Arbitration. Confirmation of Award. Second Circuit affirms district court's confirmation of an arbitration award, which refused to give effect to an administrative decree in reaching its decision.

KT Corp. v. ABS Holdings, Ltd., No. 18-2300-cv (2d Cir. Sep. 12, 2019) [click for opinion]

KT Corp. and KTSAT Corp. (collectively "KT") are satellite communications providers based in Korea that manage the Korean satellite fleet. ABS Holdings, Ltd. and ABS Global, Ltd. (collectively "ABS"), are satellite communications providers. The parties entered into two agreements whereby KT agreed to (1) sell ABS a geostationary satellite, and (2) operate the satellite for ABS. The purchase agreement required KT to obtain "all necessary licenses, consents and approvals for the sale of the Satellite" and maintain "all governmental and regulatory licenses and authorizations required" to obtain its obligations. Each agreement contained a New York choice of law clause and a mandatory arbitration clause.

In February 2011, KT delivered the satellite to ABS. In September 2011, ABS paid the satellite's purchase price, and KT delivered two bills of sale transferring title to ABS. In December 2013, two years after the transaction, the Republic of Korea's Ministry of Science, ICT and Future Planning ("MSIP") issued an order, inter alia, declaring the parties' purchase agreement null and void because it violated Korea's Foreign Trade Act ("FTA") since KT failed to obtain an export permit. MSIP's order cancelled KT's permission to use certain frequencies to operate the satellite and instructed KT to return the satellite to its original operating condition. The parties proceeded to arbitration the same month.

In July 2017, a three-member ICC tribunal issued a partial award holding that ABS held title to the satellite. The panel reasoned that title lawfully passed to ABS in 2011 when the sale was effectuated, as there was no mandatory Korean export permit requirement at the time. The panel also concluded that even if MSIP's order "was mandatory law", the outcome would be the same because it "was issued ex post facto, retroactively without time limit, and most importantly, with no notice to the Parties," which is "clearly in violation of New York law." In March 2018, the tribunal issued a final award finding KT breached the agreements, and was liable to ABS for damages from its failure to obtain and maintain all necessary government approvals. KT petitioned the district court to vacate the awards, and ABS petitioned to confirm. The district court confirmed both awards and the Second Circuit affirmed.

Pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention") and the Federal Arbitration Act (the "FAA"), KT argued the following grounds for vacatur: (1) "the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made," (2) "an arbitrator has exhibited manifest disregard of law," and (3) the "recognition or enforcement of the award would be contrary to the public policy of [the confirming] country."

The Second Circuit explained that an award will not be vacated where the arbitrators allegedly exceeded their powers "even where there is a 'serious error.'" Rather, an award will only be vacated "where the panel 'effectively dispenses its own brand of industrial justice.'" Under this standard, the Second Circuit rejected KT's argument that the ICC tribunal exceeded its authority in concluding that MSIP's order was "unauthorized" and violated due process, which KT argued was essential to the tribunal's conclusion that ABS held title to the satellite and KT breached the agreements. The court found that KT had not challenged MSIP's order before an agency or in court, but clearly delegated the issue to the arbitrators. Moreover, this determination was part of the tribunal's alternative holding. Their reasoning did not rest on their conclusions regarding the order, but on the determination that title had already passed in 2011 and that KT breached the agreements by failing to "comply with its obligation to obtain and maintain authority from the Korean government to operate the Satellite on ABS's behalf…."

The Second Circuit also rejected KT's contention that the ICC tribunal "manifestly disregarded Korean law, New York contract law, and a presumption in favor of the validity and regularity of agency actions." Vacatur on this ground "requires a showing that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case." Under Korean law, the "mandatory and retroactive nature of the MSIP Order is far from well defined, explicit, and clearly applicable" so it was not sufficiently definite to be manifestly disregarded. Under New York law, there was "at least a colorable justification" for the outcome reached.

Finally, the Second Circuit held that the award did not violate public policy. The public policy ground for vacating an award "is limited to situations where the contract as interpreted by the arbitrators would violate some explicit public policy that is well defined and dominant, and is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interests." The court explained that "even assuming it is well-defined policy [in the U.S.] to give effect to foreign administrative decrees" it was "far from clear that [MSIP's order] was an enforceable administrative decree under Korean law." Therefore, the tribunal's decision did "not violate our most basic notions of morality and justice."