The Shipping Law Review: South Korea
Commercial overview of the shipping industry
i Shipping industry
Historically and geographically, the trading and shipping industries have always been a major part of South Korea's economy. South Korea has adopted an open economic system that promotes foreign trades and imports raw resources for processing and merchandising, whereby final products are then exported to other countries. Since South Korea is surrounded by sea and the only access to the continent is blocked by North Korea, 99.7 per cent of imports and experts are carried out by sea vessels. At the end of 2021, total trade volume of South Korea was the eighth largest in the world.
ii Imports and exports
The main imported items and their regions in 2021 are listed in the table2 below.
|Regions of import, 2021|
|China||22.5||semiconductors, computers, machinery, textiles|
|The United States||12.0||machinery, semiconductors, petrochemicals, steel|
|ASEAN||11.0||semiconductors, textiles, synthetic resins|
|The European Union||10.7||machinery, textiles, synthetic resins, car parts|
|The Middle East||10.6||synthetic resins, petrochemicals|
|Japan||8.9||steel, semiconductors, petrochemicals|
|Australia||5.3||coal, iron ore, petrochemicals|
|Central and South America||4.6||petrochemicals, iron ore|
The main exported items of Korea in 2021 are listed in the following table.3
|Top 10 exports, 2021|
|Cargo||US$ (million)||Per cent|
|flat panel displays and sensors||35,912||8.4|
|wireless communication devices||16,202||3.8|
At the end of 2020, the size of the Korean-owned total fleet was 80.58 million deadweight tonnage (DWT), which is the seventh largest in the world. The type of fleet and amount of DWT are listed in the table4 below.
|Type of fleet (DWT, million)|
|crude oil carrier||13.98|
|full container ship||7.80|
|general cargo ship||3.40|
South Korean shipbuilders, including Hyundai Heavy Industries Co, Ltd, Samsung Heavy Industries Co, Ltd, Daewoo Shipbuilding & Marine Engineering Co, Ltd (DSME), are world leaders in the industry. Korea Shipbuilding & Offshore Engineering Co, Ltd (KSOE) acts as a holding company for Hyundai Heavy Industries and its affiliates, Hyundai Samho and Hyundai Mipo. Between 2019 and 2021, KSOE and DSME tried to merge but, in early 2022, the merger was unsuccessful because it was blocked by the EU antitrust regulators.
The table5 below shows the total number of shipbuilding orders to Korean shipyards for 2018–2020.
|Shipbuilding order (US$ billion)|
The major container terminals in South Korea are located in Busan, Incheon and Gwangyang. Specifically, the Port of Busan, which is the busiest port in South Korea, is regarded as highly competitive as a transshipment port because 55 per cent of all containers that were handled in 2021 were for transshipment, mostly from China.
General overview of the legislative framework
i The Korean Commercial Code
South Korea, being a civil law country, does not have a separate statute specifically dealing with shipping and maritime trades. Instead, it has a separate volume, Volume 5 of Maritime Law, within the Korean Commercial Code, which generally governs issues related to commerce and trade. Therefore, Volume 5 is the most important law as far as shipping and maritime trade are concerned. While Volume 5 deals with rights and obligations of a civil nature related to shipping and maritime trades, the Korean Civil Code and other civil law principles provide further guidance in the absence of any clear provisions.
ii Special acts
South Korea has enacted special acts, such as the Ship Safety Act, the Maritime Safety Act, the Marine Environment Management Act and the Public Order in Open Ports Act. The Private International Law Act contains conflict of law rules.
iii Maritime conventions
South Korea is a signatory or member state to only a few international maritime conventions. The international treaties that have been ratified by the National Assembly, South Korean legislature, are given the same force and effect as local laws.
South Korea has signed and ratified:
- the International Convention for the Safety of Life at Sea (SOLAS), 1974;
- the International Convention for the Prevention of Pollution from Ships (MARPOL), 1978;
- the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (STCW), 1995;
- the International Convention on Oil Pollution Preparedness, Response and Co-operation (OPRC), 1990;
- the CLC, 1969 and its 1992 Protocol;
- the Fund Convention, 1971 and its 1992 Protocol and 2003 Protocol;
- the Load Lines Convention, 1996;
- the Tonnage Measurement Convention, 1969; and
- the Convention on the International Regulations for Preventing Collisions at Sea (COLREGs), 1972.
However, instead of officially ratifying international maritime conventions, South Korea has selected or borrowed clauses from certain maritime conventions and incorporated them into its own statutes. For instance, South Korea has in its Commercial Code provisions that are almost identical to the following:
- the Hague-Visby Rules, 1968;
- the Convention on Limitation of Liability for Maritime Claims (LLMC), 1976, and part of its Protocol of 1996;
- International Conventions on Salvage, 1989; and
- the Convention on Maritime Lien and Mortgage, 1926.
As such, there may be conflicts between the international treaties and local laws, and also there is a risk that measures taken based on local laws may not be recognised internationally.
Forum and jurisdiction
In South Korea there is no separate court for specifically handling maritime disputes. Instead, civil divisions of the district courts have jurisdiction over maritime cases. Nevertheless, the Seoul Central District Court in Seoul and the Busan District Court in Busan where most of the shipping companies are located have a special division that mostly deals with cases involving international trade and maritime disputes.
South Korea has a three-level court system. A lawsuit should first be filed at a relevant district court as being the first instance court, an appeal against that district court's judgment is brought at its high court as the second instance court, and a further appeal against that high court's judgment is brought at the Supreme Court as the final level court. The right of appeal is automatic and thus there is no need for leave for a defeating party to file an appeal.
In principle, an agreement on jurisdiction is respected. However, if the agreed jurisdiction does not have reasonable connection with South Korea and the agreement is substantially unfair and unreasonable to the other contracting party, the jurisdiction agreement will be held invalid and unenforceable, according to the precedent set by the Supreme Court of Korea. In practice, a jurisdiction clause in a bill of lading in a claim for cargo damage that is not substantial is almost always held invalid by Korean courts for the same reason.
ii Applicable law
Pursuant to the Private International Law Act, in principle, a contract is governed by the law that the parties have chosen. The Supreme Court of Korea has held that a clause paramount in a bill of lading is also held to be an agreement on governing law superior to a general governing law clause in a bill of lading. A claim sounding in tort and a claim in contract are regarded as mutually exclusive, and for a tort claim the law in the place in which the tort was committed becomes the governing law over the claim. In the event that a contract is breached due to a tortious act, the contractual governing law governs the tort.
Nevertheless, pursuant to the Private International Law Act, the following are determined by the law of the country in which the ship was registered:
- the ownership and the mortgage on a ship, the maritime line and a real right on a ship;
- the order of priority of security interests on a ship;
- the availability and scope of the shipowner's right to limit liability in respect of maritime claims; and
- general average.
iii Time bar
Under South Korean law, the extinctive prescription for a tort claim is three years and for a contractual claim of commercial nature it is five years, unless it is specifically fixed elsewhere in the Korean statutes. The extinctive prescription may not be extended based on the parties' agreement.
For the claims and obligations of a carrier under a bill of lading, it is one year from the date of delivery; in case of a charter (voyage, time or bareboat) governed by Korean law, the shipowner and the cargo interest have two years from the date of delivery of cargo to bring an action against its counterparty. Claims arising from a ship collision shall be extinguished unless an action is brought within two years from the date of the collision. The time bar applicable to maritime claims, unlike extinctive prescription, may be extended based on the parties' agreement.
iv Arbitration and ADR
The arbitration agreement between the parties is valid and binding as a matter of Korean law and practice. If a lawsuit is filed in breach of valid arbitration agreement, the lawsuit will be dismissed from the outset. There is an arbitration institution called the Korean Commercial Arbitration Board (KCAB) where most arbitration matters in South Korea are resolved. The KCAB has a maritime arbitration department (currently, located in Busan) within the KCAB that specifically handles maritime disputes.
As a type of ADR, mediation during the court proceedings, which is frequently used in practice, may be held at the request of the parties or discretion of the judge. If mediation is held, the hearings outside the proceedings are conducted to reconcile the respective positions for amicable settlement. If a dispute is resolved through such mediation, the result shall have the same effect as the final and conclusive judgment.
v Enforcement of foreign judgments and arbitral awards
To enforce a foreign court judgment in Korea, a civil lawsuit should be commenced at the Korean court to seek a judgment that recognises and allows enforcement of the foreign court judgment in South Korea. A prerequisite for the Korean court to enforce a foreign court judgment is reciprocity.
The Korean court has found thus far that reciprocity has existed with the courts of the following jurisdictions:
- the United States (the states of New York, Minnesota, Oregon, California, Kentucky, Texas, New Jersey and the North Mariana Islands);
- Canada (Province of Ontario);
- the United Kingdom;
- Australia; and
- Hong Kong.
The Korean court and jurisprudence consider that there is no reciprocity with the courts of three jurisdictions: Denmark, Thailand and China.
However, among the countries that were found to have reciprocity, some of these (e.g., the United Kingdom, Australia, Germany, Hong Kong and Argentina) had cases that were not tested at the Supreme Court, but only at lower courts.
South Korea is a signatory to the 1958 New York Convention for the recognition and enforcement of an arbitral award, and therefore an arbitral award obtained in a contracting state is enforceable in accordance with the 1958 New York Convention by obtaining an enforcement judgment from the Korean court. For an arbitral award obtained in a non-contracting state, the above reciprocity requirements applicable to court judgments would need to be satisfied before it can be recognised for enforcement in South Korea.
Shipbuilders in South Korea generally use an international standard shipbuilding contract (mostly, a Shipbuilders Association of Japan (SAJ) form) with English law as the governing law and London as the forum for the resolution of disputes. In practice, the English governing law and the choice of forum clause in favour of arbitration in London are held to be valid and binding by the Korean court.
Where a shipbuilder enters into insolvency proceedings, the shipbuilding contract is expected to have been terminated pursuant to the ipso facto clause in the shipbuilding contract. However, in Korean practice, South Korea's insolvency law compulsorily applies and the ipso facto clause in the shipbuilding contract may be held invalid.
Commonly, a dispute arising under a shipbuilding contract or a refund guarantee is arbitrated in London. In this regard, where a tort claim is filed against a Korean shipbuilder for defect and damages that arose after expiry of the warranty period, Korean courts may have jurisdiction over the claim if the claimant is a third party other than the parties of the shipbuilding contract. Furthermore, for refund guarantees issued by Korean banks, there are court cases where local shipbuilders sought to obtain a preventive injunction from a Korean court to block the issuing bank from complying with the demand of payment by an overseas holder of a refund guarantee, based on arguments that the demand was made fraudulently and in bad faith.
ii Contracts of carriage
South Korea has not formally ratified the Hague, Hague-Visby, or Hamburg Rules. Instead, it has borrowed mostly from the Hague-Visby Rules and incorporated them into the Commercial Code. Nevertheless, in practice, by virtue of the governing law clause or the paramount clause in the bill of lading, the above Rules or other laws such as Carriage of Goods by Sea Act BE 2534 (1991) (COGSA) may be applicable to substantive issues when a dispute arising in respect of the carriage of goods by sea is brought before a Korean court.
Charter parties entered into in Korea mostly prescribe English law as the governing law and London (or Singapore or Hong Kong) as the choice of forum for arbitration, and these clauses are regarded as valid by Korean courts.
As regards multimodal transportation, the governing law clause agreed between the parties is regarded as valid by Korean courts. If Korean law is applicable, the Commercial Code provides that each carrier shall be responsible for its own segment of transport, pursuant to the law applicable to such segment. If the place of damage is unknown or the damage is not limited to any particular area in its nature, the carrier shall take responsibility in accordance with the law applicable to the segment of transportation that has the longest distance.
iii Cargo claims
The Korean Commercial Code has adopted many of the provisions of the Hague-Visby Rules. Therefore, the general interpretation under the Hague-Visby Rules is acceptable to Korean courts. The Supreme Court of Korea has held that a clause paramount in a bill of lading is also held to be a valid agreement on governing law superior to a general governing law clause in a bill of lading.
If the actual carrier is different from the contractual carrier, the holder of the original bill of lading may sue the actual carrier in tort.
iv Limitation of liability
As previously mentioned, South Korea is not a signatory to the 1976 LLMC. If a foreign ship is involved and wishes to limit liability in South Korea, pursuant to the Private International Law Act it shall be determined under the laws of the ship's flag whether the owner of the foreign ship is entitled to limit liability for claims and, if so, what the limitation amount should be for the foreign ship. Even if the ship's flag is a flag of convenience, the law of the flag would still govern. However, as South Korea is not a signatory of the 1976 LLMC, whether or not limitation proceedings in Korea would be recognised in a contracting state of the 1976 LLMC is still up for debate.
For a shipowner to enjoy the limitation of liability under applicable laws in South Korea, the shipowner must file an application at the court to commence the limitation proceedings in accordance with the Act on the Procedure for Limiting the Liability of Shipowners and Others. The limitation fund can be established by way of a letter of undertaking issued by a P&I Club. It is also possible to commence the limitation proceedings while reserving the right of exemption based on an act of God and force majeure or the package and kilogram limitation.
i Ship arrest
There are two types of ship arrest: prejudgment attachment and attachment for auction sale of the ship. If the vessel is arrested by prejudgment attachment, it is for security purposes and thus the arrest will not undergo any auction procedure. Conversely, if the vessel is arrested based on a maritime lien or mortgage claim, the auction procedure will commence upon arrest.
If the party arrests a vessel by prejudgment attachment, as a matter of Korean law and practice, the arresting party will be required to provide 10 per cent of its claim as counter security. If the party arrests a vessel by attachment for auction sale of the vessel, no counter security is required. The counter security can be provided in the form of surety bond available from a local surety company.
If the application for an arrest is evidently meritorious, it takes generally one to two days for the Korean court to render a decision to grant the arrest of the vessel. A writ of arrest can be issued only after the target ship has entered a Korean port because this is a prerequisite for Korean courts to exercise jurisdiction over the target ship. Under Korean law, a caveat against arrest is not available.
The quickest way for the shipowner to get release of the ship from arrest without the agreement of the creditor is to make a cash deposit in full with a Korean court. Korean courts do not accept a letter of undertaking issued by a P&I Club or a bank in lieu of the cash deposit for release of the arrested ship.
ii Court orders for sale of a vessel
The auction sale of an arrested vessel is by public auction through court proceedings. A Korean court puts a public notice to invite creditors who have a claim against the owner of the vessel to file their claim for distribution, as well as to set a date for the first auction hearing for receiving bids generally within three to six months from the issuance of the arrest order.
Before the first auction hearing, the Korean court arranges appraisal of the vessel for auction. The Korean court puts up the vessel for sale at the appraised price of the vessel at the first auction hearing and if the vessel does not get sold, then the Korean court opens subsequent hearings usually at four-week intervals thereafter until the vessel is sold and, in general, discounts the price of the vessel by 20 to 30 per cent at each hearing. After the Korean court has received the payment from the winning bidder, it publishes a list of the creditors who have a valid claim against the proceeds of the sale. Only those claims to which a third party does not object are paid from the proceeds of the sale in a pro-rata basis while a reserve is set aside for those claims to which an objection has been raised.
Assuming that the vessel can be sold early, such as at the second or third auction hearings, the whole process can take approximately six to nine months. However, depending on the market and the number of potential buyers, the process may finish quickly or it may take a long time.
The highest bidder is not automatically the winner of the auction. Although, in practice, it would be a formality, the Korean court has to approve the highest bidder to be the winner of the auction. Every bidder is required to make a deposit of monies equal to 10 per cent of the reserve price. The Korean court orders the winning bidder to make the payment of the full price for the sale in two to three weeks from the date on which the winner is announced.
iii Lien on cargo
Pursuant to the Korean Private International Law Act, the law that governs a carrier's lien over a cargo is the law of the place where the cargo is located at the time the right of lien is exercised. A carrier is entitled to exercise a lien on cargo for freight, demurrage, damages or costs, among other things. The cargo can be disposed through judicial auction to satisfy the carrier's claim.
That being said, the Korean Supreme Court has restrictively construed a carrier's right to judicial auction of the licensed cargo by stating that if there is an arbitration agreement between the carrier and the charterers for all disputes arising out of the charter party, the carrier will not be able to apply for judicial auction against the cargo. The Korean Supreme Court's rationale is that if there is an arbitration agreement between the owners and the charterers, then to allow the judicial auction would nullify the purpose of the arbitration agreement between the parties. Although this decision has been heavily criticised, it still remains good authority in Korea.
Under the Ships Act in Korea, cabotage, which is the transport of goods or passengers between two places within Korea by a foreign operator, is prohibited in principle, although there are some instances where cabotage is allowed under limited conditions. The Korean Prosecutors' Office has recently determined that foreign-flagged ships can operate within Korea for the transshipment of goods for export purposes and has exempted their criminal liability.
South Korea has adopted the International Safety Management (ISM) Code and the International Code for the Security of Ships and Port Facilities (ISPC Code) under SOLAS. It has incorporated the ISM Code into the Maritime Safety Act and the ISPC Code into the Act on Security for Ocean-going Ships and Port Facilities. The two Acts apply to both domestic vessels and foreign vessels. The Maritime Safety Act requires shipping companies to undergo inspection for approval on their safe management and to acquire a document of compliance for the shipowner and safety manamgent certificate for vessels to promote maritime safety and the smooth traffic of ship by establishing a safety control system for safe navigation of ships. The Act on Security for Ocean-going Ships and Port Facilities requires the shipowner to take measures to detect security threats and take preventive measures against security incidents that affect ships and port facilities.
ii Port state control
In December 1993, South Korea signed the Memorandum of Understanding on Port State Control in Asia-Pacific Region (Tokyo MOU) and, since April 1994, it has in place port state control (PSC). South Korea incorporated PSC into various domestic laws, such as the Ship Safety Act, the Maritime Safety Act, the Marine Environment Management Act and the Act on Security for Oceangoing Vessels and Port Facilities. There are numerous reports in which various sanctions have been put in place, including ship detention and administrative fine.
iii Registration and classification
South Korea is not a contracting state of the United Nations Convention for the Conditions of the Registration of Ships, 1986. There are two types of domestic public registry that are kept for ships in South Korea: one is kept by the district courts and the other by the Minister of Oceans and Fisheries. The former, namely, the ships registry of Korean courts, is to keep the public record of the rights and interests of a civil nature to and in the ships, and the establishment, preservation, transfer, change, restriction on disposition, or extinction of the rights of the ownership, mortgage or lease may be registered. The legal effect of registration varies depending on the matter being registered.
To increase international competitiveness of the shipping industry, South Korea has enacted the International Ship Registration Act, providing a secondary system for ship registration. A ship registered under the Act is referred to as an 'international ship,' and an international ship is permitted to have crew members of foreign nationality for posts other than master and chief engineer, and has such privileges as tax exemptions.
In South Korea, there is a class society called the Korean Register of Shipping (KR). In principle, KR can be held liable for damages arising from fault under the contract between itself and the shipowner, as well as damages in tort sought by a third party without a contractual relationship, when it is found that there was fault or negligence on the part of KR.
iv Environmental regulation
There are several domestic laws that regulate the environment aspect of a ship's operation. The purpose of the Marine Environment Management Act is to define the obligations of the people and the responsibilities of the government for the preservation and management of the marine environment and prescribe basic matters for the preservation of the marine environment. The marine environment stated in the Marine Environment Management Act includes both sea and air. Basically, this Act based on the 'polluter pays principle' stipulates that any person whose act or business activity results in the deterioration of the marine environment or in marine pollution is liable to restore the deteriorating or polluted marine environment and to bear the expenses incurred for the rectification of the damage caused.
The International Maritime Organization (IMO) regulation to limit the sulphur content of the ship's fuel to up to 0.5 per cent has been in effect in South Korea since 2020. To comply with the regulation, Korean ships are using fuel with lower sulphur content or are installing sulphur scrubbing systems. In addition, the Korean government is also regulating Busan and four other ports to limit the sulphur content of the fuel to 0.1 per cent, the breach of which may be subject to criminal punishment. Beginning in 2022, the regulation will also apply to ships that pass by the five areas.
Pursuant to the International Private Act, the liability resulting from collision of ships at an open port or on a river or territorial waters is governed by the laws of the place of the collision, and that resulting from collision of ships on the high seas is governed by the laws of the ship's flag, if each ship has the same flag or if different, by the law of the flag of the ship that caused the damage.
When a collision occurs in South Korea, the Maritime Safety Tribunal (MST) investigator interviews the duty officer and any other crew member or party involved in the collision. The MST is a quasi-judicial administrative tribunal that investigates accidents that have happened at an open port, a river or ocean and, at the end of investigation, it issues a decision containing its conclusion on the cause of the accident and administrative sanctions against involved parties, if appropriate. The MST investigation is independent and separate from the coastguard's investigation.
The MST proceedings are not to adjudicate a civil dispute between private parties. Therefore, other than the blame ratio between navigation officers involved in a collision at sea, the MST does not apportion the liability or specify blame ratio in relation to civil liability between the owners. Nevertheless, in practice, because the MST determines the cause of accident and the faults of involved vessels or entities, and the apportionment of civil liability between the concerned parties may be deduced, the MST decision becomes an important piece of evidence in the event that a civil lawsuit is instituted between involved parties. In practice, Korean courts are reluctant to take a different view from the final conclusion reached in the MST proceedings because, in general, the MST is regarded as the most impartial expert on maritime cases.
vi Salvage & wrecks
Although South Korea did not ratify the 1989 Salvage Convention, the Korean Commercial Code incorporated into it a majority of the 1989 Salvage Convention and, in doing so, special compensation rules on environmental protection works were added and the Commercial Code is to be applied to salvage contracts.
If a ship sinks, the Korean government has to order the owner of the wreck to lift and remove the wreck and prevent pollution due to fuel spillage. If the owner does not comply with the order, it will be subject to a criminal penalty.
If the cost of removing the wreck is astronomical, the reasonableness of the wreck removal order comes into question. In this regard, the Supreme Court of Korea has held that the 'amount of damage' due to the need to remove the wreck has not yet been crystallised. This decision was made in a case where removal of a wreck (a ship that was carrying asphalt that sunk at a depth of 90 metres) was technically very difficult, the cost of removing the wreck was so huge as to make the removal virtually prohibitive, and the need to enforce the administrative order was questionable as the wreck had been left in deep waters for a long period of time. In a lower court case, the court invalidated the wreck removal order issued by the government authority, holding that enforcing the wreck removal order was considered virtually unfeasible from a common sense view of the fact:
- the tremendous cost of removing the wreck did not justify the need to undertake the unrealistic task of removing the wreck (a general cargo ship that sunk at a depth of 120 metres);
- it was not possible to find salvors with a lifting capacity of over 150,000 tonnes;
- dismantling the wreck in pieces might cause additional serious harm to environment; and
- the wreck did not pose pollution risk since the remaining fuel had been already removed.
vii Passengers' rights
South Korea is not a member state to the 1974 Athens Convention. Unless agreed or prescribed otherwise, compensation for damages arising from an accident involving the carriage of a passenger by sea is governed by the relevant provisions in the Commercial Code. These provisions have been borrowed from the 1976 LLMC and part of the Protocol of 1996 to amend the same. Under the Commercial Code, a claim for the loss that has resulted from death of, or bodily injury to, a passenger is limited to 46,666 special drawing rights (SDRs) per passenger.
viii Seafarers' rights
South Korea has adopted the 2006 Maritime Labour Convention. Furthermore, it has the Seafarers Act to maintain order on a ship, ensure and improve the basic welfare of seafarers, and promote the improvement of their life by prescribing matters concerning duties, service, standard of labour conditions, employment security, welfare, education and training of seafarers.
Pursuant to the Korean Private International Law Act, unpaid wages of seafarers constitute maritime liens if the unpaid wages are recognised as such under the law of the ship's flag, including the flag of convenience. Accordingly, seafarers with claims for unpaid wages can apply for auction sale of the ship based on maritime liens in a Korean court and recover them from the sale proceeds.
South Korea ratified the United Nations Framework Convention on Climate Change in 1993 and the Kyoto Protocol in 2002. This year, the Korean government announced a target to reduce the emission of greenhouse gases from 727.6 million tonnes in 2018 to 436.6 million tonnes by 2030. To reach that high goal, renewable energy and environmentally friendly policies are being implemented. The environmental policies will pose new challenges to the trading and shipping industries of South Korea.