ICSID Annuls Award in Lone Star Case, Vindicating South Korea's Decade-Long Legal Effort

arbitrationblog
Nov 19
11 min read

A Decade-Long Dispute over a Bank Sale

Lone Star’s clash with the Korean government originates from its 2003 purchase of a controlling 51% stake in Korea Exchange Bank ("KEB") and the fraught attempt to sell that stake. The Texas-based fund bought KEB for 1.38 trillion won (around $1.15 billion) and later struck a deal in 2007 to sell it to HSBC. Korean regulators, however, delayed approving the HSBC sale amid public scrutiny and political controversy over the “fire-sale” of a major local bank to foreign investors. By the time Lone Star eventually sold KEB to Hana Financial Group in 2012 for 3.92 trillion won (about $3.5 billion), the delay and intervening market conditions allegedly reduced the sale’s value. Lone Star claimed the Korean government’s interference – including protracted regulatory approvals and tax assessments - caused it to lose out on $4.68 billion in potential profits. The dispute also encompassed a hefty capital gains tax bill (approximately 800 billion won) imposed on Lone Star’s affiliates, which was later overturned by Korean courts, adding further complexity to the case

In November 2012, Lone Star initiated an ICSID arbitration under the Belgium–Korea investment treaty (using its Belgian and Luxembourg affiliates as claimants) After a decade of proceedings, an ICSID tribunal issued an award on August 30, 2022, partially upholding Lone Star’s claim. The tribunal found that South Korea had violated the fair and equitable treatment standard under the treaty by unduly delaying the bank sale’s approval, but it rejected the bulk of Lone Star’s demand. In a split decision, the tribunal awarded Lone Star $216.5 million (only 4.6% of the $4.68 billion sought) plus interest. The relatively low damages reflected the tribunal’s view that Lone Star bore some responsibility for the delays – for instance, allegations of stock price manipulation by a Lone Star affiliate clouded the sale process and justified some regulatory caution. The award was not unanimous: one arbitrator issued a concurring opinion and another dissented entirely, highlighting how contentious the outcome was.

Neither side was satisfied. Lone Star, calling the damages insufficient for its losses, swiftly signaled its disappointment. The South Korean public and officials, meanwhile, bristled at the idea of paying even a fraction of the claim to a foreign private equity firm that had already profited from its investment. In early 2023, both Lone Star and the Korean government filed applications to annul the ICSID award.Lone Star’s bid for annulment argued that the tribunal erred by drastically undervaluing its damages, whereas the Korean Ministry of Justice asserted that the award was legally flawed – contending that the tribunal overstepped its authority and violated fundamental procedures in reaching the decision. . In the interim, Seoul refrained from paying the award, and an ICSID ad hoc committee stayed enforcement of the judgment pending the outcome of the annulment process.

The Annulment Process and Key Procedural Violations

ICSID’s annulment mechanism, though not an appeal on the merits, allows either party to challenge an award on narrow grounds such as serious procedural irregularities or tribunal overreach. A three-member ad hoc committee (separate from the original arbitrators) was convened in Washington, composed of arbitrators appointed by ICSID to ensure neutrality. Over 2024, the committee reviewed extensive written submissions from both sides. In January 2025, a three-day oral hearing was held in London, where the committee probed the conduct of the original arbitration. According to Korea’s legal team, the committee honed in on questions of due process at that hearing – a focus that Seoul took as a hopeful sign.

South Korea’s central argument was that it had been denied a fair opportunity to present its case during the original arbitration, amounting to a breach of fundamental procedure. Notably, Korean representatives pointed out that the 2022 tribunal accepted certain evidence – including documents from a private arbitration between Lone Star and Hana Financial – without allowing Korea to cross-examine witnesses or rebut that evidence. This, they argued, was a violation of the ICSID Convention’s due process guarantees, as it introduced factual findings affecting the award without affording equal hearing to both parties. Korea also alleged the tribunal may have “manifestly exceeded its powers” by awarding damages for acts outside the treaty’s scope, though the crux of its case rested on procedural unfairness.

On November 18, 2025, the ICSID ad hoc committee delivered its decision – a sweeping win for South Korea. The committee annulled the August 2022 award in full, citing grave procedural violations during the arbitration. In its ruling, the committee agreed that Lone Star’s rights had not been prejudiced by Korea’s actions to the extent claimed, whereas the Korean government’s right to due process had been compromised by the original tribunal’s case management. While the detailed legal reasoning has yet to be published, officials indicated that the decisive factor was the tribunal’s failure to uphold due process. “The annulment committee recognized that major due process violations occurred during the arbitration proceedings, which was the decisive factor in accepting Korea’s request,” said Chung Hong-sik, Director-General of the Ministry of Justice’s international legal affairs bureau, who led the case for the government. The ad hoc committee found those procedural lapses serious enough to “annul the original ruling on procedural grounds,” according to a Lone Star spokesperson’s account of the decision.

Under ICSID Convention Article 52, an award can be voided if, for example, the tribunal seriously departed from a fundamental rule of procedure. South Korea’s success indicates the committee was persuaded that the original panel’s conduct - such as admitting crucial evidence without hearing the state’s response - met this high bar. The committee’s ruling effectively wipes out all of Korea’s payment obligations that had been outlined in the 2022 awardkoreatimes.co.kr. This includes the $216.5 million principal and roughly $60 million in accumulated interest that would have been owed to Lone Star by now. Moreover, the committee ordered Lone Star to bear the costs of the annulment proceeding, requiring the fund to pay approximately ₩7.3 billion (≈$5 million) to the Korean government within 30 days. Cost reimbursements of this kind are discretionary but not uncommon when one side prevails in an ICSID annulment; in this case, it partially offsets the millions of dollars Seoul spent on international lawyers and experts over the protracted legal fight.

Reactions in Seoul: “A Significant Achievement” for Korea

South Korean officials greeted the annulment with relief and declared it a total victory in a dispute that had long loomed over the government. Prime Minister Kim Min-seok announced the outcome at an emergency press briefing in Seoul, praising the result. “At approximately 3:22 p.m. today, the annulment committee delivered a ruling in Korea’s favor, retroactively voiding roughly 400 billion won in damages previously awarded against the government,” Kim stated, noting that 400 billion won (about $272 million) had been the expected liability including interest. He characterized the decision as “a significant achievement in protecting public finances and taxpayer money” and said it affirmed “Korea’s sovereign right to financial regulation.”koreajoongangdaily.joins.com This was a reference to the crux of Lone Star’s claim – that government regulators’ actions had been improper. The annulment, in the Korean government’s view, upholds the country’s right to regulate its banking sector without facing massive investor claims.

Officials were quick to credit the team of attorneys and civil servants who worked on the case. Justice Minister Jeong (Chung) Sung-ho, who was present at the briefing, highlighted the efforts of the Ministry of Justice’s international dispute unit. Some commentators noted that the push to annul the award began under former Justice Minister Han Dong-hoon, who in 2022 vowed to “fight to the end” rather than pay Lone Star. After the decision, Han – now out of office – wrote on social media, “Lone Star lawsuit – Korea wins!” underscoring the satisfaction within Korea’s legal community at the outcome.

The Presidential Office also issued a statement welcoming the decision. Spokesperson Kang Yu-jung said, “We are gratified that these efforts have concluded successfully and we extend our gratitude to government officials, legal advisers, and citizens whose trust and support were invaluable throughout this process.”The government emphasized that by avoiding the award, it had averted what many in Korea saw as an “astronomical outflow of national wealth” Indeed, had the award stood, South Korea’s taxpayer-funded liability would have been roughly equivalent to 0.05% of its GDP – a substantial sum, though far below the $4+ billion originally claimed. Korean media noted that this is the first time South Korea has entirely defeated an Investor-State Dispute Settlement (ISDS) claim at the final stage, bolstering the government’s confidence in handling international litigation. Minister Jeong indicated that the Ministry of Justice would release a detailed analysis of the ad hoc committee’s decision after reviewing the full text, to inform the public and to help prevent similar disputes in the future.

Lone Star’s Response and Next Steps

Lone Star Funds, for its part, expressed disappointment with the annulment outcome and signaled its intent to continue pursuing the case. In a statement following the decision, a spokesperson for Lone Star stressed that the committee’s procedural ruling “does not change the underlying fact that Korean regulators improperly blocked and interfered with Lone Star’s multi-year effort to sell its controlling interest in KEB.” The firm maintains that it was wronged by the Korean government and is owed significant compensation. Lone Star noted that the ad hoc committee annulled the award on procedural grounds, without overturning the original tribunal’s findings that Korea had breached its treaty obligations.

Crucially, Lone Star affirmed it “looks forward to presenting its case again to a new tribunal” and is “confident [the new panel] will again find that Korea acted unlawfully, and will award Lone Star the full amount of its damages.” Under ICSID rules, when an award is annulled, the dispute isn’t automatically terminated; instead, it reverts to the beginning, allowing for a new arbitration tribunal to be constituted if the investor wishes. Lone Star’s statement makes clear it intends to resubmit its claims. The fund can initiate a fresh ICSID arbitration (essentially “Lone Star v. Korea II”) to seek a new ruling – a process that could take several more years. Any new tribunal would not be bound by the annulled award but would have access to the evidentiary record of the first case (subject to whatever procedural rulings the new panel may make).

The prospect of starting over prolongs a saga that has already stretched nearly two decades from investment to initial award to annulment. In the meantime, South Korea holds the advantage of not owing any payment, while Lone Star must absorb the additional legal cost burdens. Analysts say Lone Star will likely recalibrate its strategy and evidence for a re-hearing, possibly addressing the procedural issues flagged by the committee. However, the hurdle for the investor remains high: the original award’s low damages were partly due to Lone Star’s own conduct (like the stock manipulation allegations), and those facts will still weigh on any new tribunal. Korean officials have indicated they are prepared to defend vigorously again if the case is revived, buoyed by the annulment win. For now, Lone Star’s immediate options include negotiating a settlement with Korea or moving forward with a new arbitration. Given Lone Star’s public stance and confidence post-annulment, a settlement seems unlikely, pointing instead to a renewed legal confrontation.

Significance and Trends in ICSID Arbitration

The complete annulment of an ICSID award in favor of a state is an exceptionally rare event, and the Lone Star case is already being viewed as a landmark in investment arbitration circles. According to ICSID data, out of 503 arbitration decisions issued from 1972 to 2025, only 25 have ever been annulled to some degree – and in just 8 cases (including the Lone Star dispute) has the tribunal’s decision been entirely overturned. That equates to a full annulment rate of roughly 1.6%. By comparison, the vast majority of ICSID awards remain intact, as the annulment mechanism is intended to correct only the most serious legal errors. South Korea’s victory bucked long odds: an empirical study by arbitration researchers found that applicants have succeeded in only about 12% of all annulment requests, whether partial or full. It is even rarer for a respondent state (as opposed to an investor) to completely nullify an award – a feat one Korean official called “extremely rare for any government to achieve”.

The case underscores a broader trend of mounting challenges to investment arbitration awards, even though successes remain uncommon. Over 40% of ICSID awards in recent years have faced annulment applicationsbakerbotts.com, reflecting a propensity for losing parties – especially states – to exhaust every option in high-value disputes. In Seoul’s view, the outcome shows that the ICSID system can hold tribunals accountable. “This result affirms that procedural fairness is paramount in ISDS,” a Korean Ministry of Justice representative commented, noting that Korea’s focus on the tribunal’s due process lapses paid off. International law experts point out that ICSID ad hoc committees are cautious not to become a court of appeal on substantive issues, intervening only when a fundamental legal integrity issue is at stake. The Lone Star annulment is likely to reinvigorate debates about consistency and fairness in ISDS. Proponents of reform may cite it as evidence that a built-in appellate review (beyond the ad hoc committees) could be beneficial, while critics of annulment might argue it introduces uncertainty and delay for investors seeking finality.

There is precedent for what happens next: when an ICSID award is annulled, the claimant may re-arbitrate, and history shows mixed outcomes. For example, in the case of Fraport AG v. Philippines, an ICSID committee annulled a 2007 award in favor of the Philippines after finding that the tribunal had denied the investor the right to be heard on crucial evidence. Fraport filed a new case, but a second tribunal again ruled against the investor on jurisdictional grounds in 2014. In another notable case, Eiser Infrastructure v. Spain, a 2017 award ordering Spain to pay €128 million was annulled in 2020 due to an arbitrator’s undisclosed relationship with an expert witness – a serious conflict that meant the tribunal was improperly constitutediisd.org. That dispute, part of a series of renewable energy cases against Spain, had to be reheard by a new panel from scratch. These examples illustrate that annulment can drastically alter the trajectory of a dispute: a claimant who once won an award might end up with nothing (or a smaller sum) after rehearing, or in some instances, they might prevail again.

The Lone Star saga’s significance thus extends beyond the immediate parties. It demonstrates to states that persistently challenging an award on legitimate procedural grounds can succeed, saving substantial public funds in rare instances. For investors, it serves as a reminder that even a favorable award is not truly final until the slim chance of annulment is overcome – something that can add years of uncertainty. In South Korea, the result may bolster public confidence in the government’s handling of foreign investor disputes, following a string of ISDS cases in recent years. And globally, with debates underway about creating a multilateral investment court or appellate mechanism, the case will likely be closely studied as an example of the ICSID system’s self-correcting features.

As of now, South Korea has emerged with zero liability from a claim that once threatened to cost it nearly a quarter-billion dollars. The government avoided what Prime Minister Kim called “a burden on the people’s taxes” and even turned the tables by recouping a slice of its legal expenses. But the dispute’s final chapter may be yet unwritten. Lone Star’s declared intent to seek a new arbitration means the underlying allegations against Korea could be litigated all over again. Any new proceeding would likely revisit the core question: did Korean regulators treat Lone Star unfairly, or did the private equity fund simply fall victim to its own aggressive tactics and changing market conditions? The coming years may see those questions re-litigated in front of a newly constituted ICSID tribunal. For now, the 2022 award in Lone Star v. Republic of Korea (ICSID Case No. ARB/12/37) no longer has any legal effect, and South Korea is, at least temporarily, off the hook in one of the most high-profile investment disputes it has ever faced.

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