On November 14, 2012, the Korea Commercial Arbitration Board (“KCAB”) decided that even the competent authority granting a right to carry out a private participation in infrastructure (“PPII”) project and supervising such project may not arbitrarily modify or request to modify total project costs that were agreed in a PPII project agreement (the “Agreement”), nor request to lower an applicable toll for the use of the PPII based on such non-existent right to modify or request to modify such project costs.

In the PPII project concerned, private investment was made for the construction and operation of the great Guga bridge and undersea tunnel, connecting Kadeokdo in Busan and Keoje, with the total project costs of approximately 1.4 trillion Korean won. The undersea tunnel shows the excellence of Korean construction technology, as its construction requires highly advanced technology to establish a tubing tunnel 48 meters deep under the sea (e.g., located the deepest in the world so far) by connecting eighteen housings, each 180-meter long (that is also the longest undersea tunnel in the history of construction of this type of submarine tunnel). Nevertheless, civic groups including the Citizens’ Coalition for Economic Justice raised an issue for scrutiny to investigate an inadequately high toll payable, and the Board of Audit and Inspection conducted audit of the project. Thereafter, the competent authority finally demanded the project owner to deduct from the total project costs the difference between the costs under the conceptual design (i.e., conceptual review of construction methods, volume and the like) and the costs under the basic design (reflecting the size and form of the bridge/tunnel, rough estimates of the construction method and period, construction costs, etc.), and accordingly reduce the applicable toll as well. Thus, the project owner applied for arbitration to seek the KCAB’s ruling to confirm non-existence of such authority’s right to demand reduction of total project costs, arguing that the toll collected by it needed to be determined based on the investment in the project, and that the authority’s request for the reduction of a toll is in violation of the Agreement and thus unjustified.

Based on a premise that the difference between the costs under the conceptual design and those under the basic design cannot constitute a reason for modification of the total construction costs, the KCAB ruled that the competent authority may not request lowering of the applicable toll, without just cause that requires a decrease of total project costs agreed in the Agreement. The reason for the foregoing conclusion was that in the light of the nature of a PPII project, absent a cause set out in the Agreement, the total project costs agreed therein cannot be arbitrarily modified/adjusted after the execution of the Agreement, because thereunder (i) a PPII project investor may not demand an increase of total project costs for the reason of design change or otherwise, and (ii) likewise the competent authority granting the right to carry out a PPII project and supervising the project may not arbitrarily (request to) modify the total project costs agreed in the Agreement.

Reportedly the competent authorities in Korea have unreasonably requested a decrease of applicable tolls or unreasonably interpreted applicable law, due to unfavorable public opinion or local animosity against some investors in recent PPII projects. However, the above decision makes it clear that an agreement with a PPII project owner is strictly binding upon the competent authority granting the right to carry out a PPII project, as well as the PPII project owner. Thus the decision is significant as KCAB’s explicit pronouncement of a basic principle of contract law, that is, the rights and obligations of parties in a PPII project – e.g., the competent authority and the project owner – must be interpreted and enforced just as agreed in the contract entered into by them.