"They Received the First Compensation Payment, Yet Demanded Another KRW 770 Billion"... Government Blocks 'Chain-Reaction ISDS Claims' (Comprehensive)

[Financial News] The Dayyani family, relatives of the founder of Entekhab, Iran's largest home appliance and petrochemical company, sought approximately KRW 770 billion in additional compensation from the South Korean government, claiming that payment awarded in the first ISDS case had been delayed. The arbitral tribunal dismissed the claim in its entirety. The government views the ruling as significant because it blocked what is known as 'chain-reaction arbitration,' in which a new ISDS case is filed over the implementation of an existing arbitral award.
The Ministry of Justice said on the 30th that the arbitral tribunal unanimously dismissed a damages claim worth approximately KRW 770 billion in the second ISDS case filed by six Iranian nationals from the Dayyani family against the South Korean government on the 28th.
The arbitral tribunal also ordered the government to pay approximately KRW 4 billion, representing 75% of the legal costs incurred by the Dayyani side in its case against the government, along with approximately KRW 800 million in arbitration administrative costs. The dispute began in 2010, when the Dayyani family sought to acquire Daewoo Electronics, which was undergoing a workout program.
The Dayyani family pursued the acquisition of Daewoo Electronics through its subsidiary D&A and paid a contract deposit of approximately KRW 57.8 billion. However, the creditors terminated the contract and forfeited the deposit, citing reasons including the failure to submit an investment commitment letter, which led to the dispute.
The Dayyani family filed the first ISDS case against the South Korean government in 2015 and won in 2018, when the tribunal ordered the government to pay approximately KRW 73 billion plus interest. The government ultimately lost in 2019 in its action before a UK court to set aside the award.
The government subsequently began the compensation payment process, but U.S. economic sanctions against Iran became an obstacle. Because the Dayyani side requested payment in foreign currency rather than Korean won, approval from the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) was required.
After receiving OFAC approval in January 2022, the government paid the Dayyani side approximately KRW 62.2 billion in April of that year out of total compensation of approximately KRW 85.8 billion. The remaining approximately KRW 23.6 billion was deposited with the court pursuant to provisional attachment and attachment-and-collection orders issued by a domestic court. The court had issued an enforcement order concerning the compensation claim in a civil lawsuit brought by Winia Electronics, formerly Daewoo Electronics, against the Dayyani side.
However, the Dayyani side filed the second ISDS case in October 2021, saying, "If we had received the compensation on time, we could have invested it elsewhere and earned greater returns." The initial claim amounted to approximately KRW 1.26 trillion, but it was reduced to approximately KRW 770 billion during the arbitration proceedings after the government actively challenged the calculation of damages and other issues.
The government's central defense was that it was inappropriate to bring the enforcement of an existing arbitral award before another ISDS tribunal.
At a briefing held at the Government Complex in Gwacheon, a Ministry of Justice official explained, "This case was filed on the grounds that the award in the first case had not been implemented. The government's argument was that, if the compensation had not been received, the Dayyani side should have pursued it through enforcement proceedings, rather than bringing the matter back to ISDS."
The arbitral tribunal acknowledged that it had jurisdiction to hear the case. It accepted the Dayyani side's argument that "the compensation awarded in the first ISDS case was connected to an existing investment and could therefore qualify for protection under the investment treaty." However, it ruled in favor of the government on the merits.
The Dayyani side argued that the South Korean government had delayed payment in violation of its obligation to provide fair and equitable treatment under the Korea-Iran investment treaty, saying, "The South Korean government required OFAC approval because we were Iranian nationals, unlike other investors."
The government countered that OFAC approval was unavoidable in order to comply with U.S. sanctions against Iran during the foreign-currency payment process. The arbitral tribunal accepted the government's argument, finding that obtaining OFAC approval was a reasonable measure that took into account the economic sanctions against Iran and the international economic order, and did not constitute arbitrary or unjust discrimination against the Dayyani side.
The tribunal also found that the government's action before a UK court to set aside the first award was a legitimate legal procedure. It further ruled that depositing part of the compensation with the court pursuant to a domestic court's attachment-and-collection order did not violate the investment treaty.
The alleged violation of the obligation to allow free transfers, claimed by the Dayyani side, was also rejected. The arbitral tribunal stated, "The obligation to allow free transfers under the investment treaty is a provision that merely prevents a state from unduly restricting an investor's transfer of its investment assets abroad. It does not apply to cases in which a government directly pays foreign currency pursuant to an arbitral award."
In particular, the arbitral tribunal drew a line against filing another ISDS case based on issues surrounding the implementation of an existing award. It ruled that an investor who has not received compensation can pursue enforcement proceedings before a court at the place of enforcement, and that allowing another ISDS case based on noncompliance with an award could run counter to the purpose of an investment treaty.
The government explained that, had it lost the case, it could have faced an additional compensation claim separate from the amount already deposited with the court. A Ministry of Justice official emphasized, "The issue of double recovery was genuinely disputed and was also used as part of the government's defense. The Dayyani side wanted to receive the compensation as soon as possible, but once provisional attachment and attachment-and-collection orders had been issued in South Korea, the government could not ignore them and make the payment." 
The Ministry of Justice believes that the ruling has substantially resolved the dispute involving the Dayyani family, which began with the 2010 attempt to acquire Daewoo Electronics and led to the first and second ISDS cases.
A Ministry of Justice official said, "We blocked an attempt to collect the compensation awarded in the first case through a separate ISDS rather than through a court in the country of enforcement." The official added, "This ruling is significant because it prevents the abuse of so-called 'chain-reaction ISDS claims,' in which parties seek arbitration again by citing procedural delays or domestic judicial proceedings as grounds."
The government plans to prepare for follow-up procedures, including applications to correct, interpret, or supplement the award and an action to set it aside. It also plans to recover legal and arbitration administrative costs from the Dayyani side.
[email protected] Yoo Seon-jun and Choi Eun-sol Reporter