Legal finance in Korea: Lawyers weigh in (Part I)

Given growing interest in legal finance in South Korea, Quentin Pak asked a group of international arbitration lawyers from leading law firms to address questions relating to the legal framework regulating funding, common misconceptions, as well as predictions for the future of legal finance in the region.

There is currently no legal framework in South Korea regulating the funding of litigation or arbitration by a third party. Do you foresee the formalization of guidelines for legal finance similar to recent arbitration funding frameworks in Singapore and Hong Kong? What would the likely impact be?

Eun Young Park: The maintenance and champerty principle does not exist in Korea. Instead, Article 6 of the Trust Act provides “any trust, the main purpose of which is to have the trustee to proceed with litigation, shall be null and void.” This prohibition of trusts aimed at lawsuits differs from the maintenance and champerty principle in that it applies only to the acts of trust where the party delegates his rights in litigation to the trustee. Maintenance and champerty, on the other hand, apply to a broader range of interference by a third party in litigation, including funding or material assistance. Thus, Article 6 of the Trust Act would not be applicable to third-party funding as long as the third party would not be exercising rights of the litigant. As such, to the extent that the terms of third-party funding do not constitute a trust aimed at a lawsuit, there is currently no law or regulation prohibiting third-party funding in lawsuits or arbitration similar to the maintenance and champerty principle in common law.

However, to the extent that a monetary judgment or award granted to the plaintiff in a litigation or arbitration is shared with a third-party funder, such funding can be subject to restrictions set forth in the Attorney-at-Law Act. Article 34(5) of Attorney-at-Law Act stipulates that “no fees and other profits earned through services that may be provided only by attorneys-at-law shall be shared with any person who is not an attorney-at-law”. The main legislative purpose of this provision is to restrict non-Korean lawyers from practicing law in Korea, rather than aiming to restrict third-party funding. Despite the lack of any precedents, however, we cannot rule out the possibility of applying the Attorney-at-Law Act to a third-party funding case, depending on the structure of the funding.

We believe that when it comes to the actual implementation of third-party funding, issues such as conflict of interest, ensuring fairness of the process and conflict with domestic law such as Article 34(5) of the Attorney-at-Law Act will need to be addressed. Furthermore, methods of regulating third-party funding such as 1) Restriction of interference by the third party on the case, 2) Mandatory disclosure of information on third-party funding, 3) Qualification requirements and a registration system for the third party, and 4) An obligation of the third party to provide security, are expected to be discussed further.

In this regard, many Korean companies are becoming more interested in the availability of third-party funding, particularly for cross-border disputes. We think that there is a momentum to formalize and implement third-party funding guidelines in the near future, including a potential amendment to the Arbitration Industry Promotion Act and/or adding an exemption clause to Art. 34(5) of the Attorney-at-Law Act. This amendment would certainly clarify potential issues of regulation on the third-party funding by the Attorney-at-Law Act. We would expect that such formalization of the third-party funding framework is likely to result in a substantial ripple effect and create a stable legal finance market in Korea.

Jae Min Jeon, SeungMin Lee and Arie Eernisse: In line with the recent growth of Korea as one of the hubs of international arbitration in East Asia, there is also growing interest in the field of legal finance among Korea-based arbitration practitioners. However, there is currently no legal jurisprudence directly addressing legal finance issues and no legal framework clearly setting out what is permitted and what is not in relation to third-party funding. Also, at present, there are no third-party funders or funds in Korea that openly provide services in relation to Korean domestic litigation or arbitration matters seated in Korea.

Since at least 2010, arbitration practitioners in Korea have been actively discussing the necessity of adopting a legal framework for third-party funding, but there have not been any noteworthy developments. Notably, the Ministry of Justice recently released its blueprint to promote the arbitration industry for the coming years from 2019 to 2023, but it did not include any discussion of adopting a legal framework for third-party funding.

Nevertheless, arbitration practitioners in Korea are very open to the concept of third-party funding. Many Korean conglomerates are already receiving support from third-party funders in matters involving litigation in the US or UK.

Given this situation, it is difficult at this point to say whether or not Korea will enact formalized guidelines for the use of legal finance that are similar to the arbitration funding framework recently introduced in Singapore and Hong Kong. Arguably, it is only a matter of time before such a legal framework is established to regulate the funding of Korea-related litigation or arbitration by a third party. However, it remains to be seen how attorneys, parties and other stakeholders will be regulated once a framework is in place.

Kyongwha Chung: Korea’s fast-evolving arbitration landscape has proactively kept pace with the latest global thinking on various arbitration-related issues. In 2017, the National Assembly passed the Arbitration Industry Promotion Act, recognizing that arbitration was an “industry” in its own right, and accordingly putting in place a basic legislative framework for the long-term growth of this industry. Improving the legal framework for arbitration is a critical part of this strategy, and we expect legal finance to part of the agenda.

There is considerable uncertainty in the Korean arbitration community regarding the use of legal finance. “Third-party funding” as conventionally understood in international practice is an unfamiliar concept in Korea. While there are no explicit prohibitions under Korean law analogous to common law doctrines of champerty and maintenance, there is also no established legal framework for third party funding, no specific legislation or court judgments in this area and no known instances of its use in litigations or arbitrations based in Korea. Formalizing the use of legal finance will go a long way.

Burford’s latest research shows that lawyers are under pressure to remain competitive and provide clients innovative financing solutions. What do you perceive to be the main business challenges faced by lawyers in South Korea?

Eun Young Park: In Korea, lawyers generally do not offer innovative financing solutions to clients and do not yet see that as a part of lawyer’s job. However, there are cases, particularly in large international arbitrations, where the party ultimately decides not to pursue the arbitration due to costs, despite having a legitimate claim. Therefore, if a law firm can propose innovative financial solutions together with its legal proposal, it would gain a significant competitive advantage in the Korean market. However, the clients will expect the lawyers to bear the burden of financing in such circumstances.

Jae Min Jeon, SeungMin Lee and Arie Eernisse: Korea used to be a jurisdiction in which the government strictly limited the number of qualified lawyers. The number of new lawyers admitted each year was limited to 1,000. Because of this, even until recently, there were only approximately 20,000 qualified lawyers in the market, which meant that, on average, there was only one Korean lawyer for every 2,500 Korean people. However, this strict control of the number of lawyers generated market distortions and did not provide society with adequate means of accessing legal services.

In 2007, Korea established a graduate law school system similar to that of the US, and the number of new lawyers admitted each year has now risen to 1,700 lawyers. The increase in the number of lawyers changed the market dynamics drastically, adding competitiveness and many other challenges to the market. One of the noteworthy trends is a decrease in legal costs, especially for disputes. There are many young lawyers in the market who are willing to represent clients for a nominal amount but tied to a handsome success fee. This trend shows that lawyers are willing to be creative—and, to a certain extent, that they must be creative—in structuring their fee arrangements in the reformed legal market.

Faced with a public that is trying to reduce legal fees and with courts that have taken a stricter stance on types of fee arrangements and amounts of fees, lawyers in the Korean market are more likely to think outside the box and creatively structure their legal fees, while taking into consideration any accompanying risks and limitations. As such, third-party funding is definitely one of the options that practitioners will consider seriously in the coming years.

However, as mentioned above, the main business challenge for lawyers in Korea when it comes to third-party funding is that there is currently no legal framework regulating it. Therefore, there is uncertainty and ambiguity with respect to legal finance governed by Korean law. Although there are no explicit restrictions on legal finance under the current legal system, it is still unclear whether Korean courts can be expected to uphold a third-party funding agreement in the absence of express legislative or regulatory approval. Thus, it is imperative for lawyers in Korea and their clients to determine how the existing laws and regulations would apply to third-party funding and how to avoid any potential pitfalls. 

Read more of "Legal finance in Korea: Lawyers weigh in": 

Part I • Part II

To read the article in full, download the Autumn 2019 Burford Quarterly.