A Serious Threat to the Japan-Korea Relationship

On October 30, 2018, the Supreme Court of the Republic of Korea confirmed a prior decision in a World War II forced labor court case against Japanese company Nippon Steel and Sumitomo Metal Corp. This decision could catastrophically damage the relationship between Japan and the Republic of Korea, two close allies of the United States.

Japan occupied Korea from 1910 to 1945. Throughout the colonial period, Japanese companies employed Korean workers. These workers were promised pay at a scheduled rate. However, some of these wages were not paid, particularly after Japan’s government ordered the companies to turn over the pay into a central fund.

Japan unconditionally surrendered to the Allied Powers in 1945. Japan was then itself occupied by the United States. That occupation ended with the San Francisco Peace Treaty of 1951. Since then, Japan has maintained an alliance with the United States. However, Japan and Korea did not immediately normalize diplomatic relations, in part because of issues remaining from Japan’s occupation, and in part because of the Korean War, which eventually led to a split between South and North Korea.

The 1965 Settlement

The diplomatic agreement that normalized relations between Tokyo and Seoul was the 1965 Treaty on Basic Relations Between Japan and the Republic of Korea. Like most complex diplomatic agreements, the treaty covered a range of issues. One issue discussed at length was unpaid wages for conscripted Korean workers.

Because of the importance of reaching a resolution to labor-related issues, the countries agreed to a separate protocol, the Agreement on the Settlement of Problems Concerning Property and Claims on the Economic Cooperation Between Japan and the Republic of Korea.

Under the terms of the 1965 agreement, Japan agreed to pay $300 million to the ROK, along with $200 million in preferential loans. The money had various purposes, one of which was to “settle completely and finally” (Article II, section 1) outstanding claims for unpaid labor by Korean workers against Japanese corporations. Both sides agreed that “no contention shall be made” regarding further claims (Article II, section 3).

Japanese diplomats initially offered to compensate workers directly, but ROK negotiators asked instead for payment to the Korean government, for use on public works and other projects. Japan made that payment, on time and in full.

The ROK government initially did not to disperse any funds to workers. However, in 1971 and 1974, Seoul established funds to reimburse workers. Nevertheless, many laborers still have not received full payment.

Chased Through the Courts

The Nippon Steel case began in 2001, when four Korean former workers sued the Nippon Steel and Sumitomo Metal Corp. in California for unpaid wages. The California court dismissed the case, holding that the 1965 agreement clearly precluded any further lawsuits on behalf of these plaintiffs, since it finally resolved any outstanding labor claims in the September 2001 legal case In Re: World War II Era Japanese Forced Labor Litigation.

Unsatisfied with the California ruling, related plaintiffs filed a separate suit in Tokyo. A Tokyo court ruled against the plaintiffs in 2003, also finding that the 1965 agreement precluded recovery. Still not satisfied, the plaintiffs tried again in Seoul Trial Court. That court also ruled against the plaintiffs in 2005. Plaintiffs appealed to the Seoul High Court, which affirmed. Because the SHC based its opinion squarely on the 1965 agreement, plaintiffs appealed the case to the Korean Supreme Court, asking it to rule on the constitutionality of the agreement.

In a surprising opinion, the Supreme Court held in 2012 that the 1965 agreement did not preclude individual recovery for lost wages. The court found that Japan could not have meant to provide remedy for these workers, because Japan does not accept that the occupation of Korea was illegal. Therefore, Japan could not have intended to pay damages resulting from the occupation.

The Supreme Court remanded the case to the SHC, which now ruled for the plaintiffs. Defendants appealed to the Supreme Court, which affirmed on October 30. In this latest verdict, the highest court further argued that even if the 1965 treaty precluded further claims for back wages, plaintiffs could still sue for damages due to removal to Japan.

Potential Confiscation

From a legal perspective, the argument put forward by the Korean Supreme Court seems clearly false. It is actually quite common for a defendant to settle a lawsuit without admitting any fault. In fact, in 1997, Nippon Steel itself agreed to pay $163,000 to 11 families in a private settlement without fault. That settlement is binding.

The 1965 treaty represents a contract between Japan and the ROK. If individuals feel that Korea later failed to properly compensate them, their recourse is to sue the Korean government, not Nippon Steel. Separately, if individuals feel that they are owed separate remedy for removal, their recourse is to sue the government of Japan, not individual companies.

The decision in Nippon Steel will damage other nations’ confidence in Korea’s ability to negotiate international agreements. If the Koreans break binding contracts with other countries when it is to their advantage, there is no point for other nations to make compromises and politically difficult choices. Further, because of the precedent established by Nippon Steel, thousands of claims could be brought against hundreds of Japanese and American companies. Plaintiffs can sue corporations and win under the precedent set by Nippon Steel.

After winning a judgment, these plaintiffs can demand payment. If there is none, the plaintiffs can ask the court to enforce their holding. The court can then seize assets held in South Korea to satisfy judgment. Because of the legal risk caused by Nippon Steel, Japanese and American corporations doing business in Korea may be forced to relocate assets that would be vulnerable to seizure. This would crucially impair a fundamental link between Japanese and Korean civil society.

The economic and cultural relationship between individual citizens and governments ultimately shapes the future of bilateral relations. By jeopardizing so much of the mutually beneficial economic partnership between Japan and Korea, Nippon Steel could catastrophically disrupt the American alliance system in East Asia.