In November 2022, Quentin Pak directed questions concerning arbitration trends in Korea to a group of respected experts in the space.
What are the recent trends in arbitration involving Korean parties, particularly post-Covid?
Kevin Kim: Virtual hearings remain a fairly popular and recent feature of arbitration, despite the lifting of most travel restrictions. I believe that virtual hearings are here to stay to a certain extent, for instance in the case of procedural hearings or smaller cases. This is due to the fact that virtual hearings involve fewer costs, which fits the financial demands of many Korean clients.
With respect to trends regarding the types of disputes in a post-Covid world, we have recently seen a rise in cases grounded in frustration and force majeure clauses and disputes in relation to private equity in Korea and the wider APAC region.
Sae Youn Kim: Disputes involving Korean parties are steadily increasing due to their active participation in the global market. We have also seen an increase in disputes involving Korean parties in industries where more disputes are arising post-Covid, including in the energy, supply chain and biotechnology industries. That said, due to the difficult global market situation caused by Covid-19 and other events thereafter, as well as the uncertainty of global economic conditions going forward, Korean parties have become more reluctant to start a formal adjudication that would run for a long time. Korean parties are increasingly interested in early dispute settlement, and we see interest growing in international mediation. On the other hand, where arbitration is inevitable, Korean parties now understand that they will need to spend a lot of money in order to properly fight in the process.
Robert Wachter: Case numbers are down compared to pre-pandemic levels. During the pandemic there was a steady influx of new disputes, but these disputes tended to be of lower value. As a general rule, there was a pause in the commencement of new high-value cases during 2020 and 2021. That started to change in 2022, but it is difficult to extrapolate how fast the market will recover to pre-pandemic levels.
In many jurisdictions, the growth of the arbitration market has acted as a tailwind for the development of the legal finance industry. With the increasing importance of South Korea as an arbitration center, do you expect the growth of the legal finance market there to pick up pace in the coming years?
Kevin Kim: As a starting point, there are no laws explicitly prohibiting or allowing third-party funding for arbitration in Korea. Therefore, the extent to which third-party funding is permitted is unclear. There are also no third-party funders based in Korea. As such, third-party funding in Korea is almost non-existent.
However, interest in third-party funding by Korean companies, especially for complex cases seated outside of Korea, is increasing and some conglomerates are receiving third-party funding for overseas disputes. Likewise, we have seen third-party funding gaining momentum in Singapore and Hong Kong as their popularity as arbitral seats has reached new heights. This may influence Korea to follow in these footsteps because third-party funding may serve a wide range of Korean companies by managing their financial risks.
It is unclear at this point whether or when Korea will enact a legal framework expressly allowing the funding of arbitration by a third party in the coming years. If such framework were to be developed, third-party funding agreements would need to be carefully structured to ensure compliance with Korean laws.
Sae Youn Kim: Korean parties understand that international arbitrations are more expensive than other litigations they have in Korea, and as the idea of disputes funding is increasingly suggested to Korean clients by counsel in various jurisdictions, Korea will likely follow the trend of other jurisdictions. Experience with funded disputes can also come from the litigations that Korean parties start with the help of funders in jurisdictions where dispute funding is commonplace. It is the general view of Korean practitioners that third-party funding for arbitration cases is not prohibited for arbitrations seated in Korea. However, it is clearly allowed for Korean parties’ arbitrations seated outside of Korea.
In fact, the Korean arbitration community has been predicting for the past few years that dispute funding will “kick off” for Korean parties as well. That has been delayed, in part, due to Covid-19 and the market downturn. We believe it will take a few successful precedents to kick start the market. We see a gap between the standards that Korean parties think they can meet, and that the funders think the parties should meet for funding to take place. Once there are more precedents, this gap will become smaller.
Robert Wachter: The disputes funding market will grow, but the reasons for that growth will be independent of the development of Korea as an arbitration center. Korea is still perceived as a seat for disputes with a Korean nexus. Most cases seated in Korea either involve a Korean party or the project is based in Korea. It will take time for Korea to mature into a seat that parties seek out as a neutral forum. This is even [true] in cases where the dispute has no nexus to Korea. This means that the growth of the disputes funding market will more closely follow the adoption rate with Korean companies. Korea is a land of trends: When a trend catches on, change happens very rapidly. I expect that to happen with the disputes funding market sooner or later.
Are there specific types of disputes that lend themselves more to third-party funding? For example, disputes in certain sectors or involving certain types of parties?
Kevin Kim: At the outset, the key recipients of third-party funding are usually claimants. Respondents may sometimes have recourse to third-party funding, but usually only if they are pursuing counterclaims. Similarly, due to their financial model, funders usually only provide funding for cases that involve damages. It used to be that only parties without the financial means to start an arbitration would use third-party funding. However, this appears to be less frequently the case as financially stable companies increasingly use third-party arbitration.
The construction and engineering sector appears to be particularly attractive for third-party funding as construction and engineering disputes are usually larger in size and involve the possibility of high returns. In addition, contractors often have multiple claims, which allows for a more cost-effective funding structure. However, Covid-19 and current rates of inflation have likely contributed to more sectors or parties having recourse to third-party funding.
Sae Youn Kim: It may be easier for large Korean companies with experience of litigation funding in litigations overseas to start using third-party funding for their international arbitration cases. Also, Korean state-owned enterprises (SOEs) that cannot spend too much legal fees may be interested in using third-party funding for cases where the award has to be enforced in less arbitration-friendly jurisdictions. Also, the funder can add its expertise regarding enforcement in such jurisdictions. Those factors will enable the legal teams in the SOEs to persuade their managements that it will be better to seek the claims with the support of funding with limited exposure on legal fees than give up the claims altogether.
Robert Wachter: I expect that Korean claimants would be more likely to consider third-party funding in cases where the damages element is open to more uncertainty, or where they expect challenges in enforcing an award in a difficult jurisdiction. Claimants sometimes abandon valid claims in light of these uncertainties. Hopefully, a more robust funding market will mean that more of these claims are pursued.
The challenging financial conditions brought to bear by Covid on many companies have led to GCs and CFOs becoming more disciplined about legal budgeting. Are you seeing similar trends among Korean companies, particularly in dispute resolution, given the tightening macro-economic conditions?
Kevin Kim: In our practice and in Korea in general, contingency fee arrangements—typically a retainer deposit plus a success fee—are most common in domestic litigation practice. Faced with economic stress and increasing pressure on cash-flow following the Covid pandemic, stricter fee arrangements and confined amounts of fees have emerged.
I believe that the financial strain brought on by Covid-19 may force corporations and law firms to think more outside the box to come up with inventive structures with respect to legal fees. As such, third-party funding may become more prevalent to address any potential financial risks engendered by arbitration.
Sae Youn Kim: While Korean companies have always been very tight with their legal budgets, the budgets have become even tighter. More and more companies want to resolve the dispute by settlement rather than full blown adjudication that ends in a judgment or award that will only come after a long and expensive fight. They will be reluctant to enter into a funding arrangement if it will be more difficult for them to settle because of the funder’s interest. On the other hand, Korean companies are used to paying a certain portion of success fees to their counsel even in cases where the parties settle in the middle of the litigation. In this regard, if an acceptable arrangement on settlement can be reached in the funding arrangement, it may be easier for the GCs and CFOs to agree to start an arbitration with the aim of eventual settlement.
Robert Wachter: There is a high correlation between macroeconomic uncertainty and what you refer to as disciplined legal budgeting. The discipline dissipates in either a boom or a bust but becomes stronger during times of stable uncertainty. We hear from some market commentators that central banks will raise rates “until something breaks”. We hear from others that inverted yield curves signal that a near term pivot is inevitable. One way or the other, this period of “wait and see” uncertainty will likely come to an end by this time next year.
About the participants
Kap-You (Kevin) Kim is a senior partner at Peter & Kim in Seoul. He was previously a senior partner at Bae, Kim & Lee LLC, where he worked for the past three decades in various roles, including as the co-founder and head of the International Arbitration Practice and the head of the Domestic and International Disputes Group.
Sae Youn Kim is a senior member of the International Arbitration & Cross-Border Litigation Practice of Kim & Chang. She practices primarily in the areas of international litigation and arbitration with an emphasis on commercial and international law. Before joining Kim & Chang, she served as a judge at various Korean district courts, and practiced as a key member in major Korean law firms. Ms. Kim also sits as an arbitrator.
Robert Wachter is co-head of the International Arbitration & Cross-Border Litigation Group at Lee & Ko. He has acted as counsel, arbitrator or arbitral secretary in more than 100 international arbitration cases brought under all of the major arbitration rules, including the ICC, KCAB, VIAC, Swiss Chambers, SIAC, LCIA, SCC, JCAA and UNCITRAL arbitration rules.
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Quentin Pak is a Director who leads Burford’s office in Singapore with responsibility for expanding Burford’s resources to support clients in Asia. Prior to joining Burford, he was the head of the Asia commodities business at Commonwealth Bank of Australia.