[Viewpoint] ISD clause: Setting the record straight

Investor-state dispute settlement (ISD) provisions have emerged as the most contentious issue in the National Assembly’s discussion of the Korea-U.S. free trade agreement. Members of the Democratic Party strongly oppose the ISD provisions and are threatening to block ratification of the Korus FTA if they are not taken out. However, their reasons for opposition are both misguided and misinformed.

Critics of the ISD provisions have voiced two main concerns. First, they claim that the provisions limit judicial sovereignty as well as governmental autonomy and could potentially result in unfavorable revisions to domestic Korean law. They indicate that these revisions will disproportionately affect small businesses, farmers and other key economic players in Korea.

However, the text of the ISD provisions rebuts this very claim. Article 11.26 of the agreement specifically states that any ISD award “shall provide that it is made without prejudice to any right that any person may have in relief under domestic law.” In other words, in its application of remedies, the agreement is explicitly deferential to domestic law, and contrary to the claims made by the opposition, there is no authority to revise the domestic laws of either country.

In the same article, the agreement further clearly provides that awards are solely limited to monetary damages and restitution of property. Hence, the legal rights and benefits granted under Korean law to Korean farmers and businesses, both large and small, simply cannot be impeded. The laws that currently affect them will remain unchanged under the ISD provisions, as these provisions remain fully deferential to the legal sovereignty of Korea.

Second, opponents of the ISD provisions argue that, because the provisions are drawn from the U.S. Model Bilateral Investment Treaty, they are inherently in conflict with Korea’s legal system. This is not the case. The structure of the agreement draws basically on well-established principles of international law that have long been accepted by the Korean judicial system. Rather than imposing “new” foreign legal principles, the ISD settlement provisions essentially mirror long-standing Korean law and international commitments.

For example, under the ISD provisions, investor-claimants may request arbitration under the ICSID Convention, or under the Uncitral Arbitration Rules. Korea has been a member of the former since 1967, while the latter has served as the main framework for Korea’s own domestic arbitration law for over a decade. In addition, under the ISD provisions, the consent of parties to enforce international arbitration must satisfy the requirements of the New York Convention. Here again Korea has adhered to this convention for well over 30 years.

Indeed, most of the substantive provisions draw on widely accepted principles of international law that have long been recognized and accepted by Korea. For example, the minimum standard of treatment accorded to foreign investments under Article 11.5 of the agreement includes obligations by countries to provide “fair and equitable treatment” and “full protection and security.”

Furthermore, the agreement requires most-favored nation and national treatment for investments in “like circumstances.” All three of these standards are well-established principles under international trade law. In short, the ISD provisions basically restate Korea’s existing international obligations and do not conflict with Korea’s legal system. It is also worth noting that the ISD provisions in the Korus FTA closely mirror those in free trade agreements that Korea has already signed with Chile in 2003 and with Peru in 2010.

During this ongoing debate, Korea should be mindful of the significant benefits of the ISD provisions. The agreement accords substantial protections not just to American investors in Korea, but also to Korean investors in the United States. In 2010, Korean foreign direct investment in the United States was over $15 billion. The ISD provisions will help protect these Korean investors abroad, which are expected to grow significantly in the future. In addition, the protections of the ISD provisions will further promote much-needed overseas investment in Korea, and in doing so help to rehabilitate Korea’s image as an, at times, unwelcome destination for investment.

It is no surprise that an agreement as significant as the Korus FTA would engender significant debate. It is a testament to the strength of the Korean political system that the voices of all those affected by the agreement can be heard. The current controversy regarding the ISD provisions is, however, quite worrisome, as it is reminiscent of the beef debate in 2008.

During that debate, many unfounded if not wholly fabricated arguments were recklessly put forth in the media and by the opposition party. The fallout from this ill-informed and visceral debate was costly as it hamstrung the new Lee administration, sapped the nation’s energy, undermined U.S.-Korea relations and damaged Korea’s image globally.

Korea must avoid a similar fate in the current situation. It would be a travesty for the Korus FTA to be rejected based on an erroneous understanding of the facts and law. The benefits of this historic agreement for the Korean people are too great. For this reason, we must set the record straight.

*The writer is a senior partner specializing in international trade at Akin Gump Strauss Hauer & Feld LLP in Washington.

By Sukhan Kim