Blog: At a glance: regulation of litigation funding in Japan – Lexology

Regulation

Overview

Is third-party litigation funding permitted? Is it commonly used?

All references to Japanese legislation and rules in this article are translations provided by the Japanese government (at http://www.japaneselawtranslation.go.jp/law/search_nm/?re=02) or the Japan Federation of Bar Associations (at https://www.nichibenren.or.jp/library/en/about/data/basic_rules.pdf).

 

The current situation in Japan

Although contingency fees are permitted and regularly used for litigation and other types of dispute resolution in Japan, the issue of whether third-party funding is permitted under Japanese law remains uncertain. While the common law doctrines of champerty and maintenance do not exist under Japanese law, no explicit law approves or prohibits third-party funding in Japan. It is not so common to use third-party funding in Japan, but there are cases where parties of litigation or arbitration are funded. No court decision dealing with this issue has been officially reported there.

Alongside the increased attention from Japanese companies towards international arbitration in recent years, the Japanese government has provided support for developing and promoting international arbitration in its own jurisdiction. For example, in parallel with conducting a discussion on the Reforms of Arbitration Act, the government supported the establishment of the first international arbitration facilities in Japan in 2018. The government task force’s report specifically pointed out that:

 

‘[the government] should consider how to utilise and regulate third-party funding in which third parties cover the costs of arbitration proceedings as a measure for responding to the demand for supporting the cost of arbitration in the private sector’.

 

We anticipate developments in this area in the coming years. In this chapter, we will outline the set of provisions and restrictions commonly discussed regarding third-party funding under current Japanese law: the Attorneys Act, the Trust Act and the Basic Rules on the Duties of Practicing Attorneys. If some forms of third-party funding arrangements are understood as a form of loan, then financial regulations, including the Money Lending Business Act and the Interest Rate Restriction Act, may apply. In such cases, the arrangements can be subject to administrative or criminal sanction if they violate these regulations (eg, by exceeding the statutory limitation on interest rates). However, third-party funding is not likely to be considered a loan agreement, because the funded party is not required to repay the money to the funder irrespective of the outcome of litigation.

 

Article 73 of the Attorneys Act

Article 73 of the Attorneys Act provides that:

 

No person shall engage in the business of obtaining the rights of others by assignment and enforcing such rights through lawsuits, mediation, conciliation or any other method.

 

This provision specifically prohibits any person from taking over the rights of another person and enforcing those rights through court proceedings or any other dispute-resolution mechanism. However, the provision is not intended for regulating third-party funding. To avoid the possibility of violating article 73 of the Attorneys Act, third-party funders and their users should not make any arrangements that include the assignment of claims.

 

Article 72 of the Attorneys Act

Article 72 of the Attorneys Act provides that:

 

No person other than an attorney or a legal professional corporation may, for the purpose of earning compensation, engage in [legal] services such as provision of an expert opinion, representation, mediation, or settlement of [a] case for which an appeal is filed with [an] administrative authority, including a request for administrative review, objection, request for re-examination or other general legal cases, or may engage in mediation services related to these cases; provided, however, this does not apply if otherwise provided in this Act or other laws.

 

Examining the language of article 72, a third-party funder is prohibited from, among other things, engaging in legal services or mediation services (in relation to legal services) for compensation. For example, if a third-party funder gives a concrete opinion on a claim (eg, the probability of success in an arbitration case) in the funded party’s interest instead of, or in addition to, conducting due diligence in its own interest, such arrangements might constitute legal services under article 72. ‘Mediation services’ in this article refers to activities wherein a person facilitates the establishment of representation or other relevant relationship between a party of legal proceedings and a person (eg, a lawyer) who provides expert opinions, represents a party in dispute or facilitates settlement. If, therefore, a third-party funder acts as an intermediary to facilitate representation of the funded party by a lawyer, the funder may face the risk of violating article 72. Under typical third-party funding arrangements, the roles of lawyers representing the parties and those of third-party funders are clearly separated. If the service provided by a third-party funding arrangement is limited to paying the legal costs associated with legal proceedings in exchange for receiving a fee from the proceeds of the outcome of the proceedings, it is unlikely that providing the service is against article 72 of the Attorneys Act.

 

Article 10 of the Trust Act 

A similar restriction is found in the Trust Act. Article 10 states that:

 

No Trust is allowed to be created for the primary purpose of having another person conduct any procedural act.

 

In a case where a claim is transferred to a third-party funder, the transfer of the claim may arguably constitute a trust in which the primary purpose is to have the third-party funder conduct legal proceedings, and therefore such arrangements would be restricted by this provision. However, a typical third-party funding arrangement in which the third-party funder receives a contingency fee in exchange for providing the claimant with the funds to cover legal costs does not transfer the claim from the claimant to the funder. Therefore, such arrangements would not fall within the scope of this restriction.

 

The Basic Rules on the Duties of Practicing Attorneys

The Basic Rules on the Duties of Practicing Attorneys, established by the Japan Federation of Bar Associations, is a set of ethical rules governing the Japanese legal profession. Its purpose is to regulate the conduct of attorneys, some of which may be relevant for certain forms of third-party funding. For example, article 12 prohibits those in the legal profession from dividing the fees for services with any person other than a lawyer or a legal professional corporation. In this regard, to avoid any unnecessary concern about the applicability of article 12, a third-party funder should receive its fees from the litigant, not through the legal counsel of the funded party.

As another example, the Basic Rules on the Duties of Practicing Attorneys prohibit members of the legal profession from taking cases referred from someone in a non-legal profession who illegally engages in legal services or falsely indicates that they are qualified to engage in legal services, thereby violating articles 72 to 74 of the Attorneys Act. The provision of article 11 of the Basic Rules on the Duties of Practicing Attorneys is as follows:

 

An attorney shall not accept a referral of a client from a person who violates the provisions of Articles 72 to 74 of the Attorney Act (Act No. 205 of 1949) or a person who [is reasonably] suspected [of violating] these provisions, [shall not] use [the services of] such [a] person or [shall not] allow such [a] person to use [the attorney’s] name.

 

As long as a third-party funder does not engage in activities that go against the Attorneys Act, a lawyer who receives a referral from the third-party funder is not likely to be in violation of article 11 of the Basic Rules on the Duties of Practicing Attorneys.

Restrictions on funding fees

Are there limits on the fees and interest funders can charge?

There are no specific regulations limiting the fees and interest that funders can charge. If fees and interest are found to be excessively high, the arrangements may be invalid because such arrangements are considered to be against public policy, pursuant to article 90 of the Civil Code. Article 90 of the Civil Code states:

 

A juridical act that is against public policy is void.

 

If some forms of third-party funding arrangements are understood as a form of loan, financial regulations including the Money Lending Business Act and the Interest Rate Restriction Act may apply. In such cases, the fees and interest shall not exceed the statutory limits on interest rates mandated by the Money Lending Business Act and the Interest Rate Restriction Act. For example, the maximum interest rate permitted by the Interest Rate Restriction Act is between 15 and 20 per cent per year, depending on the amount of the principal.

Specific rules for litigation funding

Are there any specific legislative or regulatory provisions applicable to third-party litigation funding?

There are no specific legislative or regulatory provisions drafted for the purpose of regulating third-party funding in Japan. If some forms of third-party funding arrangements are understood as a form of loan, financial regulations including the Money Lending Business Act and the Interest Rate Restriction Act may apply.

Legal advice

Do specific professional or ethical rules apply to lawyers advising clients in relation to third-party litigation funding?

Yes. The Attorneys Act and the Basic Rules on the Duties of Practicing Attorneys are the principal rules that govern the activities of the legal profession in Japan. If lawyers advise their clients in relation to third-party funding, they are required to comply with these rules. The relevant rules, among others, are articles 72 to 74 of the Attorneys Act and articles 11 and 12 of the Basic Rules on the Duties of Practicing Attorneys.

Regulators

Do any public bodies have any particular interest in or oversight over third-party litigation funding?

Yes. The Ministry of Justice has the power to regulate matters regarding the Attorneys Act, which is currently the most relevant legislation regarding third-party funding. It is still unclear if future legislation will categorise third-party funders as a type of financial institution. If it becomes the case, the Financial Services Agency would acquire the power to regulate third-party funders.

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