DAMAGES
insufficient to support a finding that such a notice under clause (c) or (d) of
1. Damages Requested by Claimant
Article 24.2.1 was in fact given to Claimant; rather, the evidence only shows that a. Progress Payments and Additional Construction Costs
Respondent unilaterally terminated the Subcontract on July 16, 2012, without
giving such notice.
[5] “… Claimant requests payment of unpaid progress payments for its work from ...,
in the amount of …, and unpaid additional construction costs in the amount of …,
… [T]he Tribunal is of the view that Respondent’s claim that it validly terminated
for a total of ….
the Subcontract under clause (c) or clause (d) of Article 24.2.1 is without merit.
Claimant’s request for payment of the above amounts is apparently supported
by the documents presented as Claimant’s Exhibit …. These documents,
[3] “Second, the Tribunal examines the Respondent’s claim that its termination of however, are documents unilaterally prepared by Claimant, and as such
the Subcontract was valid due to Claimant’s abandonment of the Project. are insufficient to support a finding in favor of Claimant in the absence of
While clause (b) of Article 24.2.1, unlike clauses (c) or (d) of the same Article, independent corroborating evidence. The record, however, is devoid of any such
permits immediate termination of the Subcontract without a grace period, evidence, except for Respondent’s own statements, to wit, that US$63,157.85 do
clause (b) by its terms is applicable only if Claimant ‘abandons’ or ‘otherwise qualify as additional construction costs ….
plainly demonstrates the intention not to continue performance of its Accordingly, the Tribunal finds that there are additional construction costs of
obligations.’ US$63,157.85 as admitted by Respondent and, applying the formula set forth in
In the present case, Respondent alleges that Claimant’s workers did not report … the Subcontract, holds that Respondent must pay Claimant US$43,391.84 as
for work or assembly …, and that Claimant subsequently removed some of additional construction costs ….”
the construction equipment from the work site. … Respondent asserts that
Claimant’s conduct was tantamount to an abandonment of the Project and thus b. Early Withdrawal Costs
its termination of the Subcontract was valid under clause (b) ….
The Tribunal is of the view, however, that Claimant cannot be deemed to have [6] “… Claimant requests payment for premature recall costs and compensation
abandoned the Project merely on the strength of the above allegations by costs for Claimant’s Korean workers, expected to amount to … and …,
Respondent …. … [T]he record contains no other evidence in favor of Respondent respectively, TCN 1500’s monthly pay, expected to amount to … and other
with respect to this issue. withdrawal costs, expected to amount to …, for a total of ….
Claimant’s Exhibit … are apparently submitted to support Claimant’s request for
… [T]he Tribunal finds Respondent’s claim of valid termination under clause (b) payment of the above amounts. These documents, however, are insufficient to
of Article 24.2.1 to be without merit. support a finding in favor of Claimant, and there is no other supporting evidence.
Accordingly, Claimant’s above request cannot be granted.

[4] Therefore, Respondent’s sending of the notice of termination to Claimant
on July 16, 2012, was tantamount to an arbitrary termination of the
Subcontract, and was not a valid termination permitted under Article 24.2.1
of the Subcontract.”
c. Lost Profits
[7] “… Claimant requests payment for lost profits in the amount of …. Claimant’s
Exhibit … are apparently submitted to support Claimant’s request for payment
of the above amount. These documents, however, are insufficient to support a
finding in favor of Claimant, and there is no other supporting evidence.
Accordingly, Claimant’s above request cannot be granted.”

d. Performance Guarantee

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Korean Commercial Arbitration Board
[8] “… Claimant requests payment of amounts withheld as a performance
guarantee by Respondent from construction payments for work performed by
Claimant up to …, amounting to ….
In response, Respondent, while not disputing the amounts withheld, argues
that it is entitled to retain these amounts since the Project has neither been
completed nor certified as complete and defect-free.
With respect to the first prong of Respondent’s argument, since Claimant’s
incompletion of the Project was due to Respondent’s unilateral and arbitrary
termination of the Subcontract, Respondent’s refusal to pay based on such
ground is improper.
With respect to the second prong of Respondent’s argument, as there is
no evidence that Claimant’s performance of the Project was defective,
Respondent’s refusal to pay based on such ground is improper.
Accordingly, the Tribunal holds that Respondent must pay the above amount to
Claimant.”
e. Set-off against Overpayment by Respondent
[9] “In connection with the Claimant’s requests for payment above, Respondent
argues … that even if any amount is due to Claimant from Respondent, such
should be offset by the amount overpaid to Claimant for the construction work.
… [T]he Tribunal finds that Respondent has no claims for the overpayment
against Claimant; accordingly, Respondent’s above argument is without merit.”
2. Respondent’s Counterclaim
[10] “Respondent claims that the total amount due to the Claimant for the
construction work is US696,415.36 (inclusive of the additional construction
costs of US63,157.85), and that as Respondent has already paid Claimant
US$823,572.46 for the construction work, Claimant1) is actually owed the
difference between these amounts, which is US$127,157.10.
[11] “Respondent’s above Counterclaim is based on Respondent’s Exhibits …. These
documents, however, are documents unilaterally prepared by Respondent,
and as such are insufficient to support a finding in favor of Respondent in
the absence of independent corroborating evidence. The record, however, is
devoid of any such evidence. Accordingly, the Tribunal finds that Respondent’s
Counterclaim is without merit.”
1) The arbitral award states “Respondent,” but this appears to be a clerical error for “Claimant.”
7 8
III. COSTS
[12] “Considering the total circumstances of the Claim and the Counterclaim, the
Tribunal finds it appropriate to hold each Party responsible for its own costs of
arbitration.”
IV. DECISION
[13] “… [T]he Tribunal finds that Respondent is obligated to pay to Claimant
…, which consists of (i) the additional construction costs as admitted by
Respondent in the amount of … and (ii) the performance guarantee withheld
in the amount of …, and the interest thereon accrued at 6% per annum as
determined appropriate by the Tribunal, from …, the date on which Claimant
unilaterally notified the termination of the Subcontract, until Respondent’s
full payment of the above sum.
Claimant’s claims under the Claim are granted to the extent described in the
foregoing Paragraph. The remainder of the Claim and the Counterclaim are,
respectively, dismissed for lack of merit.”
Implications
I. NOTICE OF TERMINATION
To terminate the Subcontract, the Respondent, which is contractor under the
Subcontract, bears the burden of proof first that a ground listed under the
Subcontract for termination was constituted and second that written notice was
given as stipulated in the Subcontract. To terminate the Subcontract relying on the
Claimant’s failure to comply with the Respondent’s instructions, the Respondent
should give first written notice requesting the Claimant to cure the defaults within
time limit and expressing termination with its failure to do so and second written
notice to terminate the Subcontract only after the first written notice and the
Claimant’s failure to do so. Thus, attention should be brought to the point that the
giving of the first written notice, which was not sufficiently proved in the case, paves
the way for the termination of the Subcontract. With the Respondent’s successful
compliance with its burden of proof, the Arbitral Tribunal would have decided in its
favor with regard to termination of the Subcontract.
Korean Commercial Arbitration Board
KCAB case no.2
Parties Claimant (Counter-Respondent): Construction Company (Korea)
Respondent 1 (Counter-Claimant): Technology Company (USA)
Respondent 2: Energy Company (Korea)
Place of
Arbitration Seoul, Republic of Korea
Language Original in English
Subject matters - applicable law to substance
- non-conformity of goods
- breach of guarantee
- acceptance of goods
- examination of goods
- notice of non-conformity
- defense of concurrent performance
- defense of set-off
Facts
The Claimant contracted to purchase from the Respondent 1 ten reactors for the
manufacture of its products. The Respondent 2 signed the “Supply-Contract” as a
“Guarantor.” Already the Claimant’s parent company had concluded a “Technology
License Agreement” to use the Respondent 1’s process know-how for the
manufacture of the products. A few weeks after the contractual delivery date, the
parties signed an amendment to the “Supply-Contract” with respect to payment
modalities. After the delivery of the ten reactors, the Claimant began test runs to
document manifold failures, excessive dust, water leakage and dendrites during
the test runs. After completing the test runs, the Claimant’s purchasing department
issued a “Certificate of Acceptance” in accordance with the “Supply-Contract,”
stating that the reactors were proved satisfactory in specification and performance.
Then the Claimant requested from the Respondent 1 an invoice of payment for
the delivered reactors deducting a delay penalty. Finding that the reactors were
substantially short of performance stipulated under the “Supply-Contract” according
to the tests, the Claimant claimed damages against the Respondent 1 and the
Respondent 2. Meanwhile, the prices of the products continued to drop substantially
and were unclear to rebound. Finally, the Claimant has ceased the production of the
9 10
products.
The Claimant initiated arbitration relying on the arbitration clause contained in
the “Supply-Contract” which provided for KCAB arbitration. The contract provided
that the law applicable to the dispute was Korean law. The Claimant sought the
repayment of purchase price in part based on non-conformity of the products. In
response, the Respondent 1 filed a counterclaim for the contract price against the
Claimant. The Arbitral Tribunal found that there was no binding guarantee between
the parties as to output performance. In addition, the Claimant was considered to
have waived any claims under the guarantee, even if otherwise binding, by issuing
the “Certificate of Acceptance.” The Korean Commercial Code was applicable for
all the parties because they were merchants and the “Supply-Contract” was a
sales contract. According to the Code, the Claimant, a buyer, had the duty to inspect
the delivered reactors and give the Respondent 1, a seller, notice of any defects
immediately. The Claimant failed to notify the Respondent 1 and the Respondent 2
of any defects of the reactors within the time limit. Due to the explicit acceptance
and the failure of notification, the defects were deemed as accepted by the Claimant.
Without examining tortious acts by the Respondent 1 and the Respondent 2 through
delivery of allegedly defective reactors, the Tribunal was of the opinion that a claim
for damages would anyway be barred by the Claimant’s “Certificate of Acceptance.”
Consequently, the Tribunal rejected the Claimant’s claims without calculating its
damages. Also the Tribunal did not need to decide on the alleged joint and several
liability of the Respondent 2 on the ground that the Respondent 2 only guaranteed its
performance provided that proper performance was fulfilled by the Claimant and the
Respondent 1.
The Tribunal found that the counterclaim by the Respondent 1 for the price of reactor
parts was acknowledged by the Claimant without any reservation and was not subject
to the defense of concurrent performance due to the dismissal of the Claimant’s
claims. The Claimant was ordered to pay the Respondent 1 the price of the parts. On
the other hand, having found that the late delivery was neither agreed by the parties,
nor was caused by the Claimant or by force majeure, the Tribunal awarded the
Claimant a delay penalty for late delivery of the reactors and deducted this amount
from the above price of reactor parts. Also the Tribunal found that the Respondent
1’s warranty period had elapsed without being extended and thus the Claimant
was obligated to make the payment for the last installment. The alleged defects
of the reactors could also not be argued against the expiry of the warranty period
because the argument was excluded by the Claimant’s issuing of the “Certificate of
Acceptance.” Therefore, the Tribunal granted the counterclaim by the Respondent 1
for the payment for the last installment as well.
Korean Commercial Arbitration Board
Excerpt
I. APPLICABLE LAW & JURISDICTION OF THE ARBITRAL TRIBUNAL
[1] “The Parties’ arbitration agreement is included in the Supply-Contract
concluded on December 18, 2008 under Article 11 Miscellaneous. In Clause
11.5, it provides:
‘‘Any disputes which may arise between the parties, in relation to this
CONTRACT, shall be finally settled by arbitration in Seoul, Korea in
accordance with the expedited procedures in arbitration rules of Korean
Commercial Arbitration Board and under the Law of Korea.’
[2] “The jurisdiction of the Tribunal, Korean Law as governing law, and the
expedited procedure were agreed by the Parties in the Supply-Contract dated …
and no objections have been brought forward until the end of the Hearing.”
II. NON-CONFORMITY OF THE GOODS
1. Supply-Contract & Technology License Agreement between the Parties
[3] “The Parties entered into a contract (in the following “Supply-Contract”) signed
December 18, 2008 whereby Respondent 1 would sell and deliver to Claimant
10 silane based Chemical Vapor Deposition (CVD) Reactors for the production of
polysilicon usable for solar modules or semiconductors depending on the grade
of purity. The agreement provided for the reactors to be delivered to Claimant
until July 15, 2009 with a grace period until end of August 2009 for a total price
of USD 33,520,000.
[4] “Co-Respondent Respondent 2 signed the Supply-Contract as a ‘Guarantor’
whose obligations were specified in an annex to the Supply-Contract signed
by the President of Respondent 2 on December 18, 2008. The annex titled
‘Performance Certificate (Company Guarantee)’ stated that ‘in case your
company (Claimant) and Respondent 1’ perform the terms of the contract
without problems, the undersigned guarantees that our company will perform
our role diligently.’
[5] “… on January 22, 2007, Claimant’s parent company Claimant Corporation (in
the following ‘Claimant Corp.’) had concluded a Technology License Agreement
(TLA) to use Respondent 1’s process know-how for monosilane based
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polysilicon production. This TLA was replaced and partly changed by a License
Amendment signed on September 15, 2009 in view of a FBI search warrant
against Respondent 1 for alleged patent infringement. The license fee was
reduced ….
(….)
[6] “On September 25, 2009, a few weeks after the contractual delivery date, the
Parties signed an amendment to the Supply-Contract with regard to payment
modalities. Actual delivery of the 10 CVD reactors to Claimant’s “P2” factory in
Daejuk, his second production facility for polysilicon besides his “P1” factory
was completed on December 11, 2009.”
2. Acceptance of the Goods
[7] “Claimant began test runs of the reactors on December 19, 2009 and
documented manifold failures, excessive dust, water leakage and dendrites
during these test runs.
[8] “On March 19, 2010, after at least 6 test runs had been completed Claimant’s
Purchasing Department issued a Certificate of Acceptance in accordance with
… the Supply-Contract, stating that ‘…we certify that seller´s merchandise
supplied to us has been fully proven as satisfactory in all respects of the
guarantee of our purchase specification and performance.’ It further mentions
‘B. Payable amount upon this acceptance certificate: 10% of total contract
amount, USD 3,352,000.’ A warranty period of 12 months was to start with the
issuing of the Certificate of Acceptance.
[9] “On April 20, 2010, Claimant wrote to Respondent 1 by mail, stating that ‘We
issue the Acceptance Certificate and we have plan to issue last payment
according to mutual contract’ and requested for this purpose an invoice for
USD 4,424,640. This amount was calculated from the outstanding 10% of the
purchase price (USD 3,352,000) and USD 1,407,840 for separate delivery of 2
sets of CVD Reactor panel parts, minus a delay penalty of USD 335,200 (1% of
Dec. 18, 2008 contract amount) for delivery in December 2009 instead of August
2009. Claimant added that if ‘your invoice price do not match our request price,
there will be some trouble for the last payment.”
3. Examination of the Goods & Notice of Non-conformity
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Korean Commercial Arbitration Board
[10] “On August 11, 2010, Claimant wrote to Respondent 2 that according to the tests
‘conducted to this date, it is found that the foregoing products are substantially
short of the performance stipulated under the Contract’ and that it might have
no alternative but to claim damages against Respondent 1 and Respondent 2.
[11] “Between September 30 and October 8, 2010 three test runs were performed by
Respondent 1 and Respondent 2 at Claimant’s premises using Respondent 1’s
recipes which produced an estimated result of 93 / 257 / 278 (MTY) for the ten
reactors combined, as compared to 1600 (MTY) capacity claimed by Claimant to
be guaranteed by Respondent 1 and Respondent 2.”
4. Claimant’s Claim for Repayment of Purchase Price of the Goods
[12] “Claimant requests the repayment of USD 18,000,000 paid to Respondent 1 and
Respondent 2 as part of the USD 33,520,000 purchase price for 10 CVD reactors,
of which 90% had been paid before delivery on December 11, 2009. Basis for
Claimant’s request are the alleged non-compliance of the delivered reactors
with an output-guarantee given by Respondent 1 and Respondent 2, of 160 MTY
polysilicon per reactor, altogether 1600 MTY, as well as other defects of the
reactors.
[13] “Claimant refers to … of a proposal/quotation by Respondent 1 dated December
15, 2008 with the wording “one reactor can produce greater than 160 MTY of
solar grade polysilicon” and the Annex B, page 3 to the Supply-Contract with
identical wording but 180 MTY instead of 160 MTY.
[14] “…, Claimant refers to Exhibit A “Process Performance Guarantees” … as
attached to the Amendment dated September 15, 2009 to the TLA, concluded
between Claimant’s parent company Claimant Corp. and Respondent 1.
[15] “…, Claimant refers to the word “guarantee” in connection with an output per
reactor of 160 MTY as repeatedly used in the correspondence between the
Parties.”
5. Guarantee Liability
[16] “…, in the view of this Tribunal there is no explicit abstract guarantee as to the
160 MTY which could be absolutely binding for Respondent 1 and Respondent
2 because important elements of an enforceable guarantee are missing. In
particular, there is no indication at or after which time this specific output
performance should be measured.
13
[17] “Annex B to the Supply-Contract … refers to 180 MTY instead of 160 MTY
and mentions several other different production figures which should be
accomplished within 3 resp. 6 months from startup, though these tests have
never been required by Claimant nor have dates been chosen by a ‘Seller.’
Anyway, this Annex is not signed, but most probably, a copy from a purchase
specification drafted by Hyundai Engineering Co., Ltd., the Annex refers to
Claimant Corp. instead of Claimant as Buyer and does not name the Seller.
[18] “The Amendment as of September 15, 2009 to the TLA concluded Claimant
Corp. and Respondent 1, however, which might contain in Exhibit A, … a
specified guarantee is not binding to the Parties of this arbitration. Also the
correspondence between the parties contains no explicit referral to the TLA or
the TLA Amendment as being incorporated in the contractual relation between
the parties to this arbitration.
[19] “Another indication that neither Claimant nor Respondent 1considered the 160
MTY per reactor as being more than a theoretical capacity is the wording of
a mail exchange from February 19 – 21, 2009 … where Claimant’s Mr. … with
explicit approval of Mr. … remarks as to the Respondent 1 guarantee: ‘I know
that all values are determined by Claimant Man-power’s skill’ and wishes to
have indications for values when highly-well-trained people (Respondent 1
people) operate the Siemens reactor as well as under ideal circumstances of
330 days per year operation and all numbers assuming no extra downtime, no
lost batch.”
6. Remedies Waived by Accepting the Goods
a. Recovery of Price
[20] Even if a guarantee as to an output quantity were supposed to have been agreed
between the Parties, Claimant is deemed to have waived any rights thereof by
issuing the Certificate of Acceptance … early on March 19, 2010. This certificate
was to be issued within 6.5 months after delivery on December 11, 2009, that is,
at latest around end of June 2010 if no fault of the equipment would be found (5.2
D of Supply-Contract).
[21] “This early acceptance with a comprehensive wording ‘[the equipment] has
been fully proven as satisfactory in all respects of the guarantee of our purchase
specification and performance’ is in itself sufficient to negate any claims or
complaints by Claimant as to defects known, discovered or detectable up to
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Korean Commercial Arbitration Board
the date of the acceptance certificate. As evidenced through test protocols
submitted by Claimant, there have been 6 – 7 production test runs of the
reactors between December 31, 2009 and February 19, 2010 thus confirming
the statement ‘fully proven’ in the Certificate of Acceptance.
[22] “Respondent 1 and Respondent 2 could rely on the validity of this acceptance
declaration all the more as they could not know the testing results because
seemingly they had been excluded from directly conducting or supervising the
tests. These have been conducted by Claimant despite the wording of Supply-
Contract … whereas ‘Seller’ shall perform the ‘Mechanical Performance
Test’ within one month after the first start-up and probably no jointly signed
report was made before the Certificate of Acceptance was issued by Claimant.
Furthermore, these tests have not been mere mechanical test with innocuous
gases but fully fledged production test as evidenced by the test protocol and the
testimony of ….
[23] “Article 69 of the Korean Commercial Code is applicable for all parties because
they are merchants and the Supply-Contract states in its first sentence ‘Buyer
and Seller have agreed to the purchase and sale of Equipment.’ It was not a
work contract, because general contractor for the new factory was Hyundai
Engineering Co., Ltd. The undoubtedly important but somehow standardized
and substitutable ‘Siemens Type’ components delivered by Respondent 1 and
Respondent 2 were only one part of a complex installation. Any obligations in the
Supply-Contract refer only to the reactors, not the functioning or productivity of
the whole factory, whose construction, set up and other components had been
sourced by Claimant or Company A.
[24] “According to Article 69 Korean Commercial Code the buyer Claimant had
the duty to inspect the delivered goods and notify the seller of any defects and
shortfall in quality or quantity immediately. If he failed to notify the seller, he
has no right to demand price cuts, rescind the agreement or claim damages.
Claimant’s Certificate of Acceptance is a binding notification that after due
inspection no such defects existed. Therefore, only defects which were not
detectable even for an experienced buyer – as Claimant following his own public
statements and knowledge gained from the P 1 project certainly was– could be
claimed later within the warranty period.
15
[25] “However, as evidenced the reactors did at no time between the first test runs
in December 2009 and the issuance of the Certificate of Acceptance reach an
output which, if calculated for a complete year, would come even close to the
allegedly guaranteed 160 MTY. Moreover, due to excessive dust development,
building of dendrites, water leakages and power failure all of the 6 – 7
production test runs completed before March 2010 could have been regarded
as failure. Due to the explicit acceptance and the lack of notification, however,
these defects are deemed as accepted by Claimant, who - for unknown
reasons – did not notify Respondent 1 and Respondent 2 on any shortcomings
of the reactors before August 2010, despite further production tests being
continuously conducted and the products being sold to the market.
[26] “The contractual warranty period of one year after issuing of the acceptance
certificate would only be relevant for defects alleged by Claimant to have
occurred after his acceptance certificate or those which were not detectable.
None of these two possibilities has been substantiated with facts to the
conviction of the Tribunal.
[27] “From documents supplied and witness testimony one could conclude possible
motives for Claimant’s early issuing of the Certificate of Acceptance and not
formally complaining to Respondent 1 and Respondent 2 before August 2010
despite alleged defects and insufficient productivity, namely a full order book
requiring maximum production at full capacity without interruptions for repair
or improvements. Claimant’s witness … confirmed during the hearing that the
reactors were constantly producing since December 2009, that far more than
100 production runs were conducted and that the products were sold to the
market.
[28] “…, Claimant tried to optimize production by using other than Respondent
1’s recipes and, as evidenced by Claimant’s own public releases, Claimant
switched at least part of the production to the more lucrative higher purity
semiconductor-grade polysilicon which, however, results in smaller
quantities as the originally intended solar-grade polysilicon production.
These circumstances could have provided a motivation to keep, in particular,
Respondent 1away from Claimant’s factory.”
b. Tort Claim
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Korean Commercial Arbitration Board
[29] “Tortious2) acts by Respondent 1 and Respondent 2 through delivery of alleged
defective reactors are not seen by the Tribunal but a claim for damages
would anyway be barred by Claimant’s Certificate of Acceptance, issued in full
knowledge of the condition and performance of the reactors from December
2009 until early March 2010.”
7. Dismissal of Claimant’s Claims
[30] “…, the Tribunal had to reject Claimant’s requests and need not verify Claimant’s
quantum calculation.
[31] “Given the dismissal of Claimant’s request it is not necessary to decide on the
alleged joint and several liability of Co-Respondent Respondent 2, but as obvious
from the wording … Respondent 2 only guaranteed for its own performance
provided proper performance by Claimant and Respondent 1.”
III. COUNTERCLAIM
1. Contract Price & Defense of Concurrent Performance
[32] “Respondent 1’s Counterclaim refers to two different invoices namely USD
3,352,000 for the remaining 10% of the contract price, payable 7 days after
the March 19, 2010 issuance of the Certificate of Acceptance, as invoiced by
Respondent 1 on April 28, 2010 and an invoice with USD 1,407,840 already
issued on December 29, 2010 for polysilicon reactor parts. Both invoices have
admittedly not been paid by Claimant and due to the above dismissal of his
claims, there can be no holding back any payment to Respondent 1 based on the
‘Defense of Concurrent Performance.’”
a. Counterclaim for Part Delivery
[33] “Counterclaim as to USD 1,407,840 for part delivery justified: Whilst Claimant
objects for several reasons to pay the last 10% contractual installment, no
2) The arbitral award states “Tortuous,” but this appears to be a clerical error for “Tortious.”
17
factual or legal objection has been made against the invoice for the two reactor
panel parts. The amount is acknowledged by Claimant’s mail dated April 20,
2010 without any reservation and not subject to the submission of a warranty
bond. Therefore, the Tribunal has to award to Respondent 1 a payment of USD
1,407,840, evidenced by invoice … issued on December 29, 2009.
b. Counterclaim for Last Installment
[34] "Counterclaim for last installment of USD 3,352,000: The last 10% contractual
installment was due 7 days after the issuance on March 19, 2010 of the
Certificate of Acceptance by Claimant. Only on April 20, 2010 Claimant declared
its willingness to pay and demanded an invoice from Respondent 1 without
however referring to the submission of a warranty bond as required in … of the
Supply-Contract dated December 18, 2008. Nevertheless the Tribunal finds that
Claimant was not obliged to make the payment without prior submission by
Respondent 1 of a warranty bond, securing the 10% last installment of contract
price for the 12 months warranty period. Following the issuing of the acceptance
certificate, the warranty obligation and parallel the required duration of the
warranty bond was running until March 2011.
[35] “…, in this arbitration in 2012 /13, after the warranty period has elapsed for at
least one and probably even two years, the Tribunal does not accept to require
such warranty bond. There is no evidence that the warranty period has been
extended by the Parties or by events triggering an extension as provided in
Clause … of the Supply-Contract. Even if the repair and maintenance work
undertaken by Respondent 2 is regarded as an acknowledgement of faults,
those repairs in 2010 could not have prolonged the warranty period beyond
2011. Finally, Claimant has referred to the warranty bond the first time in the
course of this arbitration, long after the expiry of the warranty period.
(….)
[36] “The alleged initial faults and defects of the reactors delivered by Respondent
1 and Respondent 2 cannot be an argument against the expiry of the warranty
period because, as decided above, any such complaints are excluded by virtue
of the Certificate of Acceptance issued by Claimant after at least six real
production tests.
[37] “Counterclaim for USD 3,352,000 last installment justified: Therefore, the
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Korean Commercial Arbitration Board
Tribunal accepts Respondent 1’s request as to payment of 10% outstanding last
installment, equivalent to USD 3,352,000. However, Tribunal does not award any
interest thereon until the issuing of this award because “Respondent 1 failed
to submit the warranty bond required as a precondition for payment during the
warranty period.”
2. Claimant’s Set-off Defense
[38] “Tribunal noted that Claimant, by mail as of April 20, 2010, confirmed payments
due to Respondent 1 for the final contractual installment and for the delivery
of two reactor panel parts but for first time claimed a delay penalty of USD
335,200. Respondent 1 and Respondent 2 have referred to settlement talks
between the parties following the April 20, 2010 mail but no solution could
be reached. Claimant’s indication that ‘there will be some trouble for the last
payment,’ if Respondent were to challenge the delay penalty, could be regarded
as threatening with an off-set of more than tenfold the amount allegedly due
to Claimant. Instead of deducting the alleged delay penalty from the promised
payment, Claimant did not pay anything, claiming lack of performance of the
reactors only as late as on August 11, 2010.
[39] “Claimant requested with mail dated April 20, 2010 from Respondent 1, a
delay penalty of USD 335,200, which is equivalent to 1% of contract price for
late delivery of the 10 reactors. The actual delivery on December 11, 2009 and
the contractual delivery date, at latest, end of August 2009, are undisputed.
However, Respondent obviously refused to accept the delay penalty, but did not
prove that the late delivery was agreed by the parties or caused by the buyer or
was caused by force majeure.
[40] “As evident from Claimant’s undated mail which was answered by Respondent
1 on November 9, 2009 …, Claimant was still doing final works of construction
and had scheduled commissioning from mid-November to second week
of December. There is no indication that Claimant urged earlier delivery or
expressed disappointment with the late delivery at any time between the agreed
delivery date on July 15, 2009 and April 20, 2010.
[41] “The reservation of a first testing time in January / February 2010 as indicated in
Respondent 1’s letter dated December 2, 2009 and Claimant’s mail of same day
19
… referring to a reactor start from December 18, 2009, also make it doubtful if
an earlier delivery was expected by Claimant. Likewise an Amendment to the
Supply-Contract with a payment increase for Respondent 1 and Respondent 2
was concluded by the Parties on September 25, 2009 without referring to the
overdue delivery.
[42] “Delay Penalty of USD 335,200 justified: Since no agreement by Claimant to
the undisputed late delivery or any other acceptable reason for the delay was
submitted by Respondent 1 and Respondent 2, the Tribunal has to award the
1% delay penalty to Claimant. This amount should be deducted from the USD
1,407,840 due from Claimant to Respondent 1 for the delivery of two reactor
panel parts, because both amounts were due from April 20. 2010, when
respectively confirmed and claimed by Claimant.”
IV. CLAIMS FOR INTEREST
[43] “Respondent 1– like Claimant – requested 6% interest on the amount awarded
in accordance with Article 54 of the Korean Commercial Code because there is
no other agreement between the Parties.
[44] “As decided above for the USD 3,352,000 final installment, there is no interest
payable except in case of post-award late payment.
[45] “The Tribunal finds it reasonable to fix the starting point of interest accrual
according to the specific circumstances for each component. For the two panel
parts as invoiced on December 29, 2009, the interest is to be accrued from April
20, 2010, when Claimant confirmed USD 1,407,840. This amount after deduction
of USD 335,200 delay penalty decreases to USD 1,072,640 for which the 6%
interest will be accrued up to the date of this Final Award.
[46] “Post-award interest of 20% per annum shall be paid starting 14 calendar days
after the issuing day of this Final Award until the above referenced sum is fully
paid.”
V. COSTS
[47] “Claimant / Counter-Claimant in both arbitrations requested that all arbitration
costs be borne by Respondent resp. Counter-Respondent.
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Korean Commercial Arbitration Board
[48] “Pursuant to Article 61(2) of the KCAB Arbitration Rules, the Tribunal may at its
own discretion, taking into account the circumstances of the case, apportion the
costs between the arbitration between the Parties.
[49] “If the amounts of Claim and Counterclaim are considered together in their
entirety of more than USD 23,000,000, then Claimant was successful only as to
the USD 335,200 delay penalty, which is less than 2% of the combined amounts
in dispute and less than 2% of Claimant’s request. Therefore, the Tribunal is
of the view that Claimant should bear all Arbitration Costs. The Tribunal has in
addition considered that according to KCAB domestic arbitration standards, the
Parties has to bear all its legal costs and other expenses.”
VI. DECISION
[50] “…, the Tribunal renders the following Final Award:
(1) Claimant is ordered to pay to Respondent 1 the sum of USD 4,424,640;
(2)Claimant shall pay to Respondent 1 6% interest per annum on USD 1,072,640
accruing from April 20, 2010 to the date of this Final Award;
(3) Claimant shall pay to Respondent 1 20% interest per annum on USD 4,424,640
starting 14 calendar days after the issuing day of this Final Award until the
above referenced sum is fully paid.
(4) Any other claims or defenses by the Parties are hereby dismissed with
prejudice.”
Implications
I. BINDING EFFECT OF CONTRACT ON THIRD PARTY
The amendment to the “Technology License Agreement” concluded between the
Claimant’s parent company and the Respondent 1, which might contain a specified
guarantee, is not binding the parties of this arbitration. The parties did not refer to the
“Technology License Agreement” or its amendment to incorporate it in the contracts
between them either. However, it is necessary to examine the possibility of a contract
concluded between two parties also binding other parties. The corporate veil could
be pierced if the Claimant’s parent company exercised absolute control over the
Claimant or the Claimant’s parent company participated effectively and substantially
in the conclusion, performance, and termination of the contract concerned. Also if
21
the Claimant’s parent company concluded the agreement as an agent on behalf of
the Claimant, its binding effect could be extended to the Claimant. 3)
II. ACCEPTANCE OF GOODS
The Claimant issued a “Certificate of Acceptance,” stating that the goods were
proved satisfactory in specification and performance. The Claimant, instead of
complaining non-conformity to the Respondents, was motivated to early issue
the “Certificate of Acceptance” to satisfy high demand in the market without
interruptions for repair or improvements. Unless the Claimant were otherwise
entitled to revoke acceptance, a claim for damages relying on non-conformity of
the goods would be barred by the Claimant’s “Certificate of Acceptance.” Accepting
the goods could lead to a waiver of the right to rely on a lack of conformity of the
goods. If the buyer accepted the goods as conforming and were not entitled to
revoke acceptance, it would be prevented from relying on the defects of the goods.
Even with the market condition demanding early acceptance, the buyer should give
the seller notice of non-conformity to retain its remedies for the delivery of non-
conforming goods.
III. TORT CLAIM
The Arbitral Tribunal did not review whether delivery of allegedly defective goods
by the Respondents constituted a tort but held that a claim for damages founded in
tort would be barred by the Claimant’s acceptance of goods. Korean law was chosen
for the contract by the parties. Meanwhile, the applicable law to a tort should be
determined. The Arbitral Tribunal may determine the law applicable to a tort by the
conflict of laws rules which the Tribunal considered applicable.
Article 32(3) of the Korean Private International Law provides:
“Notwithstanding the preceding paragraphs, if a tort violates an existing legal
relationship between the tortfeasor and the injured party, the law applicable to
that legal relationship shall govern.”
Under the Korean conflict of laws rules which aim to create a uniform connection to
a single law, a claim founded in tort, if the tort violates an existing legal relationship
between the tortfeasor and the injured party, should also be governed by Korean law
which is the law applicable to the contract.
3) Nigel Blackaby et al., Redfern and Hunter on International Arbitration (5th ed.) 99-103 (2009).
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Korean Commercial Arbitration Board

shipment. However, the Claimant rejected this proposal. A quality inspection for the
third shipment was conducted in accordance with the contract to indicate that the
quality was lower than the guaranteed requirement but within the acceptable limit
of range as provided in the contract. The third shipment was delivered at an adjusted
KCAB case no.3
price based on the quality. The Respondent demanded that the price should be
adjusted in accordance with the difference between the loading port analysis and the
Parties Claimant: Resources Company (Singapore) discharging port analysis. Again the Claimant rejected this proposal, demanding full
Respondent: Power Company (Korea)
payment of purchase price for the third shipment. Despite the Claimant’s refusal,
Place of the Respondent unilaterally appointed a third party inspection agency to conduct
Arbitration Seoul, Republic of Korea a discharging port sample analysis for the remaining part of the second shipment
and the entire third shipment. The Claimant attended the inspection process on
Language Original in English
condition of ruling its admission out. Based on the analysis results showing the
Subject matters - applicable law to substance lower quality at the discharging port than that at the loading port, the Respondent
- application of KCAB International Rules requested the Claimant to reduce the purchase price for the second and third
- amendment of claim shipments in accordance with the difference in the quality at the two ports. Rather
- non-conformity of goods
than agreeing to reduce the purchase prices in accordance with the discharging port
- examination of goods
- breach of warranty analysis, the Claimant insisted the Respondent to appoint an independent agency
- hardship to analyze the loading port umpire samples of the second and third shipments.
- deposit by a provisional attachment Despite the Respondent’s refusal to appoint an agency, the Claimant appointed an
- defense of concurrent performance independent agency to analyze the shipments and to conclude that the coal in the
- applicable statutory interest rate shipments was within the parameters set forth in the contract. Another purchaser of
coal from the Claimant sought reduction of purchase price due to the lower quality
and damages due to delay in shipment and obtained a provisional attachment order
Facts
on the Claimant’s claim against the Respondent for purchase price of coal under
the contract. In accordance with the attachment order, the Respondent deposited
The Respondent contracted to purchase from the Claimant a quantity of coal mined
a certain amount out of the purchase price for the third shipment. The Respondent
from Indonesia to be delivered in four shipments. The contract provided for the final
notified to the Claimant that it would pay a reduced amount based on the discharging
determination of the quality of coal at the loading port and the adjustment of the
port analysis instead of paying the purchase price based on the loading port analysis.
purchase price in accordance with variation of quality. Also the contract provided
The Respondent partially paid for the third shipment.
that title and risk of loss or damages should pass to the Respondent as the coal
passed the ship’s rails at the loading port. The Claimant was a trader of coal and
The Claimant initiated arbitration relying on the arbitration clause contained in the
procured the contracted coal from its own suppliers. An independent inspection
contract providing for KCAB arbitration. The Claimant claimed an amount in payment
agency appointed by the parties in accordance with the contract conducted a
for the third shipment and interest. In response, the Respondent objected that the
quality inspection for the second shipment and certified the quality as satisfying
coal of substandard quality was delivered in the second and third shipments. As a
the guaranteed requirement under the contract. Around 20 days after the second
result, the Respondent was forced to use additional quantity of high calorific value
shipment was delivered, the Respondent notified a complaint about the quality of
coal, incurring excessive costs for which the Respondent claimed damages. Also the
coal based on its own analysis results and demanded price reduction for the second
Respondent was exempted from the payment obligation to the Claimant to the extent

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Korean Commercial Arbitration Board
of the above deposit. The amount of overpayment for the second shipment and
damages was set off against the purchase price for the third shipment to leave no
payment obligation of the respondent to the claimant. Furthermore, the Respondent
objected to the application of the statutory interest rate of 20% per annum under the
Act on Special Cases Concerning Expedition, etc. of Legal Proceedings.
Being of the opinion that the contract was read in its entirety to reflect the parties’
intent, the Arbitral Tribunal first held that the purchase price should be determined
on the basis of the loading port analysis of the quality. While the Respondent
was entitled to challenge the loading port analysis by appointing an independent
laboratory to analyze the umpire sample, it failed to initiate the final challenge
process despite the Claimant’s repeated invitation to do so. The reliability of the
loading port analysis would remain unrefuted even with the discrepancy between
the loading port analysis and the discharging port analysis conducted by the
Respondent. The Arbitral Tribunal granted the claim for the purchase price, rejecting
the Respondent’s argument that the purchase price should be reduced on the basis
of the discharging port analysis. The Arbitral Tribunal also found that the Claimant
did not breach a warranty obligation under the contract because it satisfied the
minimum requirement under the contract on the basis of the loading port analysis
as agreed by the parties. The Tribunal held that the Claimant’s refusal to enter into
good-faith negotiations with respect to hardship on account of technical difficulties in
using coal would not by itself lead to remedies for the Respondent. Accordingly, the
Tribunal rejected the Respondent’s argument for set-off based on alleged breach
of a warranty obligation and refusal to negotiations by the Claimant. With respect
to applicable interest rate, the Tribunal denied, in light of the nature of the dispute
and all the circumstances of the case, the application of the statutory interest rate of
20% per annum under the Act on Special Cases Concerning Expedition, etc. of Legal
Proceedings.
Excerpt
I. APPLICABLE LAW & JURISDICTION OF THE ARBITRAL TRIBUNAL
[1] “… [T]he Parties entered into the coal-sales/purchase contract …, the content of
which is summarized below …. Article 17 is the dispute resolution provision of
the Agreement, which provides:
‘17. Dispute and Arbitration
25
All disputes, controversies, or differences which may arise between the
parties, out of, or in relation to or in connection with this contract, or for
the breach thereof shall be finally settled by arbitration in Seoul, Korea
in accordance with The Commercial Arbitration Rules of The Korean
Commercial Arbitration Board and under the laws of Korea. The award
rendered by the arbitrator(s) shall be final and binding upon both parties
concerned.’
[2] “Although Article 17 of the Agreement is silent as to which KCAB rules
(“Domestic” or “International”) apply, pursuant to Article 3 of the KCAB
International Rules, such rules shall apply in case where “the parties have
agreed in writing to refer their disputes to arbitration before the KCAB, and
the arbitration is an International Arbitration.” As Claimant, at the time of the
conclusion of the Agreement, had its place of business outside of Korea, this
matter falls under the definition of “International Arbitration” as stated in Article
2 of the KCAB International Rules. Therefore, the KCAB International Rules …
shall apply to this arbitration.
[3] “According to Article 17 of the Agreement, the Parties agreed on the law of
Korea as governing law.”
II. AMENDMENT OF CLAIM
[4] “[I]n the Post-Hearing Brief …, for the first time, Claimant included, as a relief
sought in this arbitration, the following:
‘‘b. declaring that Claimant is the beneficiary of the monies in the amount …
deposited by Respondent into the Seoul Central District Court dated 19 April
2013 (Deposit Number 2013geum8344) (‘Court Deposit Amount’)’
[5] “This relief sought seems to be in replacement of a relief sought in its Opening
Memorial …, namely, ‘declaring that the Provisional Attachment has no effect
on any final award rendered by the Tribunal.’ This clearly is an amendment to its
original claim and is allowable only in accordance with Article 17 of the Rules,
which states that the Tribunal shall not allow any amendments or supplements
to a claim or defense if the Tribunal ‘considers it inappropriate to allow such
amendment or supplement because of delay to the proceedings, prejudice to
the other parties or any other circumstances.’ In light of the timing, allowing
such an amendment to the original claim would be prejudicial to Respondent4) ,
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Korean Commercial Arbitration Board
as it has had no opportunity to rebut this new claim. Therefore, the Tribunal has
determined not to allow this amendment to the original claim.”
III. NON-CONFORMITY OF THE GOODS
1. Determination of Quality of Coal
a. Loading Port Analysis v. Discharging Port Analysis
[6] “Claimant alleges that, in accordance with the terms and conditions of the
Agreement, it has performed its obligations and therefore is entitled to receiving
the full payment for the second and third Shipments of Coal. In response,
Respondent contends that the quality of Coal delivered for the second and third
Shipments fails to meet the contractual requirements, in particular, under
Article 4.01 of the Agreement.
(….)
[7] “The core subject of a dispute between the Parties is whether the quality of Coal
… has satisfied the minimum requirement under Article 4.01 …. In this regard,
the Parties are sharply divided on how to determine whether the above Article
4.01 minimum quality requirement has been met.
[8] “The answer to this question must be found from the provisions of the
Agreement which finally reflect the Parties’ mutually shared intent. Therefore,
the Tribunal turns to examine all the relevant provisions of the Agreement. The
title of Article 5 of the Agreement is ‘Determination of Quantity and Quality.’
Hence, it is natural to examine this provision first. Article 5.01 provides that ‘[t]
he determination of the . . . quantity at the loading port shall be final.’ Further,
its determination shall be made ‘by an International Independent Inspection
Agency … which will be selected by the mutual agreement between the parties.’
In this case, the Parties do not dispute that … and … are ‘the Agency’ selected
by the mutual agreement of the Parties for the second and third Shipments,
respectively. In fact, … and … conducted the quality determination and issued
the second and third Shipment Certificates, respectively, both of which indicate
the quality of the Coal in terms of …, respectively, which satisfy at least the
minimum … requirement … under Article 4.01 of the Agreement.
4) The arbitral award states “Claimant,” but this appears to be a clerical error for “Respondent.”
27
[9] “Then, a question arises: What is the meaning of the above Article 5.01.1’s
language, that is, “the determination of the quality at the loading port shall be
final”? To answer this question, in the view of the Tribunal, it is necessary to
answer a more preliminary question, that is, what is the purpose of that quality
determination?
[10] “This latter question should be answered on the basis of the relevant provisions
of the Agreement as well. In the first place, the immediate following provision,
Article 5.02.1, provides that “the quality certified by such Agency shall be the
basis for determination of the amount payable by the Buyer for the shipment.”
In other words, the quality determination by the Agency at the loading port
shall be used for determining the amount of the purchase price for the relevant
shipment. In this case, what is disputed between the Parties is the proper
amount of the purchase prices of the second and third Shipments.
[11] “…, what is the meaning of “final” under Article 5.01.1? The plain meaning
of “final” in legal sense is “conclusive” or “allowing no further doubt or
dispute.” Therefore, according to its plain meaning, it appears that, unless
other provisions of the Agreement indicate otherwise, the proper amount of
the purchase prices that should be paid by Respondent with respect to the
second and third Shipments must be based on the quality certified by … and …,
respectively, and their determination of the quality of Coal at the loading port
shall be conclusive and shall not be disputed again between the Parties. The
contractual amount invoiced by Claimant for the second and third Shipments
was calculated on the basis of the above loading port analysis of the quality, and
the accuracy of such calculation and adjustment pursuant to Articles 7 and 8 as
such is not disputed by Respondent.
[12] “The Tribunal also draws its attention to Article 5.03. This provision enables
the Buyer (Respondent) to challenge the result of a loading port analysis made
by the Agency pursuant to the preceding paragraphs of the same Article 5.
Namely, the Buyer may appoint an “Independent Laboratory” for the purpose of
analysing the umpire sample to challenge the loading port analysis conducted
by the Agency. However, it should be noted that this challenge process must be
triggered by the Buyer (Respondent), but Respondent did not do so in this case.
Rather, despite that Claimant repeatedly invited Respondent to initiate this
process by appointing the International Laboratory, Respondent has refused
to do so. Therefore, the fact that Respondent did not appoint the International
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Korean Commercial Arbitration Board

Laboratory in this case alone cannot be used to deny the reliability of the loading [17] “The essence of Respondent’s argument here is that there is an exception
port analysis results. to, or a derogation from, the application of Article 5.01. That is, when the
quality of Coal is found to be lower than the minimum requirement …, it would
[13] “What is more important about this challenge process is that Article 5.03 clearly be a breach of the contractual obligations under Article 4 and thus a price
stipulates that this is the ‘final’ process as to the quality of Coal. It provides that calculation/adjustment method for a ‘normal’ case under Articles 5, 7, 8 and 9
‘[t]he results of the Independent Laboratory shall be final as to the quality of shall not apply.
the delivery in question.’ This strongly suggests that if the Buyer (Respondent)
wishes to challenge the loading port analysis of the quality of Coal, it would have
[18] “Even assuming that a price calculation/adjustment method under Articles 7,
to be through this Article 5.03 process (umpire sample analysis), and the results
8, and 9 cannot apply when the quality of Coal … is lower than [the minimum
of this umpire sample analysis shall become the “final” determination of the
quality requirement], a more fundamental and preliminary question still
quality at issue and therefore shall not be disputed again.
remains. That is, how should the Parties determine whether the [quality] at
issue is higher or lower than [the minimum quality requirement]? In the view
[14] “This interpretation is also reinforced by another provision of the Agreement,
of the Tribunal, Article 5.01.1 provides for this determination methodology:
Article 6 (Rejection), which immediately follows Article 5. Article 6.01 provides:
a loading port analysis by the Agency. No other provisions of the Agreement
‘6.01 If the quality of the loaded Coal as determined pursuant to the quality
provide otherwise.
analysis at the loading port … pursuant to Article 5 is outside the limits of
the range as specified in Article 4, the Buyer shall have…the right to reject
[19] “Respondent further contends that the discharging port analyses conducted
such inferior coal, and also the right to cancel or terminate this contract
by itself as well as an independent inspection agency … reveal that the [quality]
without further liability… Nevertheless, in the event that the quality is
of Coal for both the second and third Shipments was lower than the minimum
outside the limits of range as specified in Article 4, the Buyer will accept
quality requirement …, and hence the loading port analysis conducted by the
the Coal if the Buyer judges that Coal can be used by the Buyer and if both
Agency … is unreliable and thus cannot be used as the basis of the purchase
parties reach an agreement to a price adjustment thereof.’
price determination.

[15] “Article 6 provides for optional remedies for the Buyer (Respondent) in case of
[20] “…, the discrepancy between the loading port analysis and the discharging port
a breach of Article 4, that is, when the minimum requirement under Article 4
analysis as such cannot be a valid reason to cast doubt to the former in terms
has not been met. Such remedies include “rejection of the coal,” “cancelling or
of its reliability. There is no evidence to prove that the loading port analysis
terminating the contract,” or “price adjustment.” These remedies are available
deviates from the American Society for Testing and Materials (ASTM) Standards,
when there is a breach of Article 4, and more relevantly, whether such a breach
as required under Article 5.02.1. Even though Respondent expressed some
has occurred should be determined on the basis of the “quality analysis at the
suspicion about the objective nature of the loading port analysis or the possibility
loading port pursuant to Article 5.” This strongly suggests that the Parties
of manipulation while pointing out, for instance, that the umpire sample was
mutually intended (and agreed) to address an Article 4 breach situation on the
sealed within two, rather than one, working day, it is not sufficient to prove that a
basis of the results of the loading port analysis rather than any other extraneous
sampling for shipment analysis or its analysis itself was conducted in a manner
factors, if any.
that is contrary to the ASTM Standards and hence cannot be relied upon.
[16] “…, the Tribunal considers that Claimant has made the prima facie case that it
is entitled to receiving the full payment of the purchase prices as alleged in this [21] “The Tribunal is not in a proper position to make a judgment on which analysis
arbitration for second and third Shipments. (loading port analysis v. discharging port analysis) is more objective and
(….) reliable. Such discrepancy might have arisen for unknown reasons. In any

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Korean Commercial Arbitration Board

event, the mission of the Tribunal in this arbitration is not to make that scientific seller in this case (Claimant) has not agreed to do so. Rather, it has consistently
or technical judgment. Rather, it is to determine whether Claimant is entitled refused to do so. Therefore, the two examples introduced by Respondent are
to receiving the full payment of the purchase price for the second and third not helpful for the resolution of the current dispute between the Parties.”
Shipments which was based on the quality of Coal certified by the Agency in
b. Warranty Obligation
its loading port analysis under Article 5.01.1. In this respect, the Tribunal has
accepted Claimant’s argument that the amount of the purchase prices as
[25] “[Further,] [r]espondent contends that Claimant breached a warranty obligation
claimed was calculated and adjusted in accordance with the relevant terms and
under Article 12.01(a) since the quality of Coal in question fails to meet the
conditions of the Agreement.
minimum requirement under Article 4 …. Therefore, according to Respondent,
Claimant must compensate Respondent for damages incurred by Respondent
[22] “…, the Tribunal rejects Respondent’s argument that the amount of the payment
due to Claimant’s breach, of which amount is …, and this amount must be set
for the second and third Shipments should be recalculated and reduced on the
off against Claimant’s claimed amount. In this regard, the Parties agree that,
basis of the discharging port analysis, not because its analysis is untrustworthy,
theoretically, Article 12.01(a) would be breached if the quality of Coal …is lower
but because there is no contractual basis to support this line of argument.
than [the minimum quality requirement]. However, Claimant denies that it
actually breached Article 12.01(a).
[23] “…, it is worth noting that, at an early stage of the bidding process for the Coal
transactions, Claimant gave options to Respondent with respect to the locus of
[26] “Once again, what is disputed between the Parties is whether the quality of Coal
the quality analysis which is inter-connected to the price adjustment and the
… is lower than [the minimum quality requirement] and, for this judgment, how
final payment amount of the purchase price. The first option was the loading
that quality should be determined.
port and the other was the discharging port. Claimant submitted an offer while
Article 12.01(a) provides:
choosing the former option in the bidding process, and Respondent accepted
‘12.01 The Seller shall supply the Coal of quality in accordance with the
it, which led to the conclusion of the Agreement including Article 5. In this light,
provisions of the Contract and warrants that:
it is reasonable to interpret the Parties’ intent as agreeing to the loading port
(a) Each shipment of Coal shall be of good grade meeting the requirements
analysis under Article 5 for the purpose of determining the quality of Coal even
referenced in Article 4 (Quality) ….’
under the circumstances at hand in this dispute.

[27] “Article 12 itself does not specifically address how to determine whether each
[24] “Respondent additionally alleges that use of methods other than loading port
shipment of Coal meets the Article 4 quality requirement …. Nevertheless, it is
analysis or umpire sample analysis is prevalent as an industry practice. To
also true that Article 12 does not exclude an application of Article 5.01 for this
show that it is an established industry practice, Respondent introduces at
determination. This logically means that a normal process for the determination
least two transactions involving the third parties … where the sellers of the
of the quality of Coal should apply for the purpose of whether the Seller
Indonesian bituminous coal agreed to reduce the purchase price when there
(Claimant) breached a warranty obligation under Article 12.01(a). As noted
was a discrepancy between the loading port analysis and the discharging port
above, Article 5.01.1 is the only contractual provision that explicitly provides for
analysis. Even assuming that the facts underlying the two examples of the coal
the methodology of determining the quality of Coal. It should also be noted that
sales transactions are true, it should be noted that there is a critical difference
Article 5.01.1 immediately follows Article 4. The title of Article 4 is “Quality” and
between the two examples, on the one hand, and the current transaction at
the same for Article 5 is “Determination of Quantity and Quality.” Unless other
issue, on the other hand. In the former, the sellers agreed to use the discharging
provisions of the Agreement provide otherwise, it is natural and contextually
port analysis as the basis of recalculating or readjusting the purchase price,
correct to interpret Article 5 as providing a methodology to check whether the
regardless of the timing of such agreement between the parties. In contrast, the

31 32
Korean Commercial Arbitration Board
quality requirement referenced in Article 4 has been met. No other provisions,
including Article 12, of the Agreement provide otherwise.
[28] “As noted earlier, the quality determination properly made pursuant to Article
5.01.1 against the Coal in question indicates that the Seller (Claimant) shipped
the Coal of which [quality] is above the minimum requirement under Article 4….
[29] “Therefore, the Tribunal finds that Respondent has failed to prove that Claimant
breached a warranty obligation under Article 12.01(a). Accordingly, Respondent’s
argument for set-off on the basis of Article 12 breach is rejected.”
2. Hardship
[30] “…, Respondent contends that Claimant breached Article 15.02 since it failed
to enter into good-faith negotiations to rectify the situation that arose from
the technical difficulty in using Coal due to the quality of Article 4. Therefore,
according to Respondent, Claimant must compensate Respondent for damages
incurred by Respondent due to Claimant’s breach, of which amount is …, and
this amount must be set off against Claimant’s claimed amount. In response,
Claimant argues that Article 15.025) is inapplicable to the current situation at
hand.
[31] “Article 15.02 (Hardship) provides in relevant part that:
‘‘In the event Buyer judges that there is a substantial difficulty in using Coal due
to the quality of Article 4 . . ., which may arise in future for technical . . . reasons,
both Parties shall, upon request by Buyer and under recognition of such
hardship on Buyer, enter into good-faith negotiations to rectify such situation.’
[32] “In order to determine whether Claimant breached Article 15.02, the Tribunal
considers it necessary to first define the scope of this provision. In other words,
what conditions should be met to trigger both Parties’ obligation to enter into
good-faith negotiations under Article 15.02?
5) The arbitral award states “12.02,” but this appears to be a clerical error for “15.02.”
33
[33] “First, there should be a substantial difficulty in using Coal due to the quality
of Article 4 which arose for technical/environmental reasons. The Parties are
split on whether this situation includes Claimant’s breach of Article 4, that is,
an obligation to meet the minimum quality requirement …. Claimant denies this
provision covers contractual breach. On the other hand, Respondent appears
to argue that Article 15.02 applies to both contractual breach and non-breach
situations.
[34] “The Tribunal considers that Article 15.02 applies to non-breach situations only
for the following reasons: First of all, Article 15.02 addresses ‘a substantial
difficulty in using Coal due to the quality of Article 4 for technical reasons.’
Its language is not ‘due to a breach of Article 4’ or ‘due to failure to satisfy
the quality requirement under Article 4.’ Thus, a plain meaning of the above
phrase suggests that Article 15.02 addresses a substantial difficulty in using
Coal which arises due to the quality requirements referenced in Article 4,
that is, a substantial difficulty arising for technical reasons when the quality
requirements under Article 4 have been met. This interpretation is justified in
light of the fact that there are other provisions of the Agreements (e.g., Articles
6 and 12) which specifically address breach of contractual obligations, including
breach of Article 4. In addition, this right to good faith negotiations is subject to
two conditions: (i) that the buyer makes a request, and (ii) that such hardship on
buyer is recognized. Claimant argues that “[i]f Article 15 was intended to cover
situations where the seller has breached the Agreement, why would recognition
of such hardship by seller be a pre-requisite to good faith negotiations?” The
Tribunal agrees.
[35] “In any event, since the Tribunal has already found that Respondent has failed to
prove breach of Article 4 on the part of Claimant, it is of no practical use arguing
that Article 15.02 applies to an Article 4 breach situation in this case.
[36] “Given that Article 15.02 addresses a substantial difficulty arising for technical
reasons when the quality requirements under Article 4 have been met, is the
current situation falling under this category? It is proven by Respondent that
it experienced some technical difficulties when actually burning the Coal in its
power plants and was required to use higher calorific value coals to meet the
target power output than expected at the time of entering into the Agreement.
The Tribunal understands that Claimant does not agree that such a situation
34
Korean Commercial Arbitration Board
falls under “a substantial difficulty arising for technical reasons.” However,
the language of Article 14.2 empowers the Buyer (Respondent) to “judge” that
there is a substantial difficulty arising for technical reasons. In Respondent’s
judgment, the current situation at hand falls under that substantial difficulty,
which, in the view of the Tribunal, is not meritless.
(….)
[37] “The good-faith negotiation must be triggered ‘upon request by Buyer and under
recognition of such hardship on Buyer.’ As to the Buyer’s request, it is proven
that Respondent repeatedly requested for discussions of the then current
technical difficulties and proposed to jointly conduct a discharging port analysis
for the purpose of reducing the contract amount of the purchase prices for the
second and third Shipments. For satisfying this ‘request’ condition, in the view
of the Tribunal, it is not necessary for Respondent to explicitly refer to Article
15.02 in making such request. Thus, the Tribunal finds that this prior ‘request’
condition has been met.
[38] “The Tribunal turns to the next condition, namely, “under recognition of
such hardship on Buyer.” Claimant contends that it has never “recognized
such hardship on Buyer.” Nevertheless, to satisfy this requirement, it is not
necessary for the Buyer (Respondent) to prove that the Seller (Claimant) made
a statement in an explicit manner, namely, that “I as the Seller recognize such
hardship (i.e., technical difficulty) on you (Buyer).” In this regard, the Tribunal
draws its attention to the fact that, as soon as Respondent raised an issue with
Claimant about the quality of Coal, the latter conveyed the former’s complaint
to the original suppliers of the Coal. As a seller under the long-term contract, it
was natural that Claimant did not simply ignore Respondent’s complaint about
the quality of Coal. Although Claimant eventually did not agree to readjust the
final purchase price of Coal in accordance with the discharging port analysis,
it appears that Claimant as a trader would have been willing to accommodate
Respondent’s concerns if the original Coal supplier also had been susceptible
to adjusting the original purchase price in light of the discharging port analysis
results. This fact alone, in the view of the Tribunal, is sufficient to satisfy the
above “hardship recognition” condition.
[39] “…, the Tribunal finds that all the conditions for triggering Article 15.02
obligations have been met. Accordingly, both Parties were under the obligation
35
to “enter into good-faith negotiations to rectify such situation.” Then, did
Claimant breach this obligation? Before answering this question, the Tribunal
considers it necessary to examine the legal nature of Article 15 obligations as a
whole, which contains Article 15.02 as a subpart.
[40] “First, the title of Article 15 is ‘Hardship.’ In addition, this provision is located
fairly at the last part of the Agreement and is preceded by all the other
provisions addressing breach of contractual obligations. The Tribunal already
found Article 15 covers non-breach situations only. Relevantly, the first sentence
of Article 15.01 expresses the underlying purpose of this provision, namely:
‘15.01 The Parties confirm the spirit of mutual cooperation and long-term
goodwill which underlies this Contract and shall transact the business
contemplating the principles of mutual cooperation.’
[41] “As Article 15.02 is also an integral part of Article 15 in its entirety, the legal
nature of the Parties’ obligations under Article 15.02 should be interpreted in
the context of the whole provisions of Article 15, including the first sentence
of Article 15.01. In other words, the Parties’ obligation to enter into good-
faith negotiations is also one way of realizing ‘the spirit or principles of mutual
cooperation and long-term goodwill.’ Article 15.02, therefore, is not designed,
and cannot be used, to address any contractual breach and its resulting ‘legal
remedies.’ It is no more than a good-faith based provision, and thus even if it
is assumed that Claimant refused to enter into good-faith negotiations and
thereby breached this provision, such breach would not automatically end up
with providing a legal tool to Respondent by which it can recover its loss or
damages arising from its hardship on account of technical difficulties in using
Coal. …, the purpose of good-faith negotiations is to ‘rectify such situation.’
Nevertheless, such rectification could and should be achieved only through
good-faith negotiations on the basis of the principles of mutual cooperation.
Even though Article 15.02 was designed to accommodate concerns of the Buyer,
that Party (Respondent) may not unilaterally impose a certain rectification
method (e.g., reducing the purchase price or seeking damages) upon the other
Party (Claimant). Such rectification must be achieved only through good-faith
negotiations of which results are mutually acceptable to both Parties. To put
it differently, remedies from breach of Article 15.02, if any, should be obtained
by ‘negotiations’ between the Parties, rather than through this arbitration
procedure.
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[42] “…, in reliance on Article 15.02 breach, Respondent is trying to reduce the
purchase price by employing a discharge port analysis or recover damages.
Then, it asserts that such amount of price reduction or damages must be set off
against Claimant’s claimed amount in this arbitration. As stated above, these
legal remedies are not obtainable through Article 15.02 in the arbitration, and
therefore the Tribunal rejects this set-off defense.”
IV. QUANTUM: THE REMAINING PURCHASE PRICE
[43] “For the foregoing reasons, the Tribunal concludes that Claimant is entitled
to receiving from Respondent the full payment of the purchase prices for the
second and third Shipments which were calculated and adjusted on the basis of
the loading port analysis in accordance with Article 5, 7, 8 and 9.
[44] “For the third Shipment, as Claimant demanded in its third invoice, it is entitled
to receive payment in the amount of USD …, which was calculated in accordance
with Article 5, 7, 8, and 9. The Parties do not dispute the payment due date, that
is, ….
[45] “…obtained the Attachment order pursuant to which Respondent deposited KRW
… out of the purchase price of the third Shipment on … payable to Claimant. The
Parties does not dispute that this KRW … is equivalent to USD … at the exchange
rate prevailing on the date of the deposit.
[46] “Under the Korean law, a provisional attachment of a claim has the effect of
prohibiting the third party debtor’s payment of the claim to the debtor, and does
not exempt the claim itself. Even if a claim has been provisionally attached,
the third party debtor is liable for any delay in payment thereof when the claim
becomes payable. In order to avoid being in such delay, the third party debtor
may deposit the claim amount in accordance with Article 291 and Article 248,
paragraph 1 of the Civil Execution Act, and by making a deposit, Respondent
is exempted from an obligation to pay the provisionally attached amount to
Claimant.
[47] “On this matter, Claimant argues that ‘[u]nder Korean law, a debtor can only
be deemed to have performed its obligations by way of court deposit in lieu of
actual performance to the creditor in case of such deposit is equivalent to full
37
performance of the obligation.’
[48] “However, the Civil Execution Act provides for the right of the third-party
debtor to deposit ‘the full amount related to the provisional attachment’ upon
execution of the provisional attachment, for the exemption from the payment
obligation which has been provisionally attached (Articles 248(1) and 297 of the
Civil Execution Act), and the amount to be deposited is not the full amount of
the third-party debtor’s payment obligation, but ‘the full amount of payment
obligation related to the provisional attachment.’ Also, even if the third-party
debtor makes a deposit for execution (jiphaeng-gongtak) in form, such deposit
is construed as a deposit for repayment (byunjae-gongtak) in substance and
therefore, such deposit has the effect of repayment vis-à-vis the debtor and the
debtor is exempted from the payment obligation to that extent.
[49] “In the present case, Respondent made a deposit for execution of the amount
subject to provisional attachment, i.e. KRW … (= USD …), which is the full
amount of payment obligation related to the provisional attachment, as a third-
party debtor to the decision of provisional attachment. In light of the above
legal principles, Respondent has thereby paid USD … out of the purchase price
of the third Shipment to Claimant, and has been exempted from the payment
obligation to Claimant to the same extent.
[50] “…, on …, Respondent partially paid purchase price of USD … for the third
Shipment. Again, on …, which is three days later than the due date, Respondent
also partially paid the purchase price of USD … for the third Shipment.
[51] “Therefore, Respondent shall pay to Claimant in the amount of …, which is the
unpaid portion out of the full payment for the third Shipment.”
V. INTEREST
1. The 6% Statutory Interest Rate under the Korean Commercial Code Not Disputed
[52] “The Claimant is claiming interest at the rate of 6% per annum be applied
for any amount due until the date of the filing of the Statement of Claim. On
the condition and to the extent that there remains any payable amount due,
Respondent does not dispute the applicability of the statutory interest rate at
the above rate under the Korean Commercial Code.”
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Korean Commercial Arbitration Board
2. Applicability of the 20% Statutory Interest Rate under the Expeditious Litigation
Proceeding Act
[53] “…, the Claimant is also claiming interest at the rate of 20% on any amount
due to be awarded by the Tribunal. According to Claimant, this claim is made
pursuant to the Expeditious Litigation Proceeding Act, and the 20% rate is to
apply from the next date of the filing of the Statement of Claim until the date
on which payment is fully received. In response, Respondent contends that
this 20% interest rate is not applicable to the current arbitration, and if there
remains any amount due, only the 6% per annum rate would apply until the date
on which payment is fully received.
[54] “Article 3(1) of the Expeditious Litigation Proceedings Act provides that:
‘Where a judgment ordering performance of all or any monetary
obligations (including ruling; hereinafter the same shall apply) is issued,
statutory interest rates constituting standards for computing the amount
of indemnification for damages resulting from the default of monetary
obligations shall be in accordance with the interest rates prescribed by
Presidential Decree in consideration of economic conditions, such as the
interest rate on delayed payments, and other relevant aspects applied by
banks under the Banking Act, etc., within the extent of 40/100 per year
from the day next to the day on which a written complaint demanding the
performance of such monetary obligations or a document corresponding
thereto was served on the obligor.’
[55] “Nowhere in the Act is there any statutory provision which explicitly requires
that this delay penalty in the name of the 20% special interest rate must apply to
an arbitration award.
[56] “For this special interest claim, Claimant relies on the Supreme Court precedent
which states ‘ordering of the payment of the amount of indemnification for
damages with statutory interest rates in accordance with Article 3(1) for an
arbitration decision ordering the performance of monetary obligations may
not be deemed to violate compulsory provisions or against the public policy’
(Supreme Court Decision No. 2004Da67264 dated May 13, 2005; Supreme Court
Decision No. 99Da13577 dated April 10, 2001).
39
[57] “In response, Respondent contends that the plain reading of these precedents
merely suggests that “even if an arbitral tribunal renders an award applying
the statutory interest rate in accordance with Article 3(1) of the Expeditious
Litigation Proceedings Act, such fact does not amount to a reason for
cancellation of an arbitration award under Article 36(2)(ii) of the Arbitration
Act or refusal to the approve and execute an arbitration award under Article
38 of the Arbitration Act.” The Tribunal agrees. Those precedents cannot be
construed as holding that, in rendering an arbitration award, an arbitral tribunal
must apply the statutory interest rate in accordance with Article 3(1) of the
Expeditious Litigation Proceedings Act.
[58] “In the view of the Tribunal, in light of the nature (e.g., international arbitration)
of this dispute and its surrounding circumstances at hand, it is inappropriate
to apply this special 20% rate to this particular case. Therefore, the Tribunal
dismisses this 20% special interest claim.
3. Defense of Concurrent Performance
(….)
[59] “…, Claimant claims for the 6% per annum interest against the allegedly
delayed payment of …. It is shown that Respondent paid … as a partial payment
of purchase price for the third Shipment on …, which is three days later than
the due date. In this regard, it is not disputed between the Parties that Claimant
delayed the second and third Shipments and hence assumed an obligation to
pay demurrage to Respondent pursuant to Article 10.08 of the Agreement, and
as directed by Respondent, the payment was made to the respective carriers on
….
[60] “Under the Korean law’s simultaneous performance doctrine, until the
demurrage was paid by Claimant, Respondent could resist payment of any
amount due by the same amount. Since Claimant paid demurrage on … and
the corresponding amount was paid by Respondent as a partial payment on
the next day, …, the Tribunal considers that Claimant is not entitled to recover
interest against the delayed payment in the amount of …. Therefore, this claim
for interest is also denied.
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Korean Commercial Arbitration Board
[61] “In light of the foregoing, Respondent is under the obligation to pay to Claimant
in the amount of … plus interest of 6% per annum from the next date of its due
date … until Respondent pays the same amount to Claimant in full.”
VI. COSTS
[62] “With respect to the Parties’ cost-related claims, the Rules of the KCAB provide
in relevant part:
‘Article 47 (Apportionment of Arbitration Cost)
1. The Arbitration Costs including administrative fees shall in principle be
borne by the unsuccessful party. However, the Arbitral Tribunal, taking into
account the circumstances of the case, may, at its discretion, apportion
each such cost between the parties.
2. When the Arbitral Tribunal issues any Award, it shall fix the costs of
arbitration provided that in case of interim, interlocutory or partial Awards,
the Arbitral Tribunal may postpone such decision by the time of issue for
the final Award.
 ‘Article 48. Costs Incurred by a Party
The necessary costs and expenses including but not limited to attorney
fees and costs for experts, interpreters, witnesses incurred by a party
during the arbitration proceedings shall be borne by such party subject to
the allocation determined by the Arbitral Tribunal set forth in the Arbitral
Award. Unless agreed otherwise by the parties, the Arbitral Tribunal shall,
taking into account the circumstances of the case, decide on allocation
between the parties of the necessary expenses incurred during the
arbitration proceedings.’
[63] “In the Request for Arbitration, Claimant claimed for all expenses and costs
Claimant has incurred in connection with this arbitration, including but not
limited to all fees paid to the Tribunal or the KCAB, and all other arbitration
expenses including reasonable attorneys’ fees incurred due to the arbitral
proceedings. In response, Respondent sought the Tribunal’s ruling that the
costs of this arbitration (including the arbitration fee, arbitrator’s’ remuneration,
Respondent’s legal costs and any other necessary expenses incurred during the
arbitral proceedings) should be borne by Claimant.
(….)
41
[64] “The issue to be determined here is which party will bear the arbitration costs
including the filing fee, the administrative fee, the arbitrator’s remuneration and
the necessary expenses incurred during the proceedings including reasonable
attorneys’ fees, and in what proportion.
[65] “First of all, the Tribunal notes that Claimant will be awarded the amount
of …, which is roughly one third of the whole amount claimed. Nonetheless,
the Tribunal notes that, regardless of whether the Parties’ individual claims/
defences/arguments prevail in the end, both parties have put forward their
factual and legal cases in good faith throughout the arbitration proceedings.
[66] “In light of the above, the Tribunal hereby determines (i) Claimant shall bear the
filing fee; (ii) each party shall bear equally the administrative fee as well as the
cost of the arbitrator’s remuneration, and (iii) each party shall bear its own legal
costs and related expenses, including attorneys’ fees.
Implications
I. APPLICABILITY OF THE 20% STATUTORY INTEREST RATE UNDER THE ACT ON
SPECIAL CASES CONCERNING EXPEDITION, ETC. OF LEGAL PROCEEDINGS
The Korean Supreme Court has held that the 20% annual statutory interest rate
under the Korean Act on Special Cases Concerning Expedition, etc. of Legal
Proceedings, if the governing law is a foreign law, does not apply in ordering
performance of monetary obligations because the provision stipulating the statutory
interest rate is not only procedural to promote expeditious litigation but also in
substance to delimitate the extent of damages due to delay in performing monetary
obligations (see Korean Supreme Court Decision No. 2009Da77754 dated Oct. 25,
2012; Korean Supreme Court Decision No. 95Da34385 dated May 9, 1997). However,
the applicable law in this case is Korean law. The Arbitral Tribunal is of the opinion
that it is, even when Korean law is designated as the applicable law, not bound to
apply the 20% annual statutory interest rate in light of the nature of the dispute
and all the circumstances of the case. Also the Arbitral Tribunal notes that the Act
does not expressly provide mandatory application of the statutory interest rate to an
arbitral award.
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Korean Commercial Arbitration Board

The Act remains silent about but is interpreted not to exclude its application to an
arbitral award. Article 3(1) of the Act provides that the annual statutory interest rate
for measuring damages resulting from the default of monetary obligations should be
stipulated by Presidential Decree in consideration of economic conditions. The Act
KCAB case no.4
does not expressly confer on an Arbitral Tribunal any discretion to apply or not the
annual statutory interest rate so stipulated. Therefore, the Tribunal may be bound to
Parties Claimant: Wholesale Trade Company (Turkey)
apply the annual statutory interest rate when the applicable law of the case is Korean
Respondent: Component Manufacturing Company (Korea)
law. However, no doubt it may be open to qualifications and exceptions. It remains
therefore to be seen how the Arbitral Tribunals effectuate the basic objectives Place of
of the international arbitration to promote international trade by elaborating the Arbitration Seoul, Republic of Korea
appropriate interest rate in light of all the circumstances in individual cases.
Language Original in English

Subject matters - applicable law

- implicit choice of law
- application of CISG
- renewal of contract
- termination of contract
- calculation of damages
- statutory interest rate

Facts

The parties entered into a distribution agreement whereby the Claimant was granted
an exclusive distributorship right to sell the Respondent’s products in Country A. The
agreement contained an arbitral clause providing for KCAB arbitration but failed to
designate the applicable law to the contract. The Arbitral Tribunal determined that
the parties implicitly chose Korean law as the applicable law to the contract.

A dispute arose when the Claimant, without authorization, registered the

Respondent’s brand and logo as trademark under the Claimant’s name in Country
A. The trademark was transferred to the Respondent as a result of negotiations.
However, the Respondent gave a notice to the Claimant, terminating the contract
on the ground that the Respondent had lost its trust in the Claimant due to its
unauthorized registration of the trademark. The Respondent entered into another
exclusive distribution contract with Company E which was established by the

43 44
Korean Commercial Arbitration Board
Claimant’s former employees. The Claimant initiated arbitration against the
Respondent. The Claimant sought damages resulting from the Respondent’s
wrongful termination of the contract and unfair practice of soliciting the Claimant’s
employees and causing them to compete with the Claimant. Furthermore, the
Claimant sought an order requiring the Respondent to purchase back the entire
inventory of the products held by the Claimant. The Respondent objected that the
contract was not renewed and, even if renewed, was rightfully terminated. The
Respondent also argued that it did not induce or solicit the Claimant’s employees for
the purpose of the unfair trade practice. Furthermore, the Respondent countered
that it was not obligated to purchase back the alleged inventory of the products.
The Arbitral Tribunal held that the contract had been renewed for another two year
term pursuant to the relevant provision of the contract. Furthermore, the Arbitral
Tribunal held that the Respondent’s termination of the contract on the ground of
the Claimant’s unauthorized registration of the trademark was unjustified and
wrongful. Consequently, the Respondent was liable for damages arising from its
wrongful termination of the contract. The Claimant was awarded damages for lost
profits. However, applying Korean law, the Arbitral Tribunal held that the Claimant
was not entitled to claim for goodwill compensation since it was not a commercial
agent. The Arbitral Tribunal also held that the Claimant’s claim with respect to the
Respondent’s solicitation and inducement of employees was not substantiated with
evidence. Further, the Arbitral Tribunal denied the Claimant’s claim for damages in
respect of reputation. Having found that individual transactions under the contract
were final and conclusive, the Tribunal denied the Claimant’s claim for an order of
repurchase of the inventory.
Excerpt
I. APPLICABLE LAW
[1] “Article 8.1 of the Agreement of October …, 2003 as referenced herein below
between Claimant and Respondent provides that:
‘8.1 All disputes, controversies or differences which may arise between
Respondent (Supplier) and Claimant (Dealer) in relation to or in connection
with this Agreement, or for the breach thereof, shall be finally settled by
arbitration in Seoul, Korea in accordance with the Commercial Arbitration
Rules of the Korean Commercial Arbitration Board (edited). The award
45
rendered by the arbitrator(s) shall be final and binding upon parties.’
[2] “Article 8.1 is clear that Claimant and Respondent have agreed to refer any
disputes arising from the Agreement to the Korean Commercial Arbitration
Board. However article 8.1 and other articles in the Agreement have specified
neither substantive laws that will govern the disputes arising out of the
Agreement, nor the language that will be used in conducting the arbitration
proceedings to resolve such disputes. Upon request of the parties the Tribunal
issued an interim ruling …, which is quoted as below:
‘(1) The language used in this arbitration case shall be the English
language. We have found that the parties have impliedly agreed upon the
English language as language to be used by entering into certain sole
distribution agreement in the English language, wherein an arbitration
clause was included and by using the English language during the parties’
communications not only for the commercial transactions but for the
subject matters that allegedly have led to initiation of this arbitration case;
and

(2) The governing laws that will be applied to this arbitration case shall
be the laws of the Republic of Korea, provided Country A laws may be
permitted to be introduced in form of experts’ opinion to the extent
necessary and relevant. We have found that the parties have impliedly
agreed upon the Korean laws as governing laws to be applied by agreeing
on Seoul, Korea as arbitral seat; by designating the Korean Commercial
Arbitration Board as arbitral institution; and by selecting the tribunal
members who are mostly familiar with the Korean laws.’
[3] “The Tribunal finds no reasons or logics to revise above rulings even after
hearing the entire case. Hence the language used in this arbitration case is the
English language and the governing laws applied to this arbitration case are the
laws of the Republic of Korea.
[4] “Claimant has argued that the United Nations Convention on Contracts for the
International Sale of Goods (CISG) also has to be applicable to this arbitration
case. However since core issue involved in this arbitration case is related to
a dispute on a distribution agreement, Claimant’s argument on this point is
rejected.”
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Korean Commercial Arbitration Board
II. WHETHER THE CONTRACTUAL RELATIONSHIP WAS DISSOLVED
1. Renewal of the Contract
[5] “On or about October …, 2003, Claimant and Respondent executed a sole
distribution agreement (hereinafter referred to as the ‘Agreement’), whereby
Respondent, as supplier of the Products, appointed Claimant as its exclusive
distributor (dealer) of the Products in Country A. Relevant provisions of the
agreement are quoted (without editing) as below:
 from the Supplier for each renewal team (should have been term).
‘‘2. TERM OF THE AGREEMENT:
2.1 The Parties hereto agree that the term of this Agreement shall be a
period of 2 year which shall commence on the … October 2003 and shall
terminate on … September 2005.
Unless terminated sooner in accordance with the provisions of this
Agreement. No change, modification and amendment of this Agreement are
binding up on Supplier or Dealer, unless made in writing and signed by both
parties.
Termination of this Agreement will not affect any right of either Supplier
and Dealer in termination or other obligation of Supplier or Dealer under
this Agreement.
‘3. MINIMUM REQUIREMENTS:

3.1 The Dealer will place the purchase order and place by the T/T from the
Supplier minimum USD 200,000. – per 2 year in order to distribute in the
Dealer – Territory.
 .2 It is understood and agreed that Dealer shall pay for each order of
3 that the Agreement has been renewed on September …, 2013, the Agreement
‘Product’ by way of placing Telegraphic transfer in order to deliver the
product.
 .3 If the customers don’t make orders over USD 100,000 – the exclusive
3
right is invalidity (should have been in validity).

3.4 Dealer is supplier’s exclusive right agency in Country A for 2 year.
‘6. OPTION TO RENEW:

6.1 Providing the Dealer shall have fully complied with all the terms and
47
conditions of the agreement and any other agreement entered into between
the Supplier and Dealer, the parties hereto agree that this agreement shall
be renewed after mutual discussion and understanding for 2 year terms, It
is agreed and understood that any renewal term shall commence on the 1st
day of after 2 year immediately following the proceeding term.
6.2 In the event that the dealer exercises the Option to Renewal, the Dealer
hereby agrees to purchase a minimum of USD 100,000. – value of ‘Product’s
6.3 The parties further agree that there shall be no renewal fee payable by
the Dealer to the Supplier for the Dealer’s exercise of the renewal option
granted hereunder.’
(….)
[6] “Respondent argues that:
(1) The term of the Agreement has not been renewed in September 2013 and
hence has expired on September …, 2013 because unlike other occasions
for renewal previously there has been no mutual understanding for renewal
between the parties in September 2013. Respondent argues that in order to
have the Agreement renewed the parties have to share mutual understanding
for renewal. However in September 2013 there has been no mutual
understanding between the parties since Claimant has remained noncommittal
to Respondent’s request for the price increase of the Products and Claimant’s
resistance to Respondent’s request for purchasing Respondent’s new line of the
Products. Respondent further argues that, even assuming that there has been
mutual understanding for renewal between the parties in September 2013 and
should be terminated or the renewal of the Agreement has to be retrospectively
rescinded on October …, 2013 when Respondent became aware of Claimant’s
registration of the Trademark without Respondent’s consent since Claimant’s
unauthorized registration of the Trademark not only destroyed mutual trust
between the parties but also erased mutual understanding for renewal.
(….)
[7] “Whether renewal of the Agreement is premised upon explicit existence of
mutual understanding for renewal of the Agreement between the parties of the
Agreement:
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Korean Commercial Arbitration Board
Article 6 of the Agreement covers the subject of renewal. The heading of this
article is ‘Option to Renew’; sub-article 6.1 states that the Agreement shall
be renewed ‘after mutual discussion and understanding’ (Emphasis added)
for two years; and sub-articles 6.2 and 6.3 presuppose that Claimant-dealer
in the Agreement could exercise the option to renew without paying any fees
to Respondent-supplier in the Agreement. Judging from the structure of
this article 6, it is fair to interpret that the Agreement could be renewed by
Claimant’s exercise of the option to renew unless Claimant is in breach of the
Agreement or the parties have reached mutual understanding of not renewing
the Agreement; and that Claimant’s exercise of the option for renewal does
not have to be explicit. Foregoing interpretation is in line with the parties’ past
practice of renewing the Agreement in 2005, 2007, 2009 and 2011 without
explicit mutual understanding to renew. As seen above, Respondent argues
that the Agreement has not been renewed on September …, 2013 and instead
the term of the Agreement has expired on September …, 2013, since it is hard
to expect on the part of Respondent to share mutual understanding to renew
the Agreement while Claimant is less cooperative to Respondent’s request to
purchase new line of the Products and is opposed to Respondent’s request for
the price increase of the Products. The Tribunal finds it to the contrary in that
as per the operation of article 6 of the Agreement, where Claimant has not been
in breach of the Agreement and there appears to be no reasons for Claimant
not to exercise the option to renew that is vested in article 6 of the Agreement
and in line with the parties’ past practice for renewal, the Agreement has been
renewed for another two year term until September …, 2015.”
2. Termination of the Contract
(….)
[8] “Respondent argues that:
(2) Even assuming for the sake of argument the Agreement has been renewed
and continuously in effect after September … 2013, the Agreement has been
rightfully terminated by Respondent on December …, 2013 on the ground of
Claimant’s breach of good faith obligation exhibited by Claimant’s unauthorized
registration of the Trademark in 2007, thereby destroying fundamental mutual
trust between the parties that otherwise is essential to the parties who have
committed to continuous transactional relationship such as an exclusive
distribution agreement.
(….)
49
[9] “Whether Claimant’s unauthorized registration of the Trademark could
constitute one of grounds to terminate the Agreement by Respondent:
Intellectual property such as trademark is extremely important for business
entities generally. Therefore, Claimant’s unauthorized registration of the
Trademark could have a potential to bring about serious consequences.
However, in the present case, Claimant has registered the Trademark with
good intention of guarding both Respondent’s and Claimant’s interests in
Country A from copycat products; eventually has caused the Trademark
assigned to Respondent without requiring any compensation from Respondent
for such an assignment; and Claimant appears to have expected that the
Agreement will remain effective as long as Claimant assigns the Trademark to
Respondent; and Respondent is already in breach of the exclusivity obligation
by shipping products that are covered in the Agreement to Company E on or
about November …, 2013. The Tribunal therefore concludes that Respondent’s
termination of the Agreement as of December …, 2013 on the ground of
Claimant’s unauthorized registration of the Trademark in 2007 is unjustified
and wrongful; and Respondent consequently is liable for damages that have
been caused to Claimant arising from Respondent’s wrongful termination
of the Agreement and subsequent cessation of the supply of the Products to
Claimant.”
III. DAMAGES
(….)
[10] “Claimant claims for damages in the aggregate amount of Euros …, comprised
of:
(1) Euros …, which represents loss of profit amount suffered by Claimant
due to Respondent’s wrongful termination of the Agreement;
(2) Euros …, which represents so-called statutory good will compensation
that Claimant is allegedly entitled to as per article 92-2 of the Korean
Commercial Code;
(3) Euros …, which represents marketing expenses that could not be
recouped by Claimant due to Respondent’s wrongful termination of the
Agreement; and
(4) Euros …, which represents damages arising from Claimant’s tainted
reputation due to Respondent’s wrongful termination.”
1. Lost Profits
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Korean Commercial Arbitration Board
(….)
[11] “Claimant’s expert Mr. F opined in his report of March …, 2016 that due to
Respondent’s wrongful termination of the Agreement Claimant has suffered a
loss of profit in the amount of Euros …. He has derived this amount based upon
his findings that Claimant’s annual average net profit arising out of the sale of
the Products prior to December …, 2013 is Euros …; Claimant’s loss of profit is
prorated and expanded for a period from January …, 2014 until September …,
2015, i.e. twenty-one months; and thereafter adjusted Claimant’s loss of profit
by considering Claimant’s profits that have been and would have been generated
through sales of remaining inventory of the Products and the substituted
products supplied by third parties. The Tribunal finds with due respect that Mr.
F’s opinion has a value of reference in determining the quantum of damages
but cannot be relied upon as conclusive guidance in defining the quantum of
damages, especially in light of the fact that raw data used in his report has not
been verified objectively; different methodology of allocating overhead could
lead to different results; methodology of dividing Claimant’s business into the
sale of the Products and the sale of Claimant’s other products could be subject
to challenges; his report has failed to reflect that not insubstantial portion of
Claimant’s business is transacted in forms of so-called factoring, where under
Claimant sells the Products and other products by offering credit terms to its
customers in exchange for higher sales price incorporating Claimant’s financial
cost.
[12] “Article 393 of the Korean Civil Code provides that a party that has breached
a contract shall be responsible for ordinary damages that have been incurred
to the aggrieved party and the breaching party shall be held responsible for
damages arising out of special circumstances only if the breaching party has
known or should have known existence of such special circumstances.
[13] “The Tribunal has been guided by above principles and searched for the
Claimant’s quantum of ordinary damages arising from Respondent’s wrongful
termination of the Agreement and found … Euros … as appropriate and
reasonable. During this search the Tribunal has considered following factors,
among others:
(i) Claimant’s average purchase volume of the Products is approximately
Euros … per annum;
51

(ii) Respondent has raised the price of the Products rather moderately
during the term of the Agreement;
(iii) Claimant could have communicated better to Respondent in 2007 when
Claimant applied for the unauthorized registration of the Trademark;
(iv) During the term of the Agreement Claimant’s average purchase volume
of the Products remained stagnant;
(v) Not insubstantial portion of Claimant’s business of the Products have
been transacted in forms of factoring, whereby Claimant could generate
considerable profits by providing credit facilities to purchasers of the
Products, which cannot be reasonably anticipated by Respondent in the
ordinary course of business;
(vi) In 2013, Claimant more or less acquiesced to Respondent’s request for
price increase at approximately fifty (50) percent level;
(vii) Claimant was able to secure a steady source of supply of the products
that are comparable to the Products in March, 2015.”
2. Goodwill
(….)
[14] “Respondent argues that:
(3) Claimant is not entitled to so-called goodwill compensation under article
92-2 of the Korean Commercial Code, since Claimant is neither qualified as a
commercial agent nor as an entity comparable thereto under article 92-2 of the
Korean Commercial Code.
(….)
[15] “Whether Claimant is entitled to so-called goodwill compensation under article
92-2 of the Korean Commercial Code:
Article 92-2 of the Korean Commercial Code provides that:
‘(i) If a principal obtains new customers or its business transaction
volume increases substantially through the activities of its commercial
agent, and the principal gains thereby profits even after the contract is
terminated, the commercial agent may request reasonable compensation
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Korean Commercial Arbitration Board
from the principal, except when the contract is terminated due to reasons
attributable to commercial agent.
(ii) The amount of compensation pursuant to paragraph (1) may not exceed
the average annual remuneration for the last five years immediately prior
to the termination of the contract. If the term of the contract is less than five
years, it shall be based on the average annual remuneration for such lesser
period.
(iii) The amount of compensation pursuant to paragraph (1) may not exceed
the average annual remuneration for the last five years immediately prior
to the termination of the contract. If the term of the contract is less than five
years, it shall be based on the average annual remuneration for such lesser
period.
(iv) A right to claim for compensation pursuant to paragraph (1) shall lapse
after six months has elapsed from the termination of the contract.’
According to a decision issued by the Korean Supreme Court (Judgment
2011Da28342, dated 14 February 2013), an entity that cannot be categorized
as commercial agent per se could also be entitled to claim for goodwill
compensation under above article provided certain conditions are met. The
decision is summarized as below:
‘(i) The entity has performed the same or similar activities to those of a
commercial agent by virtually being incorporated into the sales force
of a manufacturer or a vendor, as in the case, for example, where the
purchaser is obligated not only to promote sales with the exclusive sale
right in a specific area, but also to follow guidance or instructions from the
manufacturer or the vendor regarding sales activities;
 its reputation as separate and distinct cause of an action.”
(ii) The entity is contractually obligated to transfer its customer connections
to the manufacturer or the vendor, such as by providing the manufacturer
or the vendor with the information of those customers who were increased
substantially by its own efforts and thereby enabling the manufacturer
or the vendor to immediately utilize such customer base even after the
relevant contract is terminated; and
(iii) In light of all relevant circumstances, including how the relevant
53
contract was executed, the entity’s capital investment in the sales business
and the return on such investment and the status of the business, if
the entity is deemed to deserve a protection of a commercial agent as
stipulated in article 92-2 of the Korean Commercial Code, then above
article 92-2 will be applicable to such an entity.’
In the present case Claimant has built its transactional relationship with
Respondent under the Agreement, which clearly envisages that relationship
as one of distributor and supplier, not one of commercial agent and principal;
Claimant has purchased the Products on telegraphic transfer payment basis;
Claimant has acquired unrestricted title to the Products and structured the
distribution system at its own cost and risk without guidance or instruction
from Respondent; took all the benefits of profits and assumed all the loss
arising from the distribution system of its own creation. The Tribunal hence
concludes that Claimant is not entitled to claim for goodwill compensation since
Claimant is neither a commercial agent as defined in article 92-2 of the Korean
Commercial Code nor an entity that has to be protected in the same manner as
for a commercial agent as per above judgment by the Supreme Court of Korea.”
3. Reputation
(….)
[16] “Whether Claimant is entitled to claim for damages incurred to its reputation
due to Respondent’s wrongful termination of the Agreement as separate cause
of action:
In general, damages to reputation of certain distributor due to the supplier’s
breach of a product supply agreement is encompassed as part of the lost profits
suffered by the distributor. In the present case the Tribunal finds no special
situation or evidence that will lead the Tribunal to allow Claimant’s damages to
IV. UNFAIR TRADE PRACTICE
(…)
[17] “In addition Claimant claims for Euros …, which represents damages suffered
by Claimant due to Respondent’s unfair practice of soliciting Claimant’s Two
Employees and causing them to engage in the business competing with
Claimant; ….
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(….)
[18] “Respondent argues that:
(4) Claimant’s claim on the ground of Respondent’s violation of the fair trade
practice should be dismissed, since Respondent6) has not induced or solicited
Two Employees to depart from Claimant; ….
(….)
[19] “Whether Respondent is liable for unfair trade practice in relation to
establishment of transaction with Company E:
Claimant claims that Respondent has induced and solicited Two Employees
to leave employment of Claimant, let Two Employees establish Company E
and engaged in sales transaction with Company E of the Products; Claimant
further claims that these activities constitute unfair trade practice, for which
Respondent has to be held liable.
The Tribunal finds no evidence to support Claimant’s above claim especially in
relation to Respondent’s solicitation and inducement of Two Employees from
Claimant.”
V. REPURCHASE OF THE INVENTORY
(….)
[20] “In addition Claimant claims … for an order requiring Respondent purchase
back from Claimant the entire inventory of the Products currently being held by
Claimant.
(….)
[21] “Respondent argues that:
(4) … Claimant’s claim for an order requiring Respondent purchase back the
entire inventory of the Products at the current value also should be dismissed
since the existence of the inventory has not been proven factually and even
assuming there exists the inventory, Respondent is not obligated to do so.
(….)
[22] “Whether Claimant is entitled to claim for an order requiring Respondent
6) The arbitral award states “Claimant,” but this appears to be a clerical error for “Respondent.”
55
purchase back the entire inventory of the Products at the current value:
The Tribunal has found that the parties have intended individual transactions
consummated under the Agreement to be final and conclusive without
recourses, excepting in case of defects (if any), whereby Claimant has acquired
unrestricted titles to the Products having been delivered to Claimant. Therefore,
the Tribunal decides that Claimant is not entitled to an order, whereby
Respondent is required to purchase back the entire inventory of the Products
from Claimant.”
VI. CONCLUSION
[23] “HENCE IT IS SO ORDERED THAT:
(1) Respondent pay Claimant … Euros … together with interest at the rate of six
(6) percent per annum, which is prescribed in the Korean Commercial Code,
beginning September …, 2014, which is the day on the record immediately
following the day when the request for this arbitration was served upon
Respondent, until payment;
(2) Claimant’s claims in excess of above shall be dismissed;
(3) Article 3(1) of the Act on Special Cases Concerning Expedition, etc. of Legal
Proceedings will not be applied in this arbitration proceedings; and
(4) In accordance with article 61 of the Korean Commercial Arbitration Rules,
cost of this arbitration (KRW …) shall be borne equally between Claimant and
Respondent.”
Implications
I. IMPLICIT CHOICE OF APPLICABLE LAW
In this case, the parties failed to expressly choose the applicable law to the
substance of the dispute. Accordingly, the Arbitral Tribunal held that the parties had
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implicitly agreed upon Korean law on the ground that they agreed on Seoul, Korea
as the seat of the arbitration, designated the Korean Commercial Arbitration Board
as arbitral institution, and selected the tribunal members who were mostly familiar
with Korean law.
It is not clear whether an implicit choice of applicable substantive law is to be
inferred from the parties’ selection of an arbitral seat. An arbitration clause is
a presumptive indicator of a tacit choice of law which may be rebutted. Unless
there are other indications to the contrary in the terms of the contract and all the
circumstances of the case, the parties’ selection of the seat, coupled with other
pointers such as the arbitral institution, the language of the contract and the nature
of the contract, may legitimately infer the parties’ intention to choose the applicable
law.7) A choice of law can be inferred from an arbitration clause providing for the
seat of the arbitration and specifying arbitrators of nationality of the seat or carrying
on business in the seat. But the inferred indication of a tacit choice of law would be
weaker if the arbitration clause stipulates the seat of the arbitration but does not
provide for any method of identifying the arbitrators. A choice of law can be inferred
from the arbitration clause only if the arbitration clause contemplates clearly
localized arbitration proceedings in which the law of the seat would apply in the
absence of an express choice of law.8)
In examining this case the parties chose Seoul, Korea as the seat of the arbitration
and KCAB as the arbitral institution, which would be the positive factors to be taken
into account in inferring tacit choice of Korean law as the applicable law to the
substance of the contract. On the other hand, the language of the contract is English.
The tribunal members who were familiar with Korean law were selected by the
parties whose intention might be to choose Korean law as the applicable law.
7) Richard Plender & Michael Wilderspin, The European Private International Law of
Obligations (4th ed.) 151-152 (2015); Gary B. Born, International Commercial Arbitration (2nd
ed.) Vol. 2 2637-2642 (2014); Gralf-Peter Calliess, Rome Regulations 77-78 (2011); David
Joseph Q.C., Jurisdiction and Arbitration Agreements and Their Enforcement (2nd ed.) 179-
180 (2010).
8) Lord Collins of Mapesbury et al., The Conflict of Laws (15th ed.) Vol. 2 1812-1813 (2012);
Calliess, supra note 7, at 78.
57
II. APPLICATION OF CISG
As reviewed above, the Arbitral Tribunal held that the parties implicitly chose Korean
law as the applicable law in this case. While the Claimant argued for the application
of CISG, the Arbitral Tribunal rejected its argument on the ground that core issue
involved in this case was related to a dispute on a distribution agreement.
Article 30 of CISG requires the seller to deliver the goods and transfer the property in
the goods. Distribution agreements fall outside the substantive sphere of application
of CISG. They focus on how to organize distribution of goods rather than delivery of
goods and transfer of the property. If a distribution agreement specifies the sales
obligations of the parties and they intend the obligations to constitute the main part
of the agreement, it may fall under CISG. Also CISG legitimately applies to sales
contracts concluded in performance of the distribution agreement. The party who
relies on Article 3(2) of CISG to exclude the application of CISG bears the burden of
proving that the supply of labor or other services constitutes the preponderant part
of the obligations.9)
The Arbitral Tribunal correctly rejected the Claimant’s argument for the application
of CISG on the ground that the contract in question was a distribution agreement.
However, finding CISG to best serve their contractual purpose, the parties may want
CISG to apply to their contractual relationship which is a distribution agreement.
Then CISG could apply to even the distribution agreement by the parties’ opting
in CISG. Because the Claimant argued for the application of CISG in this case, the
Arbitral Tribunal, in the absence of the Respondent’s express indications to the
contrary, could have examined the parties’ opting in CISG.
9) Stefan Kröll et al., UN Convention on Contracts for the International Sale of Goods (CISG),
30 (2011); Ingeborg Schwenzer, Commentary on the UN Convention on the International
Sale of Goods (CISG) (3rd ed.) 34 (2010); United Nations Commission on International
Trade Law, Digest of Case Law on the United Nations Convention on Contracts for the
International Sale of Goods (2012 ed.) 21 (2012).
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Korean Commercial Arbitration Board

III. APPLICABLE INTEREST RATE

The Claimant argued in this case for the application of the 15% annual statutory KCAB case no.5
interest rate under the Korean Act on Special Cases Concerning Expedition, etc. of
Legal Proceedings. Rejecting this argument, the Arbitral Tribunal held that Article Parties Claimant (Counter-Respondent): Construction Company (Korea)
3(1) of the Act would not be applied in this arbitration proceedings. Respondent (Counter-Claimant): Power Company (France)

Place of
As reviewed above, the Arbitral Tribunal held that the applicable law to the
Arbitration Seoul, Republic of Korea
substance was Korean law in this case. The provision of the Act stipulating the
annual statutory interest rate regulates the substance of the dispute by delimitating Language Original in English
the extent of damages due to delay in performing monetary obligations (see Korean
Subject matters - applicable law to the substance
Supreme Court Decision No. 2009Da77754 dated Oct. 25, 2012; Korean Supreme - applicable law to the procedure
Court Decision No. 95Da34385 dated May 9, 1997). Where Korean law applies to - joinder
the substance of the dispute, the provision of the Act may apply in calculating delay - entire agreement clause
damages. Thus, the 15% annual statutory interest rate may apply in this case. - non-conformity of goods
- acceptance of goods
- examination of goods
- notice of non-conformity
- late delivery of goods
- termination of contract
- rescission of admission
- calculation of damages
- liquidated damages
- contributory negligence
- statutory interest rate
- summary dismissal
- power of arbitral tribunal to draw adverse inference
against party
from its failure to produce documents

Facts

The Claimant entered into a contract with Company A to construct the power plant
in a certain Middle Eastern country. The parties entered into a contract whereby
the Respondent was obligated to supply to the Claimant the goods which were
required for the construction of the power plant. A dispute arose between the

59 60
Korean Commercial Arbitration Board
parties regarding defects of the goods which were the bypass stacks and the
diverter dampers. The Claimant initiated arbitration relying on the arbitration clause
contained in the contract which provided for KCAB arbitration. The contract provided
that the law applicable to the dispute was Korean law. It is undisputed that under
the contract, the Respondent was obligated to supply the bypass stacks. While the
Claimant argued that the Respondent was also responsible for its subcontractor
Company B’s supplying the diverter dampers under the contract, the Respondent
objected that the Respondent was not obligated to supply the diverter dampers
under the contract between the parties and the Claimant entered into a separate
supply agreement for the diverter dampers with Company B.
The Claimant terminated the contract because of the alleged defects of the
goods. The Claimant subsequently ordered a quantity of new diverter dampers
from Company Z as replacement. The Claimant sought the replacement cost or
alternatively, repair cost, plus related indirect damages. The Claimant sought
further liquidated damages relying on the Respondent’s failure to deliver the
goods by the delivery date. In response, the Respondent filed counterclaim seeking
the payment of the balance of the contract price, of additional costs incurred by
changing the place of manufacture as a result of the Claimant’s request and of
the costs associated with work performed by Company B as well as damages
resulting from the Claimant’s wrongful termination of the contract. Meanwhile, the
Claimant refused the Respondent’s request to join Company B as a third party to the
arbitration. The Claimant also objected that the Respondent would not be entitled to
claim for any alleged work done by Company B if the Respondent were not an actual
party to the contract with respect to the diverter dampers.
The Respondent argued that the alleged defects were caused by the Claimant’s
failure to comply with the Respondent’s instructions and its breach of the obligation
to preserve the allegedly defective goods aggravated the damages. The Respondent
also objected that the alleged defects did not amount to material breach entitling
the Claimant to terminate the contract. Furthermore, the Respondent argued that
the Claimant, without the Respondent’s approval, made a manhole in the bypass
stacks, which constituted a major modification. The Respondent also countered that
the parties agreed to postpone the delivery date, which changed the start date of the
liquidated damages. Again, the Respondent argued that the Claimant’s claim under
the contract violated Korean fair trade laws. Meanwhile, it was disputed between
the parties whether the Respondent was obligated to assemble the goods under the
61
contract and whether the assembly costs claimed by the Claimant were reasonable.
Moreover, the Respondent argued that violating the Arbitral Tribunal’s procedural
order on document production, the Claimant concealed documentary evidence and
thus the Arbitral Tribunal should sanction the Claimant by dismissing its claims or
draw adverse inferences against the Claimant. In response, the Claimant denied that
it violated the Arbitral Tribunal’s order or concealed evidence.
Applying Korean law in examining the parties’ intention to make the Respondent a
party to the contract, the Arbitral Tribunal held that the Respondent was a party to
the contract and responsible for supplying both the bypass stacks and the diverter
dampers. A separate agreement was not concluded between the Claimant and
Company B. The Arbitral Tribunal held that the Claimant properly terminated the
contract. The Claimant did not accept the defects of the goods which would not
have been discovered upon inspection. The Claimant also relied on the documents
provided by the Respondent. The Arbitral Tribunal found that the Claimant did not
aggravate the damages by leaving the diverter dampers in the desert because the
damages existed before they were replaced with new ones and left in the desert.
However, the Arbitral Tribunal held that damages with the diverter dampers were
reduced due to the Claimant’s contributory negligence of starting gas turbines.
The Arbitral Tribunal denied in part damages resulting from the remedial work for
the diverter dampers. The Arbitral Tribunal found that the parties did not agree to
extend the delivery dates under the contract. Consequently, the Arbitral Tribunal
denied in part the Claimant’s claim for damages in respect of the diverter dampers.
With respect to the bypass stacks, the Arbitral Tribunal granted in part the claim by
the Claimant for damages. Then the Arbitral Tribunal calculated liquidated damages
for the Claimant based upon the contract price until the actual delivery dates,
rejecting claims for additional damages resulting from delayed delivery. Moreover,
the Arbitral Tribunal held that Korean fair trade laws did not apply to this arbitration.
On the other hand, the Arbitral Tribunal denied in its entirety the counterclaim
filed by the Respondent on the grounds that it failed to complete performance of
its obligations under the contract, was obligated to assume any additional costs
incurred by changing place of manufacture, and the Claimant’s termination of
contract and initiation of the arbitration were justified. The Arbitral Tribunal held that
the Claimant did not violate Tribunal’s procedural order on document production,
and that there was insufficient evidence of bad faith on the part of the Claimant to
merit summary dismissal of its claims. The Arbitral Tribunal also declined to draw
any adverse inferences against the Claimant on the ground that the evidence was
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produced by the parties prior to the hearing.
Excerpt
I. APPLICABLE LAW
[1] “This dispute concerns, inter alia, alleged defects in the construction of Bypass
Stacks and Diverter Dampers at a power plant project in Saudi Arabia. … [O]
n 29 October 2011, the Claimant entered into a contract with the Company A
to construct the Project I combined cycle power plant (the “Power Plant”). The
Power Plant was constructed in order to solve the shortage of electric power
in southern Saudi Arabia, and is a large-scale project whose contract price
amounts to approximately US$ 1.22 billion. In order to construct the Power
Plant, the Claimant needed to procure Bypass Stacks and Diverter Dampers,
both of which are required for the construction of the Power Plant. On 30 March
2012, the Claimant entered into a contract (“Contract”) with the Respondent,
consisting of, inter alia, a purchase order (“Purchase Order”) and the terms
and conditions to the Purchase Order (“Terms and Conditions”). It is undisputed
that under the Contract, the Respondent was obligated to supply the Bypass
Stacks, although the Parties dispute whether the Respondent is responsible for
supplying the Diverter Dampers under the Contract.
[2] “On 11 April 2014, the Claimant filed its Request for Arbitration with the Korean
Commercial Arbitration Board (“KCAB”), pursuant to Article 33 of the Terms
and Conditions.
Article 33 provides:
 be followed if there is no clear evidence to the contrary.
‘All disputes, controversies, or differences, which may arise out of or in
relation to or in connection with the Contract, or for the breach thereof,
shall be amicable settled between the Purchase and the Vendor.

In case no agreement is reached with [sic] reasonable period of time, such
disputes shall be finally referred to and settled by arbitration in Seoul,
Korea in accordance with the Commercial Arbitration Rules of the Korean
Commercial Arbitration Board and under the Laws of Korea. The award
rendered by the arbitrator(s) shall be final and binding upon both parties
concerned.’”
63
II. JOINDER
(….)
[3] “Also on 15 August 2014, the Claimant notified the Tribunal of a letter from
the Respondent dated 4 August 2014, in which the Respondent requested
agreement from the Claimant for the joinder of Company B, the manufacturer
of the Diverter Dampers. The Claimant stated in its email that it did not agree to
have Company B join this case as an additional party, and asked the Tribunal to
consider its position in administering the arbitral proceedings. The Claimant did
not request the Tribunal to make any decision on joinder, and the Respondent
did not ask the Tribunal to join Company B. … The Tribunal also noted that it had
considered the Claimant’s position that it did not agree to have Company B join
the case as an additional party.”
III. BREACH OF THE CONTRACT
1. Non-conformity of the Diverter Dampers
a. Responsibility for the Diverter Dampers
(….)
[4] “Under Korean law, the contracting party is determined by examining the
‘intention of the party,’ which can be ascertained by looking at objective
expressions of such intention. If the objective expression of such intention is
recorded in a ‘disposal document,’ the objective wording of such intention must
[5] “The Tribunal finds that there is sufficient objective evidence of the Parties’
intention to make the Respondent a party to the Purchase Order, for the
reasons discussed below.
 irstly, the Purchase Order itself makes clear that the Respondent is party
F
to the Purchase Order and responsible for supplying both the Bypass Stacks
and the Diverter Dampers. Article 1 makes clear that the ‘Buyer or Purchaser’
under the Purchase Order is the Claimant, while the ‘Seller or Vendor’ under
the Purchase Order is the Respondent. Conversely, Company B is not party to
the Purchase Order.
Furthermore, Article 13 makes clear that the Purchase Order encompasses
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Korean Commercial Arbitration Board

both the Bypass Stacks and Diverter Dampers. [9] “First, the Tribunal regards the Respondent’s 3 May 2012 Confirmation
Letter as further persuasive evidence that the Respondent is party to the
 he Purchase Order is also signed by the Respondent, and the Respondent
T Purchase Order. In this letter, the Respondent stated that ‘[w]e hereby confirm
is the ‘Vendor’ that guarantees to repair or replace any defects in the Bypass that RESPONDENT will perform and guarantee all tasks for this project,
Stacks and Diverter Dampers under Article 9. including delivery of diverters and exhaust stacks as agreed on all previous
 correspondence.’ This language could not be significantly clearer: it provides
Therefore, the Purchase Order makes clear that the Respondent is responsible
in express terms that ‘RESPONDENT’ (and no other party) will ‘perform and
for any defects in both the Bypass Stacks and the Diverter Dampers.
guarantee all tasks for this project.’

[6] The Tribunal notes that the Purchase Order contains an entire agreement
[10] “Similarly persuasive is the fact that shortly after signing the Purchase Order
clause, which provides that ‘[t]he Purchase Order, the Terms and Conditions of
with the Claimant, the Respondent entered into a separate purchase order with
Purchase, and other documents constituting the Contract constitute the entire
Company B for the Diverter Dampers. The Tribunal considers this is decisive
agreement between the Purchaser and the Vendor and may not be modified
evidence that Respondent entered into a ‘back-to-back’ contract with Company
except in writing signed by the authorized representative of both parties.’ The
B (i.e. one where the subcontractor contracts out part of its work to a sub-
reference to ‘other documents constituting the Contract’ can admittedly be
vendor and includes the terms and conditions of its original contract with a
subject to interpretation, but the Tribunal is of the opinion that this is merely
contractor), whereby Company B would provide specified goods and services
a reference to the other attachments to the Purchase Order, which are listed
required by the Respondent in order for it to perform its obligations under the
in Article 3 of the Purchase Order. These attachments are limited to the
Purchase Order to the Claimant.
Terms and Conditions, Dispatch of Vendor’s Expatriate, Instruction for Vendor
Document, Packing & Marking Specification, Project Master Inspection and
[11] “The Tribunal also notes that it is undisputed between the Parties that the
Test Program for Project I CCPP, and General Instruction to Bidders.’ No other
Claimant made direct payments to the Respondent for both the Bypass Stacks
documents need be considered.
and Diverter Dampers. The Respondent asserts that it was merely acting
as a conduit for the payments, but there would have been no reason for the
[7] “Given the entire agreement clause and the clear and unambiguous language
Respondent to be acting as a conduit if the Claimant had a direct relationship
of the Purchase Order, the Tribunal considers it unnecessary to examine
with Company B on the Diverter Dampers. The Tribunal is therefore of the
other documents to ascertain the reasons why the Respondent entered into
opinion that these direct payments further confirm that the Claimant contracted
the Purchase Order (specifically, whether the Respondent was pressured
with the Respondent on the Diverter Dampers.
into signing the Purchase Order by the Claimant, who needed only COMPANY
A-approved vendors to appear on the Purchase Order in order to satisfy
[12] “The Respondent has argued that several items of evidence show that the
COMPANY A requirements).
Parties intended for Company B to be responsible for the Diverter Dampers.
However, the Tribunal finds these arguments unconvincing.
[8] “The Tribunal also considers it unnecessary to consider any of the other
evidence submitted by the Parties on this issue. Nonetheless, although it is not [13] “First, the Offer submitted by the Respondent does not clearly indicate that the
necessary to reach the conclusion set forth above, the Tribunal nevertheless Respondent and Company B submitted the Offer as a ‘joint venture.’ The cover
considers that there is other evidence which fully confirms its conclusion that page of the Offer clearly indicates that the Respondent is making the offer (not
the Respondent is party to the Purchase Order. Company B or a ‘joint venture’). The Offer is only signed by the Respondent (not
Company B or a ‘joint venture’). These are the decisive indications of the identity

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of the party making the Offer.
The Tribunal considers that a single reference to RESPONDENT and Company
B bidding as a joint venture on the project, contained in the technical part of the
Offer, does not clearly indicate that the offer was submitted by the Respondent
and Company B on a joint basis. The fact that the technical specifications and
descriptions for the Diverter Dampers appear on Company B letterhead also
does not show that the Offer was submitted by the Respondent and Company B
on a joint basis. Rather, both of these references indicated how, as a technical
matter, the Respondent planned to perform its (own) obligations to the
Claimant.
[14] “Second, the fact that the Respondent and Company B submitted separate
Manufacturer Responsibility Statements is, in the Tribunal’s view, irrelevant.
The Manufacturer Responsibility Statements are merely form documents
required by the COMPANY A, which were submitted by the Claimant as part of
its bid package to the COMPANY A for the Project. These supplemental bidding
documents cannot supersede the Purchase Order itself, which clearly indicates
that the Respondent is responsible for both the Diverter Dampers and Bypass
Stacks (with no mention of Company B).
[15] “Third, the Claimant, the Respondent and Company B agreed that the
Respondent and Company B would issue separate performance and payment
guarantees for the Bypass Stacks and Diverter Dampers, and that Article 10
of the Purchase Order was revised to reflect that agreement. However, Article
9 of the Purchase Order, which provides that the Vendor shall make repairs
or provide replacements if required to remedy any defects, was not amended
to specify that Company B would be responsible for repairs/replacements
to defects in the Diverter Dampers. Thus, under the Purchase Order, the
Respondent is still the party responsible for repairing and/or replacing as
needed to remedy defects in both the Diverter Dampers and Bypass Stacks. The
Tribunal therefore concludes that despite the separate issuance of performance
and payment guarantees, the Respondent is still the only party to the Purchase
Order who is responsible for defects in the Diverter Dampers. Indeed, the
fact that the Parties chose deliberately to amend only Article 10 to provide for
Company B to directly perform limited obligations under the Purchase Order,
while leaving the remainder of the Respondent’s obligations and the basic
67
contractual structure of the Purchase Order unchanged, confirms the Tribunal’s
conclusion that the Respondent was in principle obligated to perform all of the
obligations imposed by the Purchase Order.
[16] “The Tribunal takes note of the Commercial Court of Paris’s decision dated
29 April 2014, but is satisfied that the decision can be distinguished from the
current case. In that case, the Commercial Court considered the Claimant’s
attempt to call a guarantee provided by the Respondent for the Bypass Stacks,
and it believed that the Claimant’s claims only related to defects in the Diverter
Dampers. The Commercial Court therefore concluded that the Claimant had no
grounds for calling the guarantee provided by the Respondent under Article 10
in respect of the Bypass Stacks, for defects in the Diverter Dampers supplied by
Company B. The Commercial Court’s holding therefore related only to the scope
of the guarantees under Article 10, rather than the respective responsibilities of
the Respondent and Company B for the Bypass Stacks and Diverter Dampers
under the Purchase Order. While it is true that the Commercial Court also noted
that ‘the provisions of the contract … makes a clear distinction between the two
suppliers, and the amount of the order placed with each of them, as well as the
amount of the guarantees that each of them must provide,’ this statement was
not necessary to the Commercial Court’s holding and is not inconsistent with
a conclusion that the Respondent was contractually responsible for delivery of
the Diverter Dampers.
[17] “Fourth, the Tribunal finds that the Transfer of Title Agreements do not
establish a separate agreement between Claimant and Company B for the
Diverter Dampers. The Tribunal agrees with the Claimant that the Transfer of
Title Agreements are essentially supplemental agreements required for the
administration of scheduled payments.
[18] “Under the Purchase Order, payments were to be made in four tranches:
(1) Advance Payment, (2) Progress Payment, (3) Delivery Payment, and (4)
Final Payment. To receive Advance Payment, the Respondent had to present
‘Engineering Title (including G/A Drawing),’ and for the Progress Payment, it
had to present ‘Material Title of Ownership.’ In the Tribunal’s view, the Transfer
of Title Agreements were entered into simply to satisfy these requirements,
so that the Respondent could receive the Advance Payment and Progress
Payment under the Purchase Order. They therefore do not show that a separate
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agreement existed between the Claimant and Company B with respect to the
Diverter Dampers.
[19] “Finally, the Tribunal considers that the existence of communications or
meetings between Claimant and Company B regarding the Diverter Dampers,
even if conducted without the presence of the Respondent or without notifying
the Respondent (and it is not making any determination on this issue), does not
establish a direct contractual relationship between Claimant and Company B
for the Diverter Dampers. These communications and meetings did not alter
the contractual relationship between the Claimant and Respondent under the
Purchase Order.”
b. Defects of the Diverter Dampers
or any breach of the above warranty, arises or is discovered within the less
twenty four (24) months from the date on which the Goods are put into
commercial operation by the COMPANY or thirty six (36) months from the
date on which the last shipment of the Goods is delivered on-board on the
carrier at the shipping port specified in the Purchase Order, the Vendor
shall, upon notice thereof, promptly make such repairs or provide such
replacements as may be required to remedy such defect, error or omission
at its own expense. Should the Goods or any parts thereof be repaired,
replaced or fulfil the foregoing guarantee, the Vendor shall provide a
new guarantee on the same conditions for the repaired [sic] of replaced
materials for a period of twelve (12) months from the date of completion of
such remedial work.’

[24] “As set out in Article 9, the Respondent’s obligation to make repairs or provide
[20] “Having determined that the Respondent is responsible for the Diverter
replacements to cure defects only arises after the Claimant has notified the
Dampers, the Tribunal now considers each of the defects in the Diverter
Respondent of such defects. Therefore, in order to successfully establish a
Dampers alleged by the Claimant.
claim, the Claimant will have to show that the Respondent was notified.
(….)
[21] “As a preliminary matter, the Tribunal notes the testimony of Mr. CW1 regarding
the reliability of Field Change Notices, which were submitted as evidence of
[25] “The Tribunal finds that the blade on the Diverter Dampers was defective. The
both the existence of the alleged defects, as well as evidence of the cost of the
Tribunal notes in particular that Mr. CW1, a Claimant employee who worked on
remedial work necessary to cure the defects. The Tribunal considers the Field
the Project I since October 2012, testified that the blade did not fully open to a 90
Change Notices to be reliable pieces of evidence of both the existence of defects
degree angle and was unstable, thereby allowing the hot flue to escape to the
and the cost of remedial work.
outside. Mr. PH of Company B agreed that the blade only opened up to 85 or 88
degrees.
[22] “The Respondent argued that the Claimant accepted several of the alleged
defects by inspecting the Diverter Dampers and Bypass Stacks upon delivery
[26] “The Tribunal finds that most of the Diverter Dampers were not made of SS321,
and then issuing Inspection Release Notes without raising any objections
as required under the Purchase Order. This is shown by the Positive Material
or issuing any non-conformity reports. The Tribunal finds that this does not
Identification (‘PMI Test’) results, and was acknowledged by Company B itself.
establish that the Claimant accepted the defects in the products, because it is
not convinced that the defects were detectable upon inspection.
[27] “The Tribunal also finds that the Claimant did not approve the use of the
incorrect material for the Diverter Dampers. The Claimant did issue Inspection
[23] “The Respondent also denied responsibility for several of the alleged defects
Release Notes upon accepting delivery of the Diverter Dampers, but in doing so,
with the Diverter Dampers and Bypass Stacks on the grounds that it was not
the Claimant merely inspected the documents provided by the vendor (including
notified of such defects. Article 9 of the Purchase Order provides:
the PMI test result prepared by Axis Technologies, which was interpreted by the
‘If any defect, error or omission in the Goods, or any breach of warranty as to Claimant as saying that the Diverter Dampers were made of SS321), and relied
design, materials, workmanship, performance or operating characteristics, upon their contents. The Tribunal considers that the Claimant’s reliance on

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the documents provided by the vendor was reasonable, and that the use of the
incorrect material could not have been discovered by the Claimant upon closer
examination.
[28] “Moreover, the Tribunal considers it unreasonable to expect that the Claimant
should have tested the Diverter Dampers to see if they were made of the right
material prior to releasing the Inspection Release Notes. As such, the Tribunal
concludes that the issuance of the Inspection Release Notes does not indicate
that the Claimant approved the use of the wrong material for the Diverter
Dampers.
[29] “The Tribunal finds that the liner plates were not fixed to the blade, as was
required by the design. Mr. CW1 testified that the liner plate was ‘connected
in a way that was different from the drawing.’ He further explained that ‘[a]
ccording to the drawing, a one-piece bolt should have been installed between
the liner plate and the blade, but in actuality it turned out there was a two-piece,
namely the nut and the stud bolt that was installed between the liner plate and
the blade. And it is true that a two-piece is weaker than a one-piece.’ Mr. PH
did not dispute this – he argued only that using a nut and the stud bolt made no
difference, because in his view, it is actually the same strength as a normal bolt.
[30] “The Tribunal finds that there is sufficient evidence of some of the remaining
alleged defects with the Diverter Dampers.”
(…)
c. Damages Caused by Defects of the Diverter Dampers
[31] “The Tribunal now assesses the damages arising out of the defects in the
Diverter Dampers.”
1) Aggravation
[32] “The Tribunal finds that the Claimant did not aggravate the damage by leaving
the Diverter Dampers in the desert. The Tribunal agrees with the Claimant that
its claimed damages all existed before the Diverter Dampers were replaced
with new diverter dampers, and the original Diverter Dampers were left in the
desert. The Respondent has not specifically pointed to any damage that was
aggravated as a result of the Diverter Dampers being left in the desert.”
71
2) Claimant’s Contributory Negligence: Gas Turbine Operation
[33] “The Tribunal finds the Claimant contributed to the damage caused by operating
the gas turbine and conducting the single cycle operation test. The Tribunal
considers the Claimant’s decision to conduct the single cycle operation test
imprudent in light of Company B’s warning not to do so. Company B warned the
Claimant to wait to conduct the test until it had a chance to do a full overview of
the situation (including getting a metallurgical assessment), but the Claimant
ignored this and decided that the test could not wait.
[34] “The Tribunal also finds that the Claimant unreasonably relied on the Force
Technology Report in justifying the operation of the gas turbine. As Mr. JLA
explained at some length in his witness statement, the Force Technology
Report contains a number of qualifications regarding additional factors that
needed to be considered before any decision can be made. Both Mr. PH and Mr.
JLA testified that no reasonable engineer would interpret the Force Technology
Report as giving an assurance that the gas turbine could be started.
[35] “Nor did Company B ever assure the Claimant that it could start the gas
turbine safely. According to Mr. PH, during the 28 June 2013 meeting in which
Company B presented the Force Technology Report to the Claimant, Company
B explained that the Force Technology Report evaluated the behaviour of
different materials at different temperatures, but Company B never assured the
Claimant that it could start the gas turbine.
[36] “On the other hand, the 28 June 2013 meeting minutes relied upon by the
Claimant (which it claims show that Company B gave this assurance) were not
signed by the attending parties. Mr. CW1, who stated in his witness statement
that Company B confirmed during this meeting that it would be possible to
perform the test, later testified during the hearing that he did not personally
attend this meeting, and only heard this from others who attended the meeting.
The Tribunal therefore concludes that there is insufficient documentary and
witness evidence showing that Company B told the Claimant it could start the
gas turbine safely.
[37] “There was significant testimony during the hearing about the date on which
the gas turbines were started, which is strongly disputed between the parties.
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However, the Tribunal considers it unnecessary to determine this issue, as in

any case, it has resolved that the Claimant’s reliance on the Force Technology [42] “The Tribunal therefore finds that as a result of the defects and the start of the
Report and/or the 28 June 2013 meeting with Company B was not justified, even gas turbine, the Diverter Dampers were severely damaged and ultimately had
if those events had taken place before the gas turbine was started or before the to be replaced. In particular, the Tribunal notes that the NEM Report, which
gas turbine began to produce hot exhaust gas. was completed after the single cycle operation test, found that the defects were
such that the Diverter Dampers had to be replaced by new ones.”
[38] “The Tribunal also finds that the deadline under the COMPANY A contract for 3) Quantum of Damages
performing the single-cycle operation test by 29 June 2013 does not justify
(….)
the Claimant’s actions. The Tribunal recognizes that the contract imposes
[43] “Article 9 of the Purchase Order provides that the Respondent shall, upon notice
significant liquidated damages per day of delay. However, the Tribunal considers
of the defect, ‘promptly make such repairs or provide such replacements as
that rather than starting the gas turbine and ignoring Company B’s (i.e. the
may be required to remedy such defect, error or omission at its own expense.’
manufacturer’s) warnings, a more reasonable course of action would have been
Moreover, Article 28.1 of the Terms and Conditions provides that in the event of
for the Claimant to incur these liquidated damages, give the Respondent and
termination, ‘the Purchaser may purchase similar supplies from other vendors,
Company B adequate time to investigate and remedy the situation, then seek
and the Vendor shall be liable to the Purchaser for any excess cost to the
to recover these liquidated damages later, through arbitration or otherwise.
Purchaser.’ The Tribunal therefore concludes that the Respondent is liable for
The threat of the liquidated damages therefore does not justify the Claimant
the cost of any repairs or replacements that were necessary to cure the defects,
operating the gas turbine.
including the excess cost of any supplies purchased by the Respondent after
termination.
[39] “The Tribunal therefore concludes that the Claimant imprudently started the
gas turbine.
[44] “The Claimant has sought to recover damages for the cost of purchasing
replacement dampers (including the purchase price and transportation cost),
[40] “The Tribunal also concludes that the start of the gas turbine was a contributory
as well as the labor costs associated with installing the replacement diverter
cause of the damage necessitating the replacement of the Diverter Dampers.
dampers. However, as discussed above …, the Tribunal finds that the operation
While it is true that the Diverter Dampers were made using the incorrect metal
of the gas turbine was a contributory cause of the damage necessitating the
alloy and the liner plate was not properly fixed to the blade, both issues were
replacement of the Diverter Dampers. The Tribunal is of the opinion that
exacerbated by the start of the gas turbines. Specifically, the Diverter Dampers
had the Claimant not operated the gas turbine, the Diverter Dampers could
are exposed to high temperatures (approximately 600 °C) and very high velocity
have been repaired, rather than replaced. In its post-hearing submission, the
exhaust gases (up to 300 km/h) once the gas turbine is started. This was a
Claimant submitted that if it had been possible to have the Diverter Dampers
problem given that the incorrect metal alloy used in the Diverter Dampers had
repaired instead of replacing them, ‘the estimated cost should at least be the
inferior heat resistance.
price quoted by Company B, which is €1,350,000 plus the related labor cost,
which would be at least be US$ 1,200,000, the labor cost associated with the
[41] “Moreover, during operation of the gas turbine, the liner plate broke off the
simpler work of installing the replacement diverter dampers.’ The estimated
blade and broke into several pieces during operation, causing damage to other
cost of repair is based on the quote received from Company B on 27 August
parts of the Diverter Dampers. Mr. PH testified that the gas turbine induced so
much force, pressure and suction that it caused the damage to the liner plate. 2013 for ten complete sets of damper blades and toggle arm systems, as well
The Claimant’s own documents also state that the liner plate was damaged as the cost of dismantling/installation of damper blades/shafts and transporting
during gas turbine operation. from the workshop to the Project site. The estimated labor costs are based

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on the invoices the Claimant received from SD and SC for the work they did in
replacing the Diverter Dampers with the new diverter dampers.
[45] “The Tribunal therefore awards damages of … in relation to the repair of the
Diverter Dampers.
[46] “The Claimant has also sought to recover US$ … for the cost of commissioning
NEM [a major manufacturer of diverter dampers] to investigate the alleged
defects in the Diverter Dampers. The Tribunal considers that this was a cost
reasonably incurred by the Claimant, and therefore awards US$ … in damages.
(…)
[47] “In support of these damages, the Claimant submitted Field Change Notices
that include cost breakdowns of the required remedial work. As explained above
…, the Tribunal considers this sufficient evidence of reasonable costs incurred
by the Claimant. Moreover, the Tribunal does not consider that the Claimant’s
labor costs are overestimated (contrary to the Respondent’s contention). The
Tribunal acknowledges that the Claimant could have used lower-wage Saudi
Arabian workers, but it is of the opinion that it was not unreasonable for the
Claimant to use more expensive Korean workers, if it felt they were better
qualified to do the job. The Tribunal therefore finds the Claimant’s labor costs
to be reasonable.
[48] “However, the Tribunal is also of the opinion that there may be some overlap
between this repair work and the repair work contemplated under the proposal
submitted by Company B …. The Tribunal therefore reduces the damages by
50% and awards US$ … in damages.
[49] “The Tribunal finds that all the remaining damages alleged by the Claimant
relate to defects which the Tribunal did not find …, and therefore declines to
award those damages.”
2. Non-conformity of the Bypass Stacks
[50] “The Claimant alleged that a number of defects existed that were caused by the
Respondent’s defective manufacturing of the Bypass Stacks.
[51] “Preliminarily, the Tribunal notes that, as discussed above …, it considers the
75
Field Change Notices to be reliable evidence of both the existence of defects
and the cost of remedial work. The Tribunal also considers that the Claimant
did not accept defects in the Bypass Stacks and Diverter Dampers by inspecting
them after delivery and then issuing the Inspection Release Notes. Finally,
the Tribunal reiterates its finding that under Article 9 of the Purchase Order,
the Respondent’s obligation to make repairs or provide replacements to cure
defects only arises after the Claimant has notified the Respondent of such
defects. Therefore, in order to successfully establish a claim
(….)
a. Admitted Defects
1) Admission
[52] “The Respondent admitted liability and quantum with respect to certain defects
in its Statement of Defense and Statement of Reply.”
(….)
2) Rescission of Admission
[53] “The Respondent subsequently sought to rescind its admission on the basis that
‘new facts have come to light which have shown Claimant’s bad faith attempts
to pass any and all costs to RESPONDENT.’ The Respondent did not explain
with any specificity what ‘new facts’ came to light or how the alleged bad faith
conduct could justify its rescission of the admissions. As there is no reason
justifying such rescission, the Tribunal finds that the rescission of admission
was ineffective, and that the Respondent is liable for the admitted defects in its
Statement of Reply.”
b. Defects Found & Defects Dismissed for Insufficient Evidence
[54] “The Tribunal finds that there is sufficient evidence that certain defects existed
and that the Respondent is liable for the resulting damages.
(….)
[55] “The Tribunal finds that the Claimant adduced insufficient evidence regarding
the below defects.”
(….)
c. Defects Dismissed for Failure to Properly Follow Erection Procedure
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[56] “The Respondent submitted that certain defects were the result of the
Claimant’s failure to properly follow the erection manual. For example, there
is evidence that the Claimant was following an outdated version of the erection
manual.
(….)
[61] “It is unclear to the Tribunal how this explanation renders it more likely that
this defect was a result of the Respondent’s manufacturing than the Claimant’s
faulty erection. The Tribunal therefore dismisses this claim.”
d. Quantum of Damages

(….)
[57] “However, the Tribunal is mindful that the incorrect erection manual may
[62] “Preliminarily, as discussed above …, the Tribunal finds the Field Change
have only been outdated by a couple of days, and the use of incorrect erection
Notices to be reliable evidence of both the existence of defects and the costs
drawings is likely to cause defects or aggravate defects only in relation to the
incurred in remedying those defects. The Tribunal also considers that the
liner plate.
Claimant’s claimed labor costs were reasonable because it was reasonable for
In addition, there is some evidence showing that the Claimant provided the
the Claimant to use more expensive Korean workers rather than lower-wage
wrong incentives to the assembly teams, as Mr. JLA stated in his witness
Saudi Arabian workers, if it felt that it was needed.
statement.
(….)
[63] “The Respondent admitted to certain defects with damages amounting to US$ ….
(….)
[58] “However, there is no other evidence corroborating Mr. JLA’s testimony.
The Claimant successfully established defects with damages amounting to US$
….”
[59] “Overall, the Tribunal concludes that there is some evidence that erection
(….)
procedures were not always adequately followed.
The Claimant’s failure to properly follow the erection procedures contributed to
3. Failure to Assemble the Diverter Dampers and Bypass Stacks
several of the alleged defects.
(….) a. Assembly Costs for the Diverter Dampers
Specifically, Mr. JLA suggested in his witness statement that failure to properly
follow the erection procedures caused a number of alleged defects. [64] “The Claimant asserts that the Respondent was responsible for delivering fully-
(….) assembled Diverter Dampers, but instead it delivered the Diverter Dampers in
two 180° parts, which the Claimant then had to assemble together at its own
[60] “To rebut the Respondent’s submission that the most likely cause of this cost. The Claimant now seeks to recover from the Respondent this assembly
error is that Claimant incorrectly paired the half stack sections, the Claimant cost, and it has submitted Field Change Notices and invoices in support of its
submitted that: claimed costs.
‘This issue is not related to pairing of the two half sections (180º). The issue
herein is not that the two half sections divided lengthwise did not match [65] “The Respondent did not dispute that it was liable for these costs; it only
challenged the quantum of the damages claimed on the basis that (1) the Field
with each other but that the joint areas of the upper stack shell and the
Change Notices are unilateral calculations by Claimant, and (2) the claimed
lower stack shell divided broad wise did not match with each other, thereby
labor costs are inflated.
resulting in a gap between them. As a result, the insulation material
installed in the joint area was exposed outside, and Claimant had to install
[66] “The Tribunal finds these objections unpersuasive. First, as discussed above …,
additional liner plate to cover it.’

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the Tribunal finds that the Field Change Notices are reliable pieces of evidence
regarding the costs incurred by the Claimant. Second, the Tribunal has already
explained … above that it finds the labor costs incurred by the Claimant to be
reasonable, notwithstanding that the cost of Korean workers may be higher
than the cost of Saudi Arabian workers.
[67] “The Respondent also rejected the Claimant’s claimed costs for renting welding
machines and undertaking NDE work on the grounds that the Claimant did
not sufficiently prove why the equipment was rented. However, the evidence
shows that the welding machines were rented as per Company B’s instruction,
which the Tribunal considers as adequate reason for the renting of the welding
machines.
[68] “The Tribunal notes that Company B’s instruction only requested four welding
machines, while the Claimant rented five welding machines. With respect to the
costs of the welding machines, the Tribunal therefore finds that the Respondent
is liable for only four-fifths (4 / 5) of the claimed costs, but it is liable for the total
claimed amount for the NDE work.”
(….)
b. Assembly Costs for the Bypass Stacks
[69] “In addition to the assembly costs for the Diverter Dampers, the Claimant also
seeks to recover costs associated with assembling the Bypass Stacks.
 he Parties dispute whether the Respondent is responsible for delivering fully
T
assembled, 360º sections of the Bypass Stacks (and thus, as the Respondent
only delivered 180º sections, whether it is liable for the assembly costs to put
the 180º sections together to form 360º sections).
[70] “The Tribunal holds that it is the Respondent’s responsibility to supply the
Bypass Stacks in 360º sections and thus it is liable for the assembly costs
claimed by the Claimant. In reaching this conclusion, it considered the (1)
Technical Clarification Record, (2) the Procurement Specification, and (3) the 14
December 2012 meeting, each of which is discussed in detail below.”
1) Technical Clarification Record
79
[71] “The Technical Clarification Record is part of the Material Requisition, which in
turn was specifically incorporated into the Purchase Order through Article 3.2,
and is therefore part of the Contract between the Parties.
(….)
[72] “The Tribunal finds that the Technical Clarification Record makes clear that the
Respondent is responsible for delivering fully assembled, 360° sections of the
Bypass Stacks (which means, for example, if the sections are delivered in 180°
halves, then the Respondent is responsible for assembling those halves into
360° sections).”
2) Procurement Specification
[73] “The Respondent submitted that under section 2.4 of the Procurement
Specification, the Claimant is responsible for ‘uploading and field erection,’
which it submits includes assembling the Bypass Stacks. The Claimant,
however, argued that this ‘refers to connecting the fully assembled Bypass
Stacks with other equipment.’
[74] “The Tribunal finds that the Procurement Specification cannot be taken into
account, given the entire agreement clause …. Unlike the Technical Clarification
Record, the Procurement Specification is not incorporated into the Purchase
Order under Article 3. There is therefore no need to determine the proper
interpretation of ‘uploading and field erection.’
[75] “This notwithstanding, the Tribunal agrees with the Claimant’s interpretation.
Section 2.4 provides that ‘[t]he following items will be provided by the
Purchaser’ including ‘[u]ploading and field erection.’ Reading this together with
the Technical Clarification Record, the Tribunal finds that the only plausible
interpretation of ‘uploading and field erection’ is that it refers to ‘connecting the
fully assembled Bypass Stacks with other equipment.’ Any other interpretation
would render the Technical Clarification Record and the Procurement
Specification incompatible, which is contrary to basic principles of contractual
interpretation.”
3) 14 December 2012 Meeting
[76] “The Respondent submitted that although the Parties originally agreed to supply
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the Bypass Stacks in 360° sections (as shown by the Technical Clarification
‘All equipment and material shall be delivered on the basis of DDU Job-Site
Record), the Parties subsequently agreed that due to transportation and cost (ICC INCOTERMS 2010) not later than below schedule.
restrictions, the Respondent would transport the stacks in 180° form, and the
(#1,2 : by Oct. 30, 2012, #3,4,5 : by Nov. 15, 2012, #6,7,8 : by Nov. 30, 2012,
Claimant would be responsible for assembly.
#9,10 : by Dec. 15, 2012)’
(….)

[81] “The Respondent submitted that the delivery dates were extended through two
[77] “The Tribunal has already held at paragraph … that meeting minutes cannot be
separate extensions, one at the 14 December 2012 meeting, and the other at the
taken into account due to the entire agreement clause in the Purchase Order.
28 January 2013 meeting.
The Tribunal therefore declines to find that these meeting minutes constitute
any modification of the terms of the Contract.
[82] “The Tribunal finds that the delivery dates were not extended, for several
reasons.
[78] “Even if the meeting minutes could be taken into account, the Tribunal holds
First, as discussed above …, the Terms and Conditions include an entire
that the meeting minutes did not amend the original obligation under the
agreement clause in Article 31, which states that the Purchase Order, Terms
Purchase Order. The language in Item 3 is ambiguous as to who is responsible
and Conditions and other attachments to the Purchase comprise the entire
for assembling the 180° sections, once they are delivered. The underlined
agreement. Meeting minutes (such as the minutes for the 14 December 2012
language under Item 3.1 suggests that the Respondent’s obligation remains to
and 28 January 2013 meetings) therefore should not be taken into account.
deliver full (i.e. 360°) cylinders as specified in the Technical Clarification Record.
Second, even if these meeting minutes were to be taken into account, the
However, the underlined language under Item 3.2 seems to suggest that the
Tribunal still finds that they do not amend the delivery dates under the Contract,
Respondent’s obligation is now only to deliver half cylinders, and the cost of
as discussed below.”
assembling those half cylinders therefore now lies with the Claimant. Given this
conflicting language, the Tribunal finds that the Respondent has not satisfied 1) 14 December 2012 Meeting
its burden to show that the Contract was amended at the 14 December 2012
meeting. (….)
[83] “The majority of the Tribunal considers that this language reflects the parties’
[79] “The Tribunal thus finds that the obligation under the Technical Clarification agreement that the Respondent would deliver all materials by 15 February
Record to deliver 360º sections of Bypass Stacks remains, and therefore the 2013, but they did not intend to change the delivery dates set out in Article 6
Respondent is liable to the Claimant for the costs of assembling the 180º of the Purchase Order (and therefore, the date by which liquidated damages
sections into 360º sections. The Tribunal therefore awards US$ … in damages, begins to accrue). Although this decision is not unanimous, and the Tribunal
reflecting the costs incurred in assembling the Bypass Stacks.” recognizes that there is some ambiguity as to the meaning of the sentence ‘the
4. Late Delivery of the Diverter Dampers and Bypass Stacks extension of delivery date under this MOM shall be without prejudice to the
Article 6,’ the majority of the Tribunal is of the opinion that this language most
a. Contractual Delivery Date likely means the parties intended to extend the delivery dates (as set out in
the MOM) without prejudice to the delivery dates set out in Article 6. The next
[80] “The Parties disputed the delivery dates that the Respondent was obligated to sentence then further makes clear that the delivery conditions set out in Article
meet under the Contract. The Claimant argued that the delivery dates (along 6 shall also remain the same.
with the delivery conditions) are as set out in Article 6 of the Purchase Order:

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Korean Commercial Arbitration Board
[84] “The Tribunal recognizes that another possible interpretation of this sentence
could be that the extension in delivery dates shall be without prejudice only to
the delivery conditions set out in Article 6. However, the majority of the Tribunal
does not find this interpretation convincing because the delivery conditions set
out in Article 6 (DDU Job-Site) concern the allocation of risk and transfer of title,
which would be unaffected by changes to the delivery schedule. There would
therefore be no reason or need for the parties to specify that the extension in
delivery dates shall be without prejudice to the delivery conditions. In any case,
the majority of the Tribunal considers that the Respondent has not satisfied
its burden of proving that it is more likely than not that the parties intended to
extend the delivery dates under Article 6, because simply presenting another
possible interpretation does not satisfy this burden. The majority of the Tribunal
therefore concludes that the parties did not intend to extend the delivery dates
under the Contract, although the decision is not unanimous.
[85] “The Respondent submitted that there was no reason for it to expedite
delivery if the delivery deadlines in Article 6 of the Purchase Order were not
amended. Under Article 11, liquidated damages begin to accrue for each week
of delay ‘beyond the delivery time’ set out in Article 6. Thus, according to the
Respondent, there was no incentive for it to expedite delivery if the extension
to the delivery dates agreed during the 14 December 2012 meeting did not also
extend the date by which liquidated damages began to accrue.
[86] “The Tribunal cannot accept this argument. The Tribunal finds that it is equally
plausible that there would be more incentive for the Respondent to deliver as
early as possible if the date by which liquidated damages began to accrue was
left intact. The fact that the Respondent knew the liquidated damages started
accruing would certainly incentivize the Respondent to deliver earlier so as to
avoid racking up the total liquidated damages.
[87] “The Respondent also submitted that the Parties agreed to extend the delivery
dates set out in Article 6 to accommodate delays caused by the Claimant itself.
Specifically, the Claimant allegedly made several decisions which delayed
delivery of the Bypass Stacks and Diverter Dampers:
‘These include, among others, (i) ongoing technical discussions with
Claimant related to design of the products up until at least December 2012;
(ii) Claimant’s failure to pay the customs duties on time; (iii) additional late
83
orders made by Claimant up until at least October 2012; (iv) Claimant’s
many unilateral modifications to the products without RESPONDENT’s
involvement; (v) Claimant’s onerous bureaucracy and interference; and (vi)
Claimant’s gross mismanagement of the Project.’
[88] “The Tribunal first notes that even if certain delays were caused by the
Claimant’s actions and the parties did agree to extend the deadlines to
accommodate these delays, this is not relevant to the issue of whether the
Parties intended during the 14 December 2012 meeting to amend the delivery
schedule set out in Article 6 of the Purchase Order. The Tribunal finds that
there is insufficient evidence to show that the Parties considered the Claimant’s
allegedly delay-inducing actions when the Parties met on 14 December 2012.
[89] “Further, the Tribunal finds there is insufficient evidence of any of these
purported decisions:
a. With respect to the first factor, the Respondent has not specified what
these ‘ongoing technical discussions’ are, nor pointed to any evidence of
these alleged discussions.
 b. The Tribunal similarly disregards factor (ii) for lack of evidential support.
The only evidence seems to be from Mr. JLA’s testimony, however he did
not explain how much delay this caused nor did he give much context. He
only mentioned that there were instances where customs duties were not
paid. The Tribunal is not persuaded that this led to substantial delay.
c. Factor (iii) is likewise disregarded for lack of evidentiary support. The
Tribunal does not see how the October 2012 order would cause delays in
delivery of materials, and the Respondent has not explained how or why this
would be so. The Respondent has not pointed to any other additional late
orders.
d. The Tribunal also finds insufficient evidence of factors (iv) to (vi). The
Respondent cited to the entirety of Mr. JLA’s witness statement for support;
however, his witness statement does not provide clear support for these
alleged factors.
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[90] “Mr. JLA also testified that another reason delivery was delayed was because
the Parties spent almost 40 days discussing the terms of the Purchase Order,
before they finally signed the Purchase Order. The Tribunal finds that this
is irrelevant to whether the Parties agreed to extend the delivery date in the
Purchase Order, because the influence of these pre-contractual discussions
would have been reflected in the original delivery date as set out in the Purchase
Order.
[91] “The Tribunal therefore finds that the Parties did not agree at the 14 December
2012 meeting to extend the delivery dates set out in Article 6 of the Purchase
Order.”
2) 28 January 2013 Meeting
[92] “The Tribunal also finds that the parties did not extend the delivery dates at the
28 January 2013 meeting. The 28 January 2013 meeting minutes state:
 As discussed above …, the entire agreement clause provides that the Purchase
‘PROJECT I DELIVERY ON SITE STACKS AND DIVERTER PROMISED DATES
MOM 28.01.13 CLAIMANT/RESPONDENT/COMPANY B REV 2 29.01.13’3’
[93] “The Tribunal finds that this language merely shows that the parties agreed on
some ‘promised dates’ for delivery, without amending the delivery dates set out
in Article 6 of the Purchase Order.
[94] “ Thus, overall, the Tribunal holds that the delivery dates for the Bypass Stacks
and Diverter Dampers are as set out originally under Article 6 of the Purchase
Order.”
b. Calculation of Liquidated Damages
[95] “The Tribunal discusses next the calculation of liquidated damages under
Article 11 of the Purchase Order. Article 11 provides:
‘In the event of any delay beyond the delivery time, the Vendor shall pay
Liquidated Damage to the Purchaser at the rate of 3/1000 percent (0.3%)
of contract price for each full calendar week of the delay, provided that the
cumulative sum of liquidated damages shall not exceed ten percent (10%)
of the contract amount. Such liquidated damages shall be deduced from
any payment due to the Vendor.’
85
[96] “Thus, to calculate liquidated damages, it is necessary to determine (1)
the correct contract price under the Purchase Order, and (2) the liquidated
damages period.”
1) Contract Price under the Purchase Order
[97] “The Parties dispute the contract price under the Purchase Order. The
Respondent maintained that the price was €10 million as set out in the original
Purchase Order, while the Claimant submitted that the price had been
subsequently amended by the Parties on 17 October 2012 and 16 April 2013.
[98] “The Tribunal finds that the original price of €10 million was subsequently
modified to €10.3 million in a revised Purchase Order dated 17 October 2012,
which was signed by both parties. However, the Tribunal holds that the contract
price was not modified again by the 16 April 2013 email between the Parties.
Order, the Terms and Conditions and attachments to the Contract constitute
the entire agreement between the Purchaser and the Vendor, and may not
be modified except in writing signed by the authorized representative of both
parties. The Tribunal therefore finds that the 16 April 2013 email did not validly
modify the Contract.”
(….)
2) End Date for the Liquidated Damages Period
[99] “The Parties also contest the appropriate end date for calculating liquidated
damages. The Claimant calculated liquidated damages using the alleged
termination date of 3 October 2013 as the end date, while the Respondent
asserted that the correct end date should be 13 May 2013, when the
Respondent delivered the last component under the Purchase Order.
[100] “Using the actual delivery dates for each Diverter Damper and Bypass Stack
as the end date, the Respondent submitted two tables with its liquidated
damages calculation for both the Diverter Dampers and Bypass Stacks. These
delivery dates were not challenged by the Claimant.
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Korean Commercial Arbitration Board
[101] “The Tribunal sees no basis for using the termination date as the end date for
the liquidated damages period. The Tribunal therefore calculates liquidated
damages on the basis of the actual delivery dates set out in the Respondent’s
two tables.”
3) Liquidated Damages Calculation
[102] “Article 11 of the Purchase Order provides that liquidated damages shall be 0.3
percent of the contract price for each full calendar week of delay.
(….)
[103] “The Respondent submitted that liquidated damages should be reduced after
considering the Claimant’s contributory negligence in the delay of delivery of
the products. The Tribunal considers it inappropriate to consider contributory
negligence as a basis for reducing this agreed sum. Liquidated damages
reflect the Parties’ agreement as to the amount of compensation due in
the event of contractual breach. The Respondent’s submission is therefore
dismissed.”
 c. Other Damages Arising from Delayed Delivery
[104] “The Tribunal now considers the Respondent’s argument that a number of
the Claimant’s asserted damages in relation to defects in the Bypass Stacks
arise from delays in deliveries, and such damages are already included in the
liquidated damages.
[105] “Under Korean law, when the parties to a contract agree on liquidated
damages in the event of a breach, those liquidated damages extinguish any
claim for additional damages resulting from that breach. As the Korean
Supreme Court explained in a 27 September 1988 decision:

‘If an amount of damages is prearranged between parties regarding
default, the creditor can only claim for the previously fixed amount of
damages not only regarding general damage but also regarding damage
that has occurred due to special circumstances, and cannot claim for
compensation that is in excess of such prefixed cost unless provided
otherwise under special provisions.’
87
[106] “Article 18(c) of the Terms and Conditions makes clear that liquidated
damages are for compensation of all damage arising out of any delay in
delivery:
‘The liquidated damages shall not be deemed to represent a penalty and
shall constitute full and complete payment for such losses due to the
delay in delivery by the Vendor.’
[107] 
“Therefore, any claim for additional damages resulting from delayed delivery
by the Respondent should be dismissed as excluded by the liquidated damages
clause in the Purchase Order.
[108] “The Respondent submitted that some of the items claimed by the Claimant
relate to delays in the delivery of the materials. The Claimant disputed that
these claims resulted from delayed delivery; instead, it submitted that these
claims concerned defective materials supplied by the Respondent.
[109] “The Tribunal agrees with the Respondent that some of the items claimed by
the Claimant relate to delivery delays.
(….)
[110] “The Tribunal therefore declines to award any of the damages listed above,
on the grounds that these damages are excluded by the liquidated damages
clause.”
(….)
5. Other Costs
[111] “The Tribunal denies the Claimant’s request for ‘other costs,’ including i)
business trips, ii) additional engineering manpower, iii) third party inspectors,
iv) resident supervisor, and v) indirect costs for construction.
[112] “Article 393(1) of the Korean Civil Code stipulates that the ‘compensation
for damages arising from the non-performance of an obligation shall be
limited to ordinary damages.’ According to the Civil Code Commentaries,
ordinary damages are defined as ‘damages which arise from a party’s non-
performance of its obligation and have the cause-and-effect relationship at the
same time. In other words, the ordinary damages are understood to be within
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those which are deemed to usually arise if the same kind of non-performance
of an obligation occurs, unless there is any special reason, in accordance
with the general conception of society.’ By contrast, under Article 393(2) of
the Korean Civil Code, special damages may also be recovered only if the
damages arise from the special circumstances that the obligor either knew or
could have known.
[113] “The Respondent cited two cases which it alleged presented similar factual
circumstances. In the first case cited by the Respondent, the Seoul Central
District Court found that, inter alia, (1) business trip costs and (2) costs
incurred to timely supply goods were not recoverable as ‘special damages’
because the court could not find that the plaintiff was aware of or could be
aware of the circumstances or events. In the second case, the Gwangju District
Court found that, inter alia, costs and expenses allegedly paid by the plaintiff to
investigate damage caused by oil contamination were not recoverable because
there was no causal relationship with the alleged breach.
[114] “The Tribunal discusses each category of damages in turn below:
 . Business trips. The Tribunal declines to award damages for the
a
Claimant’s ‘Business trips and Man Hours.’ The Seoul District Court
has held that business trips are not recoverable as ‘special damages.’
Similarly, the Tribunal finds that is unclear whether these business trips
were necessary as a result of the alleged breaches, as these business
trips might have occurred anyway in the ordinary course of business.
b. Additional engineering manpower. The Claimant also sought to recover
IV. TERMINATION OF THE CONTRACT
costs ‘for additional engineering manpower was incurred due to late
submission of drawings (Vendor Print, VP). Furthermore, to prepare for
[115] “The Tribunal finds that the Claimant properly terminated the Contract
several meetings and to review drawings for new diverter dampers, more
manpower was needed.’ There is no evidence that the ‘drawings (Vendor
Print, VP)’ were submitted late. The Tribunal therefore declines to award
costs relating to additional engineering manpower.
c. Third party inspectors. The Tribunal finds that the costs associated with
third party inspectors might constitute ‘special damages’ because the
Respondent likely knew or could have known that third party inspections
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might be necessary to investigate any suspected defects. However, it is
unclear whether these particular third party inspectors were conducting
inspections that are related to the alleged defects in this arbitration.
According to the Claimant, ‘[t]hird party inspectors were dispatched to
manufacturing shops in the Kingdom of Saudi Arabia due to delay of
manufacturing work and improper quality.’ However, the Tribunal agrees
with the Respondent that the underlying evidence suggests at least some
of the inspections were conducted in locations ‘irrelevant to this Project,
such as Hungary, India, Singapore, and Italy.’ The Tribunal therefore
declines to award damages in relation to third party inspectors.
d. Resident supervisors. The Claimant asserted that ‘to expedite
manufacturing work, resident supervisors from Claimant were
dispatched,’ and sought to recover the costs associated with these
resident supervisors. However, it is unclear whether these resident
supervisors were dispatched to expedite manufacturing work related
to repairing or replacing the Bypass Stacks and Diverter Dampers, or
manufacturing work related to other projects. The Tribunal therefore
declines to award costs relating to the Claimant’s resident supervisor.
e. Indirect costs for construction. The Claimant has not explained why an
additional 20% in ‘indirect costs for the construction project carried out
by SD and SC” is needed or justified. The Tribunal therefore declines to
award these damages.”
(….)
in accordance with Article 28.1 of the Terms and Conditions. Article 28.1
provides:
‘‘28.1 Termination for Vendor’s Default
The Purchaser may terminate the contract in whole or in part, by giving
ten (10) days prior notice of default to the Vendor in writing without
compensation to the Vendor under any of the following circumstances.
a) if the Vendor fails to perform or deliver the goods within thirty (30)
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calendar days from the time(s) specified in the Purchase Order.
b) if the Vendor fails to comply with other provisions of the Purchase
Order and does not cure any such failure within a period of ten (10) days
after receipt of notice from the Purchaser specifying such failure.
….’
[116] “As discussed above …, the Respondent failed to deliver the goods within 30
days of the deadlines specified in the Purchase Order. This delay in delivery
alone is sufficient to justify termination of the Purchase Order.
[117] “Moreover, as discussed above …, the Respondent has failed to cure the
defects in the Diverter Dampers and Bypass Stacks, even though it was first
notified of certain of the defects as early as April and May 2013, and then again
in September 2013. The Respondent cited to several pieces of evidence that
purportedly showed its efforts to repair the alleged defects, but the Tribunal is
unconvinced that this evidence shows good-faith efforts to repair the defects
notified by the Claimant. Moreover, there is no evidence that the Respondent
was not able to repair the alleged defects within the 10 day window set out in
Article 28.1.
[118] “Furthermore, as discussed above …, the Respondent failed to assemble
the Bypass Stacks and Diverter Dampers as it was obligated to do under the
Contract. Instead, the Claimant hired subcontractors (at its own cost) to do
the assembly work. This too, by itself, is sufficient to justify termination of the
Purchase Order.
[119] “The Tribunal therefore concludes that the Claimant properly terminated the
Contract.”
(….)
V. KOREAN FAIR TRADE LAWS
[120] “The Tribunal finds that the Fair Subcontracting Act (‘FSA’) does not apply in
this case. Both parties agree that the FSA is not directly applicable in this case.
The Claimant argues that the FSA is intended to protect small and medium
domestic businesses from known Korean conglomerates in order to further
develop the Korean economy, and the Respondent does not contest this
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interpretation.
[121] “The Tribunal declines to extend the FSA to apply to this arbitration. The
Respondent is a multinational corporation, based in France, with significant
experience in the global construction industry. Therefore, the Tribunal is of the
opinion that it is inappropriate to extend the FSA to cover this dispute.
[122] “The Tribunal also finds that the Standard Terms and Conditions Act (‘STCA’)
does not apply. Significantly, Article 1 of the STCA states that its purpose is ‘to
establish sound order in business transactions, and thus to protect consumers
and promote the balanced improvement of people’s lives by preventing
enterprises from preparing unfair terms and conditions and using them in
business transactions by taking unfair advantage of their bargaining position
and regulating unfair terms and conditions.’ This makes clear that the purpose
of the STCA is to protect consumers from an inferior bargaining position
against large enterprises. The Korean Supreme Court has never extended the
STCA to situations like the present context. The Tribunal similarly declines to
do so. The Respondent is not a consumer suffering from an inferior bargaining
position vis-a-vis the Claimant—it is a multinational corporation with
approximately equal bargaining power in relation to the Claimant. Therefore,
the Tribunal does not believe that the STCA applies to this dispute.
[123] “Even if the STCA did apply to the current arbitration, the Tribunal does not
believe that the Respondent has adequately explained how the Purchase
Order violates the STCA. In its Reply, the Respondent only alleges that the
Claimant has used a ‘pre-prepared boiler plate Purchase Order,’ and asserts
categorically that ‘any unreasonable and unfair provisions in the Purchase
Order that (a) exclude Claimant’s legal obligations arising from its intentional
or gross negligence or (b) limit the scope of liability for damages of Claimant or
shift the risk of the business to RESPONDENT should be invalidated (or should
be construed at least in favor of RESPONDENT).’ However, the Respondent
fails to specify any particular provisions of the Purchase Order that are
unreasonable or unfair, or explain how such provisions are unreasonable
or unfair. The Tribunal therefore declines to invalidate any provisions of the
Purchase Order as being in violation of the STCA.”
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VI. INTEREST
[124] “The Tribunal does not believe that the default interest rate of 20% under the
Expedition of Legal Proceedings Act (‘ELPA’) should apply in this arbitration.
[125] “Firstly, and most importantly, the text of Article 3 of the ELPA provides
that the 20% per annum interest rate only applies to ‘court judgments.’ The
Supreme Court of Korea has held that this provision should not be construed
broadly, and thus should not be applied to proceedings other than ‘civil
litigations.’ Moreover, there is insufficient evidence to conclude that it is
common practice among arbitrators in KCAB arbitration to order payment of
interest pursuant to the ELPA.
In light of the foregoing, the Tribunal is of the opinion that applying the ELPA to
the current arbitration would be improper.
[126] “Therefore, the Tribunal holds that the 6% interest rate designated by the
Korean Commercial Code is the appropriate rate in this arbitration.”
VII. DOCUMENT PRODUCTION
1. Violation of the Tribunal’s Procedural Order on Document Requests
a. Alleged Agreement between the Claimant and Company B
[127] “The Respondent requested an order directing the Claimant to disclose, inter
alia, communications and documents between the Claimant and Company B in
July 2013. This request was withdrawn by the Respondent on the basis of the
Claimant’s assertion that it had never made an offer to purchase the Diverter
Dampers from Company B. The Tribunal therefore never made any order on
this request.
[128] “The Tribunal recognizes that the Respondent has now produced evidence
(including email exchanges between Company B and the Claimant)
that suggests that the Claimant’s assertion was incorrect. However, as
discussed below, even if the uncovered evidence falls within the scope of
the Respondent’s request (which the parties dispute), the Tribunal finds
in any case that the non-disclosure of this evidence does not support the
drawing of adverse inferences or summary dismissal of the Claimant’s
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claims. It is therefore not necessary for the Tribunal to determine whether
the non-disclosure of this evidence was a violation of the Tribunal’s Amended
Procedural Order on Document Requests.”
b. Contract between COMPANY A and the Claimant
[129] “The Claimant admits that it produced only a draft, incomplete version of the
contract between COMPANY A and Claimant. However, the Respondent has
failed to adequately explain how the undisclosed portions of the COMPANY A
contract were material pieces of evidence. The Respondent has not offered an
explanation as to why disclosure of the excluded ‘price breakdowns,’ ‘contract
price, bank details and signature blanks, and vastly more detailed schedules’
was necessary for determining whether the Claimant faced serious financial
pressures from COMPANY A to fire the gas turbines, or to whether Claimant
was in fact liable for the alleged liquidated damage penalty from COMPANY
A. The Tribunal therefore finds that there was no material violation of the
Tribunal’s Amended Procedural Order.
[130] “The Respondent has also presented no evidence showing that the Claimant
intentionally concealed the full contract from the Tribunal. The Claimant
understood the Tribunal’s Order to disclose the ‘full contract’ to mean ‘the
comprehensive schedules, and for Claimant’s Statement of Reply, only
relevant extracts from schedules A, B and C, without the main contract sheets’
and denied that it had any intention to conceal any critical document or violate
the Tribunal’s Order. The Tribunal therefore is of the view that there has been
no deliberate non-compliance with the Tribunal’s order.”
c. Additional Documents Concealed
[131] “In addition to the documents outlined above, the Respondent also contends
that the Claimant has possibly breached its obligations under the Tribunal’s
Order by failing to disclose ‘additional documents, contracts or other
evidences.’ The Respondent has not specified what these additional pieces
of evidence are, nor has it provided any evidence to support this allegation.
The Tribunal therefore finds that there has been no violation of its Amended
Procedural Order with respect to additional documents concealed.”
2. Tribunal’s Authority to Dismiss Claims or Draw Adverse Inferences
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by the court, and promises and commitments by the plaintiffs.

a. Summary Dismissal of the Claimant’s Claims

[136] “The Ninth Circuit in Volcan v. Omnipoint Comm’n adopted the same approach
[132] “The Respondent argues that the Tribunal should adopt an approach similar to
and upheld a district court’s dismissal of a claim due to the plaintiff’s spoliation
that taken by U.S. courts under Rule 37(b)(2)(A) of the FRCP and sanction the
of evidence resulting from ‘willfulness, fault or bad faith.’ The district court
Claimant for its failure to comply with the Tribunal’s Order by dismissing its
found spoliation of evidence where the plaintiff had (1) knowingly permitted
claims.
its employees to destroy engineering notebooks that contained evidence
potentially relevant to the litigation; (2) destroyed and altered notes pertaining
[133] “While the Tribunal agrees that ‘arbitral tribunals possess the inherent
to its dealings with the defendant; and (3) falsified several documents and
authority to dismiss the claims of the non-obeying party in whole or in part,’
emails that were produced.
there is no basis on which the Tribunal can apply a procedural law which is
not the law chosen by the parties as applicable to the arbitration agreement.
[137] “Similarly, the Ninth Circuit in Leon v. IDX Systems held dismissal is an
Thus, contrary to the Respondent’s assertions, the Tribunal does not consider
available sanction only in circumstances where ‘a party has engaged
it within its power to apply a U.S.-style approach to non-disclosure and
deliberately in deceptive practices that undermine the integrity of judicial
summarily dismiss the claims.
proceedings,’ and held that ‘a finding of ‘willfulness, fault or bad faith’ is
required for dismissal to be proper.’ The district court found (and the Ninth
[134] “Even if U.S. procedural rules were applied, the Tribunal would not summarily
Circuit upheld) that the plaintiff’s behaviour amounted to willful spoliation
dismiss the Claimant’s claims. Rule 37(b)(2)(A) of the Federal Rules of Civil
because he knew he was under a duty to preserve all data on the laptop,
Procedure provides in pertinent part:
but intentionally deleted many files and then wrote a program to write over
‘If a party … fails to obey an order to provide or permit discovery … the deleted documents.
court where the action is pending may issue further just orders. They may
include the following: [138] “US courts have taken the same approach when considering an arbitrator’s
(iii) striking pleadings in whole or in part; authority to dismiss claims. In Americredit v. Oxford Mgmt., the district
 … court found that the arbitrator had the authority to dismiss the defendant’s
(v) dismissing the action or proceeding in whole or in part;’ counterclaim because the defendant had destroyed critical evidence that was
central to the analysis of the counterclaim on the merits, the absence of which
made it impossible for the defendant to meet its burden on its counterclaims.
[135] “U.S. courts have permitted dismissal of a claim when there has been
Specifically, the arbitrator found that the party had ‘knowingly destroyed
willfulness, fault or bad faith on the part of the claimant. For example, the
records necessary to resolve the disputes between the parties’ because it had
Supreme Court in NHL v. Metro Hockey Club held that dismissal of a claim
destroyed financial records of its activities.
should be permitted in exceptional circumstances, such as ‘flagrant bad
faith’ on the part of the respondents and counsel’s ‘callous disregard’ of
[139] “In light of the case law above, the Tribunal considers there is insufficient
their responsibilities pursuant to a disclosure order. The district court found
evidence of willfulness or bad faith on the part of the Claimant to merit
(and the Supreme Court upheld) that the respondents and their counsel
summary dismissal. There is no evidence of willful destruction of evidence, as
had demonstrated ‘flagrant bad faith’ and a ‘callous disregard’ of the
in Volcan, Leon or Americredit, nor has there been a willful refusal to respond
responsibilities owed to the court after they failed to answer interrogatories
despite repeated requests for evidence, as in NHL. As recognized by the
for seventeen months, despite numerous extensions and several admonitions
Supreme Court, the dismissal of a claim is ‘the most severe in the spectrum of

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sanctions’ and the Tribunal therefore considers that it would be inappropriate may be drawn. The Respondent asserts, relying on Professor Born, that
to dismiss the Claimant’s claims, in the absence of exceedingly clear evidence tribunals have broad authority to make adverse inferences where:
of willfulness or bad faith by the Claimant.”
a.the requesting party itself produced material evidence relating to the
disputed issue;
b. Adverse Inferences

b. the non-produced evidence could have been produced by the non-
[140] “The Tribunal recognizes that it has the authority to draw adverse inferences
producing party;
when documents have not been produced on time in response to a party
request or an order of the tribunal. For example, Article 29(3) of the KCAB
c. the requested inference to be drawn from the non-production of
Rules provide:
evidence is reasonable, supported by prima facie evidence and consistent
‘[i]f any of the parties, although duly invited to produce documentary with the evidentiary record; and
evidence, fails to do so within the established period of time, without valid
excuse, the Arbitral Tribunal may make the Award on the evidence before d. the non-producing party was aware of the possibilities of adverse
it.’ inferences.

[141] “In turn, Article 9(5) of the IBA Evidence Rules provides: [145] “The Respondent asserts that the first requirement is satisfied when the
 ‘If a Party fails without satisfactory explanation to produce any Document material evidence in question has been produced by the requesting party.
However, the Respondent has misunderstood this requirement, which actually
requested in a Request to Produce to which it has not objected in due time
places an obligation on the requesting party to provide evidence to support the
or fails to produce any Document ordered to be produced by the Arbitral
adverse inferences it seeks.
Tribunal, the Arbitral Tribunal may infer that such document would be
adverse to the interests of that Party.’
[146] “Here, the Respondent requests that the Tribunal draw the inferences that
‘a separate legal relationship existed directly between Company B and
[142] “Similarly, under Article 349 of the Korean Civil Procedure Act, a Korean court
Claimant, and that any liability for the Diverter Dampers does not concern
may accept the allegations of the other party when the party fails to comply
RESPONDENT’ or that ‘Claimant caused the alleged defects in the Diverter
with a specified order under the Act.
Dampers.’ However, the Respondent has failed to adduce evidence supporting
these inferences for multiple reasons.
[143] “However, the Tribunal considers that it is appropriate to draw adverse
inferences only in circumstances where the evidence is not produced or where
[147] “First, the allegedly concealed email exchanges between Company B and
evidence is not disclosed in due time. Here, the evidence was produced by the
Claimant do not show that a separate legal relationship existed directly
Parties prior to the hearing, and the evidence has been before the Tribunal for
between Company B and Claimant regarding the original Diverter Dampers,
many months. The Tribunal therefore believes it is unnecessary to draw any
or establish that the Respondent has no liability for the Diverter Dampers. At
adverse inferences and it is appropriate to proceed with the evidence on the
best, these emails show a separate legal relationship between the Claimant
record.
and Company B regarding the repairs of the existing Diverter Dampers. Even
if this relationship existed (and it is disputed whether an agreement was ever
[144] “Moreover, the Tribunal finds that the criteria required for the drawing of an
concluded, and the Tribunal makes no finding on that issue), this relationship
adverse inference have not been satisfied, and therefore no adverse inference

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does not establish that the Claimant and Company B had a separate legal
relationship for the purchase of the original Diverter Dampers. It is possible
that Company B simply agreed to take over the repairs of the existing Diverter
Dampers, even though it never had primary contractual responsibility for the
Diverter Dampers.
[148] “Second, the Respondent has failed to provide evidence to support an adverse
inference in relation to the Claimant’s failure to disclose the full COMPANY
A contract. The Respondent alleges that ‘Dailem fully knew that it would
cause serious damages to the Diverter Dampers by starting the gas turbines
prematurely’ and therefore it was ‘critical to receive the full contract between
Claimant and COMPANY A in order to discern whether or not Claimant actually
faced this financial pressure.’ However, the Claimant does not explain the
significance of the undisclosed portions of the COMPANY A contract, or how
those undisclosed portions show that Company B is the party responsible for
the Diverter Dampers or that RESPONDENT is not responsible for the Diverter
Dampers.
[149] “Third, the Claimant alleges the Respondent has full access to Company B’s
records and should have been able to present the evidence in question (i.e.,
the email exchange between Company B and the Claimant). This has not been
contested by the Respondent. In such circumstances, where the requesting
party itself has access to corroborating evidence but fails to present it or offer
any explanation as to its absence, no adverse inferences should be drawn.
[150] “The Tribunal therefore declines to draw any adverse inferences.”
c. Costs Sanction
[151] “The Respondent rightly noted in its submissions that a possible sanction for
failure to comply with an order is a costs penalty, as set out in Article 9(7) of
the IBA Evidence Rules:
If the Arbitral Tribunal determines that a Party has failed to conduct
itself in good faith in the taking of evidence, the Arbitral Tribunal may, in
addition to any other measures available under these Rules, take such
failure into account in its assignment of the costs of the arbitration,
including costs arising out of or in connection with evidence.
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[152] “However, the Respondent has not requested that the Tribunal impose any
costs penalty nor proposed what a cost penalty should be. The Tribunal
therefore does not impose any costs penalty.”
VIII. COUNTERCLAIMS
1. Payments pursuant to the Contract
[153] “Having considered all of the evidence before it and the submissions of
the parties, the Tribunal finds that the Counterclaimant did not complete
performance of its obligations under the Purchase Order and therefore is not
entitled to any payments that may be owed under the Contract. Specifically,
the Counterclaimant has failed to demonstrate that it completed the following
obligations required under the Purchase Order:
a. Failure to repair the defective goods, as required under the Vendor’s
Guarantee in the Contract; and
b. Failure to comply with the delivery schedule in the Contract.
(….)
[154] “The Counterclaim Respondent also alleged two other breaches that should
be briefly mentioned. First, the Counterclaim Respondent argued that the
Counterclaimant failed to submit all of the Final Documents required under
Article 5.4 of the Purchase Order prior to receiving the Final Payment. Article
5.4 of the Purchase Order provides:
‘‘Ten percent (10%) of total contract amount will be paid after submission
of Vendor’s final documents with presentation of following documents.
Original Commercial Invoice
Copy of document transmittal of final documents signed by Purchaser’s
representative’
[155] “Article 5.4 therefore provides that payment of the contract price is conditional
on receipt of particular Final Documents. The Parties do not dispute that the
Respondent submitted the original commercial invoice, although they do
dispute whether the copy of document transmittal of final documents signed
by Purchaser’s representative was submitted.
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[156] “Even if this copy of document transmittal documents signed by Purchaser’s [160] “The Tribunal therefore dismisses this counterclaim in its entirety.”
representative was not submitted, the requirement has been waived because
the Counterclaimant paid part of the Final Payment without raising any issues 2. Interference with RESPONDENT’s Performance of Its Obligations under the
related to the Final Documents requirement. The Claimant does not dispute Purchase Order
that it did make part of the Final Payment and has provided evidence of several
payments made to the Counterclaimant in the period between July 2012 and [161] “It is common ground between the Parties that there is no express provision
May 2013. in the Contract requiring the manufacture of the Bypass Stacks and Diverter
Dampers. Moreover, Article 4 of the Purchase Order provides that the
[157] “Second, the Counterclaim Respondent submitted that the Counterclaimant contract price is a ‘fixed price’ and no cost changes are permitted so long as
failed to fully perform on its obligations under the Purchase Order because ‘design conditions are not changed.’ The Tribunal finds that Article 4, on its
the ‘required guaranteed bond relating to €…of the purchase price was never terms, expressly limits any variation to the contract price to circumstances in
taken out.’ The Counterclaim Respondent does not specify, but the Tribunal which design conditions have varied, and it does not consider a change in the
believes that this is a reference to the guarantee bond that Company B, not place of manufacture to be a change to the design conditions. The Tribunal
RESPONDENT, was to procure (specifically, the Purchase Order was amended therefore concludes that no changes to the contract price are allowed in these
to specify that ‘one bond will be issued for RESPONDENT …’ and “one bond circumstances.
will be issued for Company B …’). RESPONDENT therefore has no obligation
[162] “The Counterclaimant submitted that Article 4 is ‘inherently unfair’ and
under the Purchase Order to procure the guarantee bond of €… for the
therefore should be ‘invalidated or otherwise be construed in a reasonable
Diverter Dampers.
and fair manner under the general principles of good faith under the Korean
Civil Code,’ the Fair Subcontracting Act (‘FSA’) and the Standard Terms and
[158] “In summary, the Tribunal concludes that the Counterclaimant breached
Conditions Act (‘STCA’).
the Contract by failing to repair the defective goods and failing to deliver
them in accordance with the delivery schedule, but it declines to find that the
[163] “As discussed above …, the Tribunal believes the FSA and STCA are not
Counterclaimant breached its obligations in relation to the guarantee and the
applicable in the present context.
Final Documents. Because the Counterclaimant has breached the Contract,
the Tribunal therefore finds that the Counterclaimant Respondent is not
[164] “As for the good faith principles under the Korean Civil Code, the Tribunal
obligated to pay the outstanding balance under the Contract.
declines to interpret Article 4 to mean that Claimant must ‘compensate any
and all additional costs incurred by RESPONDENT due to its deprivation of the
[159] “In relation to the Counterclaimant’s claim for €… in costs associated with
liberty to manufacture its products in its own plant in China.’ In the Tribunal’s
additional work performed by Company B, the Tribunal is of the view that these
view, an express contractual term which, on its terms, limits a price variation
costs are RESPONDENT’s responsibility under the Contract. As discussed
to changes in design conditions cannot, on any view, be read to require
above …, RESPONDENT is responsible for the Diverter Dampers and Bypass
Claimant to bear the burden of additional costs that the Counterclaimant
Stacks under the Purchase Order, and it is therefore also responsible for
made the autonomous decision to undertake when complying with Claimant’s
making any repairs or replacements necessary to remedy any defects found in
request. The Counterclaimant has failed to offer an adequate explanation as to
these products. Thus, any costs incurred in relation to repair or replacement
why Korean law would support such an interpretation.
work performed by Company B on the products are RESPONDENT’s sole
responsibility.

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[165] “In any event, the Tribunal considers that there is insufficient evidence that the
parties understood or agreed that the Bypass Stacks would be manufactured
in China:
 . The Offer submitted by the Counterclaimant makes reference to
a Counterclaimant may claim any loss of business profits.
‘ex works KSA,’ which means that the products would be supplied at
RESPONDENT’s place of business, which is in Saudi Arabia. While that
does not specify that the products were to be manufactured in Saudi
Arabia, it would have been reasonable for Claimant to infer that the
products likely would be manufactured in Saudi Arabia.
b. The 26 July 2012 meeting minutes submitted by the Counterclaimant
do not clearly evidence a mutual agreement to manufacture in China.
While the invoices attached to the 26 July 2012 meeting minutes refer
to the supplier ‘Respondent Suzhou’ for 10 units of baffles, 3 units of
silencer casing and 10 units of stack, these references, in the Tribunal’s
opinion, are insufficient to show that the parties had an understanding
that manufacture of the Bypass Stacks and Diverter Dampers would be
done solely in China.
c. Moreover, it is also unclear why the Respondent would have requested
(as it did in an email dated 27 July 2013) Claimant’s consent for
manufacture in China if such a mutual understanding already existed.
d. Finally, the comments by Mr. CW3 about RESPONDENT’s factory in
China clearly is only an expression of praise of the factory, and, on any
view, does not show any agreement between the parties to manufacture
in China.
[166] “The Tribunal therefore finds that Claimant is not liable for any additional
costs that may have been incurred by the Counterclaimant in relation to the
manufacture of products in Saudi Arabia.”
3. Loss of Business Profits
[167] “The Tribunal finds that the Counterclaim Respondent did not wrongfully
initiate the arbitration or terminate the Purchase Order. As discussed above …,
Claimant rightfully terminated the Purchase Order and initiated the arbitration
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after it discovered defects in the Bypass Stacks and Diverter Dampers, and
RESPONDENT failed to remedy defects as required by the Contract. As such,
there is no basis, i.e., no wrongful actions on the part of Claimant, on which the
In light of the foregoing, the Tribunal dismisses this counterclaim.”
IX. COSTS
[168] “The Tribunal notes that according to the Claimant’s cost submission, it
has incurred/will incur KRW 363,000,000 in legal fees, KRW 141,819,451 in
arbitration costs and KRW 26,233,498 in other expenses (including court
reporter, interpreter and courier/photocopying fees).
[169] “Under Article 47 of the KCAB Rules, arbitration costs (including administrative
fees) shall in principle be borne by the unsuccessful party. The Tribunal
therefore awards the Claimant KRW 141,819,451 in relation to its arbitration
costs.
[170] “However, under Article 48 of the KCAB Rules, the Tribunal determines the
allocation of other expenses (including but not limited to attorney fees and
costs for experts, interpreters, and witnesses incurred by a party during the
arbitration proceedings) between the parties. This Tribunal determines that
the Claimant shall be awarded 35% of its legal fees and other expenses, i.e.,
(KRW 363,000,000 + KRW 26,233,498) * 0.35 = KRW 136,231,724. This allocation
reflects the fact that the Claimant has prevailed on many (but not all) of its
claims but its damages have been reduced due to its contributory negligence
by starting the gas turbines and that the Respondent did not prevail on its
counterclaims.”
X. DISPOSITION
[171] “Based upon the foregoing, the Tribunal makes the following award:
 . Orders that the Respondent pay €1,350,000 plus US$ 1,238,750.63 in
a
relation to defects in the Diverter Dampers,
b. Orders that the Respondent pay US$ 273,309.23 in relation to defects in
the Bypass Stacks,
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c. Orders that the Respondent pay US$ 113,293.12 in relation to the
assembly costs for the Diverter Dampers,
d. Orders that the Respondent pay US$ 20,097.65 in relation to the
assembly costs for the Bypass Stacks,
e. Orders that the Respondent pay €529,980 in relation to the delay in
delivering the Diverter Dampers and Bypass Stacks,
f. Declares that the Claimant properly terminated the Contract,
g. Rejects the Claimant’s request for “other costs” associated with
business trips, additional engineering manpower, third party inspectors,
resident supervisor and indirect costs for construction,
h. Declines to apply the Fair Subcontracting Act or the Standard Terms
and Conditions Act in the present arbitration,
i. Declares that a 6% interest rate per annum should be applied to the
damages awarded above, from 4 October 2013 to the date of full payment
of damages,
j. Dismisses RESPONDENT’s counterclaims in their entirety,
k. Declines to draw adverse inferences or summarily dismiss the
Claimant’s claims on the basis of its alleged intentional concealment of
evidence, and
l. Orders that the Respondent pay KRW 278,051,175 in relation to the
Claimant’s costs in this arbitration.”
Implications
I. APPLICABLE LAW
The parties entered into a contract whereby the Respondent supplied to the
Claimant the goods in question and related services. Article 3(2) of CISG provides
that “[t]his Convention does not apply to contracts in which the preponderant part of
the obligations of the party who furnishes the goods consists in the supply of labor
105
or other services.” It appears in this case that the service part does not constitute
the preponderant part. Therefore, the contract would not fall outside the sphere of
application of CISG. As a result, the Arbitral Tribunal could have examined whether
CISG applies to the contract.
Furthermore, Article 6 of CISG provides that “[t]he parties may exclude the
application of this Convention or, subject to Article 12, derogate from or vary the
effect of any of its provisions.” In this case the parties expressly chose Korean law
as the applicable to the substance in Article 33 of the contract. Meanwhile, it is
also clear that the parties just chose Korean law as the applicable law but they did
not expressly derogate from CISG. Moreover, the contract stipulates “the Laws
of Korea” not “the Korean Civil Code” as the applicable law. A reference to the
Korean Civil Code rather than to Korean law would have higher possibility to exclude
CISG.10) Even a valid express reference to national law is not sufficient to exclude
the application of CISG since such an exclusion has to be made expressly.11) The
contract also employs DDU, stipulating that “[a]ll equipment and material shall
be delivered on the basis of DDU Job-Site (ICC INCOTERMS 2010).” The parties’
reference to the INCOTERMS is not considered sufficient to exclude the application
of CISG either. It is decisive whether the parties have intended to derogate from
CISG.12) The Arbitral Tribunal therefore should have verified the parties’ intention to
exclude the application of CISG by choosing Korean law in this case.
II. INCOTERMS
As reviewed above, the contract stipulates DDU term. The Arbitral Tribunal
held that “the delivery conditions set out in Article 6 (DDU Job-Site) concern the
allocation of risk and transfer of title.” The Incoterms are a set of rules established
by the International Chamber of Commerce. The Incoterms certainly deal with
10) Kröll et al., supra note 10, at 107.
11) Oberster Gerichtshof, Austria, 28 April 2000, unilex 1 Ob 292/99v; Landgericht Ladnshut,
Germany, 5 April 1995, unilex 54 O 644/94; US Court of Appeals for the Fifth Circuit, 11
June 2003, unilex 02-20166.
12) United Nations Commission on International Trade Law, supra note 10, at 34; Schwenzer,
supra note 10, at 115.
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the allocation of risk but do not regulate transfer of title. Property rights may
coincidently be transferred at the time of passing of risk. However, risk and title
are treated separately.13) The transfer of property in the goods is governed by the
applicable law determined by the relevant private international law. The transfer of
property in movables is governed by the law of country where the goods are situated.
The lex situs at the time of transfer, as a general rule, governs the effect of the
transfer of the goods on the proprietary rights of the parties.14)
III. THE ENTIRE AGREEMENT CLAUSE
The Arbitral Tribunal finds in this case that the entire agreement clause provides
that the Purchase Order, the Terms and Conditions and attachments to the Contract
constitute the entire agreement between the Purchaser and the Vendor, and may not
be modified except in writing signed by the authorized representative of both parties.
The contract contains an entire agreement clause also called a merger clause, a
four corner clause, or an integration clause.15)
The requirement under CISG and Korean law has a dispositive character so that
the parties may derogate from or exclude its application. The parties therefore
may derogate from the requirement by agreeing upon an entire agreement clause.
By doing this the parties bar recourse to any additional material for interpretation
beyond the four corners of the contract. An entire agreement clause must be
interpreted pursuant to the parties’ intent in the context of the contract embedding
it.16) For example, a court held that the merger clause contained in the sales
contract prevented the buyer from using extrinsic evidence such as the letter of
credit, which is an instrument of payment that must be consistent with the contract
terms and cannot prevail over them. Further the court stated that the clause
contained in the letter of credit entitling the buyer to change the date of shipment
was to be considered an offer to modify the contract which was rejected by the seller
and therefore was not binding.17)

Under CISG and Korean law which is the applicable law to the contract, due
consideration is, in determining the intent of a party, to be given to all relevant
circumstances of the case including the negotiation, any practices which the parties
have established between themselves, usages and any subsequent conduct of the
parties. On the other hand, Article 2-202 UCC provides that “[t]erms with respect
to which the confirmatory memoranda of the parties agree or which are otherwise
set forth in a writing intended by the parties as a final expression of their agreement
with respect to such terms as are included therein may not be contradicted by
evidence of any prior agreement or of a contemporaneous oral agreement but may
be explained or supplemented (a) by course of dealing or usage of trade or by course
of performance; and (b) by evidence of consistent additional terms unless the court
finds the writing to have been intended also as a complete and exclusive statement
of the terms of the agreement.”

16) United Nations Commission on International Trade Law, supra note 10, at 57; Kröll et al.,
13) Ralph H. Folsom et al., International Business Transactions (2nd ed.) 49-50 (2001). supra note 10, at 150-151; Schwenzer, supra note 10, at 162-163.
14) Kröll et al., supra note 10, at 397-398; Collins et al., supra note 9, at 1336-1339. 17) People’s Supreme Court, Appeal Division in Ho Chi Minh City, Vietnam, 5 April 1996, unilex
15) Schwenzer, supra note 10, at 163. 74/VPPT.

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The Claimant initiated arbitration relying on the arbitration clause in the contract
which provided for KCAB arbitration. The contract provided that the law applicable to
the dispute was Korean law. Further, the parties agreed that the 1980 United Nations
KCAB case no.6
Convention on Contracts for the International Sale of Goods applied as part of
Korean law. The Claimant sought damages and interest relying on the Respondent’s
Parties Claimant (Counter-Respondent): Laboratories Ltd. (New Zealand)
failure to supply a system complying with the specifications of the contract and to
Respondent (Counter-Claimant): Softgel Ltd. (Korea)
correctly install the system. In response, the Respondent objected that it supplied
Place of and installed the system in accordance with the contract. Further, the Respondent
Arbitration Seoul, Republic of Korea sought the payment of the balance of the contract price and interest.

Language Original in English

Subject matters - applicable law
- opting in CISG
- mixed contract
- non-conformity of goods
- change of condition of goods
- burden of proof
- document production
- calculation of damages
- duty to mitigate damages
Facts
The parties entered into a contract for the Claimant to purchase from the
Respondent the gelatin reclaim system which was to purify the remaining gelatin
to be reused in the course of manufacturing soft gel capsules. The gelatin reclaim
system was delivered to the Claimant’s premises where the Respondent’s engineers
installed the system. Trial runs of the system produced cloudy reclaimed gel with
the oil residue exceeding the stipulated limit under the contract. However, the
Respondent argued that the higher oil residue was attributable to the incorrect type
and excessive quantity of lubricant oil used by the Claimant in manufacturing soft
gel. In response, denying this, the Claimant instead altered the micro-filter in the
system but failed to obtain clear reclaimed gel. The Claimant also failed to produce
clear reclaimed gel even with different lubricant oil. Consequently, the Claimant
refused to pay the remaining contract price.
The Arbitral Tribunal first found that the system failed to comply with the stipulated
contractual specifications in terms of speed and quality, rejecting the Respondent’s
argument that the Claimant applied incorrect type and excessive quantity of oil to the
system and that the clarity level of reclaimed gel was not agreed by the parties in the
contract. Further, the Arbitral Tribunal found that the Respondent failed to provide to
the Claimant the documents and information necessary to run the system in a proper
and effective manner. Having found that alterations by the Claimant to the system
were not material and did not cause a problem, the Arbitral Tribunal also rejected
the Respondent’s argument that the Claimant was barred due to the alterations
from any claim for damages. The Arbitral Tribunal rejected the Respondent’s
argument that the Claimant had failed to take appropriate measures to mitigate its
loss. Therefore, the Arbitral Tribunal denied the Respondent’s counterclaim, holding
that the balance of the contract price sought by the Respondent was not due yet. As
a result, the Respondent was ordered to pay the Claimant for awarded damages.
Excerpt
I. APPLICABLE LAW
[1] “On 12 June 2013, the parties entered into a Sale and Purchase Contract …,
pursuant to which the Claimant agreed to buy from the Respondent a Gelatin
Reclaim System (…‘GRS’) for the price of ….
[2] “Clause 2(10) of the Contract reads as follows:
‘Governing Law & Arbitration: The contract shall be governed as to all
matters, including validity, construction and performance by and under

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the laws of Republic of Korea. All disputes arising out of or in connection
with this contract shall be finally settled in Republic of Korea under the
Arbitration Rule of Korean Commercial Arbitration Board by one or more
arbitrators to be appointed in accordance with the said Rules.’
(….)
[3] “By consent, the parties agreed that the Tribunal may refer to the IBA Rules
on the Taking of Evidence in International Arbitration 2010 in the conduct of
the arbitration. It was also agreed that Korean Law is the governing law of
the dispute and that the 1980 United Nations Convention on Contracts for the
International Sale of Goods (‘CISG’) applies as part of Korean Law.”
II. NON-CONFORMITY OF THE GOODS
1. Non-compliance with Contractual specifications
[4] “The Claimant argues that the Respondent expressly guaranteed that the GRS
was able to reclaim clear gel from coloured and non-coloured gel net which
would allow the Claimant to save a total of … per year. The Claimant submits
that it requested for the pilot model of the GRS to be customised to meet its
commercial needs and performance expectations.
[5] “The Claimant further argues that the Respondent had warranted that the GRS
would meet its contractual specifications under Clause 1. The Claimant alleges
that the GRS failed in respect of the following two contractual specifications:
Contractual Specifications Actual Result of GRS
4000 kg/20 hours process speed 1,000 kg/20 hours process speed
Residue Oil < 20 ppm Residue Oil > 20 ppm (i.e. 440 ppm)
[6] “The Respondent submits that the GRS has the quality and performance
contractually accepted by the parties. According to the Respondent, the GRS
produced clear gelatin solutions which could be used to manufacture gelatin
capsules during the FAT [Factory Acceptance Test] in Korea, without objections
111
from any of the parties present. The Respondent says it subsequently installed
the GRS in the Claimant's factory in exactly the same condition as during the
FAT.
[7] “The Respondent attributed the problems encountered by the Claimant to
the MCT [Medium Chain Triglyceride] oil used by the Claimant, which was
different from that used by the Respondent during the FAT. The Respondent
also suggested that the Claimant had used excessive MCT oil in the reclamation
process.
[8] “I find that the Claimant had clearly established that the GRS did not meet the
stated contractual specifications of speed of 4000 kg/20 hours process speed
and quality of less than 20 ppm. As observed by the Claimant's expert witness,
Mr. F, the GRS reclaimed gel was ‘visually opaque and not clear enough for
reuse in commercial reclaimed gel capsules.’ In the Mr. E’s Report, Mr. F noted
that it was only possible to reclaim clear gel by reducing the flow rate of the
GRS to 25-33% of the contractually agreed capacity. As such, the Claimant had
to sacrifice one of the contractual specifications stated above in order to achieve
the other.
[9] “The FAT did not establish anything related to compliance with the quality
or speed specifications. First, the Respondent did not run the GRS using the
Claimant's gel net, but with Korean gel net. The fillings and lubricants were also
different from those used by Laboratories LTD. (Claimant). In fact, it seemed
that no MCT oil was used. This was confirmed by the Respondent's Mr. H during
cross-examination. Secondly, the focus of a FAT, according to Mr. F, was the
mechanical operations of the system to ensure that they were functioning
and operating the way they were supposed to. The FAT would not validate the
contractual warranties because this would be done on-site. There was no point
doing this at the FAT because the system had to be disassembled, shipped
and then re-assembled on-site for the SAT (Site Acceptance Test). Thirdly,
there is evidence that the FAT was not properly conducted. No FAT report was
issued. The Respondent provided no information on the characteristics of the
gel net used, the oil used for fillings and lubricants, or any information that
one would expect on the parameters of the tests. Mr. E said he had expressed
dissatisfaction with the FAT to the Respondent because there was no proper
testing and the gelatin produced was not clear.
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[10] “I reject the Respondent's assertions that the cause of the problems
encountered on-site was the use of excessive MCT oil or the unsuitability of the
MCT oil used by the Claimant. There is no evidence that the Claimant applied
excessive MCT oil to the GRS. On the contrary, Mr. E explained that MCT oil was
very expensive and machines supplied by Respondent limited its use to a low
level. Furthermore, the Claimant was not using any peculiar or unusual MCT
oil, but a type described as British Pharmacopeia grade that it had been using
all along, and obtaining from professional suppliers of MCT oil in Malaysia. I
would note also that the Respondent offered a GRS specifically for use by the
Claimant, a company that it had been doing business with since 2007. There
is no suggestion that the Respondent was taken by surprise by the type of gel
net used by the Claimant, which in any event was not of an unusual type. If the
Respondent was building a machine that could only be used with certain types
of gel net not used by the Claimant, for example the type that the Respondent
claimed it tested in Korea, this was a limitation that was not captured in the
Contract. Obviously, such a limitation, if it had been raised prior to the Contract,
would not have been acceptable to the Claimant who was relying on the
Respondent to build a GRS to be used by the Claimant.
[11] “In addition, the Respondent argues that the ppm specification was not a
practical condition and therefore could not be recognised under the Korean
Civil Act which required a contract (legal act) to be determinable and feasible.
It submitted that the stipulated level of ppm was not an industry standard and
could not be measured with any accuracy. The Respondent added that parties
never agreed to the level of 20 ppm, or how it could be determined and tested.
[12] “During the hearing, it was suggested by the Respondent's counsel to Mr.
E that the clearness of the gel net solution was the most important aspect.
Mr. E answered that the GRS should achieve whatever was specified in the
specifications, and gave the example of gel strength and viscosity as well as the
requirement of less than 20 ppm. Mr. E was challenged on the origin of the 20
ppm requirement as well as how it could be calculated. According to Mr. E, the
Claimant needed to work regulatory standards in Australia and New Zealand.
The 20 ppm was the lowest level that the Claimant could test and the Claimant
needed to meet this level to avoid challenge by the regulatory authorities on
whether the Claimant had done enough to prevent cross-contamination and
impurities in the batches it produced. This was a level introduced by Company B,
113
the inventor of the GRS. He went on to explain how the testing was done in the
laboratories of the Claimant, although he was not the one who did the testing
himself.
[13] “The Respondent's argument that the parties never agreed to the ppm level or
that it was not part of the Contract is untenable. It is clear that the Respondent
had expressly assured the Claimant in its pre-contract correspondence … that
the GRS could achieve less than 20 ppm, and this was then expressly stipulated
in the Contract. It does not lie in the Respondent's mouth to now say that 20
ppm was an arbitrary number or that parties never agreed to it. It did not matter
that parties had not expressly agreed how it could be measured.
[14] “I also find that the Respondent has failed to show that 20 ppm was not a
measurable value. I accept the Claimant's position, as Mr. E maintained during
the hearing, that the ppm specification was a scientifically determinable value
and thereby perfectly enforceable. Mr. F explained further how a chart could be
constructed for turbidity and ppm using carefully weighed amounts of oil.
[15] “The Respondent referred to Korean case law and the CISG, neither of which
provided any assistance to the Respondent where it was in breach of clearly
defined contractual specifications as in this case. As the Claimant submits,
Article 35(1) of the CISG, which applies to this Contract, reinforces the principle
that the Respondent ‘must deliver goods which are of the quantity, quality and
description required by the contract ….’”
2. Failure to Correctly Install GRS
[16] “The Claimant submits that the Respondent had breached its obligations under
Clause 1 of the Contract by failing to correctly install the GRS at the Claimant's
premises. In the Statement of Claim and the Opening Statement, the Claimant
alleges that the Respondent had failed in three aspects: first, failing to plan
ahead and properly organise the installation; second, lacking the necessary
skills and expertise to properly carry out the installation; and third, failing to
provide the information that would have allowed the Claimant to independently
run the GRS. The List of Agreed Issues, however, put the second and third
grounds as separate issues from the failure to correctly install and commission
the GRS.
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Korean Commercial Arbitration Board
(….)
[17] “The Respondent argued in its Closing Argument that the GRS was installed
correctly. It referred to the statement of the Respondent's Mr. F that the GRS
was well installed and that all parts of the machinery were in good working
order, but unfortunately does not point to where Mr. F made such comments.
The Respondent might have meant the following passage in the Transcripts
where Mr. F was asked if the product was installed well and there was nothing
wrong with the actual working and operation of the machine. He answered in
the affirmative as follows:
‘Yes. In fact, I thought the quality of the workmanship was very good and I
thought overall there was nothing that I saw that said the system itself was
poorly manufactured from a workmanship perspective.’
[18] “The Respondent also pointed out that the Contract did not provide any
installation timeline or schedule. It pointed out that the complaint about
failure to plan or organize installation, and for that matter, the lack of skills
or expertise, was irrelevant to the operation and functioning of the GRS. It
maintained that the installation was well done.
[19] “As I have found that the GRS did not comply with contractual specifications
in terms of speed and quality above, the question of installation and
commissioning is a peripheral one. I agree with the Respondent that the
question of the poor planning or lack of skills in the installation of the GRS was
not material, and the Claimant did not seem to pursue this point in its Closing
Statement. For avoidance of doubt, it can be said that, factually, there was no
evidence of any mechanical problem with the GRS and no evidence of physical
poor workmanship. Nor was there any suggestion that it had been wrongly
installed in the sense that the parts were not where they were supposed to be.
This is not to say that the system had been correctly installed and commissioned
to perform according to the Contract. Indeed, it obviously could not perform
according to contractual specifications. In this sense, I find that it had not been
correctly installed and commissioned as per the Contract.
(….)
[20] “[Furthermore], the Claimant argues that the Respondent's engineers were
inexperienced and insufficiently skilled such that the installation process
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suffered delays. The Claimant emphasises that the Respondent's engineers
forgot to clean the GRS after the FAT in December 2013, which resulted in the
first batch of reclaimed gel being wasted.
[21] “The Claimant asserts that it had to explain to the Respondent's engineers as to
what was required, even though the Respondent had the task of doing so as the
manufacturer and seller of the GRS. The Claimant further asserts that although
the Respondent initially indicated that it would cooperate with Company B and
obtain its technical support, the Respondent subsequently dispensed itself
of useful guidance. The Claimant suggests that this was to the Claimant's
detriment as the Respondent failed to obtain valuable training from Company B..
(….)
[22] “I find that the Claimant has established that the Respondent's engineers
lacked the skills and expertise to properly install and commission the GRS
only to the limited extent that they did not know how to make the GRS perform
according to contractual specifications.”
3. Failure to Provide Information and Documents
(….)
[23] “The Claimant submits that (1) the Respondent provided Claimant with a
wrong and/or incomplete operating protocol to operate the GRS; and (2) the
Respondent failed to provide Claimant with the functional description of the
GRS, despite requests. The Claimant relies on Article 30 of the CISG which
provides that: "The seller must deliver the goods, hand over any documents
relating to them and transfer the property in the goods, as required by the
contract and this Convention."
(….)
[24] “During the hearing, Mr. F explained the purpose of the functional description of
components of the GRS which the Respondent did not produce. It is a document
prepared by the process engineer in the project and details every step of
the entire project. It is needed if there is a major disruption in the process. It
is customary for the manufacturer and seller of a GRS to give a copy to the
customer.
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[25] “The Respondent denies the allegations and argues that it had provided all III. CHANGE OF CONDITION OF THE GOODS
information regarding the regular operation of the GRS to the Claimant as well (….)
as all reasonable cooperation and assistance. The Respondent argues that it [27] “Another defence raised by the Respondent is based on a clause in Clause 2(6)
was entitled to protect confidential information relating to the GRS protocol and of the Contract which provides as follows:
operating principle. The Respondent asserts that it had provided the Claimant 
 ‘In no event may buyer assert a claim for any reason whatsoever after
with all the necessary documents, training and assistance necessary to run
the goods are sold, cut, proceed or otherwise altered. In no event shall
the GRS properly and in an effective manner. The Respondent alleges that
Seller be liable for the prospective profits, or indirect, special, incidental or
there was ample opportunity at the FAT and the SAT for the Claimant to ask
consequential damages.’
any question if there was any uncertainty. The Respondent further asserts
that due to the Claimant's modification of the GRS, the Claimant consistently
[28] “The Respondent argues that the Claimant had made alterations to the GRS and
demanded for documents which the Respondent expresses to be unnecessary
was thereby in breach, as a result of which it was prohibited from any claim for
for the operation of the GRS and of a confidential nature. The Respondent adds
damage on any basis whatsoever.
that the requested information, if given, would have been ineffective and would
require further re-examination due to the Claimant's customisation. It further
[29] “The alterations in question were the addition of a diaphragm valve on the
argues that the additional information that Mr. F mentioned as necessary to
permeate valve on the permeate flow pipe on 8 May 2014 to control the flow-
correctly operate the GRS was a change in the operating specifications due to
rate and the addition of a flow meter to the return flow-pipe on 9 May 2014.
the Claimant using excessive oil and the wrong type of oil.
These were part of the troubleshooting steps that the Claimant undertook after
the GRS had already been failed. As Mr. F explained, the flow meter was the
[26] “The Respondent's arguments are not convincing and fail on the evidence. I find
same diameter as the pipe that was originally there and did not affect the flow
that it has failed to provide both the categories of documents that the Claimant
of the fluid. The valve controlled the flow but when it was open, it would not
says it was obliged to provide. Indeed, it was established during the hearing that
change the parameters of the flow through the pipe.
the Respondent's witnesses had little knowledge about either the operating
protocol or the functional description of the GRS. Mr. H tried to explain that a
[30] “Clause 2(6) cannot be read in an absurd, literal way. For instance, it says that
person with less proficiency should only use the automatic operation setting but
the buyer has no claim after the goods are ‘sold,’ or after ‘proceed’ (whatever
admitted, however, that the Respondent never gave the Claimant any manual
that means). In the circumstances here, the buyer was trying to figure out a
with numbers for setting the parameters of the GRS. It was up to the Claimant,
way to solve a problem that had already arisen, for which notice had been given
by its own investigation, to figure out that flow rate and pressure settings were
to the seller, without any solution forthcoming from the seller. The alterations
important settings in the micro-filtration process. The Respondent had no
it made did not cause the problem that had already been complained of, nor
immediate answers to the Claimant's queries on the filter that the Respondent
were the alterations so invasive that it could be said the machine was materially
obtained from P. The Respondent promised to visit the site with P but never
altered. Clause 2(6) does not prohibit attempts to rectify a defect after the seller
did so. Curiously, Mr. G said the Respondent did not proceed with the visit
has failed to rectify it.”
because the Claimant was asking for data continuously. As for the functional
description, Mr. H admitted that since P refused to deliver it to the Respondent,
IV. DAMAGES
the Respondent could not deliver it to the Claimant. On further examination, he
displayed some confusion over whether he had the functional description but
1. Calculating Damages
eventually admitted that he did not have it. Consequently, I find in favour of the
Claimant on this issue.”

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[31] “As the GRS failed to comply with contractual specifications, the Claimant is
entitled to damages.
(….)
[32] “It appeared from Mr. F's testimony that the numbers provided up to then were
indeed very rough estimates. He only obtained a ballpark figure orally over the
phone from P USA as he ‘was in a hurry to put these numbers together’ and P
USA gave him a quote for six units. When questioned whether it was essential
to change the existing feed and return manifold, he said it was because of the
additional housings. At the moment there were only two housings, but if four
were to be added, there would be many more connections. Mr. F had not done
any engineering drawings so he and the stainless steel fabricators he spoke to
were working off ‘kind of a rough idea.’ He guessed that they probably gave him
a ballpark estimate that would cover themselves a bit, which I take to mean with
some margin built in. He seemed to accept that the costs could be lower but
when it was suggested it could be half the price, he replied: ‘Probably not half
the price, no.’
[33] “After the hearing, the claimed quantum was revised on quotations received
from suppliers selected by the Claimant who responded to two formal Requests
for Quotes (‘RFQs’) sent by the Claimant on …. One RFQ was in relation to
stainless steel piping and component installation of the sub-system of the
micro-filter … (for brevity, I will refer to this as ‘the Piping RFQ’) and the other
RFQ was for the automated control, operation and graphics of the sub-system of
the micro-filter … (I will refer to this as ‘the Automation RFQ’). Mr. F provided a
GRS MF Remediation Project Cost Summary … (‘Project Cost Summary’) which
explains and summarises the breakdown of the costs based on quotations
received. He said that, after the hearing, ‘work was done at Laboratories LTD.
(Claimant) to determine the operating envelope of the GRS MF system. The
result of that work was provided to management at Laboratories LTD. (Claimant)
along with the new design specifications and equipment components required
to get the systems operating at warranted design performance.’”
2. Burden of Proof & Document Production
[34] “As the Respondent submits, the burden of proving the necessity of the
proposed modification works and the quantum of damages lies on the Claimant.
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It bears noting that the Respondent had requested for production of, amongst
other documents, evidence of the quantum claimed by the Claimant but
withdrew it at the hearing by telephone conference on … after the Claimant
insisted that it had produced sufficient evidence to support its monetary claim.
The Claimant's position was it had no further documents to produce at that
time.
[35] “Although the Claimant produced further documents on quantum after the
hearing with the agreement of the Respondent, the Respondent objects to
the Claimant attempting to substantiate and add additional components to its
estimation other than those already contained and set out in the Statement of
Claim and the Mr. F’s Report, in particular paragraph … of the technical report.
The Respondent pointed out that the purpose of the statement of quantum
was to substantiate the components and work envisaged as contained in the
Statement of Claim and the Mr. F’s Report. The agreement and liberty to
submit further documents on quantum were for the purpose of firming up
the quotations and cost estimates that the Claimant had not done up to the
conclusion of the oral hearing. I agree with the Respondent. It cannot be right
that, after the close of the oral hearing, the Claimant submits claim amounts
based on specifications that neither the Claimant nor Mr. F had previously
submitted for the purpose of examination or clarifications during the oral
hearing.
[36] “The Claimant has not produced much information on the result of the post-
hearing work done at Laboratories LTD. (Claimant) or the design specifications
that would clearly show that the proposed work had not expanded beyond what
the Mr. F’s Report originally envisaged.
[37] “In particular, the Respondent highlighted the omission of a Piping and
Instrumentation Diagram (‘P&ID’) to demonstrate that the work proposed dealt
with the micro-filtration system only and that it was in line with what was set out
in the Statement of Claim and the Mr. F’s Report. The Respondent offered two
P&IDs - one depicting the current state of the GRS … and the other depicting the
additions proposed in the Mr. F’s Report …. In addition, the Respondent submits
a quotation received from Company J that it says sets out the reasonable fees
for the modifications envisaged by the Claimant …. According to the Respondent,
the total amount of the costs to bring about the modifications in the P&ID … are
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Korean Won 326,800,000 (USD 281,724.14).
[38] “The Respondent mounted numerous specific challenges to the Claimant's two
RFQs and the Project Cost Summary. Both parties have agreed that I should
proceed to a decision based on the materials and submissions before me. I
do so taking into account the parties' submissions and the principle that the
Claimant has the burden of proof, but without the benefit of specific explanation
of the items from any witness on either of the parties' closing submissions on
quantum.”
2. Duty to Mitigate Damages
the Respondent could assert that it was "normally installed" given that it was
not part of the contractual design of the Respondent. The Respondent did not
furnish evidence addressing the specific points that Mr. E had testified on, nor
was Mr. E's testimony on these points discredited in cross-examination.
[42] “The Respondent has failed to show how the Claimant had failed to take
appropriate steps to mitigate its loss and damage.
(….)
[43] “…, I repeat that I do not accept the Respondent's argument that its suggested
pre-washing was a solution that should have been accepted by the Claimant.”

(….)
V. INTEREST
[39] “There was no submission on mitigation other than the argument of the
Respondent that it had offered to install a pre-washing tank free of charge for
[44] “The Claimant seeks interest on any amount to be awarded at the rate of 6% per
the Claimant but was refused.
annum from the day following the day on which the Request for Arbitration was
served on the Respondent until full payment. In … its Statement of Claim, the
[40] “Mr. E explained the reasons for the Claimant's refusal to accept the pre-
Claimant relies on Article 54 of the Korean Commercial Code which provides as
washing tank solution as follows: first, the Claimant would not have purchased
follows:
the GRS if the pre-washing tank had been included in the original quotation;
‘The legal rate of interest on obligations resulting from commercial
second, pre-washing the gel net is not a scientific solution guaranteed to
activities shall be six percent per annum.’
generate consistent results; third, the result of the pre-washing demonstration
by the Respondent at the Claimant’s premises did not comply with the ppm
[45] “In … its Statement of Defence and Counterclaim, the Respondent denied the
specifications; fourth, pre-washing the gel was not a fully automatic process
Claimant's claim to interest on the basis that the Respondent is not liable for
and is labour-intensive as it required at least one operator to load and unload
any amount whatsoever.
200 kg of gel net 20 times a day in order to meet the contractually agreed
speed of 4,000 kg/20 hours; fifth, adding a pre-washing step to the GRS would
[46] “I decline to award interest on the damages awarded because the Claimant has
require the Claimant to add another water purification system and increase
not yet paid its suppliers for the proposed modification works.”
its consumption of city water by 60,000 litres resulting in US$ 1,000,000.00 of
Infrastructure Growth Charge to the … Water Supply Network; and sixth, the
VI. COUNTERCLAIM FOR THE PURCHASE PRICE
Claimant did not have space at its premises for another water purification
system and a pre-washing tank.
(….)
[47] “The Respondent claims under the Contract which provides for the following
[41] “The Respondent's argument that the pre-washing tank was a reasonable and
payments:
normal solution to the GRS, and that it functioned automatically with minimum
labour, was not supported by cogent or persuasive evidence. There were mainly • USD 200,000 2 months after installment
bare general assertions that it would have solved the problem. I do not see how • USD 120,000 9 months after installment

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[48] “The Respondent cited Article 59 of the CISG which provides that:
‘The buyer must pay the price on the date fixed by or determinable from the
contract and this Convention without the need for any request or compliance
with any formality on the part of the seller.’
[49] “As I have found that the GRS had not been properly installed yet, … in the sense
that it was able to perform according to contractual specifications, the payments
are not due yet. …, the Respondent is not precluded from claiming these sums
in the future.”
VII. COSTS
(….)
[50] “The Claimant claims costs in the sum of USD … and NZD ….
(….)
[51] “The Claimant cites several provisions of the KCAB Rules in support.
Article 45 of the KCAB Rules provides that the Arbitration Costs pursuant to
the above article shall include ‘the filing fees, the administrative fees, the fees
and expenses of the arbitrators incurred during the arbitration proceedings
in accordance with the Regulations on Filing Fees and Administrative Fees
(APPENDIX I) and Regulations on Arbitrators Fees and Expenses (APPENDIX II)
and other expenses.’
Article 47(1) of the KCAB Rules which relates to the apportionment of the
Arbitration Costs, provides that:
‘The Arbitration Costs including administrative fees shall in principle be
borne by the unsuccessful party. However, the Arbitral Tribunal, taking into
account the circumstances of the case, may, at its discretion, apportion
each such costs between the parties.’
Article 48 of the KCAB Rules provides that:
‘The necessary costs and expenses including but not limited to attorney
fees and costs for experts, interpreters, witnesses incurred by a party
during the arbitration proceedings shall be borne by such party subject to
the allocation determined by the Arbitral Tribunal set forth in the Arbitral
Award. Unless agreed otherwise by the parties, the Arbitral Tribunal shall,
taking into account the circumstances of the case, decide on allocation
123
between the parties of the necessary expenses incurred during the
arbitration proceedings.’
[52] “The Respondent submits that Clause 7 of the Contract which excludes liability
for ‘loss of profit or for any indirect, special, incidental or consequential losses
or damages which may be suffered by the other party’ means that the party in
breach will not be able for the legal costs of the successful party. This argument
is clearly unmeritorious.
[53] “The Respondent asked the Tribunal to take into account a number of factors,
none of which really impact the Claimant's right to costs. In its reply to the
Claimant's costs submissions, the Respondent submitted that it would be fair
and reasonable for the Claimant to produce documents to substantiate its
claim to costs. As the bulk of the Claimant's claim for costs is the legal fees of
its lawyers, there is no reason to believe that its lawyers are submitting false
numbers of the legal fees incurred and I do not see a need for the Claimant to
produce the invoices of its lawyers.
[54] “There is a component which relates to the expert's costs. I will not allow
costs claimed for the expert's expenses and fees in relation to conducting trial
runs, troubleshooting and investigations. These are not costs incurred in the
arbitration. Furthermore, the Claimant is being compensated for much of the
engineering and consulting work of the expert. The Claimant is entitled to a
reasonable sum for the expert's fees of preparing his reports and attendance
at the hearing, including his travel expenses. No explanation was given of the
invoices said to be issued by the expert, so I am unable to work out any specific
allocation of his costs. I would allow the sums of … as these were the sums
of his invoices dated … which could be surmised as invoices for work done in
connection with the hearing.
(….)
[55] “With regard to … legal fees, however, I will allow a sum of … taking into account
the following:

(a) The costs awarded should be proportionate to the amount in dispute,
although the issues and work required to be done should be considered as
well.
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(b) The Claimant made a number of submissions in its Statement of
Claim and Opening Statement which it did not follow through in its
closing arguments, for example, issues relating to the proper installation
of the GRS, the lack of skills of the Respondent's engineers and the
documentation.
(c) The Claimant has not succeeded entirely in the quantum of its claim.
(d) Although the Respondent's Counterclaim has not succeeded, the
Claimant was wrong to initially argue that the Respondent was not entitled
to payment at all. The Respondent was not entitled to payment yet, but that
does not mean it will never be entitled to payment.”
VIII. DECISION
[56] “Accordingly I hereby award and direct in full and final determination of all
claims in this arbitration that:
 concluded one contract, CISG, tailored to the international sale of goods, would apply
1. The micro-filtration system of the GRS supplied by Respondent has failed to
conform to the specifications of the Contract;
2. The Respondent shall pay the Claimant damages in the sums of NZD … and
USD …;
3. The Respondent’s counterclaims are dismissed;
4. The Respondent shall pay the Claimant’s legal fees and arbitration costs
relating to this dispute, fixed at USD … and NZD ….
Implications
I. OPTING IN CISG
In this case the parties have agreed that Korean law is the applicable law to
the dispute, and that the 1980 United Nations Convention on Contracts for the
International Sale of Goods (CISG) applies as part of Korean law. Therefore, it is
evident that Korean law applies to the matters not governed by CISG, and that the
mandatory provisions of Korean law apply.22)
125
The parties entered into a sales contract whereby the Respondent was to deliver a
gelatin reclaim system to Claimant, to install the system on the Claimant’s premises,
and to provide the information and documents for the Claimant to independently
run the system. The contract between the parties is a mixed contract stipulating
obligations to supply goods and to provide services. Article 3(2) of CISG clearly
provides that contracts which include an obligation to supply services alongside the
delivery of the goods are excluded from the scope of application of CISG, provided
that the service obligation constitutes the preponderant part of the obligations.23)
The Arbitral Tribunal could first have determined whether the obligation to supply
services is a preponderant part of the obligations in this contract. Meanwhile, it
appears in this case that the preponderant part of the obligations does not consist
in the supply of services. On the other hand, an alternative option would be to sever
the services part and to have this part governed by applicable domestic law, Korean
law in this case, while applying CISG to the sales part of the contract. However, this
option, having two laws applied to one contract, would be contrary to the ordinary
intent of the parties. Therefore, as long as the parties are considered to have
to the whole contract with necessary adjustment to fit mixed contracts.24) Even if the
services portion of the contract constitutes the preponderant part of the obligations,
the parties may opt into CISG which would most appropriately fit the contract. In this
case by the parties’ opting in CISG, the contract is governed primarily by CISG and
supplementarily by Korean law.
22) United Nations Commission on International Trade Law, supra note 10, at 34; Schwenzer,
supra note 10, at 117.
23) Kröll et al., supra note 10, at, 57-58.
24) Schwenzer, supra note 10, at 69-70.
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Korean Commercial Arbitration Board
KCAB case no.7
Parties Claimant (Counter-Respondent): Energy Company (Korea)
Respondent (Counter-Claimant): Seller Company (Vietnam)
Place of
Arbitration Seoul, Republic of Korea
Language Original in English
Subject matters - applicable law
- seller’s delivery obligation
- non-conformity of goods
- risk of loss under the CFR term
Facts
The parties entered into a contract for the Claimant to purchase from the
Respondent a quantity of goods. The goods were delivered at the delivery port. The
Claimant carried out inspections to verify the quantity of the goods shipped by the
Respondent, which revealed an alleged shortfall in weight compared to the certified
weight by the Respondent. The Claimant subsequently filed a claim with its cargo
insurer. However, the insurer rejected the claim on the ground that the insurer was
not liable for the quantity never loaded on the ship.
A dispute arose between the parties regarding the quantity of the good loaded at
the loading port. The Claimant commenced KCAB arbitration as provided for in
the contract. The contract provided that the law applicable to the dispute was the
law of Vietnam. The Claimant sought damages in respect of an alleged shortfall
of the goods and interest. In response, the Respondent denied any liability for the
Claimant’s alleged losses.
Rejecting the Claimant’s argument, not supported by sufficient evidence, that the
127
Respondent shipped a lesser quantity of the goods, the Arbitral Tribunal, based upon
the shipping documents, first found that the Respondent shipped the quantity of the
goods for which it obtained payment from the bank by presenting the documents.
Having found that the contract stipulated the CFR term, the Arbitral Tribunal further
held that the Respondent was responsible for loading the correct quantity of the
goods on board the vessel, and that once the goods were on board the risk of loss
passed to the Claimant. Consequently, the Arbitral Tribunal denied the Claimant’s
claim for damages and interest.
Excerpt
I. JURISDICTION
[1] “Each of the Contracts contains the following arbitration agreement under
Article 10 of its General Terms and Conditions:
 ‘Any dispute arising out of or in connection with this contract, including any
question regarding its existence, validity or termination shall be referred to
and any [sic] finally resolved by arbitration in Korea in accordance with the
Arbitration Rules of the Korea International Arbitration Centre (KIAC Rules)
for the time being in force, which rules are deemed to be incorporated by
reference in this clause. This tribunal shall consist of one/three arbitrator(s)
to be appointed by the Chairman of the KIAC.’
[2] “Notwithstanding the reference to ‘Korea International Arbitration Centre’ in the
Arbitration Agreement, the Tribunal understands the Parties to have intended
to submit this dispute to the ‘Korean Commercial Arbitration Board,’ as that
institution was clearly stated in paragraph 4.2 of Procedural Order No. 1 and not
subsequently objected to by either Party.
[3] “Under Article 17(2) of the Korean Arbitration Act, an objection to the Tribunal’s
jurisdiction must be raised no later than the submission of the Statement of
Defense on the merits; and under Article 17(3), an objection that the Tribunal
has exceeded the scope of its authority must be raised as soon as grounds for
such an objection exist. Both Parties have fully participated in these proceedings
without raising any jurisdictional objections or challenges to the jurisdiction of
the Tribunal or the competence of the Sole Arbitrator. Accordingly, the Tribunal
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Korean Commercial Arbitration Board
finds that it has been properly constituted in accordance with the Rules, and
decides that it has jurisdiction over the Arbitration and is competent to decide
the Parties’ dispute.”
II. APPLICABLE LAW
[4] “Each of the Amended Contracts provides, in Article 10, that ‘[t]his agreement
shall be governed by and construed in accordance with the law of Vietnam,
without reference to any conflicts of law provisions.’ It is not disputed, however,
that the transaction at issue in this Arbitration falls within the scope of freedom
of contract permitted under Vietnamese law, and neither Party has alleged
the existence of any mandatory rule of Vietnamese law having relevance to the
merits of this dispute. In practice, the Tribunal has found it possible to decide
this dispute on the basis of the Amended Contracts, and is not aware of any
relevant issue in regard to which the application of other rules of Vietnamese
law would dictate a different outcome.”
III. NON-CONFORMITY OF THE GOODS
1. Contracts between the Parties
[5] “[T]he Parties entered into two separate ‘Wood Pellet Sale and Purchase
Contracts.’ … Each of the Contracts provided for the sale and purchase of 3,000
metric tons … of wood pellets at a unit price of USD 173/MT, for a total price of
USD 519,000 per Contract. Among the various terms and conditions specified
in the Contracts, the terms pertaining to packing, shipment and delivery are of
particular relevance to this dispute. Each of the Contracts initially provided for
‘Packing Type: In accordance with Export standard’ and ‘Terms of delivery’ of
‘CFR KWANGYANG PORT KOREA in accordance with INCOTERMS 2010.’
[6] “Each of the Contracts was subsequently amended on 21 July 2014. Under
‘AMEND No. 1,’ the Contract dated 27 June 2014 was amended so as to increase
the unit price to USD 183/MT for a total price of USD 549,000. The ‘Packing Type’
term was also amended to read ‘Bulk Ship In accordance with Export standard,’
and the ‘Terms of delivery’ were amended to read ‘CFR PYEONGTAEK PORT
KOREA in accordance with INCOTERMS 2010.’ All other terms and conditions
remained unchanged.
129
[7] “The current dispute concerns a shipment of wood pellets which was loaded
onto the MV ST OLGA at the loading port in Vietnam between 14 August and 18
August 2014. According to the ‘Certificate of Quantity by Draft Survey’ prepared
at the loading port in Vietnam by A Inspection Company, the shipment contained
a total quantity of 4,665.78 MT of wood pellets. The Parties are not in agreement
as to the accuracy of the draft survey performed by A Inspection Company.
[8] “It is not disputed, however, that Respondent (i) received bills of lading from
the carrier in which the weight of the cargo was stated as 4,665.78 MT in the
aggregate, and (ii) negotiated irrevocable letters of credit with the relevant bank
to receive USD 402,600 on 21 August 2014 and USD 451,237.74 on 25 August
2014, for a total price of USD 853,837.74. The USD 853,837.74 received by
Respondent assumes a total cargo of 4,665.78 MT of wood pellets at a unit price
of USD 183/MT.
[9] “The MV ST OLGA reportedly left the port in Vietnam on 18 August 2014.
According to the Sealing Record prepared as of the same date by A Inspection
Company, all hatch covers and manholes for Hold #1 and Hold #2 had been
sealed prior to the ship’s departure. The Parties are in agreement that such
seals remained intact upon arrival of the MV ST OLGA at the delivery port, and
no particular issues have been raised concerning Respondent’s compliance
with the packing terms of the Amended Contracts in other respects.
[10] “The MV ST OLGA arrived at the delivery port, Pyeongtaek Port in Korea, on 29
August 2014, whereupon Claimant proceeded to weigh the cargo to verify the
quantity of wood pellets shipped by Respondent. To that end, a series of draft
surveys was carried out at the discharge port by B Inspection Company. The
final draft survey conducted by B Inspection Company reportedly indicated that
a total of only 4,246.22 MT of wood pellets had been unloaded from the ship’s
cargo holds, resulting in an alleged discrepancy of 419.56 MT from the amount
stated in the draft survey conducted by A Inspection Company and subsequently
recorded in the bills of lading (i.e., 4,665.78 MT).
[11] “The weight of the wood pellets unloaded from the cargo holds of the MV ST
OLGA was subsequently measured by the weigh-bridge of Pyeongtaek-Dangjin
Port Logistics Co., Ltd., whereupon the weight was found to be only 4,203.11
MT, resulting in a discrepancy of 462.67 MT from the amount stated in the draft
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survey conducted by A Inspection Company and recorded in the bills of lading (not
to mention a discrepancy of 43.11 MT from the final draft survey carried out by B
Inspection Company).
[12] “Claimant subsequently filed a claim with its cargo insurer, G Insurance
Company in the amount of USD 84,668.61, corresponding to an alleged
insufficiency of 462.67 MT. Having engaged K Insurance Adjusters Ltd. to
prepare a report on the extent and possible causes of the alleged insufficiency
…, G Insurance Company ultimately rejected the claim on the following stated
ground: ‘Considering specific gravity of wood pellets shipped by the obligor
and area of the ship, only 4141.8 tons of pellets could have been loaded on the
corresponding ST OLGA ship. As the amount of original shipment was 4,203.11
tons instead of 4,665.78 tons, the insurance company cannot make payment
on insurance benefit because the quantity, that never loaded on the ship is not
subject to cargo insurance.’
(….)
[13] “The main claim before this Tribunal is Claimant’s claim for damages in the
amount of USD 84,668.61 in respect of an alleged shortfall of 462.67 MT of wood
pellets based on a unit price of USD 183 per MT, plus pre- and post-award
interest on the claimed amount.
[14] “Article 22(3) of the Rules provides that ‘[e]ach party shall have the burden of
proving the facts relied upon to support any claim, counterclaim or defense.’
Accordingly, Claimant bears the burden of proving the facts underlying its claim
for damages in this case. For the reasons set out below, the Tribunal finds that
Claimant has not satisfied its burden in this case.”
2. Respondent’s Obligations under the CFR Terms in the Amended Contracts
[15] “The first issue to be decided in regard to this claim is the nature and scope of
Respondent’s relevant delivery obligations under the Amended Contracts.
Each of the Amended Contracts contained the following delivery term: ‘CFR
PYEONGTAEK PORT KOREA in accordance with INCOTERMS 2010.’ It is a
matter of common knowledge that ‘CFR’ under INCOTERMS 2010 stands for
‘Cost and Freight (named port of destination).’ The existence or validity of the
CFR delivery term in this case is not disputed by either Party.
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[16] “At the hearing, Respondent’s counsel presented a demonstrative exhibit
titled ‘The Process of Loading/Discharging the Wood Pellet of M/V ST. OLGA’
(copies of which were provided to Claimant and the Tribunal) which included the
following explanation:
According to article A4, A5 of the term CFR of Incoterm 2010. The seller
fulfils its obligation to deliver when it hands the goods by placing them on
board and the seller (Respondent) have transferred all risks of loss of or
damage to the buyer (Claimant) at point (B).
[17] “In the accompanying illustration, the ‘point (B)’ referred to in the quoted
passage indicates a point at which the goods have already been loaded onto
the ship. With respect to subsequent points in time (e.g., transit to discharge
port, unloading of cargo, etc.), Respondent goes on to state in the same
demonstrative exhibit that ‘the seller is no obligation about all risks of loss of
or damage in this stage. That is dispute among carrier, consignee, insurer and
others.’
[18] “The foregoing submissions by Respondent are consistent with its earlier
written submissions, where it had averred that it is ‘absolutely not responsible
for the cargo quantity were loaded on board when the ship left the loading port.’
[19] “Claimant, by contrast, has not addressed the legal implications of the CFR
term directly but has argued that ‘[e]ven if the [Respondent] actually shipped
accurate quantity, it violated the contract which requires an obligation to
guarantee that the exact quantity arrives at the Republic of Korea.’ Thus,
Claimant appears to be arguing in effect that Respondent bears the risk of cargo
loss up to the discharge port. If that is Claimant’s position, it is not supported by
the CFR term in the Amended Contracts.
[20] “Under the CFR term, the seller is responsible for delivering the goods on board
the vessel and must pay the costs and freight necessary to bring the goods to
the named port of destination. However, once the goods are on board the vessel,
the risk of loss or damage to the goods passes to the buyer. In other words, the
seller’s obligation under a CFR term is to ship goods of the agreed type and
quantity; the seller is not responsible for ensuring that the goods so shipped
arrive at the delivery port in the same condition and quantity.
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[21] “In view of the foregoing, the Tribunal finds that, under the operative CFR
delivery term in the Amended Contracts, Respondent was responsible for
loading the proper quantity of wood pellets – i.e., the quantity for which it was
paid – on board the MV ST OLGA. The risk of any loss or damage occurring
thereafter must be borne by Claimant.”
3. Whether Respondent Shipped the Quantity of Wood Pellets for Which It Was
Paid
[22] “The second issue to be decided is whether evidence from the loading port – i.e.,
the bills of lading and related shipping documents – indicates that Respondent
shipped the quantity of wood pellets for which it was paid.
[23] “It should first be noted that the present dispute concerns the quantity of wood
pellets shipped by Respondent. It has not been suggested that the wood pellets
failed to comply with the requirements of the Amended Contracts other than
in quantity. Accordingly, the outcome of the present dispute necessarily turns
on the question of whether Respondent shipped the quantity of wood pellets
for which it received payment – i.e., 4,665.78 MT – irrespective of the quantity of
wood pellets that was ultimately unloaded at the discharge port.
[24] “Under the payment terms set out in the Contracts, payment to Respondent
was to be made against presentation of certain documents including ‘clean
on board’ bills of lading marked ‘Freight Prepaid,’ commercial invoices,
packing lists, certificates of fumigation, certificates of origin, and certificates of
phytosanitary. Among these, the following key shipping documents have been
submitted into evidence in this Arbitration: (i) Bill of Lading no. STOG-RQPT01,
Commercial Invoice No. 11082014, and Packing List No. 11082014, each of
which indicates a quantity of wood pellets of 2,465.78 MT, and (ii) Bill of Lading
no. STOG-RQPT02, Commercial Invoice No. 12082014, and Packing List No.
12082014, each of which indicates a quantity of wood pellets of 2,200 MT. When
the figures in the two sets of shipping documents are combined, they amount
to a total quantity of 4,665.78 MT of wood pellets. It is undisputed that these
basic shipping documents all indicate that a total quantity of 4,665.78 MT of
wood pellets was, in fact, shipped. Furthermore, as noted by Respondent, both
of the bills of lading contained the notation ‘clean on board,’ indicating that no
irregularities had been identified in the cargo by the carrier.
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[25] “The cargo quantities listed in the bills of lading, commercial invoices and
packing lists were based on the draft survey results taken at the loading port by
A Inspection Company. The various draft survey records submitted into evidence
bear all required signatures including that of the Master/Chief Officer of the MV
ST OLGA … and consistently evidence that 4,665.78 MT of wood pellets were
shipped.
[26] “On the basis of the bills of lading (and other required shipping documents
including commercial invoices and packing lists), Respondent negotiated
irrevocable letter of credit no. M07M81407NU00025 in the amount of USD
451,237.74, and irrevocable letter of credit no. M07M81407NU00018 in the
amount of USD 402,600.00, for total payment of USD 853,837.74. As Claimant
has acknowledged in the Request for Arbitration, the foregoing documents
evidence that a total of 4,665.78 MT of wood pellets were shipped against a
purchase price of USD 853,837.74.
[27] “While Claimant contests the accuracy of the results of the draft survey
conducted by A Inspection Company on the basis that such results allegedly
conflict with draft survey results taken at the discharge port, Claimant does not
appear to dispute the fact that the draft survey results reported by A Inspection
Company, as well as the bills of lading, commercial invoices, and packing lists
tendered by Respondent in exchange for payment, all indicate that Respondent
shipped 4,665.78 MT of wood pellets.
[28] “Claimant has not established that any of the foregoing documents fail to
conform to any applicable requirements of form or content. Rather, Claimant
merely alleges that ‘the initial draft survey at loading port had something
wrong due to the unknown reason.’ In the view of the Tribunal, such vague and
unsubstantiated allegations do not constitute sufficient grounds for rejecting the
validity of the shipping documents – i.e., bills of lading, commercial invoices and
packing lists – and the underlying draft survey records, all of which (i) appear
to have been prepared in the ordinary course of business, (ii) comply with
applicable requirements of form and content, and (iii) are clear and consistent
on their face.
[29] “In light of the foregoing considerations, the Tribunal accepts that the shipping
documents clearly and consistently indicate that Respondent shipped 4,665.78
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MT of wood pellets, which is the quantity for which it was paid. On that basis,
the Tribunal finds, as a prima facie matter, that Respondent has satisfied its
obligations under the operative CFR deliver term by shipping the quantity of
wood pellets for which it was paid.”
4. Whether Evidence from the Discharge Port Proves that Respondent Actually
Shipped a Lesser Quantity of Wood Pellets
[30] “Notwithstanding the foregoing, Claimant has alleged that a lesser quantity
of wood pellets was actually received at the discharge port. Thus, a third
issue to be decided in regard to this claim is whether the evidence from the
discharge port on which Claimant’s allegations rest is sufficient to overcome
the Tribunal’s prima facie finding that Respondent shipped the quantity of wood
pellets for which it was paid.
[31] “As a preliminary matter, the Tribunal has already decided above that under the
CFR terms in the Amended Contracts, Claimant bears the risk of any loss of or
damage to the cargo after it is on board the shipping vessel. Hence, to the extent
that the bills of lading and other shipping documents establish that the correct
quantity of cargo was placed on board the vessel, there is arguably no need in
this case to examine evidence relating to events occurring after the MV ST OLGA
left the loading port in Vietnam since Claimant, as buyer, would ultimately be
responsible for any cargo shortfall identified at the discharge port.
[32] “Nevertheless, certain of Claimant’s allegations could, if proven, potentially
call into question the Tribunal’s prima facie finding that Respondent shipped
the quantity of wood pellets for which it was paid. Accordingly, the Tribunal
has carefully considered the evidence presented in support of Claimant’s
allegations, and has briefly summarized its findings in regard to such evidence
below. Ultimately, the Tribunal has found the evidence presented by Claimant
to be insufficient to prove that Respondent actually shipped a lesser quantity of
wood pellets than the quantity for which it was paid.”
5. Claimant’s Allegations of Cargo Shortfall at the Discharge Port
[33] “As explained in paragraphs … above, Claimant alleges that the final draft
survey conducted at the discharge port by B Inspection Company found that
a total of only 4,246.22 MT of wood pellets had been unloaded from the ship’s
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cargo holds, resulting in a discrepancy of 419.56 MT from the results of the
draft survey conducted by A Inspection Company and subsequently recorded
in the bills of lading (i.e., 4,665.78 MT). Thereafter, the wood pellets unloaded
from the cargo holds of the MV ST OLGA were weighed by the weigh-bridge of
Pyeongtaek-Dangjin Port Logistics Co., Ltd. According to Claimant, the weight
was found to be only 4,203.11 MT, resulting in a discrepancy of 462.67 MT
from the results of the draft survey conducted by A Inspection Company and
subsequently recorded in the bills of lading.
[34] “To be sure, the foregoing allegations are troubling, and the Tribunal has no
particular reason to doubt that some extent of shortfall could have occurred.
Claimant has not, however, established that the claimed shortfall – in the
amount of 462.67 MT – actually occurred. On the contrary, the final draft
survey conducted by B Inspection Company indicated a shortfall of only 419.56
MT, a discrepancy of 43.11 MT from the weigh-bridge results. In view of this
inconsistency between the final draft survey and the weigh bridge results, the
Tribunal can only conclude that the extent of shortfall, if any, is unproven.
[35] “There are other problems with Claimant’s evidence. First, the ‘Certificate of
Weighing Results’ issued by B Inspection Company as of 29 August 2014 was
not certified by the MCO of the MV ST OLGA on behalf of the carrier. In this
regard, Respondent has argued that the results of the weigh-bridge process
cannot be accepted because they were conducted unilaterally by Claimant,
without the involvement of any witness or supervision from the carrier’s
side. While certain related documents, including the operation daily report,
convention and voucher, were apparently signed by the MCO, none of these is
an official certificate. Nor is it clear what facts are being certified by the MCO in
these documents as each contains handwritten notes stating that ‘1. Ship not
responsible for Qtty of cargo. 2. Cargo delivered in seal holds and discharged in
full. 3. Cargo absolutely is empty in holds.’
[36] “There is also reason to doubt the reliability as evidence of the draft survey
results obtained by B Inspection Company at the discharging port. First, the
Draft Survey Report issued by B Inspection Company as of 29 August 2014 is
not signed or certified by the MCO. Furthermore, according to the K Insurance
Adjusters Ltd.’s Report …, B Inspection Company performed the draft survey
twice, first at 0400 on 30 August 2014 and again at 0530 the same day ‘after
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adjust[ing] the ship’s trim from 3.45 meters to 2.08 to obtain more accurate
figure’ …. While Claimant confirms that the draft survey was performed twice,
there does not appear to be any evidence in the record concerning the results
of the draft survey performed at 0400 on 30 August 2014. It is not clear whether
the results of that draft survey differed from the subsequent draft survey and,
if so, to what extent. In any event, as the report of the draft survey performed
at 0530 on 30 August 2014 does not contain the MCO’s signature, its reliability
as evidence is questionable. By contrast, the draft survey results taken by A
Inspection Company at the loading port appear to have been certified by the
MCO without comment or exception.
[37] “Therefore, the Tribunal finds that the evidence pertaining to the weigh-
bridge and draft survey results at the discharge port is inconclusive and does
not provide a sound and sufficient basis for disregarding the cargo quantity
indicated in the shipping documents, which were based on the certified draft
survey results taken at the loading port.
[38] “Furthermore, in light of the manifest inconsistencies between the weigh-
bridge and draft survey results at the discharge port, the Tribunal must
conclude that even if a cargo shortfall of some magnitude existed, Claimant has
not proven the extent of such shortfall. That is an entirely separate reason why
the Claimant’s claim for damages cannot be accepted.”
6. Alleged “Suspicion” regarding the Draft Survey at Loading Port
[39] “Claimant has also raised various issues and allegations concerning the draft
survey performed by A Inspection Company at the loading port. Certain of these
allegations and the evidence presented in support of them are briefly addressed
below.
[40] “First, Claimant points to a finding set out in the K Insurance Adjusters Ltd.
Report to the effect that the ballast condition of the draft surveys taken at the
loading and discharge ports differed by approximately 455 tons, which is similar
to the amount of cargo shortfall being claimed by Claimant in this Arbitration,
and endorses the opinion of K Insurance Adjusters Ltd. that ‘this discrepancy
would be too much high to be considered as human error.’ While the alleged
similarity in figures is superficially intriguing, it must be emphasized that K
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Insurance Adjusters Ltd.’s calculations are based in part on the draft survey
results taken at the discharge port. In light of the problems with that evidence
discussed above, the Tribunal cannot accept K Insurance Adjusters Ltd.’s
finding as conclusive.
[41] “Second, Claimant alleges that photos of the cargo taken at the loading port
and discharge port indicate ‘no quantity change during shipping,’ and on that
basis endorses K Insurance Adjusters Ltd.’s earlier conclusion that ‘the initial
draft survey at loading port had something wrong due to the unknown reason.’
However, the Tribunal does not find this photographic evidence to be conclusive
on any relevant point. In particular, the Tribunal does not believe that the
photographs in evidence depict the quantity of wood pellets contained in the
holds at the loading port and discharge port in sufficient detail as to be capable
of proving that there was ‘no quantity change during shipping.’
[42] “Third, Claimant argues that the quantity of wood pellets that Respondent
claims to have shipped is more than the MV ST OLGA could have carried in
light of the alleged ‘stowage factor’ of the wood pellets in question. It will be
recalled, in this connection, that G Insurance Company’s rejection of Claimant’s
insurance claim was reportedly based on the same theory:
Considering specific gravity of wood pellets shipped by the obligor and
area of the ship, only 4141.8 tons of pellets could have been loaded on
the corresponding ST OLGA ship. As the amount of original shipment was
4,203.11 tons instead of 4,665.78 tons, the insurance company cannot make
payment on insurance benefit because the quantity, that never loaded on
the ship is not subject to cargo insurance.
[43] “It should first be noted that the insurer’s conclusion that the MV ST OLGA
could only have held 4,141.8 tons of pellets appears to be based on a number of
assumptions, including that the stowage factor of the wood pellets as shipped
was actually 1.5, and that their specific gravity was actually 0.6. Neither of these
assumptions has been proven. More importantly, the insurer’s conclusion is
contradicted by the results of the weigh-bridge survey, which found that 4,203.11
MT of wood pellets had been unloaded from the MV ST OLGA, not to mention
the results of the draft survey taken by B Inspection Company, which found
that 4,246.22 MT of wood pellets had been unloaded from the ship. If either of
those figures is accurate – and it appears that K Insurance Adjusters Ltd. (the
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insurer’s appointed insurance adjuster) accepts the validity of the weigh-bridge
survey’s findings at the very least – then the insurer’s conclusion that only 4,148.8
tons of pellets could have been loaded on the MV ST OLGA is necessarily wrong.
[44] “Notwithstanding the foregoing, Claimant argues that the ‘general stowage
factor of wood pellet is 1.6 to 1.8,’ and that the stowage factor of the wood
pellets at issue in this dispute was approximately 1.6. According to Claimant,
this means that the MV ST OLGA – which has a grain capacity of 6,903CBM –
could not possibly have held the quantity of wood pellets, 4,665.78 MT, which
Respondent claims to have shipped. In support of its argument, Claimant
relies on various data including the K Insurance Adjusters Ltd.’s Report and
a Certificate of Analysis from Analysis Company, in which the stowage factor
of a wood pellet sample was found to be 1.64. While the Analysis Company
Certificate of Analysis states that the sample was from ‘August 2014,’ no other
information is available concerning the source of the sample or the sampling
methodology. In the view of the Tribunal, these omissions reduce the evidentiary
value of the Analysis Company Certificate of Analysis.
[45] “By contrast, Respondent has put forward a letter dated 24 December 2014
from the shipping company, A Shipping Company Pte., Ltd., stating that the
storage factor of the wood pellets at issue here was 1.3~1.4. Respondent also
relies on the record of a survey allegedly conducted by A Inspection Company
on or around 11 August 2014. According to that survey, which was reportedly
conducted by means of random sampling of the wood pellets to be shipped to
Claimant, the stowage factor of the wood pellets at issue was found to be 1.47.
[46] “Claimant admits that if the stowage factor of the wood pellets at issue was 1.47,
‘this would be the important evidence to determine that 4665ton of wood pellet
can be loaded on ST OLGA.’ However, Claimant argues that the A Inspection
Company survey report cannot be accepted as credible evidence because it
was allegedly never relied upon by Respondent until it was submitted into
the record of this Arbitration with Respondent’s Amendment to Self-Defense
Statement for Arbitration dated 9 January 2015. In light of the relatively late
appearance of this document, Claimant suggests that it was ‘just made up
retroactively.’ Furthermore, Claimant denies the credibility of the survey report
on the basis that A Inspection Company had, in a separate document, agreed to
be responsible for its own draft survey figure and calculation, the accuracy of
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which has been challenged by Claimant.
[47] “The Tribunal agrees with Claimant that the survey report prepared by A
Inspection Company would, if accepted, constitute ‘important evidence’ that
the quantity of wood pellets that Respondent claims to have shipped – 4,665.78
MT – could actually have been loaded on the MV ST OLGA. For that reason, the
Tribunal also finds it curious that Respondent did not seek to rely on it before
submitting it into evidence with its submission dated 9 January 2015. On the
other hand, there could be any number of legitimate reasons why Respondent
failed to rely on the A Inspection Company survey report prior to the start of
this Arbitration. In light of that fact, the Tribunal is not prepared to conclude,
based on the timing of Respondent’s reliance on the survey report alone, that
the A Inspection Company survey report lacks credibility as evidence. Rather, in
the absence of credible reasons to believe that the report itself is a fabrication,
materially inaccurate or otherwise deficient – and no such reasons have
been presented by Claimant – the Tribunal is of the view that the A Inspection
Company survey report and the findings stated therein deserve to be accepted
at face value. Accordingly, the Tribunal does not accept Claimant’s argument
that 4,665.78 MT of wood pellets could not have been loaded on the MV ST
OLGA.
[48] “As to Claimant’s suggestion that the A Inspection Company survey report
‘cannot be effective as an evidence’ because A Inspection Company has
accepted responsibility for damage to Respondent resulting from its draft
survey, the Tribunal would only note that the same logic could easily be applied
to the K Insurance Adjusters Ltd.’s Report, on which Claimant has relied
for various purposes in this Arbitration. After all, the K Insurance Adjusters
Ltd.’s Report was reportedly prepared at the request of Claimant’s insurer, G
Insurance Company, which is the party against whom cargo insurance claims
have already been filed by Claimant, and to whom Claimant will presumably
look again for satisfaction to the extent that its claims against Respondent
in this Arbitration do not succeed. In the circumstances, the Tribunal is not
prepared to draw the conclusions suggested by Claimant regarding the motives
underlying the A Inspection Company survey report.
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[49] “In short, the Tribunal does not find the various allegations and evidence
presented by Claimant25) under the heading “Suspicion of the draft survey at
loading port” to be sufficiently credible and compelling as to overcome the
Tribunal’s earlier findings based on the shipping documents.”
7. Tribunal’s Conclusion
[50] “For the reasons set out above, the Tribunal finds that the evidence presented
by Claimant in support of its allegations of a shortfall at the destination port is
inconclusive and/or insufficient to prove that Respondent actually shipped a
lesser quantity of wood pellets than the quantity for which it was paid. Thus, the
Tribunal remains of the view that the shipping documents – namely, the bills
of lading, commercial invoices and packing lists – constitute the most reliable
evidence of what was actually shipped in this case. That evidence clearly and
consistently indicates that Respondent shipped 4,665.78 MT of wood pellets,
which is the quantity for which it received payment. Claimant has not proven
otherwise.
[51] “Accordingly, Claimant’s claim for damages in the amount of USD 84,668.61 is
hereby dismissed.
In light of the foregoing, the final two issues to be decided by the Tribunal in
regard to this claim – whether Claimant has proven the quantum of damages
claimed and whether Claimant is entitled to pre- or post-award interest thereon
– have become moot.”
IV. COSTS
(….)
[52] “Under Article 47(1) of the Rules, arbitration costs, including administrative
fees, are to be borne by the unsuccessful party in principle. However, the
Tribunal retains discretion to apportion the costs between the Parties as it sees
fit, taking into account all circumstances of the case.
25) The arbitral award states “Respondent,” but this appears to be a clerical error for
“Claimant.”
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[53] “The Rules define ‘arbitration costs’ to include ‘filing fees, the administrative
fees [and] the fees and expenses of the arbitrators incurred during the
arbitration proceedings…’ (‘Arbitration Costs’). Under Article 48 of the Rules, the
Tribunal also has full discretion to apportion the costs of ‘other necessary costs
and expenses’ (such as fees for attorneys and interpreters) between the Parties.
[54] “As Claimant commenced this Arbitration but has not succeeded in proving its
claims, the Tribunal is of the view that the Arbitration Costs should be borne by
Claimant.
However, with regard to all other ‘necessary costs and expenses’ incurred by
the Parties in connection with this Arbitration, the Tribunal is of the view that
each Party should bear its own costs.”
Implications
I. EXCLUSION OF THE CONFLICT OF LAWS RULES
The contract between the parties stipulates that “[t]his agreement shall be governed
by and construed in accordance with the law of Vietnam, without reference to any
conflicts of law provisions.” The purpose of the parties appears to designate the
applicable law as Vietnamese law, ruling out any possibility that the choice of the
applicable law may be affected by reference to a conflict of laws rule. However,
the Korean court has held that the private international law, which determines
the applicable law to legal relationships including a foreign element, cannot be
derogated by the parties’ agreement (see Seoul Administrative Court Decision No.
2007Guhap26322 dated June 19, 2008). It remains to be seen in arbitration whether
the conflict of laws rules can be excluded by the parties’ agreement.
II. BURDEN OF PROOF
One of the issues decided by the Arbitral Tribunal is whether the Respondent
shipped the quantity of the goods for which it obtained payment from the bank. In
doing so, the Arbitral Tribunal could have clarified which party carries the burden of
proof in this respect. The Arbitral Tribunal holds that “neither Party has alleged the
existence of any mandatory rule of Vietnamese law having relevance to the merits
of this dispute,” and that “the Tribunal has found it possible to decide this dispute on
the basis of the Amended Contracts, and is not aware of any relevant issue in regard
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to which the application of other rules of Vietnamese law would dictate a different
outcome.”

It is necessary to identify the applicable law to the burden of proof. In general,

KCAB case no.8
the law governing the contract applies with respect to the burden of proof. For
example, Article 18 of Rome I Regulation provides that “[t]he law governing a
Parties Claimant (Counter-Respondent): Engineering Company (Korea)
contractual obligation under this Regulation shall apply to the extent that, in
Respondent (Counter-Claimant): Manufacturer (Italy)
matters of contractual obligations, it contains rules which raise presumptions of
law or determine the burden of proof.” The burden of proof is to be decided by the Place of
applicable law to the substance. The parties expressly chose Vietnamese law as Arbitration Seoul, Republic of Korea
the applicable law in this case. The Arbitral Tribunal therefore could have reviewed
Language Original in English
Vietnamese law in regard to the burden of proof.
Subject matters - applicable law
- opting in CISG
- jurisdiction
- non-conformity of goods
- fitness for a particular purpose
- public law standards
- consequences of seller’s knowledge of defects
- fundamental breach
- notice requirement
- duty to mitigate damages

Facts

The parties entered into a contract for the Respondent to purchase from the
Claimant a quantity of goods. The Respondent also contracted to purchase from
the Claimant a quantity of another goods. The goods under the first contract were
delivered to the Respondent which found the delivered goods were materially
different from the goods it ordered. Respondent informed the Claimant of the
alleged non-conformity. Various inspections and tests were carried out. The goods
under the second contract were delivered in four shipments. Following the issuance
of several inspection or test reports, the Respondent gave notice of termination for
the first and second contracts. Furthermore, the Respondent filed an application
seeking attachment of the bills of exchange issued in favor of the Claimant to the

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Italian court of first instance which seized the four bills. Again the Respondent gave
the second notice of termination for the second contract. An independent expert,
appointed by the court in accordance with the Respondent’s request, conducted an
inspection and issued a report on the defects of the goods. The Claimant challenged
the court’s jurisdiction over the second contract relying on the arbitration clause
stipulated therein.
The Claimant initiated arbitration relying on the arbitration clause contained in
the second contract which provided for KCAB arbitration. The parties agreed that
the dispute was governed by the United Nations Convention on Contracts for the
International Sale of Goods (CISG) and matters not governed by CISG were governed
by Korean law. The Claimant sought an amount in payment for the bills of lading,
interest and costs and expenses of the arbitration. The Respondent objected that the
Claimant’s delivery of the non-conforming goods amounted to a fundamental breach
of contract. The Respondent also counterclaimed its deposit allegedly paid under the
first contract and damages resulting from the Claimant’s breach.
The Arbitral Tribunal found that the Claimant had committed a fundamental breach
of the second contract by delivering non-conforming goods, and that the Respondent
gave notice thereof in accordance with CISG. Therefore, the Arbitral Tribunal denied
the claim by the Claimant for purchase price and interest. The Arbitral Tribunal
denied the counterclaim filed by the Respondent. In particular, the Arbitral Tribunal
held that it had no jurisdiction over the Respondent’s counterclaim to recover the
deposit under the first contract. Also the Arbitral Tribunal held that the Respondent
failed to satisfy its burden of proof in respect of damages resulting from the
Claimant’s breach.
Excerpt
I. APPLICABLE LAW
[1] “This arbitration is brought under the dispute resolution and arbitration clause
contained in the Sales Contract dated 14 May 2014 between Claimant and
Respondent (Sales Contract). Article 8 of the Sales Contract states as follows:
‘All disputes, controversies, or differences which may arise between the
Parties, out of or in relation to or in connection with this Contract, or for the
145
breach thereof, shall be finally settled by arbitration in Seoul in accordance
with the Arbitration Rules of the Korean Commercial Arbitration Board.’
[2] “The Parties agree that the substantive contract is governed by the United
Nations Convention on Contracts for the International Sale of Goods (CISG). The
Tribunal understands that the Parties are in agreement that, to the extent that
the CISG does not address an issue, the law of the substantive contract shall be
governed by the laws of the Republic of Korea pursuant to Article 10 of the Sales
Contract.
(….)
[3] “… [T]he Tribunal notes that both Parties’ pleadings refer to case law of various
jurisdictions other than the Republic of Korea (e.g., Germany and Switzerland).
As stated above …, however, it has been agreed between the Parties that the
substantive laws to be applied are the CISG and, where appropriate, Korean law.
As the Parties have failed to establish the relevance of case law that fall outside
the applicable scope, the Tribunal has not given weight to such jurisprudence.”
II. JURISDICTION OF THE ARBITRAL TRIBUNAL
1. Sales Contracts between the Parties
[4] “… [P]rior to the Claimant’s involvement, the Respondent had an agreement
with Trading Company A whereby Trading Company A would supply 2,080
metric tons (MT) of electrolytic tin plate (ETP) and tin free steel (TFS) to the
Respondent for a total of USD 2,048,550.00. From 24 January 2014 through 6
March 2014, the Respondent paid a total of USD 204,855.00 to Trading Company
A as a 10% advance deposit.
[5] “Trading Company A's tin materials were to be purchased from Steel Company
A. However, it is understood that the deal between the Respondent and Trading
Company A was cut short when certain restrictions imposed by Steel Company
A against Trading Company A effectively made it commercially impossible
or impractical for Trading Company A to supply the tin materials to the
Respondent.
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[6] “Due to these restrictions, the Respondent became in need of another supplier.
The Parties were acquainted through a broker by the name of Mr. B and entered
into an arrangement whereby the Claimant would supply quantities of ETP and
TFS to the Respondent.
[7] “… [T]he Parties entered into (1) a contract dated 14 May 2014 for the sale and
purchase of 208 MT of ETP by way of pro forma invoice … in consideration of
USD 204,855.00 (representing the 10% deposit the Respondent originally paid
to Trading Company A, which would transfer the amount to the Claimant), plus
any balance amount (First Contract); and (2) the Sales Contract – which was
entered for the sale and purchase of 500 MT of ETP and 400 MT of TFS (the
Goods) in consideration of USD ….”
2. Objection to Jurisdiction over the First Contract
[8] “The Claimant objects to the Tribunal’s jurisdiction over the dispute arising
from the First Contract. The Claimant asserts that the KCAB does not have
jurisdiction over such dispute as it contains no arbitration clause and that
the arbitration clause under Article 8 of the Sales Contract does not extend
its scope to disputes under the First Contract because there is no factual or
legal connection between the two agreements. The Claimant argues that the
similarities in names, execution date and purpose of the two agreements are
mere coincidence and bear no legal significance.
[9] “The Respondent asserts that the language of the arbitration clause in the
Sales Contract is very broad, and that its wide coverage was meant to apply
to not only disputes arising directly from the Sales Contract, but also to any
disputes arising in relation thereto or in connection therewith. The Respondent
thus contends that the arbitration clause under Article 8 of the Sales Contract
applies to the First Contract. The Respondent asserts that it was the Parties’
intention to subject the First Contract to the general terms of the Sales
Contract. Highlighting that the names of the invoices are almost identical, that
they were entered into on the same day and that the purpose of the agreements
were the same, the Respondent contends that the First Contract does not
contain an arbitration clause because it was already well provided in the Sales
Contract, and that the two agreements were intended to be read together.
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[10] “As an initial matter, the Tribunal notes that the Parties' submissions do not
clearly indicate their respective positions in respect of the law governing
the arbitration agreement stipulated in the Sales Contract. The Tribunal
understands the Respondent's position to be that Korean law applies and that
the Claimant has not disputed this.
[11] “… [T]he Parties have chosen the law of the Republic of Korea to govern the
substance of their dispute pursuant to Article 10 of the Sales Contract and have
designated Seoul as the seat of the arbitration pursuant to Article 8. Therefore,
the law applicable to determine the scope of the arbitration agreement
contained in the Sales Contract should be the law of the Republic of Korea.
[12] “In this connection, the Respondent seeks support of its position from the
Korean Supreme Court’s judgment in Case No. 99Da13577. Specifically, the
Respondent directs the Tribunal to the following passage:
‘The arbitration agreement applies not only to the contract in which the
arbitration clause is written, but also to disputes directly related to or
closely related to formation, performance, and validity of the contract.’
[13] “On this basis, the Respondent submits that it is clear from the Supreme
Court's ruling that under Korean law ‘an arbitration clause is interpreted to
apply to a broader range of disputes in relation to the contract, and not limited
to disputes strictly arising from the contract itself.’
[14] “The Tribunal has difficulty reaching the same conclusion. On reading the above
excerpt, the scope of the arbitration agreement in that context simply dealt with
the ‘formation, performance, and validity of the contract.’ This is distinguishable
from the present case, which concerns whether the arbitration agreement
extends to a transaction arising out of a separate contract.
[15] “The Parties have not advanced further Korean law in respect of this issue.
The Tribunal notes that the Respondent has advanced English case law, but
analysis thereof is limited and, more importantly, their relevance has not been
established.
[16] “Against that background, the Tribunal has carefully examined the arbitration
clause set out in Article 8 of the Sales Contract, which in pertinent part reads, ‘[a]
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ll disputes, controversies, or differences which may arise between the Parties,
out of or in relation to or in connection with this Contract . . . .’ (emphasis
added). Based on a plain and ordinary reading of the clause, the starting point
in determining the scope of the arbitration agreement is therefore the Sales
Contract.
[17] “As such, matters relating to the 900 MT of tin materials under the Sales
Contract naturally fall within the scope of the arbitration agreement. Based on
the arguments and evidence advanced by the Parties, however, the Tribunal
is not convinced that the same can be said for a separate quantity of similar
goods under a different contract (i.e., the First Contract). Although the Tribunal
appreciates that the two agreements bear similar names as well as the same
execution date and serve similar purposes, it is of the view that this is not
dispositive of the issue – especially so because no relevant jurisprudence in this
regard has been established by the Respondent.
[18] “Further, the Tribunal is not convinced by the Respondent's argument that the
general terms, including the arbitration clause, of the Sales Contract should
be implied into the First Contract. If the Parties intended the arbitration clause
to also apply to the First Contract, it could have easily said so, for example, by
way of incorporation by reference. In this connection, the Tribunal notes that the
Respondent has not advanced any jurisprudence in support of its implied term
argument.
[19] “In light of the above, the Tribunal finds that it lacks jurisdiction over the Parties'
dispute arising from the First Contract.
[20] “The Tribunal notes that the parties have advanced further arguments in
respect of the First Contract (e.g., the validity of the contract, the Claimant's role
thereunder and damages suffered). For the aforementioned reasons, however,
the Tribunal leaves these issues to be dealt with by the appropriate authorities.
Accordingly, all claims and/or counterclaims arising out of the First Contract
are dismissed without prejudice.
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III. NON-CONFORMITY OF THE GOODS
1. Specificity Requirement of Notice
[21] “The Claimant asserts that the Respondent breached the Sales Contract by
way of failing to make payment for the 900 MT of ETP and TFS delivered to the
Respondent pursuant to the Sales Contract. The Respondent disagrees, arguing
that non-payment was justified as the Goods were not in conformity with the
specifications stipulated in the Sales Contract.
[22] “It is undisputed that the Goods were actually delivered to the Respondent, that
they were not in accordance with the agreed specifications and that payment
was refused by the Respondent. However, the Parties do dispute as to whether
the standard of sample testing adopted by … (CBL) – a company which was
tasked to verify the conformity of goods – and the court-appointed expert, Mr.
E, were objective and reliable and whether the right standard that should have
been adopted was the European Standard, EN 10202.
[23] “In light of the above, the Tribunal understands that the main issues in dispute
are whether the Respondent gave sufficient notice in respect of the defects and
whether such defects amounted to a fundamental breach.
(….)
[24] “The Claimant submits that the Respondent failed to comply with the notice
requirements set out in Article 39(1) of the CISG. The Claimant asserts that
the Respondent was required to provide notice specifying the nature of the
non-conformity within a reasonable time of discovery. Further, the Claimant
contends that, if more than one type of non-conformity or defect is found, the
Respondent was required to duly notify the Claimant of each non-conformity or
defect.
[25] “In addition, the Claimant argues that the First Termination Letter and the
Second Termination Letter were deficient. With respect to the First Termination
Letter, the Claimant asserts that it did not specifically indicate the shipment
which contained the non-conforming products and that there was no mention
of the delivery date in the Respondent’s notice. In addition, the Claimant asserts
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that while three types of ETP (Type A, B, and C) were delivered under the Sales
Contract, only Type A was specified in the First Termination Letter. Type A, the
Claimant says, was delivered in two shipments under the Sales Contract alone.
The Claimant asserts that in the circumstances, it believed that the Respondent
had accepted the other two types of ETP that had been delivered.
[26] “As to the Second Termination Letter, the Claimant contends that the
Respondent did not specifically indicate which packages of TFS were affected
by oxidation. The Claimant argues that, because the type of TFS specified in
the Second Termination Letter were delivered in two shipments, with each
shipment consisting of more than twenty packages, it was difficult for the
Claimant to identify the defective packages.
[27] “In addition, the Claimant contends that the Second Termination Letter did
not specify the extent of oxidation that was detected on the TFS. The Claimant
argues that it could not have been aware of the defects, as no personnel from
the Claimant participated in the examination of TFS, and as the Claimant was
not provided information regarding the methods used for TFS sampling. The
Claimant contends that the Respondent, as a manufacturer of fabricated metal
products and an expert on ETP and TFS, was in a position to provide more
information but failed to do so.
[28] “The Claimant thus submits that the Respondent has forfeited its right to rely
on the defects of the unspecified ETP and the entire TFS.
(….)
[29] “The Respondent denies the Claimant’s assertion that the Respondent’s notice
of non-conformity did not satisfy the requirements set out in Article 39(1) of the
CISG.
[30] “The Respondent relies on Article 40 of the CISG which provides that ‘the
seller is not entitled to rely on the provisions of Articles 38 and 39 if the lack of
conformity relates to facts of which he knew or could not have been unaware
and which he did not disclose to the buyer.’ The Respondent submits that the
Claimant knew or could not have been unaware of the defects in both ETP
and TFS. The Respondent asserts that the Claimant must have been exactly
aware of the non-conformity as a representative of the Claimant personally
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participated in the examination of the goods.
[31] “The Respondent contends that, given the Claimant’s participation in multiple
tests of the goods and having been provided with multiple notices of the goods'
non-conformity, it was impossible for the Claimant to not have been unaware
of the non-conformity of the ETP and TFS delivered. The Respondent asserts
that the Claimant was aware of the non-conformity by 30 September 2014 at the
latest, when Mr. CW2 [a representative of the Claimant’s company] emailed Mr.
B acknowledging the defects in the products delivered pursuant to the Sales
Contract.
(….)
[32] “Having duly considered the Parties' arguments, the Tribunal is of the view that
the Respondent did give sufficient notice as to the non-conformity of the goods.
[33] “Article 39(1) of the CISG prescribes that ‘[t]he buyer loses the right to rely on a
lack of conformity of the goods if he does not give notice to the seller specifying
the nature of the lack of conformity within a reasonable time after he has
discovered it or ought to have discovered it.’
[34] “The Tribunal finds that the Respondent gave sufficient notice as to the non-
conformity observed in the three types of ETP as well as TFS Type E by way of
the Respondent's First and Second Termination Letter and, effectively, through
the various inspections and tests conducted in relation to those goods. The
notice required under Article 39(1) is as to the ‘nature’ of the non-conformity for
which the reasons discussed below were identified.
[35] “On 22 August 2014, Dr. C of CBL performed the verification process for the
three types of ETP under the Sales Contract at the Respondent’s plant. As
recorded in the CBL Operation Report dated 22 August 2014, Mr. B, Mr. CW2,
and Dr. RR (the Respondent’s representative) were present for the sampling
process. The report states that Mr. CW2, after checking that all packages and
seals were intact, personally selected one package from each specification of
products as samples to be assessed. As recorded in the Operation Report dated
23 August 2014, the same individuals underwent a similar process for the three
types of ETP that arrived at the Dome Box.
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[36] “On 28 August 2014, Dr. C conducted tests on the ETP samples collected.
The test was performed at CBL in the presence of Mr. CW2 and Mr. B. On the
same day, Dr. C issued his report, which concluded that ‘no tinplate sample
is compliant … with the contract and the labels glued on each page,’ and that
the ‘entire consignment … is not suitable to be used for tomato products.’ It is
significant to note that all parties confirmed the contents of the report, which as
recorded therein was ‘Read and Accepted’ by among others Mr. CW2.
[37] “The Tribunal further notes that the Claimant in its Post-Hearing Brief asserts
that Mr. CW2 was forced to sign off on the Operation Reports as well as the test
results of 28 August 2014 under duress and undue influence. Having carefully
considered all of the evidence and submissions of the Parties, the Tribunal finds
that there is no clear and persuasive evidence that Mr. CW2 signed off on the
said reports and test results in the circumstances alleged by the Claimant.
[38] “On 3 September 2014, Dr. C issued a chemical analysis report in respect of the
three types of ETP. The report specified the non-compliant items on the basis
of the chemical results and concluded that the goods under the Sales Contract
were ‘not suitable to be used for tomato products.’
[39] “On 16 September 2014, CBL issued a report concerning the TFS Type E that
was delivered under the Sales Contract. Based on the samples taken by CBL,
it specified the nature of the defects (i.e., oxidation) and concluded that the TFS
was ‘not suitable to be used for food products being affected by rust.’
[40] “Against the above background, the First Termination Letter was issued on 8
September 2014 in respect of the ETP. Through Mr. CW2, the Claimant was or
should have been aware of the specific issues in respect of these goods.
[41] “Further, the Second Termination Letter was issued a couple weeks later in
respect of the TFS Type E delivered by the Claimant. The letter specified that
‘oxide was detected on the wide supply and on the entire coils' surface,’ thereby
informing the Claimant that it sought to terminate the Sales Contract.
[42] “Based on the evidence submitted and submissions made by the Parties, the
Tribunal is not convinced by the Claimant’s argument that a greater level of
specificity (e.g., identification of each package of the shipment affected by the
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defect) is required.
[43] “In view of the above, the Tribunal finds that the Respondent provided sufficient
notice as to the non-conformity of the goods pursuant to Article 39(1) of the
CISG.”
2. Fundamental Breach
(….)
[44] “The Claimant submits that it has not committed a fundamental breach of
contract.
[45] “The Claimant contends that, under Article 49(1)(a) of the CISG, avoidance of
contract is only available where the non-conformity of goods can be regarded as
a fundamental breach of contract. In the case of partial non-performance, the
Clamant argues that pursuant to Article 51(2) of the CISG, the entire contract
can only be declared avoided if the non-performance amounts to a fundamental
breach; otherwise, the Claimant says, Article 51(1) permits the buyer's remedy,
including avoidance of contract, to be applied only to the non-conforming
portion of the goods. In turn, the Claimant refers to Article 25 of the CISG,
which according to the Claimant defines fundamental breach as a detriment
so significant that it substantially deprives the aggrieved party of what it was
entitled to expect under the contract.
[46] “The Claimant’s position is that the above requirements have not been satisfied.
In the Claimant's view, issues of non-conformity are not a fundamental breach
as long as the buyer can use the goods or resell them even at a discount.
Further, the Claimant argues that the buyer should not be entitled to avoid the
contract so long as the goods are not bought for a particular purpose, they can
be reasonably used in the normal course of business and there is no need to
buy replaced goods.
[47] “In this connection, the Claimant contends that the Respondent could have
mitigated its damages as the types of ETP and TFS that were delivered could
have been used. For example, the Claimant asserts that the ETP delivered was
still of a quality which was still usable for light metal packaging such as cans
for food, beverage, and general line products. Further, the Claimant argues that
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the Respondent's business uses a wide range of ETP and could have made use
of some of the delivered ETP for Company S, a company which the Claimant
alleges is affiliated with the Respondent. Therefore, the Claimant says, the
Respondent could make reasonable use of goods within its normal course of
business.
[48] “The Claimant denies that the Respondent’s purpose of purchasing the goods
should negate the usability of the goods. Further, the Claimant argues that it
was not aware of the purpose behind the Respondent’s purchase – according
to the Claimant, it was neither expressly stipulated in the Sales Contract nor
discussed in the course of the negotiation thereof. According to the Claimant,
the Respondent bears the burden of proof that both the ETP and TFS in question
were difficult for the Respondent to resell, that it could only have done so at a
lower price or that such an attempt of disposal could not have been expected
from the Respondent at all.
(….)
[49] “The Respondent submits that the Claimant’s delivery of the non-conforming
goods amounts to a fundamental breach under Article 25 of the CISG and thus
the Sales Contract has been successfully avoided by the Respondent through
the First and Second Termination Letter pursuant to Article 49 of the CISG. The
Respondent submits that in the circumstances the Claimant is not entitled to
receive the claim amount.
[50] “The Respondent denies that the delivered goods could have been of some use
to the Respondent. According to the Respondent, the sole purpose of entering
into the Sales Contract was to purchase raw materials to produce tin cans for
storage of tomatoes. This purpose, the Respondent says, was known to the
Claimant.
[51] “According to the Respondent, it has been firmly established throughout
multiple investigations and tests by SST, CBL and SSICA that the delivered
goods did not conform with the specifications of the Sales Contract. Further,
the Respondent asserts that the reports from CBL and SSICA, as well as from
Mr. E, conclude that the goods cannot be used to produce cans to store food for
human consumption as they are affected by rust and oxidation.
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[52] “The Respondent submits that, as it could not produce tin cans as it planned
and expected, the situation could not be resolved by a price reduction or any
other means of remedy other than avoidance of the Sales Contract. According to
the Respondent, it could not reasonably use the goods within the Respondent’s
normal course of business, as conformity of quality is critical in the production
of tomato cans and their derivatives. Tomatoes, according to the Respondent,
are acid in nature, and require stricter tinplate and steel specifications
compared to cans that store other foodstuffs.
[53] “The Respondent further argues that Italy maintains strict regulations
regarding the technical requirements of tinplates and steel which prevent non-
compliant products from entering the market. The Respondent asserts that it
could not possibly manufacture and sell cans that could be transacted in the
Italian market, and that reselling the non-compliant goods would also have
been arduous.
(….)
[54] “Article 49(1) of the CISG prescribes in pertinent part as follows:
‘The buyer may declare the contract avoided:
(a) if the failure by the seller to perform any of his obligations under the
contract or this Convention amounts to a fundamental breach of contract …’
In turn, Article 25 defines a fundamental breach as:
‘[a] breach of contract committed by one of the parties is fundamental if
it results in such detriment to the other party as substantially to deprive
him of what he is entitled to expect under the contract, unless the party in
breach did not foresee and a reasonable person of the same kind in the
same circumstances would not have foreseen such a result.’
[55] “As discussed above, it was found based on the examination reports and test
results that at least all three types of ETP as well as TFS Type E were not
in conformity with the contractual specifications. Those category of goods
comprised of around 700 MT of the total 900 MT delivered – i.e., nearly 80
per cent of the shipments. Based on the arguments raised by the Parties,
the Tribunal is of the view that such circumstance amounts to substantial
deprivation of what the Respondent would have expected under the Sales
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Contract. Accordingly, the Tribunal finds that a fundamental breach was
committed by the Claimant.
[56] ‘As to the Claimant's submission on the possibility of resale of the Goods or
the particular purpose behind the Respondent's purchase of the Goods, the
Tribunal finds that the Claimant has failed to establish their relevance based on
the evidence submitted. For instance, the Tribunal notes that the Claimant in
its Memorial on the Merits refers to Supreme Court decisions from Switzerland
and Germany as well as a CIETAC arbitration award - none of which on their
face fall within the scope of the governing law.
[57] “As to the reliability of the reports and test results, the Tribunal, having duly
considered the Claimant's arguments and the evidence it has advanced, fails
to see any clear and persuasive evidence that they were unreliable or partial.
Further, the Tribunal is not convinced by the evidence and arguments submitted
by the Parties that the European Standard, EN 10202, should have applied
mandatorily or that the sampling method adopted was unsuitable.
[58] “For the aforementioned reasons, the Tribunal finds that it was the Claimant
who had committed a fundamental breach of the Sales Contract in the first
place. Accordingly, the Claimant's claims for the contract price26) under the
Sales Contract are dismissed.”
IV. COUNTERCLAIM
[59] “The Respondent asserts that, as a result of the Claimant’s breach, it has
suffered damages in the form of incidental damages, reputational damages and
lost profit. It also seeks the return of the deposit allegedly paid under the First
Contract.
[60] “The Claimant denies that the Respondent is entitled to such damages, arguing
among other things that it is not justified, that the calculations are erroneous
and that Respondent has failed to mitigate its losses.
26) The arbitral award states “claims for damages,” but this appears to be a clerical error for
“claims for the contract price.”
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[61] “With respect to the 10 per cent deposit allegedly paid under the First Contract,
the Tribunal has no jurisdiction to decide this issue for the reasons mentioned
above ….
[62] “Turning to the Respondent's claims for loss of profit and goodwill, as well as
for incidental damages, the Tribunal notes that it has carefully reviewed the
Parties' arguments and the evidence submitted. However, the Tribunal remains
unconvinced that the Respondent has satisfied its burden of proof in this
regard. In particular, the Tribunal has found it difficult to award such damages
due to the Respondent's failure to clearly and adequately set out relevant
jurisprudence in support of its damage theory. For instance, the Respondent in
its Reply to Claimant’s Defense Memorial states what it views to be the ‘norm
under Korean law’ in respect of lost profits but then fails to provide any evidence
in support of its position on the law. The same goes for the Respondent's case
for reputational and incidental damages. The Respondent makes some (albeit
minimal) reference to Article 74 of the CISG throughout its pleadings, but such
article is discussed in the context of the alleged damages suffered under the
First Contract (which as discussed the Tribunal is not in a position to entertain);
otherwise the article is only referenced in a broad statement in respect of the
Claimant's alleged obligations to compensate the Respondent.
[63] “For the aforementioned reasons, the Respondent's counterclaims for damages
are dismissed.”
V. INTEREST
[64] “The Tribunal notes that the Parties dispute as to whether the interest rate
set out in Article 3(2) of the Special Act should apply. The Respondent seeks
application thereof whereas the Claimant opposes.
[65] “The Tribunal has carefully reviewed the Parties’ submissions in this regard.
However, given that neither party has succeeded with regards to its respective
damages claims, the Tribunal sees no need to render a decision as to the
interest rate.”
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VI. COSTS
[66] “The Respondent in its Cost Submission directs the Tribunal's attention to
Article 47(1) of the KCAB Rules, which prescribes that ‘the Arbitration Costs
including administrative fees shall in principle be borne by the unsuccessful
party.’ The Tribunal finds no reason to depart from this general principle and
thus accepts this approach.
[67] “The Tribunal notes that the Claimant did not succeed in any of its claims.
Respondent therefore has succeeded in its defense against the Claimant's
claims but did not succeed in respect of its counterclaims. Therefore, on
balance, the Tribunal is of the view that the Respondent shall be deemed to be
the (partially) successful party when assessing costs.
(….)
1. Translation Costs
[68] “The Respondent submits that it has incurred EUR … in translation costs and
has submitted what appears to be invoices issued by the translation service
provider.
[69] “The Tribunal appreciates that a significant portion of the documents exhibited
have required translation. However, the Tribunal notes that the Respondent fails
to provide any details required to verify the extent of work performed. On the
face of the invoices, there appears to be no indication as to how these figures
have been calculated and, in any case, they are recorded in a foreign language
not comprehensible to the Tribunal. In the circumstances, the Tribunal in its
assessment does not find it appropriate to award the entire sum; rather it views
that a deduction of 40 per cent would be suitable and within reason.”
2. Expert Costs
[70] “The Respondent submits that it has incurred EUR … in expert costs during this
arbitration.
[71] “Based on the evidences submitted by the Respondent, the Tribunal is not
convinced that the entirety of these items set out under … the Respondent's
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Cost Submission can be claimed under this head. In particular, the Respondent
fails to explain the relevance of item nos. …, which on its face do not appear to
correspond to the costs of the experts appointed by the Respondent in these
proceedings …. Further, the Tribunal has difficulty understanding the nature of
item no. 10, an "Expert Opinion" by Mr. E, as the Tribunal understands that Mr.
E has only submitted a fact witness statement in these proceedings.
[72] “In the circumstances, the Tribunal in its assessment finds that the only
claimable item under this head is item no. 9 (claimed in the sum of EUR …),
which according to the Tribunal's understanding represents the costs associated
with the expert report issued by Mr. RE. Similar to the invoices observed above,
however, the Respondent has failed to show any supporting detail such as the
rate charged, time spent or description of the work performed, thereby making
it difficult for the Tribunal to assess the reasonableness of the costs claimed.
On this basis, the Tribunal assesses that a 40 percent reduction is appropriate.”
3. Costs of Legal Experts
[73] “The Respondent submits that it has incurred EUR … in legal costs, which the
Tribunal understands includes fees and disbursements of legal counsel.
[74] “In … the Respondent's Cost Submission, the Respondent has identified
sums corresponding to various ‘Contractor[s],’ namely ‘Studio Legale A,’
‘Studio Legale B,’ ‘Studio C’ and ‘Studio D,’ of which the Respondent has
failed to explain their role in these proceedings. The invoices attached to the
Respondent's Cost Submission do not help in this regard. On this basis, the
Tribunal is not able to assess the relevance of these items and therefore is not
in a position to award their corresponding figures.
[75] “The Tribunal does recognize those items corresponding to Law Firm,
the Respondent's counsel on record …. But again, having reviewed the
corresponding invoices, there appears to be no submission with regards
to hourly rates, time spent or descriptions of the work performed. For this
reason, the Tribunal finds it difficult to assess the reasonableness of the sums
pertaining to the attorney’s fees and therefore assesses that a 40 per cent
reduction is appropriate.
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[76] “Further, the Tribunal notes that the Respondent's counterclaims in respect
of the First Contract has proved unsuccessful. As it was the Respondent that
invoked the First Contract, which as a result led to extensive arguments by both
Parties in relation thereto, the Tribunal assesses that the Respondent bears
some responsibility in the extra time and costs spent. The Tribunal therefore
assesses that an additional 40 per cent reduction to the sum claimed for the
costs of the Respondent's counsel is appropriate.”
4. Arbitration Costs
[77] “The Respondent submits that it is entitled to its payment of the ‘KCAB fees’ in
the sum of EUR …. The Tribunal notes that the total amount of the arbitration
costs fixed by the Secretariat of KCAB is KRW ….
[78] “As provided under Article 47(1) of the KCAB Rules, the Tribunal, ‘taking into
account the circumstances of the case, may, at its discretion,’ apportion the
arbitration costs between the Parties. Applying the same principle in paragraph
… above, the Tribunal finds it appropriate to apportion such costs in the
following manner: the Claimant and the Respondent will bear KRW … and KRW
…, respectively.”
Implications
I. APPLICABLE LAW TO OBJECTIONS TO JURISDICTION
The parties agreed upon the application of CISG to the contract and of Korean law
to matters not governed by CISG. The parties did not clearly indicate the applicable
law to the arbitration agreement contained in the contract. While the Respondent
appears to be of the opinion that Korean law applies to the arbitration agreement,
the Claimant has not contested this. While ruling on objections to its jurisdiction, the
Arbitral Tribunal needs to identify the applicable law to the arbitration agreement.
Having found that the parties chose Korean law to govern the substance of the
dispute and designated Seoul as the seat of the arbitration, the Arbitral Tribunal
correctly determined that the applicable law in delimitating the scope of the
arbitration agreement should be Korean law. The Arbitral Tribunal’s determination
could be sustained because Korean law is not only lex causae but also lex arbitri.
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II. CONSEQUENCES OF SELLER’S KNOWLEDGE OF DEFECTS
With respect to the Respondent’s notice of defects, the arbitral award stated that
“[t]hrough Mr. CW2, the Claimant was or should have been aware of the specific
issues in respect of these goods.” On the other hand, Article 40 of CISG provides
that “the seller is not entitled to rely on the provisions of Articles 38 and 39 if the
lack of conformity relates to facts of which he knew or could not have been unaware
and which he did not disclose to the buyer.” “Should have been aware” stated in
the arbitral award needs to be distinguished from “could not have been unaware”
provided in Article 40 of CISG. The facts of which the seller “should have been aware”
include those facts that would be disclosed by an investigation that he should make.
On the other hand, the facts of which the seller “could not have been unaware” are
the facts that are before his eyes and reach his mind even without fulfilling a duty
of investigation. By employing “could not have been unaware,” Article 40 does not
differentiate “could not have been unaware” from “knew” in practice.27) Furthermore,
the relevant time when the seller could not have been unaware of the defects, in
light of the purpose of Article 39, is the expiry of the reasonable time within which
the buyer should give notice under Article 39.28)
III. FITNESS FOR A PARTICULAR PURPOSE: PUBLIC LAW STANDARDS
In this case, the Respondent argues that the sole purpose of entering into the
contract was to purchase raw materials to produce tin cans for storage of tomatoes
and the purpose was made known to the claimant. In addition, the Respondent
argues that Italy, the intended place of use in this case, maintains strict regulations
regarding the technical requirements of tin plates and steel which prevent non-
complying products from entering the market, and that it could not possibly
manufacture and sell cans that could be transacted in the Italian market. Meanwhile,
the parties dispute whether the inspection standard for the goods is European
Standard, EN 10202.
27) John O. Honnold, Uniform Law for International Sales (3rd ed.), 229-230 (1999).
28) Kröll et al., supra note 10, at 632; Schwenzer, supra note 10, at 646.
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have perceived the purpose. It would therefore serve for implicit information if the
Article 35 of CISG provides: buyer provides to the seller brochures describing his activities or products. However,
“Article 35 for evidentiary reasons, it is advisable that the buyer clarifies any particular purpose
(1) The seller must deliver goods which are of the quantity, quality and when concluding the contract. The relevant time for the purpose to be made known
description required by the contract and which are contained or packaged to the seller is the time of contract conclusion.29) The Arbitral Tribunal could have
in the manner required by the contract. drawn attention to whether a particular purpose of the Respondent was made known
to the Claimant and thus the Claimant was responsible for the fitness of the goods in
(2) Except where the parties have agreed otherwise, the goods do not this case.
conform with the contract unless they:

(a) are fit for the purposes for which goods of the same description would
ordinarily be used;
(b) are fit for any particular purpose expressly or impliedly made known to
the seller at the time of the conclusion of the contract, except where the
circumstances show that the buyer did not rely, or that it was unreasonable
for him to rely, on the seller's skill and judgement;

(c) possess the qualities of goods which the seller has held out to the buyer
as a sample or model;

(d) are contained or packaged in the manner usual for such goods or, where
there is no such manner, in a manner adequate to preserve and protect the
goods.

(3) The seller is not liable under subparagraphs (a) to (d) of the preceding
paragraph for any lack of conformity of the goods if at the time of the
conclusion of the contract the buyer knew or could not have been unaware
of such lack of conformity.”

Article 35(2)(b) requires the seller to supply goods that are fit for any particular
purpose expressly or impliedly made known to him. The particular purpose includes
climate conditions, cultural traditions, religious beliefs, and public law standards. The
particular purpose is only required to be made known to the seller but not required
to be contractually agreed upon. The particular purpose may not only be expressly
made known to the seller but it would also be sufficient if a reasonable seller could

29) United Nations Commission on International Trade Law, supra note 10, at 146; Kröll et al.,
supra note 10, at 513-515, 518-520; Schwenzer, supra note 10, at 580-582.

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Korean Commercial Arbitration Board
KCAB case no.9
Parties Claimant (Counter-Respondent): John Doe (Korea)
Respondent (Counter-Claimant): Electronic Company (Vietnam)
Place of
Arbitration Seoul, Republic of Korea
Language Original in English
Subject matters - capacity of a party to the arbitration agreement
- applicable law to the procedure
- lex arbitri
- correction of a party
- termination of contract by agreement
Facts
The parties entered into four contracts whereby the Respondent purchased
manufacturing equipment from the Claimant and the Claimant also installed the
equipment. The equipment were delivered to the Respondent and the Claimant was
paid for them. A dispute arose between the parties regarding the installation of the
equipment and the payment therefor under the installation contract. The Claimant
initiated arbitration relying on the arbitration clause contained in the installation
contract which provided for KCAB arbitration. The contract provided that the law
applicable to the dispute was Korean law. The Claimant sought damages in the
amount of 70% of the outstanding payment and interest because it completed 70%
of its performance under the contract. In response, the Respondent objected that it
was not liable for the outstanding payment under the contract because the parties
terminated the contract by executing the “Liquidation Agreement.” Having found
that the “Liquidation Agreement” terminated the installation contract, the Arbitral
Tribunal held that the Respondent was not obligated to make any remaining payment
to the Claimant under the contract. Accordingly, the Claimant was not awarded
165
interest as well.
Excerpt
I. JURISDICTION AND APPLICABLE LAW
1. Jurisdiction
[1] “Article 14 of the Installation Contract I and … contain the Parties’ arbitration
agreement:
Any dispute arising out of or in connection with this Contract shall be finally
settled by arbitration in Seoul in accordance with the Arbitration Rules of
the Korean Commercial Arbitration Board.
[2] “The present dispute concerns Claimant’s claim for payments allegedly due
under the Installation Contract I and thus arises out of the Installation Contract I.
Therefore, said dispute is within the scope of the Parties’ arbitration agreement,
which designates the KCAB as the administrative institution and the KCAB’
arbitration rules as the rules to govern the resolution of said dispute.
[3] “Also, under Article 17(2) of the Korean Arbitration Act (‘KAA’), an objection
to the Tribunal’s jurisdiction must be raised no later than the submission of
the Statement of Defense on the merits; and under Article 17(3) of the KAA,
an objection that the Tribunal has exceed the scope of its authority must be
raised as soon as grounds for such an objection exist. Both Parties have fully
participated in these proceedings without raising any jurisdictional objections
or challenges to the jurisdiction of the Tribunal or the competence of the Sole
Arbitrator.
[4] “Accordingly, the Tribunal finds that it has been properly constituted in
accordance with the Rules, and decides that it has jurisdiction over the
Arbitration and is competent to decide the Parties’ dispute.”
2. The Applicable Law
[5] “… and Article 13 of the Installation Contract I contain the governing law clause:
This Contract shall be governed under the laws of Korea.”
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II. BREACH OF CONTRACT [10] “Claimant filed separate arbitrations i.e. one arbitration on the basis of the
Installation Contract I and the other on the Installation Contract J. This Final
Award concerns the former.”
1. Contract between the Parties
(….)

[6] “In early …, Respondent sought to set up a manufacturing facility in Vietnam for
the production of printed circuit boards (‘PCBs’). Towards that end, Respondent 2. Suspension of Installation
executed four contracts with Claimant which provided for Claimant’s sale of
[11] “On …, Claimant commenced installation pursuant to the Installation Contract I.
PCB-manufacturing equipment as well as the installation of such equipment at
Company D was contracted by Claimant to carry out said installation work.
Respondent’s facility. The contracts at issue are as follows:

[12] “On …, Claimant informed Respondent that installation pursuant to the

(1) Contract No. ADPS-01 dated … for the supply of a PCB Full Automatic
Installation Contract I could not continue because certain utility work (such as
Through-Hole Plating System (‘Sales Contract I’).
air compressor, waste water system, etc.) which was an essential prerequisite
for Claimant’s installation had not been completed or purchased. The Parties
(2) Contract No. ADPT-01-3 dated … for the Tear Down & Setup of Plating
do not dispute that installation pursuant to the Installation Contract I was to
System (‘Installation Contract I’).
be completed by …, as well as do not dispute that as at … installation was not
completed.
(3) Contract No. ADP26-01 dated … for the supply of “J” PCB Production
Machine List (‘Sales Contract J’).
Meanwhile, installation pursuant to the Installation Contract J commenced on
…. Company D was contracted by Claimant to carry out said installation work
(4) Contract No. ADT26-02 dated … for the Tear Down & Setup of the “J”
as well. The Parties do not dispute that installation pursuant to the Installation
PCB Production Machine List (‘Installation Contract J’).
Contract was also to be completed by …, as well as do not dispute that as at …
installation was not completed. And it is common ground between the Parties
[7] “The Parties do not dispute that the equipment that are the subject of the Sales
that installation pursuant to the Installation Contract J was completed on ….
Contract I and the Sales Contract J were duly delivered to Respondent and that
Claimant was duly paid for them.
[13] “On …, to discuss installation progress under both the Installation Contract I
and the Installation Contract J, Mr. John Doe met with Respondent’s Mr. B at
[8] “The Parties’ dispute rather arises from Claimant’s performance of, and
a meeting at which Company D’s Mr. C and six other people attended. At the
Respondent’s payment obligation under, the Installation Contract I and the
meeting, Respondent took the position that Claimant had failed to complete
Installation Contract J. Claimant contends that Respondent owes Claimant
performance of both the Installation Contract I and the Installation Contract J on
monies under both the Installation Contract I and the Installation Contract J.
time, and thus, that Respondent would not pay Claimant the amounts due under
either the Installation Contract I or the Installation Contract J unless installation
[9] “Under both the Installation Contract J and the Installation Contract I,
pursuant to both such contracts was completed within 40 days.
Respondent was obligated to pay amounts due thereunder in installments. The
Parties agree that all installments under both Installation Contracts were paid
[14] “Mr. John Doe took the position that the two contracts were separate and
save for the final payment of USD 21,000 under the Installation Contract J and
independent, and thus, that Respondent should not condition payment under
the final payment of USD 36,600 under the Installation Contract I.
one contract on the completion of both contracts. Specifically, Claimant was of

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the view that performance of the Installation Contract J could be finalized by
the end of …, so Respondent was obligated to pay for corresponding amounts
regardless of whether the Installation Contract I had been completed.
[15] “However, Respondent disagreed. In response, Claimant counter-offered,
proposing that, Respondent, irrespective of the payment terms under the
Installation Contracts, pay USD 15,000 in addition to USD 5,000 as part of the
Installation Contract J’s final installment payment of USD 21,000—a total of
USD 20,000—to resolve the matter. Respondent, however, rejected the counter-
offer.
On …, Respondent insisted that Claimant choose, within one hour, either
to terminate the Installation Contracts or complete performance of both
Installation Contracts within 40 days. Claimant consulted Company D, which
furnished its view that completion of the Installation Contract I would require
at least 2 months, which was more than the 40 days Respondent offered.
In addition, Claimant had previously visited the site a couple of days earlier
and had seen that only 3 out of 26 components of the equipment J had been
installed.”
3. Execution of Liquidation Agreement
[16] “On the same day … Claimant and Respondent, under such circumstances,
signed the Liquidation Agreement (‘Liquidation Agreement’).
Then, also on the same day … Claimant instructed Company D to discontinue its
installation work and withdraw from the site.
On …, Company D issued a Construction Completion Certificate to Respondent
stating that construction corresponding to the Installation Contract J was
completed on …, as well as a Construction Completion Certificate to Respondent
stating that construction corresponding to the Installation Contract I was about
70% complete as at ….”
4. Claim for Damages
[17] “The main claim before this Tribunal is Claimant’s claim for damages in the
amount of USD 25,620—i.e. 70% of the final outstanding installment of USD
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36,600 under the Installation Contract I —plus interest at the rate of 18% per
year accruing from … until completion.
Claimant’s position is that it is owed 70% of the final outstanding installment of
USD 36,600 under the Installation Contract I because Claimant completed 70%
of its performance under the Installation Contract I.
[18] “However, Respondent’s position is that: (i) Respondent is not obligated to pay
the final outstanding installment of USD 36,600 under the Installation Contract
I unless Claimant’s performance thereunder is completed; (ii) Respondent
is not obligated to pay the final outstanding installment of USD 36,600 under
the Installation Contract I unless Claimant provides acceptable documents
confirming Claimant completed its performance; and (iii) Respondent is not
obligated to pay the final outstanding installment of USD 36,600 under the
Installation Contract I because the Parties terminated the Installation Contract I
by executing the Liquidation Agreement.
[19] “Based on the facts alleged by the Parties, the critical issue in the Arbitration is
determining the scope and terms of the Liquidation Agreement. And although
Claimant raised contentions concerning whose fault it was that performance of
the Installation Contract I and the Installation Contract J was not completed on
time, due to the Tribunal’s decision on the effect of the Liquidation Agreement
the Tribunal finds that Claimant’s such contentions are moot.
(….)
[20] “The intent of the Liquidation Agreement is clear and unambiguous.
Thereunder, the purpose of the Liquidation Agreement was to terminate two
contracts specifically identified in the Liquidation Agreement and to release the
Parties from any obligations under those two contracts. That said, while ‘ADT26-
02 date …’ referred to the Installation Contract J, ‘ADPS-01 – Date …’ referred to
the Sales Contract I, not the Installation Contract I.
[21] “The fact that the Liquidation Agreement referred to the Installation Contract
J was understandable, because the Sales Contract J was not at issue since
the equipment to be supplied thereunder delivered and payments owed paid.
Rather, it was the installation of that equipment, pursuant to the Installation
Contract J, that was thus at issue and outstanding at the time the Liquidation
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Agreement was executed, so it made sense for the Liquidation Agreement
to terminate the Installation Contract J. On the other hand, however, it is odd
that the Liquidation Agreement referred to the Sales Contract I instead of
the Installation Contract I because while the former had been fulfilled at the
time the Liquidation Agreement was executed, it was the latter that was at
issue. Therefore, the point was explored during the course of the Arbitration,
particularly at the evidentiary hearing.
[22] “The Parties agree that the Liquidation Agreement contains typographical
errors. While Claimant contends that the scope of the Liquidation Agreement
extends to the Sales Contract I and the Sales Contract J, not the Installation
Contract J, Respondent contends that the scope of the Liquidation Agreement
extends to the Installation Contract J and the Installation Contract I, not the
Sales Contract I.
[23] “Having reviewed and evaluated all submissions and evidence including witness
testimony presented during the course of the Arbitration, the Tribunal finds that
Respondent’s contention is more probable.
First, it is common ground between the Parties that their intent in executing the
Liquidation Agreement was to terminate two contracts effective at the time the
Liquidation Agreement was executed and to release the Parties from obligations
owed under those two contracts. However, as noted, at the time the Liquidation
Agreement was executed the Sales Contract I and the Sales Contract J had
both been fulfilled. The equipment that were to be supplied under those
two contracts had been delivered and paid for. Consequently, the two Sales
Contracts could not be terminated. It is illogical and contrary to the evidence to
construe the Liquidation Agreement as having been executed to terminate two
contracts had already been fulfilled and thus could not be terminated.
Second, factually, the evidence shows that Claimant’s contemporaneous
understanding about the progress of installation under either the Installation
Contract I or the Installation Contract J was that they could not be both
completed within 40 days of … i.e. the timeline Respondent afforded. Thus, at
the time the Liquidation Agreement was executed, Claimant was aware that it
was performance of the Installation Contracts that was at issue and that the
Liquidation Agreement was being executed to resolve issues concerning the
incomplete performance of the Installation Contracts.
Third, the Tribunal finds dispositive the fact that Claimant, after signing the
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Liquidation Agreement, instructed Company D to withdraw from the site.
Indeed, at the hearing, Mr. John Doe testified that he instructed Company
D to withdraw from the site because his understanding at the time was that
installation pursuant to both the Installation Contract I and the Installation
Contract J had been terminated.
(….)
And Company D’s understanding was the same, as Mr. C testified at the hearing.
(….)
Consistently, Ms. H’s and Mr. B’s testimony is that the Liquidation Agreement
was executed against the backdrop of discussions with Mr. John Doe of … that
if the Liquidation Agreement is signed Claimant would not have to install the
machines and Respondent would not have to pay.
(….)
Fourth, the Tribunal is of the view that if Claimant’s position is to be entertained,
it would mean that Claimant continued to be bound to complete both Installation
Contracts. In such case, Claimant would have been exposed to the risk of
incurring substantial unexpected costs and expenses. Such burden would have
been substantial for Claimant, and thus, would have been reason for Claimant
to discontinue performance under the Installation Contracts, not to continue
them.
Fifth, the Tribunal cannot find any evidence showing Claimant made any effort
to correct the mistakes in the Liquidation Agreement so that it would conform to
Claimant’s understanding of the Liquidation Agreement. If it was not Claimant’s
intention to terminate the Installation Contract J but to terminate the Sales
Contract J instead, it would have been in Claimant’s interest to correct the
Liquidation Agreement accordingly. The Tribunal however is unaware of any
follow-up communication between the Parties to that effect, or of any instance
where Claimant reserved its rights to receive any amounts outstanding under
the Installation Contracts.
[24] “In sum, the Tribunal finds that the Liquidation Agreement terminated the
Installation Contract I and that consequently there are no legal obligations
thereunder remaining between Claimant and Respondent. Therefore,
Respondent is under no obligation to make any remaining payment to Claimant.
[25] “In closing, as noted above, Claimant raised contentions concerning whose
fault it was that performance of the Installation Contract I and the Installation
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Contract J was not completed on time. Having reviewed and evaluated those
contentions, the Tribunal concludes that the issues so raised only matter if
the Liquidation Agreement was not legitimately entered into between the
Parties. At the hearing, the Tribunal clarified the issues before both Parties, and
advised that these were only to be reviewed and/or evaluated if the Liquidation
Agreement was not effectively entered into. Therefore, the Tribunal refrains
from making any decisions in this regard.”
III. INTEREST
[26] “For the reasons set out above, the Tribunal finds that the evidence presented
by Claimant in support of its allegations is inconclusive and/or insufficient
to prove that Claimant is entitled to the amount it claims pursuant to the
Installation Contract I. The Tribunal finds that the Liquidation Agreement was
legitimately entered into and that its scope extended to, and thus terminated,
the Installation Contract I. Accordingly, Respondent is under no obligation to pay
any amounts to Claimant under the Installation Contract I, so the principal that
is the basis of Claimant’s claim for interest cannot be sustained. Consequently,
with no principal, Claimant cannot be awarded interest.”
IV. COSTS
[27] “Under Article 47.1 of the KCAB International Rules, the Arbitration Costs,
including administrative fees, are to be borne by the unsuccessful party in
principle. However, the Tribunal retains discretion to apportion the costs
between the Parties as it sees fit, taking into account all circumstances of the
case.
[28] “The KCAB International Rules define ‘Arbitration Costs’ to include ‘filing fees,
the administrative fees [and] the fees and expenses of the arbitrators incurred
during the arbitration proceedings…’ (‘Arbitration Costs’). Under Article 48 of
the KCAB International Rules, the Tribunal also has full discretion to apportion
the costs of ‘other necessary costs and expenses’ (such as fees for attorneys
and interpreters) between the Parties.
[29] “Since Claimant commenced the Arbitration but failed to prevail, the Tribunal
173
is of the view that the Arbitration Costs should be borne by Claimant. However,
with regard to all other ‘necessary costs and expenses’ incurred by the Parties
in connection with this Arbitration, the Tribunal is of the view that each Party
should bear its own costs.”
Implications
I. CAPACITY OF A PARTY TO THE ARBITRATION AGREEMENT
In this case, the Arbitration Tribunal finds that the arbitration was initiated by the
Claimant under the name of Company A which was not an independent legal entity.
In the absence of the parties’ objections, the Arbitral Tribunal names Mr. John Doe,
the sole proprietor of the company, as the Claimant.
A party to the arbitration agreement must have legal capacity to enter into that
agreement. If the arbitration agreement is entered into by a party who lacks the
capacity to do so, the arbitral process could be challenged on the basis that the
arbitration agreement is void, inoperative, or incapable of being performed.30)
Without objections from the parties, the Arbitral Tribunal correctly names Mr. John
Doe as the Claimant. However, the Arbitral Tribunal could have examined whether
Company A is a party to the arbitration agreement and determined whether the
arbitration agreement is void, inoperative, or incapable of being performed due to
the incapacity of Company A.
II. CORRECTION OF A PARTY AND THE LAW APPLICABLE TO THE PROCEDURE
In naming Mr. John Doe as the Claimant, the Arbitral Tribunal holds that the Tribunal
has the authority to identify and designate the parties to the arbitral proceedings.
The Arbitral Tribunal relies on the Korean courts’ practice to do so under Korean
procedural law. A distinction is made between the rectification of a defendant and
30) Articles II(3), V(1)(a) of United Nations Convention on the Recognition and Enforcement of
Foreign Arbitral Awards; Articles 8(1), 34(2)(a), 36(1)(a)(i) of the Model Law on International
Commercial Arbitration; Blackaby et al., supra note 3, at 95.
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the correction of a party. Article 260(1) of the Korean Civil Procedure Act expressly
provides that “[w]here it is obvious that a plaintiff has mistakenly designated a
KCAB case no.10
defendant, the court of first instance may, upon request of the plaintiff, permit by its
ruling the plaintiff to rectify the defendant, by the close of the pleadings.” However, Parties Claimant: Aircraft Manufacturing Company (Indonesia)
the Korean Civil Procedure Act does not expressly stipulate the correction of a party. Respondent: The Republic of Korea (Korea)
But the Korean Supreme Court has held that the court should, at the request of one Place of
of the parties, mandate the correction of the incorrect description of a party, provided Arbitration Seoul, Republic of Korea
that it retains the identity of the proper party identified by the court (see Supreme
Court Decision No. 2010Da99040 dated Mar. 10, 2011; Supreme Court Decision No. Language Original in Korean
2005Ma425 dated July 4, 2006; Supreme Court Decision No. 96Da3852 dated Oct. 11, Subject matters - applicable law
1996). - late delivery of goods
- force majeure
Article 20(1) of the Korean Arbitration Act provides that “[s]ubject to the mandatory - exemption of liability
provisions of this Act, the parties are free to agree on the arbitral proceedings.” - liquidated damages
Paragraph (2) provides that “[f]ailing such agreement referred to in paragraph (1), - statutory interest rate
the arbitral tribunal may, subject to the provisions of this Act, conduct the arbitration
in such manner, as it considers appropriate.” The parties chose the Arbitration Rules
of KCAB. The parties’ adoption of procedural rules does not amount to a derogation
from the lex arbitri. The parties’ autonomy in determining the rules of procedure
is subject to the mandatory provisions in the Korean Arbitration Act. This strikes
the balance between the parties’ autonomy and the overriding requirements of the
lex arbitri. Therefore, the procedure of the arbitration is generally regulated by the Facts
Rules chosen by the parties. The Korean Arbitration Act, the lex arbitri, to the extent
The Respondent contracted to purchase from the Claimant four patrol airplanes,
that it contains mandatory provisions, is binding the parties.31)
in two installments, installed with search radar made by Company C and forward
looking infrared system made by Company L. The engineers of Company C
It is natural that the Arbitral Tribunal should look into the Korean Arbitration Act,
established in Country I were scheduled to visit the Claimant in Country B to conduct
the lex arbitri. In this case the Arbitral Tribunal further refers to “Korean procedural
lab integration test between the two components to be mounted on the airplanes.
law.” However, it is ambiguous whether it indicates the Korean Civil Procedure
Meanwhile, several civilians were killed by a military raid by Country I’s naval
Act. The Arbitral Tribunal could have ascertained whether and why the Korean Civil
commandos on the MV Mavi Marmara carrying humanitarian aid in international
Procedure Act extends to the arbitral proceedings. It remains to be seen whether the
waters. Because of Country B’s refusal of the engineers’ entry triggered by the
Korean Civil Procedure Act is encompassed into the lex arbitri and thus extends to
raid, the test was not conducted as planned. Later the engineers managed to enter
the arbitral proceedings in respect of correcting a party.
Country B and to conduct integration test with help of Company L. As a result, the
Claimant failed to deliver the airplanes in accordance with the contractual schedule.
In response, the Respondent paid the remaining amount deducting the liquidated
damages from the purchase price.
31) United Nations Commission on International Trade Law, supra note 4, at 100-101;
Blackaby et al., supra note 3, at 179-180.

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Korean Commercial Arbitration Board
The Claimant initiated arbitration relying on the arbitration clause contained in
the contract which provided for KCAB arbitration. The contract provided that the
law applicable to the dispute was Korean law. Even though the United Nations
Convention on Contracts for the International Sale of Goods (CISG) did not apply, the
Arbitral Tribunal decided to take it into account. Arguing that the delay in delivery
was due to a force majeure, the Claimant sought the payment of the amount
equivalent to the liquidated damages deducted from the purchase price and interest.
In response, the Respondent objected that Claimant was not exempted because it
failed to satisfy the requirements for exemption due to a force majeure.
Having found that the delay in delivery was due to a force majeure, the Arbitral
Tribunal examined the duration of the force majeure and the amount of the
liquidated damages. The Claimant was awarded the remainder exceeding the part
granted by the Arbitral Tribunal at the daily rate for, and subject to a maximum of
ten percent of, the purchase price of the delayed part out of the amount suspended
by the Respondent as the alleged liquidated damages. Further, the Arbitral Tribunal
denied in part the Claimant’s claim for interest.
Excerpt
I. APPLICABLE LAW
[1] “The formation, validity and the performance of this Contract shall be
governed by the laws of the Republic of Korea. Nothing in this Contract shall be
interpreted against the ‘Act on Contract to which the State is a Party.’
[2] “Article 2(f) of the United Nations Convention on Contracts for the International
Sale of Goods (CISG) provides that it does not apply to sales of aircraft. If the
subject matter of this contract were goods to which CISG applies, CISG would
apply to this contract by Article 1(1) (b) of CISG because the parties chose
Korean law as the applicable law to the contract. Furthermore, CISG is an
international standard to be relied on for international trade in general as
well as for international sales. Therefore, the arbitral tribunal takes CISG into
account in examining the claimant’s prerequisites of exemption from paying the
liquidated damages resulting from the delay in delivery.
177
[3] “Article 79 of CISG provides:
‘(1) A party is not liable for a failure to perform any of his obligations if he proves
that the failure was due to an impediment beyond his control and that he could
not reasonably be expected to have taken the impediment into account at the
time of the conclusion of the contract or to have avoided or overcome it or its
consequences.
(2) If the party's failure is due to the failure by a third person whom he has
engaged to perform the whole or a part of the contract, that party is exempt
from liability only if:
(a) he is exempt under the preceding paragraph; and
(b) the person whom he has so engaged would be so exempt if the
provisions of that paragraph were applied to him.
(3) The exemption provided by this article has effect for the period during which
the impediment exists..
(4) The party who fails to perform must give notice to the other party of the
impediment and its effect on his ability to perform. If the notice is not received
by the other party within a reasonable time after the party who fails to perform
knew or ought to have known of the impediment, he is liable for damages
resulting from such non-receipt.’
[4] “Article 29 of the General Terms of this contract provides:
‘All disputes, controversies, or differences which may arise between the Seller
and the Buyer in relation to this Contract shall be finally settled by arbitration
in Seoul, the Republic of Korea, in accordance with the Commercial Arbitration
Rules of the Korean Commercial Arbitration Board.’”
II. EXEMPTION DUE TO A FORCE MAJEURE
[5] “Article 21 of the General Terms of this contract provides:
‘a. The Seller shall not be responsible for any delay or failure of Delivery
of Commodity which may arise from acts of God, fires, explosions, strikes,
lockouts, riots, civil commotions, mobilizations, threat or existence of war,
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blockades, embargoes, requisition of vessels, epidemics, changes in the
relevant laws and regulations made after this Contract became effective,
or other causes beyond the Seller’s reasonable control (the ‘Force Majeure
Event’).
b. Upon occurrence of the Force Majeure Event, the Seller shall notify the Buyer
by teletransmission and subsequent airmail within ten (10) days from such
occurrence of the Force Majeure Event. The notification shall be attached by a
written certificate issued by the authorized governmental organization of the
applicable country. The certificate shall indicate:
(i) that the Seller could not reasonably foresee occurrence of the Force
Majeure Event at the time of execution of the Contract, and

(ii) that the Seller could not control the failure of or the delay in Delivery of
Commodity due to such Force Majeure Event.’
[6] “In accordance with the above provision of the contract, the claimant is entitled
to be exempted from liability if it can prove cumulatively the following:
(i) that the delay in delivery was due to a force majeure beyond its control;
(ii) that the force majeure was not foreseeable at the time of the conclusion of
the contract; and
(iii) that it gave notice to the respondent of the force majeure.”
1. Did the Alleged Unlawful Attachment Constitute a Force Majeure?
[7] “The claimant argues that the delay in delivery of the patrol airplanes was
due to a force majeure under Article 21 of the General Terms of this contract
because it was unable to purchase major parts on time as a result of the
unlawful attachments by Company E on the contract price.
[8] “While Company E had been an agent for the claimant’s business in Korea,
the claimant terminated the agency agreement on …. In response, Company E
obtained the attachments order on the claim for the purchase price which the
claimant held against the respondent. Furthermore, the arbitrator rendered
an arbitral award ordering the claimant to pay US $ … to Company E. It would
179
be difficult to consider the attachments to be unlawful. Even if the attachments
were groundless, they would not constitute a force majeure beyond the
claimant’s control because they resulted from the dispute between the claimant
and its agent Company E. Therefore, the arbitral tribunal rejects the claimant’s
argument.”
2. Was the Delay in Delivery due to the Delay in Payment of the Purchase Price?
[9] “The claimant argues that even upon the delivery of the first and second
airplanes the respondent paid the remaining amount deducting the amount
subject to the attachment orders from the purchase price for the two airplanes
in two installments three months later and five months and ten days later
respectively. The claimant therefore asserts that it is not responsible for the
delay in delivery of the third and fourth airplanes.
[10] “The arbitral tribunal is of the opinion that the seller to supply the goods to be
manufactured or produced is responsible to procure parts necessary for the
manufacture of the goods, and that the buyer’s failure to pay in part does not
relieve the seller of the obligation to deliver the goods or the liability for the
delay in delivery thereof. It appears that the delay in payment in part for the first
installment was resulted from remedying the documents stipulated in the letter
of credit or the dispute with respect to the payment of the liquidated damages
to be borne by the claimant. Therefore, the respondent is not liable for the delay
in payment in part for the first installment. The arbitral tribunal rejects the
claimant’s argument because the claimant is not entitled to rely, based on the
respondent’s delay, on the exemption of liability for the delay in delivery of the
third and fourth airplanes.”
3. Did the Failure for the Engineers to Access the Goods Constitute a Force
Majeure?
a. Prerequisites of Exemption
[11] “The claimant argues that the delay in delivery of the patrol airplanes was due
to Country B’s refusal of the engineers’ entry with the computer equipment
triggered by the MV Mavi Marmara incident, which constitutes a force majeure.
As reviewed above, the claimant is entitled to be exempted from liability if it can
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prove cumulatively the following: engineers entered Country B;

(i) that the delay in delivery was due to a force majeure beyond its control;
(ii) that the force majeure was not foreseeable at the time of the conclusion
of the contract; and
(iii) that it gave notice to the respondent of the force majeure.
Therefore, the arbitral tribunal examines the requirements.”
b. Whether the Delay in Delivery was due to a Force Majeure beyond Control
[12] “The arbitral tribunal finds that the integration between search radar and
forward looking infrared system manufactured by different producers is
essential. The integration test consists of lab integration test, ground integration
test and flight integration test in the three phases. The lab integration test may
be conducted with bench integration test tool which is a computer equipped
with necessary software. The lab integration test conducted before the ground
integration test may be skipped. If, however, the lab integration test identified
any problem in integration, the claimant could resolve the problem in the
course of manufacturing the airplanes and deliver them on time.
(iii) that the integration between search radar and forward looking infrared
system was scheduled in the 19th and 20th flight tests;
(iv) that the technical data necessary for the installation of search radar was
procured barely on …;
(v) that the independent navigation system provided by U.S. Company K
had not been procured by the time of the pre-inspection of the Korea Coast
Guard; and
(vi) that even if the engineers had entered Country B in June …, they could
not have conducted the integration test because the bench integration test
tool sent by Company C arrived on December 22, …
[15] “However, the respondent’s above arguments are groundless on the following
grounds:
(i) that the incorrect version of the software, which was alleged as the cause
of the failure of integration test, could result in the delay in delivery;

[13] “The arbitral tribunal finds that the engineers of Company C were unable to
(ii) that the flight test is separate from the integration test;
enter Country B and to conduct the lab integration test as scheduled, and that
they later conducted the unsuccessful ground integration test. The claimant’s
(iii) that as reviewed above the lab integration test was scheduled to be
remedying the failure resulted in the delay in delivery of the airplanes. Because
followed by the flight integration test;
of Country B’s refusal to issue visas triggered by the MV Mavi Marmara incident,
the engineers were unable to enter Country B. State’s refusal to issue visas
(iv) that the technical data necessary for the installation of search radar is
constitutes a force majeure beyond the claimant’s control.
not necessary in the phase of the lab integration test;

[14] “On the following grounds the respondent objected that the failure to conduct
(v) that as reviewed above the lab integration test requires only the bench
the lab integration test resulting from the delayed entry of the engineers did not
integration test tool and forward looking infrared system, not all of search
have a causal link to the delay in delivery of the airplanes:
radar, forward looking infrared system, independent navigation system,
etc.; and
(i) that the cause of the failure of integration test was the incorrect version
of the software installed in forward looking infrared system made by
(vi) that the delay of the lab integration test is not attributable to the delay
Company L;
of arrival of the bench integration test tool because the engineers were, in
entering Country B, supposed to take the tool.
(ii) that three flight tests had already been conducted by the day when the

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[16] “The respondent further argues that the delivery of the airplanes was delayed
not because the engineers were unable to enter Country B but because the
supply of parts necessary for the manufacture of the airplanes was delayed by
upstream suppliers, for which the claimant is responsible. However, the arbitral
tribunal finds that the delay in supply of parts necessary for the manufacture
of the airplanes resulted in the delay production rate of 3% to 14%, and that
the extended working hours pushed up the process completion rate of the first
airplane to 99.63% and that of the second to 98.62% in January, …. Therefore,
the arbitral tribunal rejects the respondent’s argument that the delay in delivery
of all the airplanes resulted from the delay of the supply of parts.”
c. Whether the Claimant Could not Reasonably Foresee the Cause of the Delay
in Delivery
[17] “A reasonable person is not expected foresee that Country I would raid a foreign
ship, that crew members would be killed by the raid, and that people of Country
B would be among them. The claimant could not reasonably have foreseen at
the time of the conclusion of the contract that the MV Mavi Marmara incident
would arise and as a result the engineers would be unable to enter Country B.
Therefore, the second pre-requisite of exemption is satisfied for the claimant.
[18] “The respondent further argues that the claimant could have avoided or
overcome the force majeure by a reasonable effort of trying reentry of the
engineers and conducting the integration test in a third country. The claimant
would not be liable if it could not reasonably foresee the force majeure and also
avoid or overcome it or its consequences.
[19] “The arbitral tribunal finds that the claimant made an effort to contact the
government authorities of Country B for the entry of the engineers and as a
result the engineers were, with unofficial visas issued by Country B’s consulate
office in Singapore, able to enter Country B on December 20, ….
The arbitral tribunal also finds that the claimant considered the option to
conduct the lab integration test in a third country Country S, not in Country
B, and that it turned out to be infeasible because handing over of the forward
looking infrared system of Company L to a third country was subject to the
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approval under the US Arms Export Control Act which takes a considerable
time. Thus, the claimant attempted to conduct the integration test at the US
parent company of Company L, but it was unable to conduct the integration test
because the system retained by Company L was sent for the Farnborough Air
Show in the U.K.
[20] “The respondent argues that under the US International Traffic in Arms
Regulations the relocation of a defense article without transfer of ownership
is not subject to the approval by the US government. However, “reselling,
transferring, reexporting, retransferring, transshipping, or disposing” provided
in the Regulations is not necessarily interpreted to mean the cases in which the
ownership is transferred. A temporary export is also subject to the Regulations.
The arms trading control is not limited to the cases in which the ownership is
transferred in light of the purpose to regulate exports to a third country. In light
of the foregoing, the arbitral tribunal is of the opinion that the relocation to a
third country is subject to the approval by the US government.
[21] “As such, the claimant did a reasonable effort to avoid or overcome the force
majeure, i.e., the failure of the engineers to enter Country B and to conduct the
integration test, or its consequences by trying to let the engineers enter Country
B and to conduct the lab integration test in a third country Country S or at the
US parent company of Company L. Therefore, the arbitral tribunal rejects the
respondent’s argument that the claimant could have avoided the delay in the
integration test.”
d. Whether the Claimant Gave Notice to the Respondent of the Cause of the
Delay in Delivery
[22] “The claimant argues that because since July, … the respondent was aware that
the delivery of the airplanes would be delayed the claimant did not have to give
notice to the respondent of the delay. However, there is no evidence to prove the
argument. The arbitral tribunal therefore rejects this argument.
[23] “The arbitral tribunal finds that in the midterm checkup meeting held in Country
B October 12 – 15, …, the claimant gave notice to the respondent of the possible
delay in delivery due to the failure of the engineers to enter Country B and to
conduct the integration test.
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(…)
Therefore, the arbitral tribunal finds that the claimant gave notice to the
respondent of the cause of the delay in delivery by October 15, … when the
meeting was closed.
[24] “In response, the respondent objects that the claimant failed to give notice to the
respondent pursuant to Article 21(b) of the General Terms. The Article provides
that ‘[u]pon occurrence of the Force Majeure Event, the Seller shall notify the
Buyer by teletransmission and subsequent airmail within ten (10) days from
such occurrence of the Force Majeure Event. The notification shall be attached
by a written certificate issued by the authorized governmental organization of
the applicable country.’ The respondent therefore argues that the claimant was
not entitled to rely on the force majeure.
[25] “The arbitral tribunal finds that the claimant failed to give notice in accordance
with Article 21 of the General Terms. However, the arbitral tribunal is of the
opinion that the notice is a procedural requirement to prove the force majeure,
that the exemption remains unaffected in case of the failure to notify, and that
the party who fails to notify is liable to compensate the damages which have
arisen from the failure (Article 79(1), (4) of CISG). Therefore, the claimant is
entitled to rely on the exemption because it gave notice to the respondent of
the force majeure. However, the claimant would not be exempted from liability
during the period when it failed to perform its duty to notify. The arbitral tribunal
grants the respondent’s argument to that extent.”
e. Conclusion on the Force Majeure
[26] “The arbitral tribunal recognizes that the respondent’s decision to purchase the
airplanes from the claimant was based on diplomatic and political consideration
rather than business and technical consideration because the contract was
in tandem with the other contract whereby Country B purchased T50 practice
planes from Korea.
Also due consideration is to be given to the respondent’s request to replace the
US search radar to be installed in the airplanes with another made by Company
C in Country I while the specifications in the bidding did not require the search
radar made by Company C when the claimant was chosen as the preferred
185
bidder.
The reply letter by the Korea Defense Acquisition Program Administration to the
Korea Coast Guard expresses its opinion that the delay in supply of the search
radar by Company C was due to the disruption of the diplomatic relations
between Country B and Country I, and that this constitutes a force majeure
beyond the claimant’s control and as a result it is entitled to the exemption of
the liquidated damages.
In light of the foregoing, the arbitral tribunal is of the opinion that the delay
in delivery of the airplanes was due to the failure of the engineers to enter
Country B and to conduct the integration test on time, that this constitutes a
force majeure beyond the claimant’s control which it could not reasonably be
expected to foresee and to avoid or overcome, and that the claimant gave notice
to the respondent thereof. Therefore, the claimant is entitled to rely on the
exemption of liability based upon the force majeure.
[27] “The respondent objects that because the claimant is responsible for conducting
the integration between the search radar and the forward looking infrared
system the claimant must not be exempted from liability due to the failure of
the engineers to enter Country B. If, however, the party’s failure to perform
its obligations is due to the failure by a third person whom it has engaged to
perform a part of the contract, that party is exempted from liability by relying
on the person’s force majeure under certain requirements (Article 79(2)). The
arbitral tribunal therefore rejects the respondent’s argument.”
f. Claimant’s Other Arguments for Exemption
[28] “The claimant argues that the delivery date for the first and second airplanes
was extended to April, … by the respondent’s consent at the meeting in January,
…. However, the arbitral tribunal is unpersuaded by Exhibit 4 on which the
claimant relied. There is no evidence that the delivery date was extended.
[29] “The claimant further asserts that the respondent admitted the force majeure
in delivering the first and second airplanes by paying on October 28, … US $...
whose payment had been suspended by it. However, Exhibits 1 and 2 show that
the respondent expressed its intent not to waive the liquidated damages when
paying the above suspended payment. Therefore, the arbitral tribunal rejects
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the claimant’s argument.”
III. LIQUIDATED DAMAGES
[30] “In light of the foregoing, the arbitral tribunal finds that the delay in delivery of
the airplanes was due to the force majeure and thus the claimant is entitled
to be exempted from liability. The arbitral tribunal examines next the extent to
which the claimant is exempted from liability.”
1. Whether the Liquidated Damages Are Excessive
[31] “The claimant argues that the liquidated damages should be reduced in
accordance with Article 398 of the Korean Civil Code because they are
unreasonably excessive even if it is obliged for them. Article 20 of the General
Terms provides that the claimant is obligated to pay liquidated damages to the
respondent at the rate of 0.15% of the contract price of the delayed part for each
day of delay with the cumulative total not exceeding 10% of the total contract
amount. The arbitral tribunal is of the opinion that the liquidated damages
agreed upon by the parties are a kind of calculation of damages in advance to
which Article 398 of the Korean Civil Code applies.
[32] “The arbitral tribunal recognizes that the liquidated damages at the rate of 0.15%
of the contract price of the delayed part for each day of delay are ordinary in
domestic and international contracts and are not excessive in amount. However,
the cumulative total of the liquidated damages set at 10% of the total contract
amount instead of the delayed part only is unreasonably excessive because
the delay in trivial part could amount to 10% of the total contract amount. …
Therefore, the arbitral tribunal, pursuant to Article 398(2) of the Korean Civil
Code, reduces the cumulative total of the liquidated damages to 10% of the
contract price of the delayed part, not of the total contract price.”
2. Period during which Liability is Exempted
[33] “In general the exemption due to a force majeure has effect for the period
during which the force majeure exists (Article 79(3) of CISG). Therefore, the
claimant is exempted from liability for the delay in delivery from the day
187
following the day of its notice of the force majeure until the day when the force
majeure ends. As reviewed above, the claimant gave notice of the force majeure
to the respondent on October 15, … and the engineers of Company C entered
Country B and conducted the integration test on December 22, …. Therefore,
the claimant could be exempted from liability for the delay in delivery during the
period of 68 days. If the claimant was able to perform earlier, it would be liable
from the following day.
[34] “As reviewed above, the process completion rate of the first and second
airplanes was well over 98% in January, … and on February 10, …. The claimant,
succeeding in the integration test, promised to deliver the first and second
airplanes by April, …. At the hearing held in Country B, the claimant stated that
the delivery would take about 53 days upon the completion of the integration
test. The witness Mr. BS testified that if the lab integration test had been
conducted before December, … the first and second airplanes could have been
delivered by the delivery date, February 17, …. In light of the foregoing, the
arbitral tribunal finds that the claimant was able to deliver the first and second
airplanes to the respondent at latest by mid-April, …. Therefore, the claimant is
liable to the respondent for the delay in delivery of the first and second airplanes
after April 15, ….
Meanwhile, as reviewed above, the integration test for the third and fourth
airplanes was conducted in December, … and they were able to be delivered
without difficulties by the delivery date, June 17, …. Therefore, the delay in
delivery of the third and fourth airplanes has no causal link to the force majeure
on which the claimant relies.”
3. Calculation of the Liquidated Damages
a. Calculation of the Liquidated Damages for the First and Second Airplanes
[35] “The claimant should have delivered the first and second airplanes by April 15,
…. However, the first airplane was delivered on May 10, and the second was
delivered on May 14, … respectively. Therefore, the claimant is liable for the
delay of 25 days for the first airplane and of 29 days for the second respectively.”
(….)
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b. Calculation of the Liquidated Damages for the Third and Fourth Airplanes
[36] “The claimant should have delivered the third and fourth airplanes by June
17, …. However, the third airplane was delivered on January 17, and the fourth
was delivered on March 11, … respectively. Therefore, the claimant is liable
for the delay of 201 days for the third airplane and of 255 days for the fourth
respectively. As reviewed above, the cumulative total of the liquidated damages
is limited to 10% of the contract price of the delayed part.”
c. Calculation of Suspended Payment Exceeding the Liquidated Damages
[37] “The respondent paid the remaining contract price deducting the liquidated
damages of US $ … from the total contract price. Therefore, the respondent
is obligated to pay the amount of US $ …, the remainder exceeding the part
granted by the arbitral tribunal out of the amount suspended by the respondent
as the alleged liquidated damages.”
IV. INTEREST
[38] “The respondent is obligated to pay to the claimant US $ … of the unlawfully
deducted part of the contract price and 20% per annum interest, as provided
in the Act on Special Cases Concerning Expedition, etc. of Legal Proceedings,
thereupon from the date following the date of the delivery of the arbitral award
to the date of full payment.
Meanwhile, the claimant seeks 5% per annum interest from the date following
the date of delivery of the fourth airplane to the date of the arbitral award.
However, the arbitral tribunal is of the opinion that it is reasonable for the
respondent to contest the existence and extent of the obligation to pay the
remaining part of the contract price. Therefore, the arbitral tribunal dismisses
the claimant’s claim for 5% per annum interest.”
(….)
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Implications
I. APPLICABLE LAW
The parties chose Korean law as the applicable law to the contract in this case. The
sales of aircraft is excluded from the CISG’s sphere of application. Furthermore, the
parties did not opt into CISG. However, the Arbitral Tribunal takes CISG into account
in examining the Claimant’s exemption of liability on the ground that CISG is an
international standard for international trade.
II. EXEMPTION OF LIABILITY DUE TO A FORCE MAJEURE
1. Exemption from Liability for the Conduct of Third Persons
Article 79(2) of CISG provides that:
“If the party’s failure is due to the failure by a third person whom he has
engaged to perform the whole or a part of the contract, that party is exempt
from liability only if:
(a) he is exempt under the preceding paragraph; and
(b) the person whom he has so engaged would be so exempt if the
provisions of that paragraph were applied to him.”
Article 79(2) of CISG intends to cover not the third persons under the party’s
organizational structure and sphere of control but those acting independently
under its responsibility. An upstream supplier of the seller is not considered to be
a third person the seller has engaged to perform a part of the seller’s contract. The
supplier may supply to the seller manufactured parts necessary for the manufacture
of the goods. The failure of the supplier to provide the seller with the parts does
not constitute an impediment under Article 79(2). This falls under the seller’s
procurement risk for the parts. The seller has the duty to procure the parts from
some other source. However, the seller may be exempted with respect to the failure
of the supplier if the seller successfully meets the requirements under Article
79(1).36)
36) United Nations Commission on International Trade Law, supra note 10, at 392-393; Kröll
et al., supra note 10, at 1080-1081, 1083-1084; Schwenzer, supra note 10, at 1077-1079.
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Korean Commercial Arbitration Board
Referring to Article 79(2) of CISG, the Arbitral Tribunal holds that the Claimant is
entitled to be exempted from liability. The Arbitral Tribunal finds that the Claimant
has engaged a third person Company C to perform a part of its contract, and that the
failure of Company C to perform was due to an impediment and the seller’s failure
was due to the failure of Company C’s failure. It is clear that Company C is a supplier
of parts necessary for the manufacture of the airplanes by the Claimant.
2. Exemption from Liability for Liquidated Damages
In this case the Arbitral Tribunal calculated the liquidated damages under the
premise that the exemption due to an impediment extends to the contractually
agreed sums, that is, the liquidated damages. Article 79(5) provides that “[n]othing
in this article prevents either party from exercising any right other than to claim
damages under this Convention.” Therefore, it is not expressly regulated in CISG
whether the exemption due to an impediment extends to the contractual obligation
to pay liquidated damages or penalties. The impact of an impediment on such a
contractual agreement must be decided according to the purpose of the parties
found by interpreting the agreement – i.e., whether they have stipulated payment
of liquidated damages or penalties instead of a damages claim. In case of doubt, a
claim for damages under CISG should be deemed to be replaced by a contractual
claim. Therefore, the exemption of liability extends to the liquidated damages by
directly or at least indirectly applying Article 79.37) The Arbitral Tribunal first could
have examined whether the exemption of liability extends to the liquidated damages.
3. Temporary Force Majeure and Extent of Exemption
Under the premise that the exemption due to a force majeure has effect for the
period during which the force majeure exists, the Arbitral Tribunal is of the opinion
in this case that the Claimant is exempted from liability for the delay in delivery
from the day following the day of its notice of the force majeure until the day when
the force majeure ends. The extent of the exemption from paying damages due to
an impediment must be determined by the effect of the impediment. In this case
the impediment caused the delay in delivery. As a result, the Claimant is entitled
37) Kröll et al., supra note 10, at 1060-1061; Schwenzer, supra note 10, at 1082-1083
191
to be exempted from paying damages caused by the late delivery.38) The extent of
exemption from paying damages in respect of late delivery should be determined
by the duration of the impediment. The period during which the impediment exists
and accordingly the extent of exemption in respect of late delivery would not be
influenced by a notice of the impediment. Even with the failure to give notice of
the impediment as provided in Article 79(4), the exemption of liability may remain
unaffected. However, the other party has the right to claim damages which have
arisen from the non-receipt, imprecise or untimely receipt of notice. 39)The period
during which the Claimant is entitled to be exempted from liability in this case
starts, irrespective of the timeliness of the notice, upon the occurrence of the
impediment, not upon the notice of the impediment. The untimeliness of the notice
by the Claimant may give rise to only the Respondent’s right to claim damages with a
causal relation with it.
III. INTEREST
While the Claimant seeks 5% per annum interest from the date following the date
of delivery of the fourth airplane to the date of the Arbitral Award, the Arbitral
Tribunal dismisses the Claimant’s claim on the ground that it is reasonable for
the Respondent to contest the existence and extent of the obligation to pay the
remaining part of the contract price. Once, however, the Arbitral Tribunal finds that
the Respondent is obligated to pay the contract price to the Claimant, the Arbitral
Tribunal could have ordered the Respondent to pay the contract price and interest
thereon. No legal effects could be imputed to the starting point of interest accrual by
whether it is reasonable for the Respondent to contest the existence and extent of
the obligation to pay.
38) Schwenzer, supra note 10, at 1082; Kröll et al., supra note 10, at 1060-1061.
39) Kröll et al., supra note 10, at 1094-1095; Schwenzer, supra note 10, at 1081.
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Claimant’s products.

The Claimant initiated arbitration relying on the arbitration clause contained in

the agreement providing for KCAB arbitration. The agreement provided that the
KCAB case no.11
applicable law to the dispute was Korean law. The Claimant sought damages resulting
from the breach of the agreement, the infringement of the trademark rights, unfair
Parties Claimant: Cosmetic Company A (Israel)
competition, or torts and interest. In response, the Respondent objected that it
Respondent: Cosmetic Company B (Korea)
used for its products colors not listed negatively in the agreement. The Respondent
Place of further argued that the allegedly similar products were not confirmed to be
Arbitration Seoul, Republic of Korea manufactured after the conclusion of the agreement.

Language Original in Korean

The Arbitral Tribunal first held that the Respondent breached the agreement
Subject matters - applicable law to the substance unless it persuasively proved the similar products were manufactured prior to the
- applicable law to the arbitration agreement conclusion of the agreement. The Arbitral Tribunal then found that the Respondent
- scope of the arbitration agreement was liable to pay damages resulting from the infringement of the trademark rights
- entire agreement clause by manufacturing and selling its products with similar trademark on them. However,
- infringement of trademark rights the Arbitral Tribunal dismissed the Claimant’s argument for unfair competition on
- unfair competition the ground that the Claimant failed to prove that its trademark was widely known
- tort claim in Korea. But the Tribunal held that the Respondent’s manufacturing and selling its
- calculation of damages products with similar trademark on them were sufficient to constitute a tort, and the
- statutory interest rate Respondent was liable for the Claimant’s damages.

Excerpt

Facts I. APPLICABLE LAW

1. Applicable Law to the Substance

The Respondent displayed its hair treatment products with trademark “A oil” on
them in a trade show. The trademark has been registered for the Claimant at the
[1] “Article 15 of the Settlement Agreement provides that ‘[t]his agreement is to be
Korean Intellectual Property Office. The Claimant sought an injunction against
construed under Korean law.’ Article 12 also provides that ‘[i]n the event that
the Respondent to bar the infringement of the trademark rights and the unfair
any future dispute arises between Company A and Company B concerning the
competition at the Central Court in the State of California. In the course of the
terms, conditions, or enforceability of this Agreement, the Parties agree that
litigation, the parties concluded the “Settlement Agreement” to resolve their dispute.
proper and exclusive venue for such dispute shall be the Korean Commercial
The Respondent was obligated not to use for its products similar packaging to the
Arbitration Board (KCAB). Company A and Company B hereby consent to
Claimant’s packaging and a prominent capital letter “M.” The Respondent also
personal jurisdiction in the KCAB and waive any objection to the KCAB based on
agreed not to challenge or contest the Claimant’s trademark rights worldwide. After
improper or inconvenient venue.
the conclusion of the agreement, the Respondent manufactured and sold allegedly
similar products on line as well as in Korea, which caused confusion with the
[2] “The arbitral tribunal determines the law applicable to the dispute and to the

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arbitration agreement in accordance with the Arbitration Act and the Private
International Law of Korea, the seat of the arbitration.
First, Article 29(1) of the Arbitration Act provides that ‘[t]he arbitral tribunal
shall decide the dispute in accordance with such rules of law as are chosen by
the parties as applicable to the substance of the dispute.’ Article 25(1) of the
Private International Law also provides that ‘[a] contract shall be governed by
the law expressly or implicitly chosen by the parties.’ As such, party autonomy
is respected for the choice of law. Because the parties agreed to interpret the
Settlement Agreement in accordance with Korean law, the applicable law to the
alleged breach of the agreement is Korean law.
Furthermore, the arbitral tribunal examines the applicable law to the
infringement of the trademark rights, unfair competition and a tort. Article
29(2) of the Arbitration Act provides that ‘[f]ailing the designation referred to in
paragraph (1), the arbitral tribunal shall apply the law of the State with which
the subject matter of the dispute is most closely connected.’ However, the
Arbitration Act fails to provide for any standard in determining the law of the
state with which the subject matter of the dispute is most closely connected.
Referring to the Private International Law, the arbitral tribunal therefore
determines the law of the state with which the subject matter of the dispute
is most closely connected. Article 24 of the Private International Law provides
that ‘[t]he protection of an intellectual property right shall be governed by the
law of the state where the right was infringed.’ Therefore, the applicable law to
the infringement of the trademark rights and the violation of unfair competition
law, closely related to the former, is the law of Korea with which the subject
matter of the dispute is most closely connected and where the infringement
is prevailing in scope. Article 32(1) of the Private International Law provides
that ‘[a] tort shall be governed by the law of the state where in which the event
giving rise to the damage occurred.’ The applicable law to the alleged tort by the
respondent is the law of Korea with which the subject matter of the dispute is
most closely connected and where the tort was mostly committed.
Meanwhile, Article 32(3) provides that ‘[n]otwithstanding the preceding
paragraphs, if a tort violates an existing legal relationship between the
tortfeasor and the injured party, it shall be governed by the law applicable to that
legal relationship.’ Between the parties exists the Settlement Agreement which
195
was violated by the infringement of the trademark rights, unfair competition
or a tort. Therefore, Korean law, the applicable law to the agreement, is the
applicable law to the infringement of the trademark rights, unfair competition
or the tort. In conclusion, the applicable law to the dispute in this case is Korean
law which the parties chose
2. Applicable Law to the Arbitration Agreement
[3] “Both the Korean Arbitration Act and the Korean Private International Law
remain silent on the applicable law to the arbitration agreement. With respect
to this, the Supreme Court of Korea has held that ‘[t]he validity and effect of the
arbitration agreement is determined by the law of the seat of the arbitration or
the applicable law to the arbitration clause’ (see Supreme Court Decision No.
88Daca23735 dated Feb. 13, 1990). Therefore, the applicable law to the effect
of the arbitration agreement is Korean law which is the applicable law to the
Settlement Agreement or the law of the seat of the arbitration.”
II. SCOPE OF THE ARBITRATION AGREEMENT
[4] “With respect to whether the arbitration agreement on disputes arising out
of a contract extends to a tort, the Supreme Court of Korea has held that ‘[t]
he arbitration agreement covers not only the contract itself containing the
agreement but also disputes directly related to or closely connected with the
existence, the performance and the effect of the contract (see Supreme Court
Decision No. 2004Da67264 dated May 13, 2005); the arbitration agreement
extends to a claim for damages founded in tort with which the contract is closely
connected (see Supreme Court Decision No. 91Da17146 dated Apr. 14, 1992);
and it is reasonable to deem that the arbitration agreement, absent special
circumstances, covers all disputes arising between the parties in respect of a
defined legal relationship (see Supreme Court Decision No. 2005Da74344 dated
May 31, 2007).’
In light of the foregoing decisions of the Supreme Court of Korea, the arbitral
tribunal is of the opinion that the arbitration agreement extends to the disputes
in respect of the infringement of the trademark rights, unfair competition
and the tort with which the breach of the Settlement Agreement is closely
connected.”
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III. BREACH OF THE SETTLEMENT AGREEMENT reviewed above, the respondent admitted that no representation or promise
not expressly contained in the Agreement has been made and the parties are
not entering into the Agreement on the basis of any promise, representation or
[5] “As reviewed above, the respondent agreed not to adopt confusingly similar
statement, express or implied, which is not specifically set forth therein (Article
trade dress to that currently used by the claimant for its own products (Article
16 of the Settlement Agreement). The respondent is not entitled to rely on the
6 of the Settlement Agreement), and, to enforce this, to discontinue use of the
transcripts as a part of the Settlement Agreement.
amber color and glass bottle similar to the ones being used by the claimant and
to change the packaging for its products to incorporate design elements which
Also the respondent argues that there is no evidence produced by the claimant
are not substantially similar to the packaging on the claimant’s product (Article
to corroborate its claim that the respondent’s products have been manufactured
1 of the Settlement Agreement).
after the conclusion of the Settlement Agreement. However, the products are
presumed to have been manufactured after the conclusion of the agreement
In comparing the respondent’s products to the claimant’s product, the arbitral
as long as they are being marketed. The respondent bears the onus of
tribunal finds that the respondent’s products have changed in part design
demonstrating that the products were manufactured prior to the conclusion of
elements of the previous ones but use orange colored trademark ‘B oil’ on
the agreement. Notwithstanding the respondent’s argument to the contrary, the
the packaging and labelling, similar light blue packaging and labelling, and
arbitral tribunal finds that the products marketed in Korea were manufactured
amber color and glass bottle. The arbitral tribunal therefore notes that the
on July 31, … which is after the conclusion of the agreement. The respondent
respondent’s products cause confusing with the claimant’s product.
is not entitled to argue that it has not breached the agreement unless it
satisfies the burden of proving that the products marketed abroad were also
As such, the respondent’s manufacture and sales of its products breached the
manufactured prior to the conclusion of the agreement.
agreement to discontinue use of the amber color and glass bottle and not to
adopt confusingly similar trade dress. Therefore, the arbitral tribunal holds that
Therefore, the arbitral tribunal dismisses the respondent’s argument that the
the respondent breached the Settlement Agreement.
products have not breached the agreement.

[6] “The respondent argues that it did not agree not to use light blue packaging for
[7] “The arbitral tribunal holds that the respondent’s manufacture and sales of the
its own products but agreed not to use a total of 12 colors, including Pantone
products breached Articles 1 and 6 of the Settlement Agreement, and that the
color 305C, exhaustively listed in the Settlement Agreement. The respondent
respondent is obligated to pay damages thereof for the claimant.”
further objects that its products used Pantone color 310C not listed in the
agreement and thus did not breach the agreement.
IV. INFRINGEMENT OF THE TRADEMARK RIGHTS
As reviewed above, however, the respondent agreed not to manufacture and
sell products confusingly similar to the claimant’s product. Considering that 1. Identicalness and Similarity to the Registered Trademark and the Designated
the parties have agreed that the packaging shown in Exhibit C is acceptable Goods
and non-infringing, it cannot be deemed that the Settlement Agreement
exhaustively lists a total of 12 colors as the colors for the respondent not to use [8] “Under the Korean Trademark Act, the identicalness and similarity to the
and the respondent is allowed to freely use the other colors. In this respect, registered trademark and the designated goods are required to constitute the
submitting transcripts (Exhibit 12), the respondent argues that the parties made infringement of the trademark rights.”
an agreement different in the contents from the Settlement Agreement. As
a. Identicalness and Similarity to the Designated Goods

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[9] “The designated goods of the trademark for the claimant in Korea are hair
lotion, hair oil, etc. The respondent’s products are hair oil which is identical to
the hair oil, one of the designated goods. Therefore, this satisfies the requirement
of the identicalness of the designated goods to constitute the infringement of
the trademark rights.”
b. Similarity to the Registered Trademark
[10] “The similarities of the trademarks are determined by examining them in their
entireties as to their appearance, sound and meaning. The trademark of the
claimant, ‘A oil’ and the trademark of the respondent, ‘B oil’ are similar in their
appearance. … Also the two trademarks are similar in their sound. … Lastly,
the two trademarks are similar in their meaning because the marks mean oil
originating from the Mediterranean countries. Therefore, the arbitral tribunal
finds that the two trademarks are similar as to their appearance, sound and
meaning.”
2. Extent of Effect of the Registered Trademark
[11] “The respondent argues that the effect of the claimant’s trademark rights does
not extend to the respondent’s trademark because it is ‘a trademark indicating
the common name, place of production, quality, raw materials, efficacy, uses,
quantity, shape, price, or methods of production, methods of processing,
methods of use and time of goods identical or similar to the designated goods
of the registered trademark according to methods in common use.’ ‘B’ is a
geographical name and … means oil originating in the above area. Therefore,
they are common names. However, the arbitral tribunal is of the opinion that ‘A
oil’ combining ‘B oil’ and … is not a trademark indicating the common name or
place of production according to methods in common use. The arbitral tribunal
therefore dismisses the respondent’s argument.”
3. Tribunal’s Conclusion
[12] “Finding that the trademark of the claimant, ‘A oil’ and the trademark of the
respondent, ‘B oil’ are similar as to their appearance, sound and meaning
and their designated goods are identical, the arbitral tribunal holds that the
respondent manufacturing and selling the products with the trademark ‘B
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oil’ on them constitute the infringement of the claimant’s trademark rights.
Therefore, the respondent is obligated to pay damages the claimant suffered
from the infringement.”
V. UNFAIR COMPETITION
1. The Prerequisites of Unfair Competition
[13] “Article 2(1)(a) of the Korean Unfair Competition Prevention and Trade Secret
Protection Act provides that ‘[a]n act of unfair competition is constituted by an
act of causing confusion with another person’s goods by using marks identical
or similar to, another person’s name, trade name, trademark, or container or
package of goods, or any other mark indicating another person’s goods, which
is widely known in Korea; or by selling, distributing, importing or exporting
goods bearing such marks.’ The manufacture and sales of the respondent’s
products constitute an act of unfair competition if the following requirements
are met: (i) that the claimant’s trademark, container or package of the products
is widely known in Korea; (ii) that the respondent’s mark is identical or similar
to the claimant’s mark; and (iii) that the respondent’s manufacture and export
of its products cause confusion with the claimant’s products.”
2. The Claimant’ Mark
[14] “The arbitral tribunal first examines whether the claimant’s trademark,
container and package of its products constitute the mark indicating its products
under the Act. The arbitral tribunal finds that the claimant’s trademark, ‘A oil’ is
no doubt the mark indicating its products and further finds that the claimant’s
products can be differentiated from other products with light blue packaging
and labelling symbolizing the color of the Mediterranean Sea, the amber color
and glass bottle effectively showing their functionality, and orange colored
letters on the packaging. The arbitral tribunal recognizes that the claimant has
continued to advertise its products in Korea and abroad and thus they have
been individualized enough for the traders or consumers to associate their
color and shape with them due to the differentiating characteristics. Therefore,
the arbitral tribunal holds that the claimant’s products are unique in their
packaging, labelling, the color of the container, and the combination thereof and
thus the container and packaging of the products, along with the trademark,
also constitute a mark indicating its products.”
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3. Confusing Similarity
[15] “As reviewed above, the trademark of the respondent ‘B oil’ is similar to
that of the claimant ‘A oil.’ The respondent uses similar lettering in orange
colored type for its trademark, the amber color and glass bottle, and light blue
packaging and labelling. The arbitral tribunal therefore is of the opinion that
the respondent’s products are similar to the claimant’s product. Furthermore,
the respondent advertises its products with a capital letter ‘M’ and ‘Korea OEM’
on them, which gives rise to misunderstanding that the products have been
manufactured by the respondent according to the order of the claimant. In
practice some consumers mistook the respondent’s products for the claimant’s
products and thus purchased them. Based upon the foregoing, the arbitral
tribunal is of the opinion that the respondent’s products cause confusing with
the claimant’s product by using similar trademark, container, packaging, etc.”
4. Wide Knowledge
[16] “In addition, the arbitral tribunal examines whether the claimant’s mark
indicating its products is widely known in Korea.
(….)
With the above facts, the arbitral tribunal is not persuaded that the claimant’s
mark indicating its products is widely known in Korea. There is no evidence
sufficient to prove this.”
5. Tribunal’s Conclusion
[17] “The respondent’s selling its products would constitute an act of unfair
competition under the Korean Unfair Competition Prevention and Trade Secret
Protection Act if the claimant satisfied its burden of proof proving that the
claimant’s mark indicating its products is widely known in Korea. In light of
the foregoing, the arbitral tribunal dismisses the claimant’s claim for unfair
competition on the ground that the claimant failed to discharge the burden.”
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VI. TORT CLAIM
1. The Prerequisites of a Tort
[18] “Even if it does not constitute an infringement of the intellectual property rights
or an act of unfair competition, an act to gain undue interests at the expense of a
competitor’s legally protected legitimate interests by using the achievements of
the competitor’s substantial efforts and investment without authorization, which
is contrary to good commercial morals or the fair competition order, would
constitute a tort under the Korean Civil Code (see Supreme Court Decision No.
2010Da20044 dated Mar. 29, 2012; Supreme Court Decision No. 2008Ma1541
dated Aug. 25, 2010). The arbitral tribunal examines whether the respondent’s
manufacturing and selling the products constitute a tort.”
2. Unlawful Competition
[19] “The arbitral tribunal finds that the claimant chose ‘A oil’ for its trademark,
differentiated its products from others in terms of the packaging and container
shape, continued to advertise its products in Korea and abroad, gained
substantial reputation from the consumers, and thus the products are its
achievements with its substantial efforts and investment. Taking advantage
of the reputation for the claimant’s products achieved by its efforts and
investment, the respondent manufactures, sells and exports similar products in
Korea and abroad, and gains substantial profits. As a consequence of this, the
claimant suffers damages. The arbitral tribunal therefore is of the opinion that
the act of the respondent constitutes an act of unlawful competition contrary to
good commercial morals or the fair competition order.”
3. Tribunal’s Conclusion
[20] “The respondent’s manufacturing and selling its products would not constitute
an act of unfair competition under the Korean Unfair Competition Prevention
and Trade Secret Protection Act because it was not sufficiently proved that the
claimant’s products are widely known in Korea. However, the respondent’s
manufacturing and selling its products are an act of unlawful competition
and are considered sufficient to constitute a tort under the Korean Civil Code.
The arbitral tribunal therefore holds that the respondent is obligated to pay
damages suffered by the claimant.”
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VII. QUANTUM OF DAMAGES
[21] “It is sufficiently found in accordance with the rules of logic and experience that
the claimant suffered damages due to the respondent’s manufacturing and
selling its products which constituted the breach of the Settlement Agreement,
the infringement of the trademark rights, and a tort. The arbitral tribunal now
considers the quantum of damages suffered by the claimant. It is an evident
fact that the margin of the cosmetics manufacturing industry is more than 10%
of the total sales. The arbitral tribunal finds that the increase in the claimant’s
sales in Korea remarkably dropped due to the respondent’s manufacturing
and selling its products in …. The arbitral tribunal is of the opinion that the
reduction of the claimant’s sales due to the respondent’s manufacturing
and selling its products amounts to at least KRW 500,000,000 and as a result
the claimant suffered loss of profit in the amount of KRW 50,000,000. In the
infringement of a trademark right where damages have been suffered but it
is difficult, because of their nature, to verify the facts necessary to prove the
quantum thereof, reasonable quantum of damages may be awarded based on
the evidence and the tenor of all the pleadings. This also applies by analogy in
calculating damages resulting from the breach of a contract or a tort. In light
of all the circumstances including the total sales and advertising costs of the
claimant’s products in Korea and abroad, the arbitral tribunal is of the opinion
that damages suffered by the claimant are reasonably calculated in the amount
of KRW 50,000,000.”
VIII. INTEREST
[22] “The respondent is obligated to pay to the claimant KRW 50,000,000 and
20% per annum interest, as provided in the Act on Special Cases Concerning
Expedition, etc. of Legal Proceedings, thereupon from the date following
the date of the closing of the proceedings to the date of full payment. The
arbitral tribunal grants the claim for damages to this extent and dismisses the
remainder of the claim.”
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Implications
I. APPLICABLE LAW
1. Applicable Law to the Substance
It is clear that the applicable law to the breach of the “Settlement Agreement” is
Korean law expressly chosen by the parties. However, certain categories of claim
cannot be subject to the applicable law chosen by the parties.40) The Arbitral Tribunal,
referring to the Korean Private International Law, determines the applicable law
to the infringement of trademark rights, unfair competition and a tort. It is correct
that the Arbitral Tribunal determines the applicable law to those issues instead of
applying the parties’ chosen law. Article 29(2) of the Korean Arbitration Act provides
that “[f]ailing the designation referred to in paragraph (1), the arbitral tribunal shall
apply the law of the State with which the subject matter of the dispute is most closely
connected.” Article 25(1) of the International Arbitration Rules of the KCAB provides
that “[i]n the absence of any such agreement, the Arbitral Tribunal shall apply the
substantive laws or rules of law which it determines to be appropriate.” Neither the
Korean Arbitration Act nor the Rule stipulates the application of any conflict of laws
rule. If the Arbitral Tribunal had referred to the relevant provisions of the Rule and
stated why the Tribunal referred to the Korean Private International Law even when
it is not stipulated to do so, it might have been better. Also, if the Arbitral Tribunal,
where it considers it proper to refer to any conflict of laws rule, had stated why it
considers the Korean Private International Law applicable, it might have been better.
In addition, the Arbitral Tribunal holds that the applicable law to the infringement
of trademark rights and the violation of unfair competition law, closely related
to the former, is the law of Korea with which the subject matter of the dispute
is most closely connected and where the infringement is prevailing in scope.
Unlike the Rome II Regulation which provides a separate conflict of laws rule for
unfair competition, the Korean Private International Law remains silent for unfair
competition. Unless and until the Korean Private International Law sets forth a
separate conflict of laws rule for unfair competition, it would be reasonable to
resort to the conflict of laws rule for a tort rather than that for an infringement of an
intellectual property right.
40) Born, supra note 8, at 2721-2722.
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2. Applicable Law to the Arbitration Agreement
The Arbitral Tribunal holds that the applicable law to the arbitration agreement is
Korean law which is the applicable law to the “Settlement Agreement” or the law
of the seat of the arbitration. In doing so, the Arbitral Tribunal relies on Korean
Supreme Court’s decision which is ambiguous with respect to whether the decision
pointed the applicable law to the arbitration clause or to the main contract. However,
a distinction is made between the applicable law to the substance and the applicable
law to the arbitration agreement. If the Arbitral Tribunal had ascertained whether the
parties had chosen the applicable law to the arbitration agreement and, failing any
designation by the parties, explained how to determine the applicable law, it might
have been better. In particular, if the Arbitral Tribunal had first examined whether
the parties implicitly had chosen the applicable law to the arbitration agreement, it
might have been better.
II. SCOPE OF THE ARBITRATION AGREEMENT
The Arbitral Tribunal correctly holds that the arbitration agreement extends to the
disputes in respect of the infringement of trademark rights, unfair competition and
the tort with which the breach of the “Settlement Agreement” is closely connected.
In determining the scope of the arbitration agreement, the arbitration agreement
itself, other relevant contractual provisions, the notice of request for arbitration,
and the pleadings exchanged between the parties are taken into account. A broad
interpretation is adopted for the arbitration agreement.41) The arbitration agreement
is broadly drafted to encompass all disputes arising out of or in relations to or in
connection with the “Settlement Agreement.”
III. ENTIRE AGREEMENT CLAUSE
Under Korean law, the applicable law to the “Settlement Agreement,” due
consideration is to be given to all relevant circumstances of the case including the
negotiations and any subsequent conduct of the parties. However, the parties are
free, by agreeing upon an entire agreement clause, to bar an interpretation beyond
the four corners of the contract.
41) United Nations Commission on International Trade Law, supra note 4, at 151-152.
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In this case the parties agreed on an entire agreement clause. Article 16 of the
“Settlement Agreement” stipulates that “[e]ach Party represents and warrants
that no representation or promise not expressly contained in the Agreement has
been made and the parties are not entering into the Agreement on the basis of any
promise, representation or statement, express or implied, which is not specifically
set forth herein.” Submitting transcripts, the Respondent argues that the parties
made an agreement different in the contents from the “Settlement Agreement.”
Rejecting the Respondent’s argument, the Arbitration Tribunal, based on the entire
agreement clause, correctly holds that the Respondent is not entitled to rely on the
transcripts as a part of the “Settlement Agreement.”
IV. STATUTORY INTEREST RATE
The Arbitral Tribunal grants in part of the claim for damages and orders the
Respondent to pay to the Claimant 20% per annum interest, as provided in the Act
on Special Cases Concerning Expedition, etc. of Legal Proceedings, thereupon
from the date following the date of the closing of the proceedings to the date of
full payment. Article 3(2) of the Act provides that “[w]here it is deemed reasonable
for an obligor to contest whether he or she is responsible for the performance of
obligations or the extent thereof not later than a ruling that the obligor is responsible
for the performance of such obligations at a fact-finding proceeding is adjudicated,
paragraph (1) shall not apply to the reasonable extent.” In this case it is deemed
reasonable for the Respondent to contest the existence or extent of its obligation.
The Arbitral Tribunal holds that 20% per annum interest starts to accrue from the
date following the date of the closing of the proceedings. In light of Article 3(2) of the
Act, it would, however, be reasonable to hold that 20% per annum interest starts to
accrue from the date following the date of the delivery of the arbitral award, not the
date of the closing of the proceedings. If the Arbitral Tribunal had examined the date
when 20% per annum interest starts to accrue and had stated its opinion regarding
why 20% per annum interest starts to accrue from the date following the date of the
closing of the proceedings, not of the delivery of the arbitral award, it might have
been better.
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