In Japan, there is no explicit law or regulation authorising third-party funding and no judicial precedent addressing whether and/or to what extent third-party funding would be permissible.

In practice, third-party funding is generally considered acceptable, as no explicit law, regulation, or judicial decision prohibits it. Although it is not yet prevalent in Japan, in recent years, some emerging enterprises have commenced offering third-party funding in Japan. There have also been reported instances of Japanese companies utilising third-party funding.

The common law doctrines of maintenance and champerty do not exist under Japanese law.

There are no binding rules or regulations that specifically address or intend to regulate third-party funding in Japan. Nevertheless, as discussed below, certain provisions of Japanese law may be relevant to the topic of third-party funding. While a typical third-party funding arrangement – where a funder provides financial resources to a litigant to cover legal costs in exchange for a contingent fee – would be unlikely deemed a violation of these provisions, these provisions may impose restrictions or requirements on certain types of funding arrangements or activities. Moreover, it should be noted that no court decisions or official interpretations clarify how these provisions would apply to third-party funding in Japan. Therefore, the scope of these provisions in relation to third-party funding remains unclear and subject to further developments in Japan.

Article 72 of the Attorneys Act

Article 72 of the Attorneys Act provides:

“No person other than an attorney or legal professional corporation may provide an expert opinion, represent a client, arbitrate a case, settle a case, or otherwise handle legal services regarding a litigation case, non-contentious case, case in which an appeal is filed against an administrative authority, including a request for an administrative review, request for re-investigation, or request for re-examination, or other general legal cases, or engage in mediation services involving the abovementioned actions, for the purpose of receiving compensation as their business; provided, however, this does not apply to a case otherwise provided in this Act or other laws.”

Based on the language of Article 72, a third-party funder is prohibited from, among other things, providing legal services, providing an expert opinion and engaging in mediation services to earn compensation. A violation of Article 72 may be subject to criminal sanctions. Below are several key points at which a funder’s conduct could potentially raise concerns under Article 72.

Providing legal services

A third-party funding arrangement itself is unlikely to constitute providing “legal services” for the purpose of Article 72. However, if a funder proactively controls the case – for example, by appointing or discharging attorneys, directing legal strategy, or determining or advising whether and how to settle – it cannot be ruled out that such involvement could be construed as providing “legal services” under Article 72.

Providing expert opinions

Before entering into a funding agreement with a funded party, a third-party funder typically conducts due diligence or assessments of the case. If such due diligence or assessments are conducted solely for its own interest, they would be unlikely to violate Article 72. However, if the funder shares its assessment with the funded party, there is a risk that, depending on the specific circumstances, such conduct could be regarded as providing an “expert opinion” under Article 72.

Engaging in mediation services

If a third-party funder acts as an intermediary to facilitate the engagement of legal counsel – such as by helping establish the relationship between a lawyer and a funded party for legal advice or representation – there is a possibility that the funder’s actions could be interpreted as a “mediation service” under Article 72. If the funder’s conduct is deemed to violate this provision, there is also a chance that the attorney involved may be found in breach of Article 27 of the Attorneys Act and Article 11 of the Basic Rules on the Duties of Practicing Attorneys (referred to as the “Attorneys Basic Rules”).

Compensation

Article 72 only prohibits services rendered for compensation. However, even if individual services are provided without direct compensation, they may still fall within the prohibition if they constitute part of a series of services performed with the intent to receive compensation from the funding arrangement.

While third-party funding arrangements do not necessarily violate Article 72, attorneys utilising third-party funding should remain aware of potential issues — particularly where a funder’s role may extend beyond mere financial support and into areas that could be construed as providing legal services, expert opinions, or mediation — to avoid any suggestion of unauthorised legal practice.

Article 73 of the Attorneys Act and Article 10 of the Trust Act

Article 73 of the Attorneys Act provides:

“As their business, no person may exercise rights that another person has assigned to them through a lawsuit, conciliation, settlement, or any other means.”

A similar restriction is found in Article 10 of the Trust Act, which states:

“Trusts may not be created for the main purpose of having another person conduct litigation.”

These provisions specifically prohibit any person from taking over the rights of another person and/or being entrusted with such rights and enforcing those rights through court proceedings or any other dispute resolution mechanism. These provisions are not expressly intended to regulate third-party funding but rather to prevent non-lawyers from circumventing Article 72 of the Attorneys Act above by utilising the assignment of rights or trusts.

A typical third-party funding arrangement would not involve assigning rights or creating a trust by the litigant to the funder. Therefore, such arrangements would generally not trigger issues under Article 73 of the Attorneys Act or Article 10 of the Trust Act. However, if a funding arrangement does involve the assignment of claims or the creation of trusts – such as where the funder takes over the litigant’s right to pursue or settle the claim or acquires the litigant’s claim for enforcement purposes after a judgment or arbitration award is rendered – there is a possibility that the arrangement could be viewed as violating these provisions.

Criminal sanctions could be imposed if a violation of Article 73 of the Attorneys Act is established. In order to mitigate such risks, funders should avoid funding arrangements involving the assignment of claims or the creation of trusts, ensuring that the litigant retains ownership of the disputed rights throughout the proceedings. 

The Basic Rules on the Duties of Practicing Attorneys

The Attorneys Basic Rules, established by the Japan Federation of Bar Associations (JFBA), are ethical rules governing attorneys registered in Japan. While the purpose of these rules is to regulate the conduct of attorneys, certain provisions may be relevant to third-party funding. For instance, the Attorneys Basic Rules prohibit attorneys from remunerating a third party, including a third-party funder, for client referrals or referring a client to a third party, including a third-party funder, in exchange for compensation.

The Attorneys Basic Rules do not apply to third-party funders who are neither attorneys nor legal professional corporations. However, third-party funders must be cognizant of the Attorneys Basic Rules, as attorneys must refuse any arrangement that contravenes these Rules. A breach of the Attorneys Basic Rules by an attorney could result in disciplinary measures, including potential revocation of their bar admission.

At present, there are no non-legal frameworks (including guidelines) that third parties providing funding are commonly adhering to in Japan.

No additional regulations apply when a typical third-party funding arrangement (ie, an arrangement where a third-party funder provides financial resources to a litigant to cover its legal costs in exchange for a contingent fee) is provided to a specific type of counterparty, such as consumers in Japan.

There are no specific provisions that are commonly included in third-party funding agreements in other jurisdictions, which would be highly likely to be modified or declared unlawful or unenforceable by a court or tribunal in Japan.

However, as mentioned in 1.2 Rules and Regulations on Litigation Funding, a funding arrangement that grants a third-party funder the authority to direct litigation strategy, issue instructions to the litigant or its attorney, or exercise decision-making power or veto rights over settlement may, depending on its extent and nature, be deemed a violation of Article 72 of the Attorneys Act.

Even if a third-party funding arrangement contravenes the Attorney Act or the Trust Act, as discussed in 1.2 Rules and Regulations on Litigation Funding, the funding agreement is not necessarily rendered invalid. However, if the funding agreement terms are found to be excessively unfair, unreasonable, or contrary to public policy, the agreement may be rendered invalid or unenforceable under Article 90 of the Civil Code.

In Japan, there is no specific requirement to disclose funding (either automatically or upon application by an opponent).

Under Article 220 of the Code of Civil Procedure (the “CCP”), a party in civil litigation may file a motion for a document production order, compelling the funded party, the funder, or any other document holder to submit the funding agreement. The court has the authority to grant such an order if the motion satisfies the requirements set forth in the CCP. However, it is generally unlikely that the court would order the disclosure of the funding agreement, as such an agreement is unlikely to be considered necessary evidence for resolving the issue in dispute.

Litigation

There is no specific rule or precedent that addresses the liability of a third-party funder for adverse costs in Japan.

However, Japanese courts do not generally have the power to order a third party to pay the successful party’s legal fees. Consequently, a court cannot directly compel a third-party funder to bear adverse costs.

Additionally, Japanese courts do not generally require the unsuccessful party to cover the successful party’s legal fees, except in cases where such fees are awarded as part of the damages in tort claims. Even in these instances, the recoverable amount is typically far lower than the actual legal fees incurred, up to approximately 10% of the total damages awarded in most cases. As a result, the successful party is usually unable to fully recover its attorney costs from the opposing party.

While there may be some indirect avenues for the successful party to seek recovery of its legal costs from a third-party funder, these are highly constrained. For example, a separate tort claim might be pursued against the funder for maliciously instigating or supporting a frivolous or vexatious litigation, such as a SLAPP lawsuit. However, such claims would face significant practical and legal obstacles, and their success would depend heavily on each case’s specific facts and circumstances.

Arbitration

Under the Arbitration Act or the Commercial Arbitration Rules (2021) of the Japan Commercial Arbitration Association (the “JCAA Rules”), a tribunal does not have the authority to directly order a third party to bear any costs.

However, the arbitration tribunal may compel the losing party to bear the adverse costs. In such cases, depending on the applicable funding agreement, the funder who financed the losing party might have to pay the adverse costs to the losing party.

The extent to which the tribunal may order the unsuccessful party to bear the arbitration fees and/or adverse costs depends on the parties’ agreement and applicable arbitration rules. For instance, if the parties choose to adopt the JCAA Rules, the tribunal has the discretion to decide how the arbitration costs, including reasonable attorney fees and other adverse expenses, will be allocated. This decision is based on various factors, such as the arbitration’s outcome, the parties’ conduct during the proceedings, and any other pertinent circumstances.

Litigation

The court may order a plaintiff, but not a third-party funder, to provide security for costs under certain statutory circumstances. For example, under Article 75(1) of the CCP, at the defendant’s motion, the court shall issue an order against the plaintiff to provide security for court costs if the plaintiff is not domiciled in Japan or does not have a place of business or business office in Japan.

Arbitration

A party may apply for interim measures to safeguard rights or evidence during the arbitration proceedings. If the tribunal grants such interim measures, it may, at its discretion, require the requesting party to furnish security. However, a tribunal will not have the authority to directly order a third party to provide security.

As a general rule, Japanese courts recognise and enforce foreign arbitration awards. Nevertheless, if the arbitration award is challenged in the supervisory court of the seat of arbitration, the Japanese enforcing court may suspend the proceedings for recognition and enforcement. In such instances, the Japanese court may, at its discretion, require the party requesting the suspension of the proceedings to provide security.

After-the-event (ATE) insurance (or a similar product) is not widely utilised or accessible in Japan to mitigate the risk of adverse costs.

As explained in 2.1 Adverse Costs, generally, the losing party is not required to bear the adverse costs in litigation in Japan. Therefore, it is minimally necessary in Japan to employ ATE insurance to cover such costs.

Additionally, the Insurance Act does not recognise ATE insurance as a valid form of insurance under Japanese law. Article 2(1) of the Insurance Act defines “insurance policy” as “a contract, whether it is referred to as an insurance contract, mutual aid contract, or by any other name, under which one of the parties promises to provide property [...] on the condition of the occurrence of a certain event, and the other party promises to pay insurance premiums [...] according to the likelihood of such event occurring.” It is considered that ATE insurance does not fall within this definition, as the insured event (ie, the adverse outcome of the litigation) has already occurred or is highly likely to occur at the time of entering into the contract.

However, before-the-event (BTE) insurance policies are prevalent in Japan. These policies are either stand-alone or added to other insurance as an optional extra.

Traditionally, in accordance with the pre-amendment Attorneys Act, the JFBA and each local bar association established the standards for attorney fees. These standards provided limited fee structures for attorney fees for litigation, namely:

• the combination of the up-front fee and partial contingent fee; and
• hourly billing.

However, effective in 2004, the Attorneys Act was amended, and the JFBA and local bar associations abolished the standards.

Today, attorneys in Japan can utilise various fee structures, including hourly billing, partial or full deferment of fees with success fees, partial or pure contingent fee structures, fixed fees, or other “no win, no fee” structures. There are no specific restrictions or requirements applicable to those alternative fee structures, except that the fees must be “appropriate and reasonable under the circumstances such as the economic interest involved, the difficulty of the matter, and the time and labour required” and that attorneys must follow certain processes (eg, to establish and maintain their fee standard, and to prepare a written contract that includes the applicable fee arrangement upon their retention).

In Japan, the allocation of fees between lawyers and third-party funders (assuming they are not attorneys or legal professional corporations) is subject to specific restrictions under the Japanese legal framework. Under Article 12 of the Attorneys Basic Rules, attorneys are generally prohibited from apportioning their legal fees with non-attorneys or entities that are not legal professional corporations, including third-party funders. Article 12 explicitly states: “Attorneys shall not distribute fees related to their duties with persons or entities that are not attorneys or legal professional corporations,” although there are some exceptions to this prohibition.

The prohibition specifically applies to the sharing of “fees related to the [lawyers’] duties.” Therefore, it is permissible for third-party funders to receive compensation from their clients as part of their investment as long as this compensation is unrelated to the attorneys’ responsibilities. To avoid any issues regarding the sharing of “fees related to the [lawyers’] duties,” it is recommended that attorneys do not enter into funding agreements with third-party funders. Instead, they should receive their fees directly from the client, ensuring that third-party funders are not involved in the payment process.

Non-lawyers are prohibited from holding equity in law firms.

Article 30-4(1) of the Attorneys Act stipulates that “[a] member of a legal professional corporation must be an attorney.” An exception exists for registered foreign lawyers; although they cannot be members of a legal professional corporation, they are permitted to be members of registered foreign lawyer corporations or Japanese attorney/registered foreign lawyer joint corporations under the Act on the Handling of Legal Services by Foreign Lawyers. Nevertheless, a non-lawyer, such as a third-party funder, is not allowed to hold equity in a legal professional corporation, registered foreign lawyer corporations, or Japanese attorney/registered foreign lawyer joint corporations.

Similarly, non-lawyers cannot own equity in unincorporated law firms. As stated in 1.2 Rules and Regulations on Litigation Funding, under Article 72 of the Attorneys Act, non-lawyers may not engage in legal services to earn compensation. Additionally, a non-lawyer cannot use indication or description of “attorney”, “law office”, or “law firm” under Article 74(1) of the Attorneys Act. Moreover, under Article 27 of the Attorneys Act, attorneys must not permit or allow a non-lawyer who violates these rules in the Attorneys Act to utilise their name.

In Japan, attorneys’ fees payable by clients to lawyers are subject to a 10% Consumption Tax (including the Local Consumption Tax) unless the legal services are provided to an overseas person or entity. If the client is a taxable person for Consumption Tax purposes, the tax may be reclaimed as an input tax. However, to do so, the client must receive a qualified invoice from the attorney, who must be registered as a qualified invoice issuer.

In Japan, third-party funding is not yet widespread; there is no explicit law, regulation, judicial precedent, or official statement from the tax authority regarding the imposition of withholding tax on returns paid under a third-party funding agreement. Nonetheless, depending on the arrangement – for example, when an overseas third-party funder provides a loan to a Japanese litigant – the payment from the Japanese litigant to the overseas third-party funder may be subject to withholding tax.