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

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.

What are the biggest misconceptions lawyers and their clients have about legal finance?

Eun Young Park: One of the biggest misconceptions about legal finance would be that the control over decision making will be taken away from the client/lawyer. Some even worry of losing their right/claim and the negative influence that legal financing might have on their reputation. There is also the concern regarding the risk of third-party funding as it is still not considered as “an established practice” in Korea.

Jae Min Jeon, SeungMin Lee and Arie Eernisse: The two most commonly discussed (and sometimes not fully understood) issues are (i) whether third-party funding is in violation of the Attorney-at-Law Act or (ii) the Interest Limitation Act in Korea.

First, Article 34(5) of the Attorney-at-Law Act provides that non-lawyers are prohibited from sharing in any fees or other profits earned through services that may be provided only by attorneys. Therefore, unless and until third-party funding is legalized in Korea, third-party funding agreements involving any nexus to Korea should be structured carefully to ensure that they are in compliance with the relevant Korean laws. At the same time, considering the language and the legislative history of Article 34(5), it arguably cannot be interpreted as an outright ban on funding agreements.

Second, under the Interest Limitation Act and the relevant decree, interest rates must not exceed 24 percent. Any violation of these laws may result in criminal charges. However, the Korean courts take a restrictive approach when deciding whether a contract qualifies as a money lending contract (Seoul High Court Case No. 2014Na8532, dated 14 May 2015). Therefore, if the arrangement is on a non-recourse basis, it is unlikely that a third-party funding arrangement will be viewed as money lending.

Our view is that third-party funding would not violate the relevant laws if the arrangements are made carefully. However, interested parties would of course benefit from legislative and regulatory certainty in relation to third-party funding, and it would be ideal if Korean authorities enacted relevant laws to legalize and adopt third-party funding based, for example, on the Singapore or Hong Kong model.

Apart from dealing with legal technicalities, the legal industry may also face a cultural challenge to the wide-scale acceptance of legal finance in Korean society. The prestige traditionally accorded to lawyers in Korea came with the expectation that they would also serve as defenders of public interest, meaning that there was a certain culturally imposed restriction as to how and to what extent lawyers could gain profit. Despite the recent changes in the market, the public’s expectation remains the same. For third-party funding to be institutionalized, the public needs to be persuaded that the adoption of third-party funding will provide them with an option to pursue justice even when one party does not have the means to do so, instead of letting the market be swayed by questionable lawyers and forcing people without means to sell out their entitlements to bring lawsuits.

How would the growth of the legal finance market in South Korea potentially impact the use of contingency fee arrangements? Would legal finance expand the types of matters that can be taken on risk, either by the lawyer or a legal finance provider?

Jae Min Jeon, SeungMin Lee and Arie Eernisse: Third-party funding may serve as a flexible financial and risk management tool to benefit a wide range of parties within the Korean market. Firms may utilize third-party funding to meet their regular overhead needs as well as other disbursements in exchange for a share of the contingency or future success fees. Thus, third-party funding is expected to reduce the cost barriers associated with commercial disputes and provide better access to justice. Although the Korean courts have imposed limitations on contingency fees in certain types of cases, we do not believe this will have a negative effect on the viability of legal finance, considering that contingency fee arrangements and third-party funding arrangements have different features.

Kyongwha Chung: Contingency fee arrangements—typically a retainer deposit plus a success fee—are legal and widely available in Korea, both for litigation and arbitration. We expect that the introduction of legal finance in Korea would have a positive impact on the use of contingency fee arrangements for arbitration matters.

The types of matters taken on risk would be expanded as legal finance is provided to clients in Korea. Given that Korean courts dispense civil justice quickly and cheaply, arbitration is viewed as a costly procedure in Korea especially to clients with little means to fund their case. However, legal finance, if introduced through explicit legislation, would definitely have an impact on expanding the matters that can be taken by lawyers, which otherwise were restricted due to limited funding.

Looking ahead to the next decade, what are your predictions for how legal finance will impact the business of law in South Korea?

Eun Young Park: We see a positive opportunity to develop the legal finance industry in Korea in the near future. It will be more so if certain policy decisions are made to remove regulatory risks associated with third-party funding. The interest of Korean companies in third-party funding, especially for complex international arbitration cases seated outside of Korea, is increasing and lawyers who can propose innovative financing alternatives to Korean clients would gain a competitive edge. It is possible that such momentum may also carry over to the domestic legal market and help create a platform to establish a solid framework for legal finance market within Korea.

Jae Min Jeon, SeungMin Lee and Arie Eernisse: Having the means to resolve a legal dispute is one key factor in promoting investment and business in a country. We believe that the adoption of a legal framework for the use of third-party funding and other legal finance tools will be essential in this regard. For Korea, the issue remains when and how such tools will become legally sanctioned and commonly accepted by users. Our view is that if users are provided with more flexible options, it will definitely promote business overall and have a positive impact on the business of law in Korea.

Kyongwha Chung: Arbitration in Korea, as a function of the Korean economy, most of which is outward facing and international, is brimming with potential. The growth of legal finance will give a much-needed impetus to realize this potential and will play a crucial role in the development of arbitration in Korea. Legal finance and its innovations are essential in this growth and the professionalization of this “arbitration industry”. Legal finance providers are expected to offer another source of potential instructions for law firms and constitute an additional client base.

Korea could be a promising market for funders. It is, after all, home to giant conglomerates with complex business activities worldwide giving rise to disputes. Many Korean corporates are likely to find legal finance attractive, either because they cannot fund their own claims or because they prefer to use resources for other purposes.  

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.