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Journal of Korean Law Volume 7 Number 1
Law Research Institute & BK 21 Law Seoul National University 00Kor Low 7-1부속_재 2008.4.25 19:20 페이지ii (주)애니프린팅 Esko-Graphics FlowDrive 4.2 -1 00Kor Low 7-1부속_재 2008.4.25 19:20 페이지iii (주)애니프린팅 Esko-Graphics FlowDrive 4.2 -1
INFORMATION ABOUT THE JOURNAL OF KOREAN LAW
The Journal of Korean Law is co-published twice annually, in June and December, by Law Research Institute and BK 21 Law of Seoul National University. Please address all correspondence to: College of Law 15-527 Seoul National University Shillim-dong San 56-1, Kwanak-ku Seoul 151-742, Korea Phone: +82-(0)2-880-6867 FAX: +82-(0)2-876-2160 E-mail: [email protected] Homepage: http://www.snujkl.org
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3. All published manuscripts become the permanent co-property of Law Research Institute and BK 21 Law of Seoul National University and may not be published elsewhere without written permission. ISSN 1598 -1681 00Kor Low 7-1부속_재_수정 2008.4.26 10:1 페이지iv (주)애니프린팅 Esko-Graphics FlowDrive 4.2 -1
ADVISORY BOARD
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EDITORIAL BOARD
Editor-in-Chief Hwa-Jin Kim Seoul National University
Editors Seung Wha Chang Stephen Choi Seoul National University New York University Tom Ginsburg Sang Gon Kim University of Illinois Lee & Ko, Korea Kenneth S. Korea Chang Hee Lee Dechert Silicon Valley Seoul National University Keun-Gwan Lee John Ohnesorge Seoul National University University of Wisconsin Ghyo Sun Park Joon Park Shin & Kim, Korea Seoul National University Adam C. Pritchard Chi Yong Rim University of Michigan Bae, Kim & Lee, Korea Hyun Woong Song Sunsuk Yang Evergreen Law Group, Korea Kyungpook National University Young-Tae Yang Horizon Law Group, Korea
Assistant Editor Junho Kim Seoul National University 00Kor Low 7-1부속_재 2008.4.25 19:20 페이지v (주)애니프린팅 Esko-Graphics FlowDrive 4.2 -1
iii Information About the Journal of Korean Law
iv Advisory Board / Editorial Board
Articles
1 Korean Legal System and the Human Rights of Persons with Mental Disorders: Current State and Challenges Kyong-Whan Ahn
25 The Future Direction of Takeover Law in Korea Stephen J. Choi
51 Why do We Pursue “Oral Proceedings” in Our Legal System? Hyun Seok Kim
81 Journal Against the Viability of Private Enforcement: Focusing on Korean Environmental Law Hong Sik Cho of Comments 109 Litigating in Korea: A General Overview of the Korean Civil Procedure Youngjoon Kwon Korean 145 The Prospect for ISP’s Liability in UGC-Related Cases in Korea Jun-Seok Park Law 2007 Beseto Conference 157 Between Dreams and the Reality: Making of the Administrative Procedure Act in China Xixin Wang
183 The Legal System of Nature Conservation in Japan: From the Viewpoint of Biodiversity Hisashi Koketsu
197 The Chinese Financial Conglomerate and Its Company Law Implications Li Guo
217 Environmental Public Interest Litigation: When will it Flourish in China? Jin Wang
229 New Regulatory Framework for Units of Non-regulated Collective Investment Schemes in Japan Hiroyuki Kansaku 00Kor Low 7-1부속_재 2008.4.25 19:20 페이지vi (주)애니프린팅 Esko-Graphics FlowDrive 4.2 -1 01Kyong-Whan Ahn다시 2008.4.25 19:21 페이지1 (주)애니프린팅 Esko-Graphics FlowDrive 4.2 -1
Korean Legal System and the Human Rights of Persons with Mental Disorders: Current State and Challenges
Kyong-Whan Ahn*
Abstract
Medical and social statistics present the alarming reality that one in four people will suffer from mental illness at some point in their lives. Yet, in most countries, mental health is one of the least cared about issues. Korea is no exception. Here people with mental disorders have been subject to prejudice, stigma, discrimination and marginalization in all aspects of their social lives. Korean legal schemes and practices reveal a grave injustice in the treatment of patients and the administration of the mental health system. Yet, to this date, the Korean legal community has not shown the slightest of interests in this matter. This paper, which is long overdue, aims at bringing this painful issue to public attention, with a plea for attentive care for this vulnerable group of people. The current status of persons with mental illnesses is analyzed critically and suggestions for improvement are made with a special emphasis on the necessity for a comprehensive national report, as undertaken in both Australia and U.S.A.
I. Introduction
According to a WHO report in 2001, mental health affects 450 million people and one in four of us will suffer from mental illness at some time in our lifetimes.1) Human rights abuses of mentally disordered people, particularly those who lack sufficient social capital to stand up for themselves against mistreatment for the reason of their illness and who are retained voluntarily or involuntarily in
* Chairperson, National Human Rights Commission of Korea; Professor of Law, Seoul National University. 1) MENTAL HEALTH — GLOBAL POLICIES AND HUMAN RIGHTS, at xi (Peter Morrall & Mike Hazelton eds., Whurr Publishers 2002).
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unregulated establishments, can be extremely serious and brutal.2) A mental health care system should be ensured for the protection of the rights of people with mental disorders, who are among the world’s most vulnerable groups. They are often subjected to stigma, discrimination and marginalization in all societies, which increases the likelihood of violations of their human rights. Mental disorders can sometimes impair decision-making or legal capacity, and the affected-people may not always seek or accept medical treatment for their problems. Rarely, people with mental illness may put themselves or others at risk because of their impaired decision-making ability. In fact, the risk of violence or harm associated with mental disorders is relatively small.3) Common misconceptions on this matter should not be allowed to influence legislation of mental health laws.4) The lives of people with mental disorders have been one of the least addressed issues in the contemporary Korean society, even in comparison to persons with physical disabilities whose difficulties and hardships have come into spotlight in recent years. This article aims to bring this topic into the arena of ‘law and society’ with a plea for attentive care of the fellow jurists to these unduly neglected people in our society. Part II of the article briefly overviews the international and domestic legal frameworks on mental health care. In Part III, the article highlights current status of the mentally disabled persons with selected statistics. Part IV discusses the roles of the National Human Rights Commission of Korea in the promotion and protection of the rights of the citizens with mental disorders, and Part V analyses flaws and shortcomings in the legal system and practice of mental health care in Korea, as have been repeatedly raised in recent years. Part VI concludes with a suggestion for a comprehensive national report on the conditions of the mentally disordered, based on models preceded in a few advanced countries.
2) Id. at xv. 3) Cho, Sung-Nam, A Study on the Criminal Psychotics — Crime Rates and Crime Motives, 3 JOURNAL OF KOREAN NEUROPSYCHIATRIC ASSOCIATION 1025-35 (1992) (available only in Korean). 4) WORLD HEALTH ORGANIZATION, MENTAL HEALTH LEGISLATION AND HUMAN RIGHTS: MENTAL HEALTH POLICY AND SERVICE GUIDANCE PACKAGE 2 (2003).
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II. Frameworks of Mental Health Law
1. International Framework
Concerns about human protection, respect, dignity, and tolerance have a long history dating back to ancient Greece or China, even further to the very beginnings of social gatherings. However, it was not until the mid-twentieth century that such humanitarian concerns became formalized principles for universal application, with the creation of the United Nations (1945) and the Universal Declaration of Human Rights (1948).5) The Universal Declaration makes reference to universal human rights of access to adequate health care in Article 25(1). Nonetheless, it was as late as 1991 that the principles for the protection and treatment of people suffering from mental disorders have been proclaimed by the General Assembly of the U.N.6) The United Nation Principles for the Protection of Persons with Mental Illness and for the Improvement of Mental Health Care, often called ‘MI Principles’, enunciate that all persons with a mental illness shall be entitled to have access to the best available medical care appropriate to their health needs and be diagnosed without any political interference and shielded from exploitation, discrimination and social stigma.7) However, it should be noted that the adoption of the principles had not only been much overdue but also the United Nations still tolerates involuntary incarceration, enforced treatment (possibly psycho-surgical), restraint and seclusion in some circumstances.8) As is easily understood, there is more to be done in practical rather than theoretical terms. The WHO Guidelines for the Promotion of Human Rights of Persons with
5) Morrall & Hazelton, supra note 1, at xi-xii. 6) The U.N. Principles for the Persons with Mental Illness and the Improvement of Mental Health Care, General Assembly Resolution 46/119, 17 Dec. 1991(hereinafter referred to as “MI Principles”). 7) Principle 1 (Fundamental Freedoms and Basic Rights) (1) All persons have the right to the best available mental health care, which shall be part of health and social care system; (5) Every person with a mental illness shall have the right to exercise all civil, political, economic, social and cultural rights as recognized in the UDHR, ICESCR, ICCPR, and in other relevant instruments such as Declaration on the Rights of Disabled Persons and the Body of Principles for the Protection of All Persons under Any Form of Detention and Imprisonment. 8) Morrall & Hazelton, supra note 1, at xiv.
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Mental Disorders9) is a supplementary document designed for an easier application of the MI Principles to concrete actions. Other international instruments applicable to the protection of rights of the mentally ill include the Declaration on the Rights of Disabled Persons,10) the U.N. Convention on the Rights of Persons with Disabilities (2006); and the Declaration of Hawaii/II as approved by General Assembly of World Psychiatric Association in Vienna, Austria on July 10, 1983. These documents are instrumental in formulating both policy and mechanical devices.
2. Legal Schemes of Korea
Like many other countries, mental health legislation in Korea is characterized as a combination of an ‘integration approach’ and a ‘dispersion approach.’ In other words, a specific statute on mental health is complemented by various general legal instruments in which mental health issues are addressed. As the basic norm, Article 10 of the Constitution declares that “every citizen shall enjoy the right to human dignity and worth and to pursue happiness.” In the same provision, the Constitution manifests the state’s general duty to protect the rights of the citizen. This duty is reiterated in the Constitution with specific reference to health.11) Based on these constitutional authorities, a barrage of statutes related to mental health has been enacted. Particularly, the Mental Practice Act (1951) sets out the ground scheme and rules. The Mental Health Act serves as a specification of the Medical Practice Act attuned to its sub-category. The Mental Health Act was first enacted in 1995 and entered into force in 1996 (Law No. 5133). Since then, it has been amended a few times, lastly in 2006.12) It was the product from the increased public awareness of mental health problems. A series of debates over the mistreatment or ill-treatment of patients played an important part in shaping the public agenda on mental health reform. In fact, since 1983, there has been only
9) Doc. WHO/MNH/MND/95.4 (1996). 10) UN General Assembly Resolution 3227 (XXX), 9 Dec. 1975. 11) Article 36, Section 3. “Every citizen shall enjoy the protection of the State regarding their health.” 12) Ironically enough, an earlier legislation attempt was made in 1985 under the authoritarian regime, mainly for regulating the ‘the undesirables’ under the pretext of ‘social protection.’ However, faced with ferocious opposition from social workers and human rights activists, the government was forced to withdraw the legislative attempt.
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intermittent media coverage on the inhumane conditions of mental health facilities.13) In the preparatory stages for the legislation of the Mental Health Act, the World Health Origination provided technical assistance by arranging international experts to participate in workshops held in Seoul. Korean psychiatrists and administrators started to draft a bill modeled on a Japanese law of 1987. It was October 1993 that the then Ministry of Health and Social Affairs submitted the final draft to the National Assembly. At the invitation of the Korean government, the WHO representatives reviewed the draft bill before its final passage by the National Assembly in 1994. According to the WHO appraisal, as contrasted with cases in western countries where the individual’s free will is strongly protected, the law gives an important role to members of the family of a person with a mental illness, allowing involuntary admission of such people to a mental health facility on the grounds of the agreement between family members and certified psychiatrists.14) The Act contains a few provisions addressing the rights of a patient. Article 2 protects the right to human dignity and worth (Sec. 1). It also minds the right to physical integrity by articulating that the principle of voluntarism should be observed in the entire process of treatment.15) The Act further ensures several social rights such as the right to best available treatment, the right to education for a minor patient (Article 2, Sec. 2 and 4), and the right to petition (Article 29). Despite such provisions, the Act is regulatory rather than protective in character, from the perspective of a patient.16) The Act mainly sets out basic working mechanisms of a mental care system with a permissive attitude towards the tightened control over mental patients. Therefore, it could hardly be recognized as a Bill of Rights for the patient citizens.17) The Mental Health Act carries both characteristics of health law and welfare law. On the health side, as mentioned earlier, the Act is a special extension of the Medical
13) Seo, Dongwoo, The Protection of Human Rights of Persons with Mental Disabilities, presented in Public Hearing on the Human Rights Situation in the Mental Health Facilities held by the National Human Rights Commission of Korea, 20 Nov. 2004, at 10 (available only in Korean). 14) WORLD HEALTH ORGANIZATION, supra note 4, at 42. 15) For example, under Article 2 (Sections 5 and 6) of the Mental Health Act, involuntary admission of a patient should be limited to exceptional situations. 16) Seo, supra note 13, at 12-13. 17) Id.
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Practice Act.18) The Social Welfare Law, the basic statute on this front, lists the Mental Health Act as one of its major sister legislations (Article 2). In the same vein, the Welfare of Disabled Persons Act (Article 2) includes persons with mental illness in its coverage. Based on these provisions, the mentally ill are entitled to social welfare benefits (Article 13). A newly enacted statute, The Act for the Prevention of Discrimination against Disabled Persons and Protection of Their Rights, etc. (2007)19) also reiterates mental impairments in the definition of ‘disability’ on equal footing with physical impairments (Article 2). Further, Article 37 of the Act explicitly proscribes discrimination against persons with mental impairment and imposes special affirmative duty on the state and local governments to make their best efforts to organize preventive and educational activities. Notwithstanding these firm principles of equality and non-discrimination, de jure discrimination against persons with mental illness exists in many areas.20) For example, a constitutional right to occupation for the mentally ill is severely curtailed. There are at least 21 statutes as well that deny a license or authorization to a person with mental illness. Specifically, anyone with a history of mental illness is ineligible for being a medical doctor,21) pharmacist,22) medical technician, paramedic, barber, beautician, veterinarian, hygienist, construction equipment operator, or even mortician.23) Similarly, driver’s licenses for motor vehicles or motor boats are categorically denied to mentally ill citizens.24) Further, such citizens are denied access to the most basic of public services including public libraries25) and art museums.26)
18) See supra note 12 and accompanying texts. 19) Law No. 8341, 11 Apr. 2007 20) Park, Jong Ik et al., Discrimination of Mentally Ill Persons in Korean Legislative System, 43-2 JOURNAL OF KOREAN NEUROPSYCHIATRIC ASSOCIATION 237-41 (2004). 21) Article 8, The Medical Service Act, Law No.221, 25 Sep. 1951, as amended as Law No. 8559, 27 Jul. 2007. 22) Article 4, The Pharmacist Act, Law No. 300, 18 Dec. 1953, as amended as Law No. 8558, 27 Jul. 2007. 23) SHIN, YOUNGJEON ET AL., LEGISLATIVE STUDY ON THE IMPROVEMENT OF HUMAN RIGHTS FOR PEOPLE WITH MENTAL ILLNESS 78, (National Human Rights Commission of Korea 2006) (available only in Korean). 24) Article 70(2), Road Transportation Act, Law No. 941, 31 Dec. 1961, as amended as Law No. 7969, 19 Jul. 2006 and Article 5, Navigational Leisure Act, Law No. 5910, 8 Feb. 1999, as amended as Law No. 8621, 3 Aug. 2007. 25) Article 7(1), Rules for the Use of National Central Library, Decree of Ministry of Culture No. 8, 16 Jul. 1991, as amended as Decree No. 83, 10 Dec. 2003. 26) Article 8(1), Rules for the Entrance to the National Museum of Contemporary Art, Ministry of Culture
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As such, basic freedom of movement of persons with mental disorders is severely restricted. In a similar vein, the Immigration Control Act27) in its Article 11 prohibits the entry of a foreigner who is “mentally handicapped and void of a capacity of discriminating sense and has no person to assist his or her sojourn activities in the Republic of Korea.” Moreover, despite the Article 42 of Mental Health Act prohibiting disclosure of the personal information of mental patients,28) a breach of such provision takes place almost routinely, oftentimes by the governmental entities. Property rights of persons with mental disorders are easily infringed upon as well. Article 22 of the Mental Health Act obligates family members of a mental health patient to protect the patient’s property rights. Nevertheless, incompetency provisions of the Civil Code carry an inherent possibility of abuses against the mentally ill. Traditionally, Articles 9 (quasi-incompetency) and 12 (incompetency) have been misused by the family members as handy tools to eliminate or restrict the property rights of their “less competent” family members.29)
III. Current State of the Mentally Ill
All the pertinent statistical information highlights an alarming situation for the mental health of Korean people. According to a survey conducted by the Ministry of Health and Welfare in 2001, 14.4 percent of Koreans between the ages of 18 and 64 were diagnosed of a mental disorder or of a kind of mental illness.30) It also indicated that the majority of patients (68.7%) who were determined to have a mental illness were aged between 20 and 49. The statistics of the Ministry of Health and Welfare of 2005 showed that total number of hospitalized patients steadily increased at the average annual rate of 7.8 percent between the years 2000 and 2005: 51,757 in 2000 and 60,279 in 2005.31) According to a report of the National Human Rights
Decree No. 46, 1 May 1975, as amended as Decree No. 138, 30 Jun. 2006. This provision was repealed in 2004. 27) Law No. 1289, 5 Mar. 1963, as amended as Law No. 7655, 4 Aug. 2005. 28) “A person who was or is performing duties in relation to a person with mental illness as prescribed by this Act shall not disclose or announce the secrets of other persons acquired in relation to the performance of such duties except as specially prescribed in this Act or other Acts and subordinate statutes.” 29) The terms “lost mind” or “incompetency” typically indicate or remind the persons with mental disorders. 30) MINISTRY OF HEALTH AND PUBLIC WELFARE, A GUIDE TO THE MENTAL HEALTH BUSINESS 3 (2005). 31) 51,747(2002); 56,514 (2001); 58,218(2002); 62,154 (2003); 67,896 (2004)
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Commission of 2006, in less than a decade, the total number of hospital beds almost tripled from 21,513 in 1996 to 62,554 in 2004.32) In 2004, only 8.4 percent of patients were admitted to mental health care facilities on their own will.33) As high as 91.6 percent of patients were institutionalized involuntarily: 76.8 percent by the arrangement of a family member bearing legal duty of guardianship and 13.3 percent by initiative of governmental authorities.34) On average, a patient was institutionalized for 267 days,35) as sharply contrasted with the figures in other OEDC countries: for example, 26.9 days in Germany, 52 days in the U.K., 35.7 days in France, and 13.4 days in Italy.36) In the case of mental sanatoriums established for the care of chronic and long-term patients who are not cared for by their own family members, the figure went up to as high as 2,485 days.37)
IV. The Role of National Human Rights Commission
Established in 2001, the National Human Rights Commission emerged as one of the high-profile national agencies of Korea. Its organic statute declares that its
Source from Ministry of Health and Welfare and National Health Insurance Corporation 32) SHIN ET AL., supra note 23, at 68. 33) Id. at 6. 34) Id. Under the Act, a mental patient may be institutionalized in 4 ways: (1) A patient may be hospitalized under Article 23 by filing a written request himself (voluntary admission); (2) The hospital may accept a patient with the consent of a person legally responsible for the protection of the patient. In the case, the diagnoses of a psychiatrist should be accompanied (Article 24); (3) On the report and request from a psychiatrist, the head of a local government may cause a patient to be committed to a mental hospital, when there is a danger that he might harm himself or others (Article 25); and (4) (Emergency measure arranged by police officer and psychiatrist) Those who discover a person assumed to have psychopathy and who presents a significant risk of harm to himself or others, may request emergency hospitalization of the person concerned to a medical institution for mental illness with the consent of a doctor and a police officer when the situation is very urgent and the hospitalization as provided for in Articles 23 through 25 cannot be executed (Article 26). 35) NATIONAL HUMAN RIGHTS COMMISSION OF KOREA, REPORT OF STUDY VISIT TO THE UNITED KINGDOM AND GERMANY: RESEARCH OF HUMAN RIGHTS PROTECTION OF PERSONS WITH MENTAL DISABILITIES 48 (2006) (available only in Korean). 36) BAE, JEONGGYU, SURVEY ON THE PERFORMANCE OF MENTAL HEALTH CARE IN THE LOCAL GOVERNMENTS 66- 67 (National Human Rights Commission of Korea 2006) (available only in Korean). 37) NATIONAL HUMAN RIGHTS COMMISSION OF KOREA, supra note 35, at 48 (Mental Health Care Facilities)
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purpose is to “contribute to the realization of human dignity and worth and […] to ensure the protection of the inviolable and fundamental human rights of all individuals.”38) The Commission is a ‘quasi-judicial’ body to address human rights violations. Citizens or foreign nationals in Korea may file a complaint alleging abuses of human rights including discrimination. The Commission’s law governs the acts of governmental entities as well as private actors.39) Based on a complaint or by its own initiation, the Commission conducts a wide range of activities: most chiefly, the investigation of the alleged acts and the recommendation for remedies to respondent parties. The recommendation of the Commission does not legally bind the parties concerned and thus it lacks enforceability. However, its influence is enormous. The acceptance rate of the recommendations for remedies exceeds 80 percent.40) The Commission has jurisdiction to consider the complaints of detainees in the “detention or protective facilities” which include institutes for medical service as provided in Section 2(a), Article 2 of the Commission Act. For the period between November 2001 and June 2006, the Commission received 1,126 complaints alleging human rights violations on the grounds of mental impairment. This figure comprises 5.6 percent of total complaints filed with the Commission during the same period.41) The number of such complaints steadily grew in its first three years, and the Commission was met with huge increase in pleas for help notably during 2004 and 2005. In response, the Commission installed petition boxes within health facilities, in addition to enhancing public awareness of the Commission’s activities. Such efforts seem to have substantially induced active complaint filings from the patients. The Commission found substantive human rights violations in approximately 10 percent of the complaints and issued recommendations for remedies. Private-run institutions were found to be major violators. Violations were found in the process of admission to a mental facility (24%), extension of the retention period and discharge (15%) and
38) Article 1, The National Human Rights Commission Act, Law No. 6481, 24 Mar. 2001, as amended as Law No. 7796, 25 Dec. 2005. 39) Article 30, The National Human Rights Commission Act, Law No. 6481, 24 May 2001, as amended as Law No. 7796, 25 Dec. 2005. 40) “Because of the increased respect for the Commission, in the legal and political communities, many of the recommendations of the Commission are reported in the media, explored by scholars, seriously considered by politicians and often adopted by the nation.” See Sean Hayes, THE KOREA TIMES, 10 Aug. 2007, at 21. 41) The Commission received 20,057 complaints in total between 1 November 2001 and 30 June 2006.
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excessive use of force or confinement (18%), and they included the invasion of privacy and other forms of rights infringement.42) In addition, since 2002, the Commission has hosted a series of workshops and seminars on mental disabilities at both the domestic and international levels. This has resulted in several recommendations presented to the government. The Commission has also been engaged in various activities raising public awareness of the hardships that these underprivileged people with mental illness endure. Particularly, in 2006, the Commission took the issue of the rights of people with mental illness as one of its top ten priority concerns, and it continued to do so in 2007.
V. Challenges in Korean Legal Framework for Mental Heath Care
Many humanitarian-minded psychiatrists, lawyers, and social workers have pointed out serious flaws in the Korean legal framework of mental health care in terms of both policy and practice.
1. The Principles of Separation and Discrimination
Fundamental criticism is that the current system is based on arcane philosophical residue — the principles of separation and discrimination. Public ignorance and prejudice by and large condone or even approve of such policies. As one English scholar argued, until recently in the history of western civilization, the determination of insanity was based on the notion that the mad were categorically distinguished from the rest of humanity. They were a genus distinctive from that of “normal” people, essentially ‘wild beasts’ to be excluded from the jurisdiction of the courts or dealt with by separate laws and forms of discipline.43) In criminal law, insanity was a prime cause of incompetnecy to commit a crime, assuming that the perpetrator lacked mens rea (criminal intent).44) There is a
42) BAE, supra note 36, at 8. 43) ROBINSON, D.N., WILD BEASTS AND IDLE HUMORS: THE INSANITY DEFENSE FROM ANTIQUITY TO THE PRESENT, (Harvard University Press 1966). 44) Article 10, Criminal Code (1). “The act of a person who, because of mental disorder, is unable to make distinction or to control his or her own
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prevailing ‘culturally normative prejudice’ associated with mental illness, which is as constraining and brutal as political suppression.45) Overt prejudice of the mass media has been reflected in news reports of the crimes supposedly committed by someone with a history of mental disorder, however slight it might have been. The Korean press is notorious for its sensationalism, where TVs and on-line media compete among one another for the highest ratings.46) In a country where community concerns over terror are widespread, any effort to protect human rights could arouse public demand for increased control of the people with mental disorders.47) In Korea where incidents of organized terrorism are relatively rare, any isolated case of ‘unmanly’ crime tends to wage public paranoia against these perceived “semi-beasts.” Under such a backdrop, government policy basically tends to favor building up demarcating walls between the sane and “insane” of society.48)
2. The Principles of Community-Based Treatment and Rehabilitation
In a landmark decision, Olmstead v. L.C.,49) the Supreme Court of the United States declared that the Americans with Disabilities Act (ADA) prohibits the unnecessary institutionalization of persons with mental disabilities. In the words of the Supreme Court, services to persons with disabilities must be provided “in the most integrated setting possible.”50) The Olmstead rule is hardly an invention of the U.S. Supreme Court. Earlier in 1991, the MI Principles manifested the rights of
will shall not be punished.” 45) Johnstone M.J., Stigma, Social Justice, and the Rights of Mentally Ill: Challenging the Status Quo, 10-4 AUSTRALIAN AND NEW ZEALAND MENTAL HEALTH JOURNAL 201 (2001). 46) Park, Heonsoo, Human Rights Situation of Persons with Mental Disabilities and the Necessary Actions and Responses, presented in Public Forum on the Human Rights of Persons with Mental Disabilities held by Korea Family Association for Mental Health, 13 May 2005, at 45 (available only in Korean). 47) PETER MORRALL, MADNESS AND MURDER, (Whurr Publishers 2000). 48) SHIN ET AL. supra note 23, at 8-9; Peter Morrall, U.K. Mental Health Policy: Chaos and Control, in MENTAL HEALTH — GLOBAL POLICIES AND HUMAN RIGHT (Peter Morrall & Mike Hazelton, eds, Whurr Publishers 2002), at 16. 49) 527 U.S. 581 (1999). 50) The Americans With Disabilities Act, Title II, Section 302 (b)(1)(B). “Goods, services, facilities, privileges, advantages, and accommodations shall be afforded to an individual with a disability in the most integrated setting appropriate to the needs of the individual.”
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persons with mental illness to be integrated into the community as one of its cardinal rules.51) The principles have been repeated in succeeding international documents to be reconfirmed in the most recent U.N. Convention of Rights of Persons with Disabilities (2006). The policy of community-based mental health care is enshrined in Korean legislations as well. The ideal of community-based rehabilitation is incorporated in Articles 15 and 16 of the Mental Health Act.52) However, this proclaimed policy largely remains a declarative norm. The Korean government has consistently taken the opposite route, as evidenced by its records.53) During the last decade, there has been a steady increase in the numbers of hospitals and beds.54) The MI principles and Olmstead rule encourage the community-based treatment
51) “Every person with a mental illness has the right to live and work, as far as possible, in the community.” (Principle 3); “Every patient shall have the right to be treated and cared for, as far as possible, in the community in which he or she lives.” (Principle 7, Item 1). 52) Article 15 (Creation and Operation of Rehabilitation Establishments) (1) The State and local governments may create and operate rehabilitation establishments. (2) In the event that any person other than the persons referred to in paragraph (1) intends to create and operate a rehabilitation establishment, he shall make a report thereon to the head of Si/Gun/Gu having jurisdiction over the location of such rehabilitation establishment. The same shall apply to a case where he intents to change important matters that are prescribed by the Ordinance of the Ministry of Health and Welfare from among the reported matters. (3) The head of every rehabilitation establishment shall conduct rehabilitation training for psychopaths under the conditions as prescribed by the Minister of Health and Welfare. (4) Necessary matters concerning the standards for establishments, the number of psychopaths to be accommodated therein, the number of employees and their qualifications, the report on the creation and operation, the report on alteration, the use and operation of rehabilitation establishments shall be prescribed by the Ordinance of the Ministry of Health and Welfare. Article 16 (Kinds of Rehabilitation Establishment) The kinds of rehabilitation establishments shall be as follows: 1. Life training facilities for psychopaths: facilities for psychopaths who have difficulties in daily lives at home because of their psychopathy, and of which the purpose is to promote rehabilitation of psychopaths by enabling them to use a living room or other facility at a discounted fee and providing them with necessary training and guidance so that they may adapt themselves to a daily life at home; 2. Work training facilities for psychopaths: facilities of which the purpose is to promote rehabilitation of psychopaths who have difficulties for employment through allowing them to use a living room or other facility at a discounted fee and providing necessary training and mediating their jobs; and 3. Other facilities as prescribed by the Ordinance of the Ministry of Health and Welfare. 53) See supra note 30. 54) See supra note 32.
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system. One of the core devices of this system is a community treatment order, oftentimes associated with the judiciary. The Community treatment order is a civil commitment system which makes it mandatory for certain kinds of long-term mental patients, such as schizophrenia and mania patients, to be treated under the community health care schemes rather than in mental hospitals.55) It is claimed that this system has been proven very effective in reducing the number of chronic patients.56) In Australia, mental health services are provided in both institutional and community settings.57) Community-based mental health care services include assessment, crisis intervention, case management and rehabilitation.58) In Australia, between the 1960s and 1990s, the transition from institution-based care to community-based care saw a decline in the availability of psychiatric beds from 287 per 100,000 populations to 40 beds per 100,000.59) Within a policy context of balancing between the protection for the rights of the people with mental illnesses in need of treatment and the community’s legitimate expectation to be protected from harm, much of the reform direction continues to be shaped by the needs of specialist psychiatric services and the compulsory end of the treatment spectrum.60) Local governments in Korea, which are both administrators and protectors of patients under the Mental Health Act, are not fully equipped with either human resources nor professional knowledge to handle these newly emerging issues effectively. Moreover, to date, only one provincial government enacted ordinance related to this subject, and none has established a long-term policy plan.61) Considering such unreadiness of the local governments, coupled with the apathetic attitude that the Korean judiciary has maintained on the matters of mental health, it is unrealistic that a Korean version of Olmstead will be born in the near future.
55) This system is called in various names such as IOC (Involuntary Outpatient Commitment), AOT (Assisted Outpatient Treatment) and CAT (Compulsory Ambulatory Treatment). 56) SHIN ET AL. supra note 23, at 62. 57) Mike Hazelton & Michael Clinton, Human Rights, Citizenship and Mental Health in Australia, in MENTAL HEALTH — GLOBAL POLICIES AND HUMAN RIGHTS 43 (Peter Morrall & Mike Hazelton, eds., Whurr Publishers 2002). Psychiatric hospitals and wards in acute hospitals provide specialized psychiatric care. 58) Id. 59) Id. at 46. 60) Id. at 48. 61) BAE, supra note 36, at 57.
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3. Involuntary Admission to Mental Health Facilities
Under the MI Principles, an agent should act in the best interest of the patient, and in no case a person whose interest is in conflict with the patient should be allowed to act on his behalf.62) As a special notion was made by the WHO, the Mental Health Act of Korea presupposes the major role of the family members of the patient throughout the entire process of medical treatment.63) As the statistics vividly demonstrates, the majority of cases of involuntary hospitalization are heralded by the family.64) In contemporary Korean society, the extended family is becoming a rarity. The evaporation of traditional family values associated with the extended family has entailed serious impacts on Korean society.65) The vacuum of neglect that was created in the demise of traditional family values has not been properly filled, either by the State or other social mechanisms.66) Under the Mental Health Act, duty bearers of family support under the Civil Code hold and bear primary rights and duties as a person responsible for guardianship and representation of a mental patient. Given the dramatic changes in the attitude of the contemporary Koreans, the legal scheme based on the outgoing traditional values needs serious reconsideration. There is an ever increasing danger of conflicting interests among family members, which is likely to be intensified when the family members fail to share comparable status. Some have argued for implementing a ‘public guardian system’ as an alternative.67) This may deserve policy consideration. However, if the system pre- supposes active involvement of the court, the likelihood of success is flimsy at best.
62) “In any decision affecting the rights of the patient, representation must be done by a person who has no conflict of interests with the patient.” (Principle 6) 63) See supra note 12 and accompanying texts. 64) See supra note 34. 65) Support of helpless parents is no more an unchallengeable customary law, much less for the care of the siblings. Older generations accustomed to traditional ways of life suffer emotional distress. Many have also been deprived of economic means. 66) Elderly Koreans with mental illness are virtually abandoned. 67) PAMELA B. TEASTER ET AL., WARD OF THE STATES: A NATIONAL STUDY OF PUBLIC GUARDIANSHIP (University of Kentucky Press 2005).
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4. Inadequate Treatment
In all the relevant legislations, mental illness is included in the definition of disability. For example, Section 1, Article 2 of the Welfare of Persons with Disabilities Act defines the term ‘disabled person’ to include ‘mental disabilities’ on equal footing with physical disabilities.68) The Article 3 (1) of the Mental Health Act defines the term of mental illness, and by the revision of 2000, alcoholism is also included as a form of mental illness.69) The concept of mental illness is diverse in character.70) Therefore, different methods and skills of treatment should be employed depending on the patient’s health needs. On this front, the Scottish experience may provide a valuable reference. Scotland adopted the “four populations policy” as its basic framework for the treatment of mental patients. Scotland applies the following policy respectively to people in four categories:
(1) Prevention policy targets the general public to prevent potential harm on its mental health with a special attention to the young generation; (2) Psychological therapies are prioritized for a population group having mild to moderate mental health problems, namely depression, stress and anxiety; (3) A central focus of mental health policy is put on those who suffer severe and enduring mental illnesses such as schizophrenia, bi-polar disorder and dementia; and (4) Extra safety mechanisms are to be implemented for those who have severe
68) (1) For the purpose of this Act, the term “disabled person” means those who are considerably restricted in their daily and social life for a long period of time due to their physical or mental disabilities. Under Article 2, Section (2)-2, the term “mental disabilities” means the disabilities caused by mental retardation and mental diseases. The UN Convention on the Rights of Persons with Disabilities (2006) provides similar definition: “Persons with disabilities include those with who have long-term physical, mental, intellectual or sensory impairment which in interaction with various barriers may hinder their full and effective participation in society on an equal basis with others.” (Article 1) 69) “The term ‘psychopath’ means a person with a mental illness (including an organic mental illness), personality disorder, alcoholism and medicinal poisoning and other non-psychopathic mental disorders.” 70) It includes depression, anxiety disorder, dysthymic disorder, and obsessive compulsive disorder (OCD).
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mental illnesses coupled with criminal history.71)
The principle of treatment by least restrictive means, as proclaimed by the MI Principles has been firmly established at the international level.72) This principle is pronounced in the mental health legislations of Korea accordingly.73) In response to the recommendation of the National Human Rights Commission on December 30, 2003, the Ministry of Health and Welfare issued a guideline on the ‘segregation and restraint’ in the treatment of the mental patients. The guideline, although not fully compatible with the MI principles, serves as an important working norm in the field. National health policy seems to spell out the place of mental health in the overall planning of health care. However, integrating mental health into primary health care has not become a policy focus. The health insurance system discriminates against mental health care patients by applying different rules to the medical treatment of the mentally ill.74) The Mental Health Adjudication Committee under Article 27 of the Mental Health Act may fall into the category of “review body” as envisioned by the MI Principles.75) The Committee is authorized with expansive powers ranging from
71) Geoff Huggins, Feature and Merits of Scottish Mental Health Law and Major Issues in the Legislation Process, presented in International Symposium on Human Rights of Mentally Challenged, Nov. 2006, at 87-100. 72) Principle 8 (1). “Every patient shall have the right to be treated in the least restrictive environment and with least restrictive or intrusive treatment.” 73) Mental Health Act, Law No. 5133, 30 Dec. 1995, as amended as Law No. 7849, 21 Feb. 2006 Article 45 (Prohibition on Movement Restriction) (1) The director of a medical institution for mental illness shall not restrict the freedom of communication, the freedom of interviews, and other freedom of movements with respect to psychopaths as prescribed by the Presidential Decree. (2) In case where the director of a medical institution for mental illness is restricting movements with respect to matters provided for in paragraph (1), the restriction shall be conducted in the minimum extent, and the reasons for restriction shall be recorded in a record of treatment. 74) Seo, supra note 13, at 14-15. 75) Principle 17 (Review Body) 1. The review body shall be a judicial or other independent and impartial body established by domestic law and functioning in accordance with procedures laid down by domestic law. It shall, in formulating its decisions, have the assistance of one or more qualified and independent mental health practitioners and take their advice into account. 2. The review body’s initial review, as required by paragraph 2 of Principle 16, of a decision to admit or retain a person as an involuntary patient shall take place as soon as possible after that decision and shall be conducted
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policy deliberation to the specific decisions on the admission or discharge of an individual patient.76) The reality shows, however, that the Committee does not
in accordance with simple and expeditious procedures as specified by domestic law. 3. The review body shall periodically review the cases of involuntary patients at reasonable intervals as specified by domestic law. 4. An involuntary patient may apply to the review body for release or voluntary status, at reasonable intervals as specified by domestic law. 5. At each review, the review body shall consider whether the criteria for involuntary admission set out in paragraph 1 of Principle 16 are still satisfied, and, if not, the patient shall be discharged as an involuntary patient. 6. If at any time the mental health practitioner responsible for the case is satisfied that the conditions for the retention of a person as an involuntary patient are no longer satisfied, he or she shall order the discharge of that person as such a patient. 7. A patient or his personal representative or any interested person shall have the right to appeal to a higher court against a decision that the patient be admitted to, or be retained in, a mental health facility. 76) Article 28 (Duties of Mental Health Deliberative Committee) (1) The Central Mental Health Deliberative Committee shall deliberate the matters falling under one of the following subparagraphs: 1. Matters pertaining to mental health policies; 2. Matters pertaining to standards of mental health facilities; 3. Various kinds of standards of hospitalization and treatment of psychopaths; 4. Offering of medical opinions pertaining to the consent for treatment; and 5. Cases of application for re-examination. (2) The Local Mental Health Deliberative Committee shall deliberate the matters falling under one of the following subparagraphs: 1. Supervision and correction on mental health facilities; 2. Assessment on mental health facilities; 3. Review on treatment procedures to which objections have been raised; 4. Review on improvement in treatments; and 5. Review on discharge and continuative hospitalization. (3) The number of members of the Central Mental Health Deliberative Committee and the Local Mental Health Deliberation Committee (hereinafter referred to as each “Mental Health Deliberative Committee”) shall be not less than five and not more than fifteen and the tenure shall be two years, with an opportunity for reappointment. (4) The members of each Mental Health Deliberative Committee shall be appointed or entrusted by the Minister of Health and Welfare and the Mayor/Do governor respectively from among the psychiatrists, persons with qualifications as a judge, public prosecutor or a lawyer, the specialists of mental health and persons with expert knowledge and experience in mental health. (5) The Mental Health Adjudication Committee shall consist of the number of members ranging from not less than 5 to not more than 10 who are appointed by the Minister of Health and Welfare and the Mayor/Do governor from among members of the Mental Health Deliberative Committee and shall review cases in the
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function effectively for the protection of mental patients. Typically, it is mostly composed of psychiatrists and disposes too many cases without serious deliberation, mainly due to time constraints.77) Statistics reveal that the denial of decision for renewal remained extremely rare (4.4 percent) in 2001.78) In one province, only 7 out of 1,156 patients were ordered to be discharged from the hospital.79) As such, free will of patients has been systematically neglected in the process of admission to and discharge from hospitals, extension of retention periods and medical treatment, and daily life. Some have called for the active role of the judiciary in this field. Indian practice may be a case in point. In India, the judiciary led by the Supreme Court has been actively involved in matters of mental health care by granting various remedies and forcing reformation in favor of protecting the rights of people with mental illnesses.80) However, under Korean legal system and practice, the judiciary remains a largely irrelevant and remote institution in the mental health care business. The judiciary is basically an institution for remedial justice, not for preventive justice. It would be extremely costly to bring the court into the routine business of mental hospitals. Furthermore, public trust in the judiciary is not deep enough to invite its routine intervention. This agenda needs time long enough to ripen before being brought to the table. Another complexity stems from the conflicting interests of the health professionals and related industry, such as mental hospitals and protection institutions. It has been repeatedly argued that health professionals are one group that displays adverse attitudes toward the mentally ill.81) There exists an assertion that the health industry subtly reaps the public prejudice for its economic gains. Amidst serious competition in the health industry, the mental hospital has emerged as one of
collegiate court. In this case, the members shall include not less than one person having qualifications as a psychiatrist, judge, public prosecutor, or a lawyer, respectively. 77) Seo, MiKyung, Measures to Improve the Human Rights Conditions in the Mental Health Facilities, presented in Public Hearing on the Human Rights Situation in the Mental Health Facilities held by National Human Rights Commission of Korea, 20 Nov. 2004, at 19 (available only in Korean). 78) Id. 79) Id. 80) R. Srinivasa Murthy, India: Towards Community Heath Care, in MENTAL HEALTH — GLOBAL POLICIES AND HUMAN RIGHTS (Peter Morrall and Mike Hazelton, eds., Whurr Publishers 2002), at 104. 81) Hazelton and Clinton, supra note 57, at 57.
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the more lucrative medical businesses in recent years.82)
5. Inadequate Funding: Problem of Social Costs
Equality and fairness are two core values that should be upheld in formulating policies for the mental health system. Mentally disordered people should not be discriminated against in such areas of civil life as education, employment, and access to health services, while those in most need are given the highest priority in health resources allocation. These two core values are emerging from high quality, comprehensive, and integrated services, which are focused on the needs of the user, and supported by evidence.83) As the financial cost of mental health care continues to escalate, so also does the human cost.84) It is nearly impossible to separate policy, economics, social status markers, education and genetic predispositions into clear areas of scientific or historical inquiry.85) There are several other issues in measuring economic costs of mental illness that are potentially large in magnitude and controversial in their conclusions. These are the costs of families caring for their mentally ill members, the labor market impact of mental illness and non-productivity losses due to illness.86) Other costs are those associated with improper measurements, unreliable diagnostic systems and inappropriate measures of reliability.87) These costs are acutely felt when resources and talents are used in a wasteful fashion.88) Physicians, policy makers and others struggle to strike a balance between the need to contain the costs and efforts to maintain or improve both access to services and the quality of care provided.89)
82) Song, Sanggyo, Human Rights of Persons with Mental Disabilities: From a Legal Perspective, presented in Human Rights Workshop for Mental Health Practitioners held by National Human Rights Commission of Korea, 27 Oct. 2007, at 28 (available only in Korean). 83) Morrall, supra note 48, at 19. 84) Shirley A. Smoyak. US Mental Health Policy: Progress and Continuing Problems, in MENTAL HEALTH — GLOBAL POLICIES AND HUMAN RIGHTS (Peter Morrall & Mike Hazelton, eds., Whurr Publishers 2002), at 24 85) Id. 86) Ahmed Okasha, Egypt: 5000 Years of Science and Care for Mental Patients, in MENTAL HEALTH — GLOBAL POLICIES AND HUMAN RIGHTS (Peter Morrall and Mike Hazelton, eds., Whurr Publishers 2002), at 90. 87) Id. 88) Id. 89) Id.
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6. Addendum: Aliens
“Every patient shall have the right to be treated suited to his or her cultural background” (MI Principle 7, para. 3). This provision has special relevance to the mental suffering of foreigners. The national health insurance system of Korea is open to non-nationals, albeit with some restrictions.90) However, a mental health care system is virtually non-existent for foreigners. A substantial portion of mental illness generates from emotional hardship. Foreigners are one of the most vulnerable groups to emotional distress, trauma, and mental illness. In the notorious Chandra case,91) a female migrant worker from Nepal was incarcerated in a mental sanatorium for nearly seven years with no proper channel of communication. Originally she was mistaken for a Korean due to her physical resemblance. But even after her true identity was confirmed, the case dragged until the National Human Rights Commission intervened. Both ignorance and aloofness of the Korean society were the cause of this tragedy. An old adage has never been tarnished in Korea: “Blood is thicker than water.” Korea has lived proudly under the myth of being a “nation of single ethnicity.” This claim has just as much dubious historical justifications92) as the phrase regarding Korea’s “long history of five thousand years.” But it is sufficiently engrained enough to represent the public sentiment prevalent in the Korean society. In the 2006 state report submitted to the U.N. Committee on the Elimination of Racial Discrimination, Korean citizens were described as two groups: “pure-blooded” versus “mixed bloods.”93) Such descriptions may be indicative of the prejudice against foreigners
90) Article 5(2) of the National Basic Living Security Act (1999) by virtue of the revision in 2005 grants minimum aid to a foreigner only when he or she is a resident spouse with a minor child. 91) Lee, Ranjoo, Speak, Chandra — Stories of Foreign Migrant Workers in South Korea, in WINDOW OF REFLECTING LIFE (Sam-Ie-Bo-Ie-Neun-Chang) (2003) (available only in Korean). Chandra’s case was also featured in a human rights film ‘If You Were Me’ made by the National Human Rights Commission of Korea. 92) “About 46 percent of the Korean’s family names originate from neighboring countries, especially from China. At least 20 percent of Koreans still use foreign surnames. This shows that people have cherished illusions about their ethnic origins and historical facts.” See “Multiracial Society-Nation Should Eliminate Discrimination Against Minorities,” THE KOREA TIMES, 21 Aug. 2007. See also Kim, Jungho, IMPORTED KOREAN FAMILY NAMES (Jisik-Sanup Publications 2003) (available only in Korean). 93) Paragraphs 43-46 (Ethnic Minorities).
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deeply rooted in the Korean mindset. Foreigners are a ‘suspect’ class to be contained, regulated, and ultimately to be returned to their countries of origin. The concept of ‘citizenship’ is usually understood as a combination of social rights and obligations that determines legal identity, access to scarce resources and social membership.94) In general and in principle, non-citizens are outside the realms of social rights and national welfare schemes. Korea may be a manifest example loyal to this old regime of the ‘nation state’. In recent years, Korean society has been in rapid transition. There has been an influx of migrant workers, predominantly from Asian countries. For the last few years, international marriage has been on the rapid increase, comprising up to 13 percent of the total number of newly weds.95) It has introduced a sudden revolution into a country with a strong tradition of ethnic homogeneity.96) Recently, the Basic Act for the Treatment of Foreigners in Korea came into effect. The Act includes provisions such as extending support for married migrants and their children to help with their social integration, assisting with education of the Korean language and culture, as well as providing child care.97) By its mandates, the National Human Rights Commission of Korea is one of the most foreigner-friendly national institutions in Korea.98) In response to the recommendation of the Commission, the Korean government is preparing a bill for a comprehensive anti-discrimination legislation, which would include specific references to discrimination99) on the ground of race as declared in the Constitution
94) Turner BS. Outline of A Theory of Citizenship, 24-2 SOCIOLOGY (1990) at 189-217. 95) According to “Statistics of Marriage and Divorce in 2005” of the Korea National Statistical Office, international marriage marked 13.6 percent of the total number of newly married couples in 2005. 96) For details, see the government report of Republic of Korea submitted to the Committee on the Elimination of Racial Discrimination (CERD/KOR/14, 10 Aug. 20007) available at www.unchr/ch/huricane/huricane.nsf/ view01/ 97) Article 12 (Treatment of Foreign Spouse Married to a Korean National and their Children) 1. The State and local governments can provide a foreign spouse married to a Korean national with the support of education of Korean language, culture and social construction as well as the support of child care and education for their children to facilitate quicker adjustment to Korean society. 2. The paragraph 1 applies to a foreign partner who is in a de facto marriage relationship with a Korean national and raises a child born in such relationship, and the child. 98) Park Chung-hee Alive at Detention Center, THE KOREA TIMES, 10 Aug. 2007, at 21. 99) The Bill is expected to be submitted to the National Assembly during its regular session commencing in September 2007.
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and National Human Rights Commission Act.100) The nation is now experiencing unprecedented problems that are typical of multi-ethnic populations with episodes of racism and newly emerging chauvinistic inclination within some strata of society.101)
VI. Concluding Remarks
As is widely accepted, Korea presents a unique image in the mirror of the international community. Arguably it is the only state born after World War II that has successfully achieved both democratization and economic prosperity. Moreover, such achievement was made within an extremely short period of time. In the course of rapid transition, a Serbonian bog has been created where all kinds of social underdogs are placed. Among these underdogs, those with mental disorders can be found at the bottom. In lieu of this conclusion, I wish to underscore the reality that Korea still lacks a comprehensive national study report on the overall situation of persons with mental illnesses, qualitatively comparable to the Bush Report of the United States (2003)102) or the Burdekin Report of Australia (1993).103) Notwithstanding Article 4-2(1) of the Mental Health Act that obliges the Government to conduct periodic surveys on the situation of people with mental disorders every five years,104) all legislation and government policies to date have been enforced on a piecemeal basis without a master plan. Such lack has naturally caused unavoidable inefficiency, confusion, and
100) Article 11 of the Constitution of the Republic of Korea and Article 2(4) of the National Human Rights Commission Act. 101) Lorenzo Burti, Italy: Radical reform of mental health policy and its consequences, in MENTAL HEALTH — GLOBAL POLICIES AND HUMAN RIGHT (Peter Morrall & Mike Hazelton, eds., Whurr Publishers 2002), at 68. 102) The President’s New Freedom Commission on Mental Health, Achieving the Promise: Transforming Mental Health Care in America (July 2003), available at http://www.mentalhealthcommission.gov/reports/ FinalReport/downloads/downloads.html 103) BRIAN BURDEKIN, HUMAN RIGHTS AND MENTAL ILLNESS: REPORT OF NATIONAL INQUIRY INTO THE HUMAN RIGHTS OF PEOPLE LIVING WITH MENTAL ILLNESS (Human Rights and Equal Opportunity Commission of Australia 1993). 104) The Article 4-2(1) of the Mental Health Act provides, “the Minister of Health and Welfare shall conduct a survey on actual status of psychopaths every 5 years for the adequate enforcement of this Act.” However, the final reports have not come out with sufficient information to be a basis for long-term policy.
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inconsistency. There is an urgent need for a comprehensive survey report before it is too late to avoid widespread discrimination against people with mental illnesses in Korea.
KEY WORDS: Mental Disorder, Mental Health, National Human Rights Commission
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The Future Direction of Takeover Law in Korea
Stephen J. Choi*
Abstract
This Essay compares the legal takeover regimes of Korea and the United States and observes that important institutional differences exist between Korea and the United States (the model for many of Korea’s recent corporate governance-related reforms including Regulation FD and Sarbanes-Oxley Act-like reforms). Controlling shareholders dominate Korean Chaebol firms. Irrespective of whether Korea eventually adopts poison pills and other defensive tactics, the large control position of the Korean Chaebol firms represent a potent antitakeover defensive tactic, shielding Chaebol firms from market pressures. Korea also lacks a specialty corporate court and a well-developed plaintiffs’ attorney bar. These differences call for a different emphasis in the package of laws controlling agency costs within Korean firms. Deciding upon the exact set of laws that is optimal for Korean companies is a difficult task — particularly since market participants are constantly evolving the techniques used in corporate control transactions. The Essay offers several suggestions — including expanded fiduciary duties, fixed bounties for private class action attorneys, and “reverse” tag-along rights for minority shareholders in the case of a failed hostile takeover bid against a Chaebol member firm.
I. Introduction
In large publicly-held corporations, shareholders face an agency problem. Because the shareholders are dispersed and individually lack an incentive to monitor management closely, management has freedom to operate the corporation in the management’s private best interest. A hostile takeover, in theory, helps align the incentives of management with shareholders. Managers that expropriate value from the corporation will result in a depressed share price. The greater the expropriation of
* Murray and Kathleen Bring Professor, New York University Law School. Thanks to Kon Sik Kim for helpful comments and information on Korea’s legal system and the participants of the 2007 KDI conference on the Market for Corporate Control: Comparative Perspectives. Special thanks to Un Kyung Park.
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private benefits of control, the more the corporation’s share price will be depressed, making the corporation a greater target for a hostile takeover. Not all hostile takeovers benefit shareholders. Acquiring companies suffer from their own agency problems. The CEO at an acquirer may seek a takeover not to reduce agency costs at the target company but instead simply to expand the CEO’s own business empire. To the extent the market determines share price with some degree of myopia (an assumption not shared by all), hostile takeovers may lead to a short-term focus on the part of managers. Still others express concern about the welfare of third parties affected by corporate takeovers, including employees, customers, suppliers, and local communities. Target shareholders may also not always approve takeovers that are in the target shareholder’s own individual or collective best interest. Some forms of takeover, particularly contingent, two-stage offers with a lower second-stage price, may coerce target shareholders to agree to a first-stage hostile bid to avoid the second-stage price even if not in the collective best interest of the target shareholders as a group. In the United States, takeover law attempts to balance both the advantages and disadvantages of hostile takeovers. While hostile takeovers are not banned entirely, those seeking to obtain a control of another company in a hostile transactions faces several legal and legally-sanctioned hurdles. Part II of this Essay discusses the hurdles facing hostile bidders in the United States. What works for companies in the United States may not translate to other regimes. Part III discusses the agency problem in Korean corporations, focusing in particular on Chaebol firms, and the role of hostile takeovers and other mechanisms to reduce the agency cost. Given the institutional differences between Korea and the United States, the Part offers some tentative suggestions at reform.
II. The United States Regime
Two categories of law apply to takeovers in the United States: (A) the law governing all corporate control transactions (including friendly transactions) and (B) the law specific to hostile takeovers.
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1. General Background Law
The key theme of U.S. law regarding corporate control transactions is choice. Managers at acquiring and target companies have a number of options at their disposal to execute a transaction in which control of substantially all of the target’s assets and business is transferred to the acquiring company. The acquirer and target may simply combine through a statutory merger, transferring all the assets and liabilities from the target to the acquirer and eliminating the existence of the target corporation. Alternatively, the acquirer may purchase the assets of the target, typically avoiding the transfer of the target’s liabilities to the acquirer.1) As yet another alternative, the acquirer may purchase a controlling block of shares of the target. The acquirer may then keep the target as a subsidiary corporation or eliminate the remaining minority shareholders of the target through a later squeezeout merger. Given this choice in transactional form, lawmakers in the United States wrestle with the question of how much the law should take into account the separate interests of shareholders of the target and acquiring corporations. Even where target and acquiring company management agree on a particular control transaction, shareholders of both companies may not necessarily benefit. Target managers may agree to a statutory merger that is not in the best interests of target shareholders, for example, in return for a separate payment through a golden parachute agreement or a post-merger consulting agreement. An acquiring company may pay too much for the shares of a target corporation where the acquiring company’s CEO is a significant shareholder of the target or receives other private benefits from the acquisition. Target controlling shareholders may approve a transaction to obtain a control premium not shared with the target minority shareholders. How much veto power shareholders have in a corporate control transaction in the United States depends largely on the state of incorporation.2) By far, the most important state in terms of mergers and acquisition deal activity is Delaware. Delaware state law provides a number of protections for shareholders of acquiring
1) Under successor liability, some liabilities (particularly tort liabilities) may nonetheless travel with the assets to the purchasing corporation. See Note, Successor Liability, Mass Tort, and Mandatory-Litigation Class Action, 118 HARVARD L. REV. 2357 (2005). 2) Under the U.S. internal affairs doctrine, the law of the state of incorporation governs corporations.
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and target corporations including: (a) the requirement that a majority of outstanding shares must vote to approve certain corporate control transaction and (b) appraisal rights. Delaware also provides for (c) enhanced scrutiny of whether transactions are consistent with director fiduciary duties in certain circumstances. Delaware does not make voting or appraisal rights universally available for change in control transactions. In a statutory merger, the target shareholders typically receive voting and appraisal rights.3) The acquiring company shareholders only receive voting and appraisal rights if 20% or more of the outstanding common shares are issued as part of the offering.4) Both voting rights and appraisal rights decrease for other forms of corporate control transactions. In a purchase of substantially all the assets of the target company, the target shareholders receive the right to vote on the acquisition but no appraisal rights.5) Delaware does not generally provide for voting approval or appraisal rights for the acquiring company’s shareholders in an asset purchase transaction. In a tender offer, where the acquirer purchases the shares of the target corporation, the target shareholders receive neither voting nor appraisal rights.6) Similarly, the acquiring company shareholders typically receive neither voting nor appraisal rights.7) What does choice mean in practice for change in control transactions involving Delaware companies? Those planning a change in control transaction may take advantage of choice to provide as much (or little) voting and appraisal rights as desired.8) Companies that desire to avoid a vote and appraisal rights on the part of the target and acquirer shareholders, for example, may directly purchase the shares of the target company from the target’s shareholders in a tender offer using cash consideration.
3) Exceptions exist to appraisal rights. See Del GCL § 262(b)(1) (detailing the exception from appraisal rights for shareholders holding securities listed on a national securities exchange or held of record by more than 2,000 holders). 4) See Del. GCL § 251(f). 5) Del. GCL § 271 6) Other regulatory bodies may require additional protections, nonetheless. NYSE and Nasdaq rules require a shareholder vote where an acquiring corporation issues more than 20% of its current outstanding common stock, among other situations. 7) Situations can arise where the acquiring shareholders are entitled to vote. Where an acquiring corporation needs to issue more stock than authorized in its corporate charter in an acquisition using the acquiring stock as consideration, the acquiring shareholders must vote to authorize an amendment to the corporate charter. 8) See DALE A. OESTERLE, THE LAW OF MERGERS AND ACQUISITIONS (3d ed. Thomson West).
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Delaware provides special rules for control transactions involving a controlling shareholder. Under Delaware law, controlling shareholders enjoy substantial freedom to profit from control. Target controlling shareholders are allowed to obtain a premium when selling their shares.9) Controlling shareholders are also allowed to vote their shares in their own private best interest — for example, voting down a merger with a third party that increases the overall value for all shareholders but eliminates the controlling shareholders’ private benefits for control. Despite this freedom, Delaware law imposes restrictions on controlling shareholders and directors of controlled corporations in certain control transactions. Controlling shareholders are prohibited from selling their control block to a third party where the controlling shareholder has reason to believe that the third party is “dishonest or in some material respect not truthful”.10) Controlling shareholders are prohibited from taking certain corporate opportunities for themselves.11) Controlling shareholders may not use their influence to obtain a disproportionate dividend from the corporation greater than that given to minority shareholders.12) Controlling shareholders that attempt a squeezeout merger to eliminate the minority shareholders may, if minority shareholders protest, face scrutiny from a Delaware court under the strict entire fairness standard.13) Under the entire fairness standard, a Delaware court will assess the procedures used to approve the squeezeout transaction (fair dealing) as well as substantive fairness of the deal for minority shareholders (fair price).14) Where a majority of the minority shareholders approve the squeezeout transaction, the burden of proof in the entire fairness analysis rests with the dissenting minority shareholders.15) Otherwise, the controlling shareholder
9) See Zetlin v. Hanson Holdings, Inc. 48 N.Y.2d 684 (1979). 10) See Harris v. Carter, 582 A.2d 222 (Del. Ch. 1990). 11) For the contours of the corporate opportunities doctrine as applied to controlling shareholders see Thorpe v. Cerbco, Inc., 676 A.2d 436 (1996). 12) See Sinclair Oil Corp. v. Levin, 280 A.2d 717, 720 (Del. 1971) (“Self-dealing occurs when the parent, by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of, and detriment to, the minority stockholders of the subsidiary.”). Where self-dealing occurs, Delaware courts will apply the intrinsic or entire fairness test to the self-dealing transaction. See id. 13) See Kahn v. Lynch Communication Sys., Inc., 638 A.2d 1110 (1994); Orman v. Cullman, 794 A.2d 5 (2002). 14) For a description of the entire fairness standard see Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156 (1995).
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bears the burden of proof. Even in a squeezeout, controlling shareholders may keep undisclosed their top bid for the minority shares.16) Furthermore, Delaware provides choice to controlling shareholders to avoid the enhanced scrutiny test. Controlling shareholders that desire to avoid the entire fairness test for a squeezeout merger may, for example, structure the transaction as a non-coercive tender offer to acquire the remaining minority shares. Delaware takes a much more permissive view toward non-coercive tender offers that work to cash out minority shareholders, eschewing the entire fairness test and allowing minority shareholders to determine for themselves whether to accept the tender offer price.17) In addition to state law provisions, the federal securities laws also apply to certain change in control transactions. For situations where a shareholder vote is required, the transmissions of proxy materials relating to the vote are regulated under the proxy rules of the federal securities laws. In a friendly merger or asset purchase where a shareholder vote is required, the target company must, among other things, complete a detailed disclosure form under Schedule 14A and distribute such disclosure form to investors prior to the vote. Where an acquiring corporation attempts to purchase stock of a target through a broad-based and public offer to shareholders in the market place at a fixed price, the purchase will be deemed a tender offer and fall under the Williams Act, a component of the Securities Exchange Act of 1934 (Exchange Act). Among other things, the Williams Act requires the acquirer to make certain disclosures,18) keep the offer open to everyone for at least 20 business days,19) give the best price to all tendering shareholders,20) and allow withdrawal of tendered shares at any time while the tender offer is open.21)
15) See Weinberger v. UOP, 457 A.2d 701 (1983). 16) See Rosenblatt v. Getty Oil Co., 493 A.2d 929 (Del. 1985). 17) See Solomon v. Pathe Comm., 672 A.2d 35 (Del. 1996); In re Pure Resources, Inc., Shareholders Litigation, 808 A.2d 421 (2002). In a non-coercive tender offer, the controlling shareholder may fail, of course, to buy out all the minority shareholders. If the controlling shareholder succeeds in obtaining at least 90% of the common stock, the controlling shareholder can follow the tender offer with a short-form merger under Delaware GCL § 253 to eliminate the remaining minority shareholders. 18) See Section 14(d)(1), Exchange Act. 19) See Rule 14e-1(a), Exchange Act. 20) See Rule 14d-10(a)(1), Exchange Act. 21) See Rule 14d-7, Exchange Act.
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2. Hostile Takeover Law
Two related problems face target shareholders in a hostile takeover. First, acquirers may use aggressive tactics to coerce target shareholders to tender their shares even when not in their own best interests. Second, defensive tactics, often installed to protect against coercive tender offer bids, can work instead to entrench target management at the expense of shareholder welfare. Acquirers may coerce target shareholders into bidding through a number of ways. Consider a two-stage contingent tender offer.22) Suppose a target’s shares trade at $100 per share. An acquirer may make a tender offer for shares at $95 per share contingent on receiving 90% of the shares. The acquirer may then make it known that it will do a short-form merger23) for the remaining shares, if it obtains the 90% block, at $80 per share.24) In such a situation, investors will rush to tender their shares at $95, despite the previous market price of $100, to avoid the possibility of being a shareholder who receives only $80 in the second stage short form merger.25) While the Williams Act requires disclosure and implements procedural protections to reduce the time pressure to tender on shareholders, the Act does not alleviate the coercive aspect of two-stage contingent tender offers. Target management filled the gap left by the Williams Act with various defensive tactics to protect target shareholders from coercive tenders offers.26) Through a poison pill, for
22) See Lucian Arye Bebchuk, Toward Undistorted Choice and Equal Treatment in Corporate Takeovers, 98 HARV. L. REV. 1693 (1985). 23) Delaware allows a Delaware corporation with a controlling shareholder with 90% or more of the equity shares to eliminate the minority shareholders without a vote through a short-form merger. See Del. GCL § 253. The minority shareholders nonetheless receive appraisal rights. 24) Appraisal rights will still apply for the minority shareholders in the short-form merger. See Del. GCL § 262(b)(3). Alternatively, the acquirer could simply make known that it will not purchase the minority shareholders — leaving the minority shareholders to worry that the acquirer will use its control to extract even greater private benefits at the expense of the remaining minority shareholders, reducing the value of the minority shares below $95 per share. 25) Of course, appraisal rights apply to the minority shareholders who are cashed out in the second-stage short form merger. To the extent appraisal rights provide equal or better value than the tender offer price, the coercive pressure to tender is removed. 26) In addition, many states enacted antitakeover statutes. For example, Delaware employs a business combination statute, limiting the ability of shareholders that acquires a 15% or more interest in a target company to
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example, a target company may severely dilute the value of the shares of an acquirer who crosses a predetermined threshold of target share ownership. Acquirers, realizing that their shares face dilution, will choose not to acquire target shares above this threshold — allowing target companies to “just say no” to a hostile bid. The use of hostile antitakeover devices by target management, ostensibly to block coercive tender offers among other things, however, also works to entrench target management from even value-increasing tender offers. Where target management use defensive tactics, target shareholders receive neither voting rights nor appraisal rights. Target shareholders receive no direct say in the decision to use defensive tactics. Instead, target shareholders are left only with the ability to go to court to challenge the use of antitakeover devices as inconsistent with the target boards’ fiduciary duties under Delaware state law. The range of defensive tactics is broad. Prior to the appearance of a hostile takeover, a company may enact amendments to the corporate charter requiring a supermajority vote to approve any merger. A company may also install staggered board of directors, delaying the ability of an acquirer to obtain majority control over the board. After the commencement of a hostile takeover, target companies have paid greenmail to make acquirers leave.27) Target companies also will issue shares to friendly parties or a “white knight” third-party acquirer who will give the target managers (although not necessarily the target shareholders) better terms. Target companies may attempt to sell key “crown jewel” assets to third parties, reducing the desirability of the target company as a hostile takeover target. And by far the most popular technique today is to install a poison pill provision. Combined with a poison pill, a staggered board is a particularly effective defensive tactic. Because of the staggered board, acquirers that win a proxy contest are unable immediately to replace a majority of the board to redeem the poison pill, increasing the cost of a takeover and leading many potential acquirers never to make a hostile bid in the first place. Delaware’s response to defensive tactics has evolved over the past several decades, tracking the development of defensive tactics over time. Determining the
enter in a transaction to combine with the target for three years unless the target’s board gives prior approval of the combination. See DEL. CODE ANN. tit. 8, § 203(a)(2), (c)(5). 27) Greenmail payments were among the earliest defensive tactics, popular in the 1980s. Today, a number of states employ anti-greenmail statutes, prohibiting the use of payment of greenmail to relatively short-term shareholders. See, e.g., MINN. STAT. § 302A.553.
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proper balance between allowing and removing target management defensive tactics is not easy. Too pro-defensive tactic a position will lead to high levels of management entrenchment. Too anti-defensive tactic a position will result in takeovers that may not necessarily improve on target shareholder welfare. The inquiry will also depend on the specific defensive tactic at issue and the facts of the particular hostile takeover. Grounded in the fiduciary duties of the target directors, Delaware’s case law has moved away from the permissive business judgment rule toward intermediate scrutiny of the target’s decision to implement or continue defensive tactics in the face of a hostile bid. Under the Unocal-standard, directors of the target corporation may employ defensive tactics that are reasonable in relation to the threat posed by the takeover.28) The exact contours of the intermediate standard depend on the facts of the particular hostile acquisition. Where the target company puts itself up for sale, the target board must seek only to maximize the immediate return to the target shareholders pursuant to the Revlon decision.29) Importantly, the market is constantly adjusting to Delaware case law. Delaware’s judiciary plays a cat-and-mouse game with market participants in responding to both new innovative hostile takeover techniques and defensive tactics. For example, after Delaware courts allowed the use of poison pills, companies started to introduce variations on the pill including dead hand and no hand pills. Dead hand pills provide that only board members who originally adopted a poison pill may redeem the pill. Dead hand pills undermine attempts by acquirers to first use a proxy contest to remove the adopting directors and then second have the new directors redeem the pill to pave the way for a tender offer bid. Under a no hand pill, no one can remove the pill for a specified period of time following the announcement of a bid (committing the board to blocking the bid no matter the value of the bid for shareholders).30)
28) See Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (1995) (discussing the Unocal standard); see also Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1989) (discussing Unocal threats against which a board may implement defensive tactics). 29) See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). Whether Revlon applies turns on whether there is in fact a decision on the part of the target board to put itself up for sale in a transaction where shareholders will not get any subsequent control premium. See Paramount Communications v. QVC Network, 637 A.2d 34 (Del. 1994). 30) For a discussion of dead hand and no hand pills see Stephen M. Bainbridge, Precommitment Strategies in Corporate Law: The Case of Dead Hand and No Hand Pills, 29 J. CORP. L. 1 (2003).
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Delaware eventually outlawed both the dead hand and no hand pills, although Georgia and Pennsylvania have taken more permissive positions.31)
III. Korea
Korea has often looked to the U.S. legal regime as a model for how to regulate the Korean corporations and securities markets. Shortly after the U.S. Securities and Exchange Commission promulgated Regulation FD in 2000, for example, Korea followed suit with its own version of prohibitions against selective disclosures. Korea enacted a class action law that went effective in 2005 similar (although not identical) to the laws in the U.S. allowing class actions. Korea also employs a U.S.-Williams Act-style early warning system in requiring investors holding 5 percent or more of the equity securities of a public company to disclose to Korean Financial Supervisory Commission and the Korea Stock Exchange (KSE) within five days the purpose of their acquisition of shares, among other requirements.32) Simply adopting the laws of the United States, or any other country, may not provide the best laws for Korea.33) Unlike the United States, many of the larger Korean companies are members of Chaebol conglomerate groups. Chaebol groups represent a large fraction of Korean’s economy and stock market capitalization.34) Typically forty to fifty firms will comprise a Chaebol group.35) While shares of Chaebol companies often trade on the Korean Stock Exchange and other markets, the founding family of a Chaebol typically holds a controlling interest in each company
31) See Camody v. Toll Brothers, Inc, 723 A.2d 1180 (Del. 1998); Invacare Corp. v. Healthdyne Tech, 968 F. Supp 1678 (ND Georgia, 1997); AMP v Allied Signal No 98-4405 LEXIS 15617 (Pennsylvania, 1998). 32) See http://www.korealaw.com/content/immigration/Immigration01_02.asp?cate=57 (last visited on July 3, 2007). 33) See also Ok-Rial Song, The Legacy of Controlling Minority Structure: A Kaleidoscope of Corporate Governance Reform in Korean Chaebol, 34 LAW & POL’Y INT’L BUS. 183, 187, 221, 244 (2002) (arguing that the transplant of U.S.-style corporate governance into Korea may not be effective without also reforms to the separation of votes and cash flow rights within Chaebols). 34) See Jeong Seo, Who Will Control Frankenstein? The Korean Chaebol’s Corporate Governance, 14 CARDOZO J. INT’L & COMP. L. 21, 23-24 (2006) (“In 2002, chaebols were involved in an average of 19.2 industries, ranging ‘from chips to ships.’ In addition, public firms belonging to ten major chaebols accounted for more than 52% of stock market capitalization as of 2003.”). 35) See Song, supra note 33, at 184.
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within the Chaebol group. The controlling interest will usually include direct share ownership by the founding family as well indirect ownership through “pyramid” ownership in other companies that in turn own shares in the particular Chaebol company.36) The pyramid ownership scheme in Chaebol groups leads to a large separation of voting and cash flow rights and magnifies the agency costs to minority shareholders.37) A controlling shareholder that owns 50% of Company A that in turn owns 50% of Company B will have control over Company B with only a 25% ownership interest in Company B. This divergence between control and rights to cash flows gives the controlling shareholder an outsized incentive to expropriate private benefits of control at the expense of Company B’s minority shareholders.38) Not only are agency problems within Chaebol firms exacerbated, but the legal and market mechanisms to limit such agency problems in Korea are weaker compared with firms in the United States. Regardless of the legal regime in Korea with respect to explicit defensive tactics, hostile takeovers are presently difficult in Korea due to the pyramid share holding schemes that concentrate voting power (but not cash flow rights) with the controlling shareholder. The controlling shareholder’s pyramid control over each Chaebol firm provides a defensive tactic even more powerful than a poison pill. Similarly, proxy contests and other forms of shareholder vote are typically ineffective in disciplining the controlling shareholder in a Chaebol group. This Part canvasses three areas of possible reforms to improve on corporate governance within Chaebol firms.
36) While dual class stock is prohibited in Korea, the pyramid structure of ownership allows equally if not greater separation of cash flow rights and voting rights. See Song, supra note 33, at 199 (citing Korea’s Commercial Act and Monopoly Regulation and Fair Trade Act). 37) See Song, supra note 33, at 199-201. Song also notes that “all companies in the chaebol designated by the Korean Fair Trade Commission are prohibited from acquiring or owning shares of stock of other domestic companies in excess of 25% of their net assets, and the amount of such net assets is calculated by subtracting the amount of the investment made by the affiliated firms. However, the enforcement of such a strict rule has rarely been observed in practice.” See id. at 200-201. Note that the ceiling on affiliate share ownership was increased to 40% in 2007. Thanks to Professor Kon Sik Kim for this information. 38) See Seo, supra note 34, at 25-26 (reporting that “[i]n a typical Korean chaebol, the dominant family usually owns only a small equity share in the conglomerate — less than 10% of the total equity in many cases.”). Seo provides examples of Chaebol private benefits of control, including mismanagement and outright expropriation of value through “tunneling” transactions. See id. at 52-56.
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1. Fiduciary Duties
Due to the difficulty of takeovers, regulators may wish instead to focus on other mechanisms to improve corporate governance within Chaebol firms. For example, Korea could increase the fiduciary duties imposed on controlling shareholders. As discussed above, the United States imposes various limitations on controlling shareholders. Controlling shareholders may not usurp corporate opportunities or pay themselves a disproportionate dividend. In addition, controlling shareholders face court review under the strict entire fairness standard for squeezeout mergers (but not non-coercive tender offers).39) Despite the limits imposed on them, controlling shareholders enjoy substantial freedom in the United States. A controlling shareholder is under no duty to force the corporation to undertake any actions, even if maintaining the status quo is disproportionately in the controlling shareholders interest. Nor is any duty imposed on how a controlling shareholder votes its shares. Controlling shareholders may elect directors of their choosing to the corporation. When faced with a value-increasing merger proposal, a controlling shareholder may vote its shares to block such a proposal to further its own private interests. Controlling shareholders are also under no obligation to contribute more capital to a corporation, or sell or purchase their shares even if such actions will improve the welfare of all shareholders. When they do sell, controlling shareholders may receive a control premium for their shares not shared with minority shareholders. Control, in other words, is valuable. Korean regulators may wish to focus more specifically on the agency problems involving controlling shareholders. The ability of controlling shareholders in Korean Chaebols to use their control to extract value through transactions between related companies in the Chaebol group provides a large source of the private benefits of control for the controlling shareholders.40) Greater fiduciary limits on controlling shareholders will reduce such private benefits and thus lessen the benefits from
39) See supra note 17. 40) See Seo, supra note 34, at 75 (“Perhaps the reason that pyramidal group structures are relatively rare in the United States and the United Kingdom is that many transactions inside a group would be challenged on fairness grounds by minority shareholders of subsidiaries, who would get a receptive hearing in court.”).
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maintaining the pyramid ownership structures common in Chaebol groups. Until the late 1990s, controlling shareholders enjoyed great leeway to extract private benefits of control in Korea. Among the reforms installed after the 1997 Financial Crisis, Korea imposed direct legal liability on controlling shareholders within Korea’s corporate law.41) It is unclear how far direct liability will go in punishing controlling shareholders who act opportunistically and whether this punishment will deter such behavior. The ability of controlling shareholders to extract private benefits is wide ranging across a number of different transactions. Controlling shareholders may extract value through the hiring of family members at substantial salaries. Controlling shareholders may divert corporate opportunities away from Chaebol member firms in which they hold a lower fraction of the cash flow rights to firms where they hold a greater fraction. Controlling shareholders may order firms in the Chaebol to enter into self-dealing, intragroup transactions designed to increase the profit of firms in which the controlling shareholder holds a larger fraction of the cash flow rights.42) Controlling shareholders may attempt to repurchase minority shares at an overly large discount. And the list goes on. Despite the institutional differences between Korea and the United States, the methods through which controlling shareholders in both countries extract private benefits of control are similar. While U.S. controlling shareholders lack the pyramid ownership structure, courts in the U.S. have long dealt with self-dealing transactions, usurpation of corporate opportunities, share repurchases from minority shareholders at inadequate prices and so on. Korea could therefore benefit in this particular area of substantive law from piggy-backing on the developed body of fact intensive law within Delaware on conflicted transactions with controlling shareholders.
41) See Song, supra note 33, at 224. See Commercial Act, art. 401-2 (Korea). 42) The Monopoly Regulation and Fair Trade Act (MRFTA), as administered by the Korean Fair Trade Commission (KFTC) in Korea governs intra-group transactions. The MRFTA requires approval of transactions where the amount of the transaction exceeds 10% of the firm’s capital or 10 billion won by the board of directors of involved companies. In addition to approval, the Chaebol must disclose the transaction to the public. The KFTC is also given the authority to review the transaction and can either block or adjust the transaction or impose a surcharge of up to 5% of the sale price on the purchasing company. See Seo, supra note 34, at 77 (citing the MRFTA, art 11- 2(1)). Problems exist with the MRFTA procedure. The purpose of the MRFTA regulation of intra-group transactions is not to protect minority shareholders. Instead, as Seo notes “it is rather intended to protect competitors of a preferentially treated party.” See id. (citing MRFTA, art. 23(1); 24;24-2). Any KFTC review will not necessarily result in the protection of minority shareholders.
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Indeed, in addition to mere piggybacking, Korea could consider expanding the fiduciary duties placed on controlling shareholders. The division between permissible and impermissible actions on the part of controlling shareholder in the United States does not necessarily represent the best division for Korea. The present high level of entrenchment among Chaebol controlling shareholders in Korea argues for some amount of expansion of fiduciary duties. In the United States, one might worry about the increased probability of frivolous suits that may come with an expanded set of fiduciary duties. As well, expanded fiduciary duties on controlling shareholders may deter some from becoming controlling shareholders in the first place, exacerbating agency problems involving managers at companies with dispersed shareholders. Korea’s situation however is different. The problem in Korea is not agency costs involving managers with dispersed shareholders but rather with large controlling shareholder blocks. Because control shareholder blocks already exist, the cost of deterring their formation is less important in Korea. What sorts of enhanced fiduciary duties are possible? Korea, for example, could consider applying a strict enhanced scrutiny review of large Chaebol intragroup transactions (above a specified won amount) that are not approved by a majority of the minority, non-Chaebol shareholders. Similarly, Korea could implement a strict corporate opportunity doctrine, prohibiting a controlling shareholder from using any opportunity derived from a Chaebol firm regardless of whether the opportunity is in the Chaebol firm’s line of business. Rather than give controlling shareholders of a Chaebol complete freedom to vote their shares and obtain a control premium on the sale of their shares, Korea could also take a different stance than the United States. The Essay discusses below one proposal to alter the incentives on how controlling shareholders vote their shares in the context of a hostile takeover.
2. Shareholder Litigation
In addition to strengthening fiduciary duty standards, Korean regulators may consider increasing the private enforcement of fiduciary duty standards through derivative suits and securities class actions. Korea recently enacted the Securities Class Action Act (SCAA) that went effective in 2005. The SCAA allows investors to bring a class action against publicly-listed companies for a defined list of investor harms, including insider trading, share manipulation, and misrepresentations in a
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securities offering registration statement or periodic filing.43) While Korea has implemented a class action law, the law as presently designed is unlikely to generate many law suits. In Korea, public companies in Korea are generally smaller in size compared with public companies in the United States. Consider the range of companies trading on the KSE. In 2002, there were 683 companies listed on the KSE. The largest company listed on the KSE, Samsung Electronics, had a market capitalization of U.S. $39.1 billion. Market capitalizations dropped rapidly, however, after Samsung Electronics. The tenth largest firm, Samsung Electro-Mechanics, had a market capitalization of U.S. $2.5 billion in 2002. After taking away the thirty largest market capitalization firms, the remaining 653 listed firms had an average market capitalization of only U.S. $83.4 million. In 2002, the entire NYSE had a global market capitalization of $13.4 trillion and about 2783 listed firms, giving an average market capitalization of $4.82 billion. Evidence exists that plaintiffs’ attorneys file suit primarily against larger issuers, offering greater securities damage awards, in the United States. Whatever the loss in deterrence caused by the tendency of plaintiffs’ attorneys to file suit only against larger companies in the U.S., the problem is only magnified in Korea. Samsung Electronics would likely qualify under even the most stringent size screens employed by U.S. plaintiffs’ attorneys. Perhaps not coincidentally, the second derivative suit in Korea where shareholders won a judgment against directors of a Korean corporation was against Samsung Electronics. Nonetheless, Samsung Electronics is an outlier in terms of market capitalization among KSE-listed firms. It is unclear what impact a class action regime will have in Korea outside of the top thirty listed firms on the KSE. In the United States the laws governing securities class actions depend on the presence of a robust plaintiffs’ attorneys bar to bring such class actions. In comparison, the lack of any professional plaintiff firms in Korea exacerbates the lack of class action enforcement. The number of practicing attorneys is much lower in Korea. As of the early 2000s, South Korea had only about five thousand practicing attorneys serving a population of forty-eight million people.44) In contrast, the state of
43) For a description of Korea’s securities class action law see Dae Hwan Chung, Introduction to South Korea’s New Securities Class Action, 30 J. CORP. L. 65 (2005). 44) See Misasha Suzuki, The Protectionist Bar Against Foreign Lawyers in Japan, China, and Korea: Domestic Control in the Face of Internationalization, 16 COLUM. J. ASIAN L. 385, 391-92 (2003).
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California has approximately 157,710 active attorneys providing services for a population of over thirty-five million people.45) Regulators may wish to consider ways of improving on the derivative suit and class action regime in Korea. One possibility is for regulators to provide fixed bounties for plaintiffs’ attorneys who successfully bring a derivative or class action suit. Regulators could set the fixed bounty at an amount sufficient to cover the fixed costs of litigation and provide a profit above these costs for plaintiffs’ attorneys. Even if the damages from such an action are small, due to the relatively small market capitalization of many Korean companies, a fixed bounty to cover the fixed costs of litigating a class action suit may increase the incentive of some attorneys to file class action suits. With sufficient bounties, some attorneys may choose to specialize as plaintiffs’ attorneys. With the rise of specialized plaintiffs’ attorneys will come increased expertise in assessing corporate actions and monitoring of public companies for activities harmful to minority shareholders.
3. Hostile Takeovers and Reverse Tag-Along Rights
Even with a more vigorous fiduciary duty regime to control agency costs among non-Chaebol firms, developing a strong takeover regime is important. Not all actions on the part of managers that reduce shareholder value are the same. Managers may extract value over time by, for example, shirking at their work. Other managers may extract a large amount of value in one isolated transaction, such as transferred a corporate asset to themselves at a bargain price. A fiduciary duty regime works best to stop isolated and large expropriations of value (through a self-dealing transaction for example). Fiduciary duties work less well in disciplining managers that engage in mismanagement or low levels of expropriation over a large number of transactions and decisions. Takeovers, on the other hand, because of the focus on overall share price and not any particular transaction, work better at deterring low level (but in the aggregate egregious) expropriation of private benefits of control.46)
45) The State Bar of California, Membership Demographics, at http://members.calbar.ca.gov/search/ demographics.aspx (visited on December 3, 2003). 46) Song similarly makes the point that not all costs controlling shareholders impose on minority shareholders are the same. While rules focusing on misappropriation of assets, insider trading, and self-dealing work well, according to Song, other costs are not so easy to reduce. See Song, supra note 33, at 239. Song notes that the large
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Hostile takeovers involving Chaebol group firms presently face enormous hurdles.47) Korea has made changes over the past 15 years that have increased the possibility for takeovers. In 1994, Korea repealed Article 200 of the former Security Exchange Act, allowing outside investors to retain more than 10% of a firm’s equity.48) Since the Asian Economic Crisis in 1997, various limitations on foreign investors have also been lifted, opening up Korea’s market to a new set of investors more willing to engage in aggressive tactics to improve corporate governance and share value.49) In 2004, Korea began to allow domestic private equity funds.50) Korea also repealed a provision requiring acquirers that acquired more than 25% of a target’s shares to make a bid for a majority of the shares.51) Despite the reforms in Korea, hostile takeovers against Chaebol firms remain a daunting undertaking in Korea today due to the voting power of controlling shareholders. Normally a hostile takeover is difficult against a Chaebol firm because the controlling shareholder can use its direct and indirect (through other affiliate firms in the Chaebol group) votes against a merger. While the total voting power of a controlling shareholder is typically less then 30%, the large block of votes against a merger raises the cost to a potential acquirer seeking to acquire sufficient votes among the remaining shares — particularly to the extent some of the remaining shares are in the hands of parties friendly to the incumbent controlling shareholder (such as financial institutions and vendors).52) In response, regulators in Korea may
degree diversification present within Chaebol businesses will likely persist absent a more radical change to the alignment of voting and cash flow rights (or, alternatively, government direct intervention). See id. 47) See Song, supra note 33, at 211 (“[O]ne of the most important barriers to hostile takeovers is the CM structure itself. Because the controlling shareholders have over 40% of outstanding voting power, the bidder has to acquire almost all of the remaining shares.”). 48) See Seo, supra note 34, at 68. 49) See Seo, supra note 34 at 68. 50) See Hee Chul Kang, The Current State of Equity Investments By Foreign Funds [In South Korea] and Related Legal Issues, 15 PAC. RIM L. & POL’Y 73, 86 (2006). 51) See Bernard Black et al., Corporate Governance in Korea at the Millennium: Enhancing International Competitiveness: Final Report and Legal Reform Recommendations, 26 J. CORP. L. 538, 555 (2001). 52) For a discussion of takeover activity in Korea and the vulnerability of Korean Chaebol groups of hostile takeovers see Hwa-Jin Kim, A Tale of Three Companies: The Emerging Market for Corporate Control in Korea, in A DECADE AFTER CRISIS: TRANSFORMING CORPORATE GOVERNANCE IN EAST ASIA (Hideki Kanda, Kon Sik Kim & Curtis Milhaupt eds., Routledge, 2008) (“Numerous companies that belong to corporate groups are already free from any hostile takeover attempts because the recourse is available for them through the means of cross and circular shareholdings and complicated ownership structure.”).
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wish to alter the incentives of controlling shareholders of Chaebol firms faced with a hostile bid. As discussed above, Delaware takes an intermediate position with respect to target company defensive tactics. While the business judgment rule is not applied, courts eschew applying an entire fairness standard. Instead, an intermediate standard of review is applied following Unocal, Revlon, and other major Delaware cases. Korea may wish to go a step further than Delaware law given the entrenchment of the controlling shareholders at the Chaebol corporations. One tender offer provision increasingly popular among other countries is the provision for mandatory bid rights in a tender offer, sometimes referred to as tag-along rights.53) The European Union takeover directive, for example, provides that a person who acquires control must make a bid for the remaining minority securities at an equitable price.54) If an outside acquirer obtains more than a specified percentage of a target’s equity (for example, many EU member states set the threshold at 30 or 33% of the voting rights),55) then the acquirer must purchase the remaining shares at the same or equitable price. Tag along bid rights prevent the acquirer from profiting through the extraction of value from minority shareholders who do not tender their shares in a first stage of a tender offer. Tag along rights not only protect minority shareholders, they help ensure that the acquirer who obtains control of the target company through a tender offer in fact values the entire enterprise more than the target shareholders. Acquirers that do not value the target more highly will be unwilling to pay the same high price to all the target’s shareholders. Tag along rights therefore have the virtue of ensuring that assets move to those who value them more highly. Commentators on Korean corporate governance have supported the adoption of tag along rights in Korea.56) Regulators may use a modified version of tag along rights to alter the incentives of the controlling shareholders and improve the efficient
53) See John C. Coffee, Jr., Racing Towards the Top?: The Impact of Cross-Listings and Stock Market Competition on International Corporate Governance, 102 COLUM. L. REV. 1757, 1808-11 (discussing tag along rights in Brazil and Mexico). 54) See Zsofia Kerecsen, Regulation of Takeover Bids in the European Union (presented at 2007 KDI Conference on the Market for Corporate Control: Comparative Perspectives). 55) See id. 56) See Black et al., Corporate Governance in Korea at the Millennium, 26 J. CORP. L. 537, 605 (2001) (proposing that “a mandatory offer for the company’s remaining ordinary shares following acquisition of a controlling interest by any such company, person or group of affiliated persons, unless the obligation to make such an offer is waived by majority vote of the shareholders who would otherwise be entitled to accept the offer”).
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allocation of resources in Korea. In particular, regulators could force controlling shareholders that reject a hostile acquisition bid to put money behind their rejection. Under this proposal (termed here “reverse tag-along rights”), those who vote against a hostile bid would have an obligation to repurchase a specified fraction of the shares of those who voted for the hostile bid at the bid price. The proposed reverse tag- along rights would treat the controlling shareholder in rejecting the bid price of a hostile acquirer as implicitly deciding to purchase its own shares at the bid price. The reverse tag-along rights would then force the controlling shareholder to offer this same bid price to the target minority shareholders. If the controlling shareholder truly believes that the bid is inadequate and that the corporate value is greater than the bid price, the controlling shareholder will profit from purchasing additional shares at the bid price. On the other hand, the share purchase provision will impose a penalty on those controlling shareholders that reject the bid not because they believe it undervalues the company but instead to maintain their own private benefits of control. A reverse tag-along rights scheme is not without costs. Some hostile acquirers may seek to abuse the rule by filing false tender offer bids, seeking to harass the controlling shareholder of a Chaebol and drain the controlling shareholder of its cash resources. Even in a legitimate bid, the controlling shareholder of a Chaebol may lack the liquid resources to buy back the necessary number of shares from the minority shareholders. Even in situations where the target corporation is in fact worth more than the hostile bid price, the lack of liquidity may cause the controlling shareholder to acquiesce to the bid. The controlling shareholder may also not wish to take such an undiversified position in any one company. While these complaints are legitimate, at least two responses are possible. First, the deep entrenchment of the Chaebol firms and their current insulation from hostile bids coupled with the ineffectiveness of current private rights of action in Korea lead to large private benefits of control. The need to reduce such private benefits is correspondingly greater in Korea compared with countries with stronger corporate governance protections. Not only are shareholders harmed, but the general economy is harmed from the inability to move corporate assets to their highest value use due to the concern of controlling shareholders to maintain their private benefits of control. While not all hostile bids may improve on shareholder welfare, the entrenched private benefits enjoyed by Chaebol controlling shareholders and the benefit from moving assets to more efficient uses counsel in favor of a radically more pro-
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takeover regime. Second, procedural protections are possible to alleviate some of the concerns of a reverse tag-along rights regulatory requirement. Government regulators may intervene to moderate the level of market pressures imposed through reverse tag- along rights. Consider, for example, the following three step process that Korea could impose on hostile bids for control:
(1) In the first step, a government regulatory body such as the Korean Financial Supervisory Commission (KFSC) or other regulatory decisionmaker (such as the KSE) could assess the hostile tender offer bid. Introducing a government regulator to make an initial assessment does not necessarily mean that the government controls the substantive terms of takeovers. Instead, government regulators could play a more limited role. In the United States, courts often have the final say in hostile takeover battles, determining whether and when fiduciary duties require the board to lift its defensive tactics. This determination, however, focuses only, in a non-auction situation, on the question of whether the defensive tactics are reasonable in relation to the threat posed by the hostile takeover bid to target shareholders and corporate policy.57) Korean regulators may make a similarly limited assessment of the acquirer and the acquisition bid. Korean regulators, for example, could take into account the reputation of the bidder, assessing whether there is a true motivation to acquire the company versus a desire simply to harass the controlling shareholder of the company. The initial assessment can also look at whether the bid price is likely to be adequate, taking into account the performance of the target company relative to comparable companies. Because of the possibility of regulatory error in assessing the fairness of a bid price, such a review should not impose too stringent standards. Instead, so long as the bid is within the range of possible bid prices that a shareholder might accept, the bid should be allowed to go forward. To provide for consistency (and to limit the possibility of a regulatory decisionmaker from choosing to block a hostile bid for reasons other than overall shareholder welfare), the regulatory decisionmaker could be
57) See supra note 28 and accompanying text.
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required to write up a set of reasons for its decisions. Potential hostile bidders could then review these reasons to predict how future bids may fare.
(2) In the second step, shareholders of the corporation should be given the ability to vote as a group on the hostile tender offer bid. The ability to vote as a group provides another layer of protection for the target shareholders against coercive tender offer bids.58) So long as the vote is separate from the decision whether to tender or not, the vote of the group of shareholders provides an effective deterrent to coercive bids. If the vote approves the tender offer, the tender offer should proceed.
(3) In the third step, if the hostile bid fails (either because the target shareholder vote did not approve the bid or insufficient shares were tendered in the case of a contingent bid), those shareholders who voted against the bid would become obliged to make an offer to purchase a predetermined fraction of the shares of those who voted for the bid and tendered their shares. Shareholders who supported the hostile bid, at their choice, could either sell to the shareholders opposing the bid or, in the alternative, keep their shares. Regulators can adjust the purchase fraction to take into account liquidity problems. For small-size hostile bids, for example, those who voted against the bid could be made to repurchase all of the shares of those in favor of the hostile bid. For larger bids where liquidity is an issue, those who oppose could be forced to repurchase only a fraction (say one-quarter for example) of the shares of those who favor the bid. Variations are possible on the reverse tag-along provision. If regulators are able to identify those shareholders who are in control, the regulators could
58) See Lucian Bebchuk, The Case Against Board Veto in Corporate Takeovers, 69 U. CHI. L. REV. 973, 982 (2002) (“A voting mechanism provides a ‘clean’ way of enabling shareholders to express separately their preferences [in relation to whether a takeover should go ahead, and whether they want their shares acquired under the takeover].”); Lucian Bebchuk, Towards Undistorted Choice and Equal Treatment in Corporate Takeovers, 98 HARV. L. REV. 1695, 1697-98 (1985) (“According to the undistorted choice objective, a target should be acquired if and only if its shareholders, or at least shareholders holding a majority of its shares, judge the offer acquisition price to be higher than the independent target’s value.”).
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place the obligations of the reverse tag-along provision only on these identified controlling shareholders. On the other hand, some non- controlling shareholders may vote against a bid out of pre-existing arrangements with the controlling shareholder. For example, one Chaebol group may own a minority position in another Chaebol’s company and agree to vote against a tender offer in return for a separate side payment. Placing the reverse tag-along burden on all shareholders who vote against a tender offer would help deter separately negotiated side deals providing support for a controlling shareholder. As another variation, regulators may wish to apply reverse tag-along rights only if a majority of minority, non-controlling shareholders either vote for the tender offer in step two or tender their shares in step three. Some bids may fail simply because the shareholders believe that the bid is inadequate. By requiring that a majority of minority shareholders either vote or tender their shares in favor of an offer, regulators provide another check against inadequate bids and impose the burden of tag-along rights on controlling shareholders only when the minority shareholders demonstrate that they in fact value the initial tender offer bid.
One may wonder whether any acquirers will appear even if Korea opens Chaebol companies up to more hostile bids in the future using a reverse tag-along rights rule. Significantly, hostile takeover attempts do occur in Korea today, although infrequently. Kumkang Korea Chemical Co., Ltd. (KCC), for example, recently launched a hostile takeover attempt of Hyundai Elevator, Inc.59) The growing influence of large institutional investors, particularly foreign funds, provides the prospect of financially-well backed bidders in the future. Since 1997, foreign investment in Korean equity has grown rapidly. As of 2004, foreigners owned over 40% of the total aggregate market capital in the Korean securities market.60) Foreign funds represented about half of the foreign invested capital.61) Foreign private equity funds have already taken concentrated positions in Korean companies, sometimes with control. Management control in Korea First Bank, KorAm Bank, and Korea
59) See Kang, supra note 59. 60) See id. at 80. 61) See id. at 80.
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Exchange Bank has changed hands in recent years.62) In addition, the Korean government recently amended the Act on Business of Operating Indirect Investment and Assets to allow for more domestic private equity funds.63) Another objection to reverse tag along rights focuses on the overall desirability of hostile acquisitions from the perspective of society as a whole. Labor union and employees will likely resist hostile takeovers into the future in Korea,64) adding political pressure against such takeovers. Regulators at the Fair Trade Commission of Korea have stated: “[I]t will not be acceptable, socially and politically, if frequent and massive downswings and restructuring of corporations by M&A activities result in a serious unemployment problem.”65) Against the interests of labor unions and employees is the possibility that hostile takeovers, by increasing overall efficiency within Korean corporations will result in faster economic growth, more job creation, and higher standards of living for all Koreans. While special interests opposed to hostile takeovers are vocal, the broader beneficiaries from faster economic growth are less vocal. It is unclear, therefore, whether the objections of unions and displaced employees should represent the preferences of Korean society as a whole. Even if they do, the disruptions caused to unions and employees are not unique to hostile takeovers. Friendly acquisitions occur. And even without an acquisition, companies can reorganize in ways that dramatically affect worker welfare. It is also unclear therefore why hostile takeovers are singled out as disruptive in particular to unions and employees. An important impact of hostile takeovers is on the structure of Korean Chaebol groups. Strong fiduciary duties against intra-group transactions coupled with a more permissive takeover environment will put pressure on group structures that are put together less for efficiency reasons and more to benefit the controlling shareholders of the group. Regulators, of course, could simply mandate a change in the present pyramid ownership scheme within groups. Korea, for example, presently places ceilings on intra-group shareholding. These ceiling provide a crude way to reduce the influence of a controlling shareholder in a pyramid ownership structure by depriving
62) See id. at 74. 63) See id. at 74. 64) See id. at 86. 65) See Seo, supra note 34, at 68 (citing the Fair Trade Commission of Korea).
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group companies of voting power in other group companies.66) The government also attempted to require Chaebols to identify their primary industry and “voluntarily” exchange some of their non-primary businesses in what is referred to in Korea as the “big deal”.67) However, regulators may make mistakes. Government regulators may not have full information on the value of bringing certain types of operating companies together nor the expertise to determine the best financial ownership structure. While the pyramid scheme of ownership of the Chaebol groups appears to allow controlling shareholders to expropriate large levels of private benefits of control, perhaps such structures allow for synergies between group companies.68) Commentators have observed that the ceilings may result in inefficiencies, limiting the ability of Chaebol firms to establish new subsidiaries to take advantage of limited liability to engage in specific new business operations.69) Rather than mandate any particular control
66) Seo describes the limits as follows: The MRFTA limits individual affiliated companies from holding other affiliated companies’ equity when the companies belong to an enterprise group with more than 6 trillion won (equivalent to $6 billion) in assets. Such an enterprise group is defined as a shareholding-capped enterprise group. More specifically, a member company of the shareholding-capped enterprise group cannot acquire other affiliated companies’ shares surpassing 25% of its net assets. The net assets of a company refer to the amount obtained by subtracting the amount of equity investment made by the company’s other affiliates in the company from the larger amount between the company’s capital sum and equity capital. Seo, supra note 34, at 60-61. See id. at p. 56-57 (“With the reinforcement of the ceiling on intra-group shareholding in 2001, the Chey family became unable to exert leveraged voting power on the SK Corp. through the member companies, such as SK C&C. Of the 10.83% of the SK Corp.’s shares owned by SK C&C, approximately 9.5% were deprived of voting rights. As a result, the family would have lost control over a large part of the conglomerate.”). Note that the ceiling on affiliate share ownership was increased to 40% in 2007. Thanks to Professor Kon Sik Kim for this information. 67) See Song, supra note 33, at 222. Song observed though that: “[O]nly a few of the big deals have been completed at present. Meanwhile, Chaebol have no stopped diversifying their investments.” Id. at 222. 68) See Seo, supra note 34, at 26 (noting that “the potential dissipation of corporate wealth cannot explain the surging popularity of at least some chaebol firms among investors. For example, Samsung Electronics, a core company of the Samsung chaebol, accounts for 18.18% of capitalization in the Korean stock market as of March 2005.”). Seo goes on to remark that the Chaebol structure may be useful in reducing the agency cost from the rising use of professional managers to run corporations in Korea. See id. at 28-29, 49 (mentioning the failure of Kia Motors as an example of the dangers associated with professional managers). See also Song, supra note 33, at 185 (noting that “the Chaebol system has historically produced some great successes.”). 69) See Seo, supra note 34, at 64 (noting the possibility that “a firm may abandon a risky yet profitable project because of limitations on equity-holding.”).
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structure, allowing the market to determine for itself the value of the Chaebol control structure (with background fiduciary duties to control obvious attempts to grab value through conflicted transactions) introduces an alternative decisionmaker with better expertise and incentives to adjust ownership structures to maximize shareholder welfare.70) Providing a mechanism, such as reverse tag-along rights, to expose the Chaebol pyramid ownership structure to greater market discipline has the promise of allowing value-increasing pyramid structures (if any) to remain intact while unwinding value-decreasing structures. Exposing Chaebol companies to the limited possibility of a hostile takeover provides for a market mechanism to determine the optimal organization of Chaebol firms. The proposed reverse tag-along rights do not force controlling shareholders to divest themselves of any specific Chaebol firm. Instead, reverse tag along rights simply impose market discipline on Chaebol ownership structures. If a particular firm is truly at maximum value within a Chaebol, the controlling shareholder will match any hostile bid for control. If not, then the firm and its shareholders are better off outside of the Chaebol. The reliance on a regulatory authority, such as the Korean FSC or the Korea Stock Exchange, to impose some limits on hostile bids reduces the problems of opportunism on the part of bidders that may come with a reverse tag along rights regime. While problems still exist, the deeply entrenched nature of the Chaebol pyramid ownership structure and the more error-prone alternative of relying on government direct intervention argue for using limited market pressures to restructure the Chaebol groups when possible, as within a reverse tag along rights regime.
IV. Conclusion
Korea’s economy has been dominated by Chaebol groups for the past several decades. Following the 1997 Asian financial crisis, foreign investment and deal activity escalated rapidly in Korea. Given the predominance of Chaebol firms in
70) In contrast, Korea’s government policy in the 1960s and 1970s largely led to the creation of the Chaebol structure in the first place. See Song, supra note 33, at 185-186. While the Chaebol structure at the time may have had value for Korea’s then less developed economy, it is unclear whether this value still exists today. Implementing reverse tag-along rights would allow the market to assess whether the Chaebol continues to have such value.
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Korea’s economy, this Essay observes that important institutional differences between Korea and the United States (the model for many of Korea’s recent corporate governance-related reforms, such as Regulation FD and Sarbanes-Oxley Act-like reforms). Controlling shareholders dominate Korean Chaebol firms. Irrespective of whether Korea eventually adopts poison pills and other defensive tactics, the large control position of the Korean Chaebol firms represent a potent antitakeover defensive tactic, shielding Chaebol firms from market pressures. Korea also lacks a specialty corporate court and a well-developed plaintiffs’ attorney bar. These differences call for a different emphasis in the package of laws controlling agency costs within Korean firms. Deciding upon the exact package of laws that is optimal for Korean companies is a challenging task — particularly since market participants are constantly evolving the techniques used in corporate control transactions. The Essay makes several suggestions — including expanded fiduciary duties, fixed bounties for private class action attorneys, and “reverse” tag-along rights for minority shareholders in the case of a failed hostile takeover bid against a Chaebol member firm.
KEY WORDS: Hostile Takeover, Controlling Shareholder, Shareholder Litigation, Reverse Tag-along Right, Chaebol
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Why do We Pursue “Oral Proceedings” in Our Legal System?
Hyun Seok Kim*
Abstract
Historically, the value of oral proceeding was found in its two major goals to be advanced: enhancing transparency and fairness of the judiciary and providing actually opened court-procedure to the public. In these days, however, what makes our judiciary take notice of is that oral argument helps communications between parties and judges in sharing information, leading to harmonious dispute- settlements and enhancing the appropriateness of decision-making. Judical adherence to the conventional court practice such as focusing on the case files, minimizing in-court arguments, judges’ concentrating on writing opinions, has obstructed the communication among the people involved in the case and caused dissatisfaction to them. As a measure to resolve these problems, oral proceeding should mean a judicial effort of making itself accountable to the public: In trial, there must be arguments over the substantial merits of the case on issue; Trial should be a place of interactive communication between the judges and the parties; Court’s managements should secure the pro se partys active procedural participations. Through oral argument proceeding in presenting the case-file contents submitted and communication between the judge and the parties, more alternative dispute resolutions are likely to be and there might be increasing people’s trust in judiciary, leading fewer appeals arising from the parties’ acceptance of outcome of the trial. As oral proceedings have been more used, with more court scheduled date, there has been more arguments over the substantial merits of the case on issue, making the parties and the judge share more information. While some have expressed concerns that oral argument could be time wasting in repeating the case briefs already submitted to the court, oral proceeding is a method of hearing where we try to get something more than just reading written pleadings. Since we tried to implement oral proceeding in our court system, the shared belief in the need of strengthening oral proceeding has been widely expanded among the members of the legal communities. We still need more guidelines for a detailed manual and development of supporting programs and facilities.
* Presiding Judge of Busan District Court, Republic of Korea.
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I. Introduction
1. Background of raising the issue of “oral proceedings”
For the last one and a half years, the Korean judiciary has been in the center of debate on whether to implement oral proceedings regularly into our judicial system. What caused oral proceedings to become one of the most controversial issues in the Korean judiciary? The judiciary should be accountable to the public. However, due to rapid social changes in Korea, including the growth of the public’s aspirations for their rights, it is unlikely that the public would be satisfied with the services provided by the judiciary. Thus, the public will end up distrusting the judiciary.1) We grabbed the catch phrase of oral proceedings out of imminent fear that the basis of our judiciary system would collapse if the judiciary adheres to conventional court practices and do not take measures to adjust to the desires of the public. Then, what do we expect from oral proceedings in the judicial process as one of the crucial means to reconstruct our judicial system? Would a switch to oral proceedings build up public trust on the judiciary? This article examines the background of proposing oral proceedings, the process of discussing, and feasible methodology of using oral proceedings in the litigating process and ongoing prospects and tasks.
2. oral proceedings as a principle in civil procedure
As a counterpart of the principle of written proceeding, the principle of oral proceedings2) refers to a ‘speech-centered’ legal process. In a ‘speech-centered’ legal process, the parties communicate with the judges through speech when parties offer their arguments, testimonies and evidence from discoveries for hearings. A judge should admit and consider only spoken arguments for his decision under the
1) Byungdae Park, The theory and present situation of civil procedure structure reform (in Korean), THE 21ST THESIS AND PROSPECT (in Korean), at 603. 2) HYUNGJOONG KANG, CIVIL PROCEDURE (in Korean) 427 (5th ed. 2002); SEEYOUNG OH, CIVIL PROCEDURE (in Korean) 393 (2004).
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principle of oral proceedings. The Civil Procedure Act conveys the principle of oral proceedings by promulgating specific rules of arguments,3) examination of evidence4) and judgments.5) In addition, only the judges who took part in the oral proceedings should make judgment on the case at issue.6)
3. Goal and efficiency of the principle of oral proceedings
As a role model of the Korean civil procedure, the German civil procedure has set its current oral proceedings as a substitute of the prior written proceeding tradition. The prior procedure of the old German law before 19th century, which was referred as a typical form of writing-oriented legal proceeding, could be described as the following sentence: “things which are not in records do not exist in this world (quod non est in action, non est in mundo).” However, in 1877, German law adopted the principle of oral proceedings in its code of civil procedure, and began advocating liberal oral arguments in courtrooms in seeking quick and fair trials. This movement was based on the belief of the legal
3) Civil Procedure Act Article 134 (Necessity of Pleadings) (1) The parties shall conduct pleadings orally in the court in regard to the litigation: Provided, with respect to the case to be concluded by a ruling, the court shall determine whether or not any pleadings are to be held. 4) Civil Procedure Act Article 303 (Duty of Witness) Except as otherwise prescribed, a court may examine any person as a witness. Article 333 (Application Mutatis Mutandis of Provisions relating to Examination on Witnesses) The provisions of Section 2 shall apply mutatis mutandis to expert testimony Article 339 (Method of Stating Expert Testimony) (1) The presiding judge may have expert witnesses state their opinions either in writing or orally. Article 367 (Examination of Parties) A court may, either ex officio or upon request of the parties, examine the parties themselves. In this case, the court shall have the parties take an oath. 5) Civil Procedure Act Article 206 (Method of Pronouncement) The presiding judge shall pronounce a judgment by reading the text thereof pursuant to the original of judgment, and if deemed necessary, he may briefly explain the grounds therefor. 6) Civil Procedure Act Article 204 (Principle of Directness) (1) Judgment shall be made by the judges who have taken part in the pleadings forming a foundation thereof
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profession that they should follow the need from the liberal political activism requiring the independence of the judiciary and opening the court proceeding to the public. Following the changing trends of Germany, Japan also adopted the principle of oral proceedings, although it has been criticized for not having realized the system until their recent reformation of the civil procedure.7) Historically, two major reasons are usually advanced by persons who assert the value of oral proceeding: enhancing transparency and fairness of the judiciary, and providing an actual open court procedure to the public. However, what makes our judiciary take notice of this procedure is that oral arguments facilitate communication between parties and judges, eventually leading to a harmonious settlement of the dispute and enhancing appropriate decision-making.
II. Finding problems and seeking the solutions
1. How our court proceedings were in the past
It is our willingness to correct the problems resulting from the prior dominant mode of litigation in the Korean court system. Thus we began to pay attention to the values of oral proceedings and lay emphasis on it in practice. It is the judge’s customary working pattern that he or she enters the courtroom only once a week to proceed tens of cases and on the other days writes judgment-opinions for the overly- loaded cases, articulating the reasons for decisions based on the written briefs and other records from case files in his or her chamber. The following theses are golden rules from that tradition, which the Korean judiciary has identified as a key to success in handling the overloaded cases quickly. However, the Korean judiciary has no choice but to change the system according to social changes, to fulfill public aspirations for better judicial services and dissolute antipathy toward the judiciary.
7) See Article in detail about the history of oral proceedings in Germany and its present situation in Japan, Takesitamirio, Importance and necessity of oral argument (in Japanese), 5 JURIST 220 (1988. 7).
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A. Weight of the case documents — about the thesis of “all solutions are in the case documents”
Korean court proceedings have mainly been operated in two ways. The one is that many trial dates are scheduled every three or four weeks up to the end (dispersed trials for one case), and the other is that many cases are supposed to be heard on the same designated trial date (parallel hearings for many cases). Therefore, the court has put more emphasis on written briefs than on oral arguments and has regarded written brief as a more appropriate method to overcome time constraint against caseloads in reality. In this court environment, the custom of written proceeding, which is not anticipated by the law, has taken roots in our court system, and the conception prevails that things which are not in records do not exist in this world, meaning that judges have difficulty in considering orally made arguments. Repetitious reviewing of case documents has become usual work for the judges when reaching decisions.
B. Ways of operating trials in courtroom — about the thesis that “court proceedings should be proceeded concisely without any delay or hindrance”
In the past, actual details of cases were not commented in courtrooms since oral arguments were substituted by implicit quotations of the written briefs if the judge did not specifically order otherwise. This kind of litigation practice was said to be unavoidable due to the time constraint and was grounded on the belief that it is unnecessary to reiterate the contents in the written documents offered to the judge. Most of the works of judges were concentrated on reviewing the written documents and written opinions. Those practices were based on a consensus that the court proceeding should reduce unnecessary components and only leave essential ones.
C. Function and role of written opinions — about the thesis “judges speak only through their decision”
In our court proceedings, judges’ written opinions contain abridgments of complete records of the parties’ testimony and argument, the outcome of examination of evidences, undisputed fact statements, and legal analysis. They are so
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well constructed that anyone could grab a clear picture of the case in a glance. When writing his opinion, a judge can check scrupulously any possible flaw in his legal analysis based on the parties’ arguments and evidences. Also, his judgment writing could function as an answer given to the parties and enhance the likelihood of their acceptance. However, we do not always compliment the merits of our court proceedings when we consider the fact that judges are spending most of their time in writing opinions in detail. This is the time for us to reconsider what the losses are when we make judges invest enormous time and effort into performing their job in writing.
2. What kind of problems were caused by prior court proceedings?
A courtroom could not function as a communication place due to the lack of oral arguments. Parties faced limits when making counter-arguments and had to submit case briefs under the anxieties that the deciding judge would read their written works several weeks later. These ways of court proceedings led the judge not to be interested in oral proceedings; he did not tend to listen eagerly to the parties’ arguments and even the witnesses’ testimonies; he believed that he could reach the right conclusion by isolated readings of case documents. The custom of court proceedings, rather than the individual choice made by the judge, prevented him from propelling the implementation of oral proceedings. As for the parties, they had suspicions whether the judge on the bench understood their assertions properly or even the facts of the case. They were unable to figure out to which direction the case was going, or what points had to be focused on when making arguments. To them, the court proceedings were so rigid and authoritative that they would not dare to raise objections through the proceedings. Consequently, it was not so unusual that the judge on the bench did not have a chance to listen to the oral arguments itself, far from showing his deep concern over the parties’ predicaments. Due to the lack of common understanding of the merits of the case, parties were unable to predict the result. To the parties, the judiciary seemed not to be concerned about them, but only interested in formally handling the case. Also, the chances of reconciliation between the parties were low. As a result of lack of communication between the judge and the parties in terms
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of assertions and evidence during court proceedings, the parties did not understand the reasoning of the court decision. Moreover, the judge’s written opinion supporting that decision was not sufficient enough to resolve the parties’ questionings. The rates of appeals against the decisions made by the judges were high and the public’s need of a good judicial service could not be satisfied even in the appellate courts. In some occasions, parties had doubts about the fairness of court proceedings, as the process seemed to be indifferent to the needs of the customers of the court services. The court ‘s indifference had made damage to the public’s faith in the judiciary. Eventually, the judicial system could not play their appropriate role in solving the disputes in society.
3. How shall we resolve these problems?
As I mentioned, the crisis in our judiciary requires us to find a new solution for the problems in courtroom procedure. What first came across my mind is that we should look back on our judicial system from the parties’ point of view. As judges, we should consider the parties’ needs in court proceedings rather than our own capability in handling cases since a decision would not be regarded as fair in itself but only when the parties also believe that it is fair. The Korean judiciary started reconsidering its system; whether it has not watched the moon at which the parties have pointed but has watched the hands with which the parties pointed at the moon; whether it has done the best to serve what the parties want in trials; whether it has tried to find out the most favorable proceedings and adequate resolutions to them; whether it helped the parties reach the ultimate resolution of the disputes; and lastly whether the court has presented the right answers to the assertions from the parties. We reached the conclusion that court proceedings should be adjusted so that it would meet the needs of the parties rather than those of the judges. Through listening to what the parties hope and what they want to assert by communicating with open minds, the judiciary could regain public faith. Recent advocations of oral argumentation in the judiciary is one of the many judicial efforts to become “the judiciary accountable to the public.” oral proceedings provides judges and parties with a chance for active communication in courtrooms by making arguments and counter-arguments in real ways. Implementing oral arguments can be a great stress to those engaged in legal
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professions, most of them who are accustomed to the writing-centered tradition. Nevertheless, our society requires a fresh change in the court system and I believe that oral proceedings would play an important role to achieve that goal, compelling a fundamental cognitive change to the legal profession. Emphasis on oral proceedings does not imply that the writing-centered tradition is totally wrong or that it should be discarded. I do not ignore the efforts of judges who try to make the best decisions under the time straining working conditions with heavy caseloads. Rather, I point out that it is necessary for us to pay attention to the things which our tradition has overlooked. Oral proceedings is one of the principles our procedural law had enshrined. It is necessary for the Korean judiciary to operate the court by balancing both procedural principles, writing-centered proceedings and oral proceedings. In doing so we will be able to benefit by the advantages of both types.
III. Summary: Advocating the progress and procedure of oral proceedings
1. Operation of Concentrated proceedings and a New model in civil procedure
In 1989, an effort to improve the case management system in civil cases started by establishing an exemplary bench in the Seoul Central District Court. For the next ten years, the effort has been continued as the number of exemplary benches for civil cases increased, until the judiciary executed a “brand-new model for civil case management” (so-called the “New model”), effective since March 1, 2001. This new model drastically changed the civil procedure. The motto of the “New model” is the ‘enhancement of public faith in the judiciary through substantial court proceedings’. In other words, the purpose of the “New model” is to increase the likelihood of the parties’ acceptances of the court decision, as a result of satisfying court proceedings. The proceedings under the “New model” are as follows. In order to avoid the previously sporadic and dispersed court proceedings, parties’ exchange and rebutting with written-documents (“pleading”) is required to precede first. Then, all the points at issue and the plans for proof should be prepared before the first scheduled court date when concentrated examinations of
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evidence is complete. All these proceedings are newly developed to switch the previous traditional court proceedings (which needs lots of scheduled court dates and has almost no substantial oral argument), into a new one (which requires the parties to exchange pre-trial documents for an open confrontation through actual oral arguments).
2. Operation plan for oral proceedings
Although there has been noticeable achievement in pre-trial confrontation through the well-prepared written arguments, oral argument proceedings have not been effectuated successfully. Therefore, in 2006, every court in our country simultaneously executed “operation plan for oral proceedings,” stressing the party pro se’s active participation in the proceedings and communication among all the people involved in the case. On the date of December 2nd, 2005, the National Chief Judges Conference identified needs for making efforts to change court proceedings toward reinforcement of oral proceedings. Accordingly, courts around the country began to drive forward ways to strengthen oral proceedings. In 2006, the following official conferences were sponsored by the judiciary: the national conference of vice chief judges;8) the national conference of civil presiding judges;9) an informal gathering for discussion between the Supreme Court and the Korean Lawyers Association;10) an informal gathering for discussion in courts around the country held by the Court Administration;11) nationwide court workshops for oral proceedings;12) and a seminar for reforming civil court proceedings in the Judicial Research and Training Institute.13) All these conferences and gatherings were integrated into the bench book
8) March 6. 2006. oral proceedings implementation is adopted as the conference agenda and discussed. 9) April 17. 2006. Courts in every level presented the process of oral proceedings/the implementation plans in turn and all attendants agreed that the Supreme Court needs to develop an ideal model for oral proceedings. 10) April 24. 2006. Representatives of Prosecutor-General’s Office, Korean Bar Association and Seoul Bar Association attended to discuss the legal community’s interest, help and difficulties in strengthening oral proceedings. 11) From May 3. 2006. to May 26. 2006. The judge from Office of Court Administration, who is in charged of oral proceedings planning, held an informal gathering to discuss and collected the opinions from all local courts. 12) From June 12. 2006 to September 11. 2006. All court in nationwide established oral proceedings workshop and discussed action plan to promote oral proceedings. 13) From October 23. 2006. to October 25. 2006. In this seminar, an ideal model for oral proceedings in its
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“Manual of the oral proceedings” published in the end of 2006. This book presents a standardized model for oral court proceedings. Workshops and seminars have been held throughout year 2007 by courts around the country. Many papers,14) articles15) and columns16) about oral court proceedings have been published through the newspaper and other publications. Workshop materials and trial audience reports have also been published.17) Now, I would like to introduce the overall methods of oral proceedings in the following paragraphs.
IV. Case Management for the court, with regard to oral proceedings
1. Summary of case classification and proceedings operation
The presiding judge shall decide on case classification and ways of handling the cases depending on whether the pleadings from the defendant have been submitted or not and the contents of the pleadings. A short track of court proceedings by rendering court judgment without any hearings is proceeded for “fast dispute resolution”, if the defendant fails to file a written pleading within a limited number of days or if the submitted pleading contains full admission of the plaintiff’s claim. If
unified form was mainly discussed. 14) The judicial research and training institute, The structure of civil procedure and the skill of oral argument (in Korean); Hongyub Kim, The Study of application and its limit of oral proceedings (in Korean) etc. 15) Younghun Kim, Is oral argument inefficient? (in Korean), THE LAW TIMES Jul. 24, 2006; Younghun Kim, Retrospect and thesis of oral argument (in Korean), THE LAW TIMES Dec. 12. 2006 etc. 16) The editorial of the Law Times, We hope that oral proceedings takes root as soon as possible (in Korean); The present situation and thesis of oral proceedings (in Korean); The article of the Law Times, (1) Light and dark side of oral proceedings, (2) Persuasion in courtroom and ruling concise, (3) No survival of lawyer without competitiveness (in Korean); Special Gathering for discussion on 56th anniversary of foundation of the Law Times (in Korean) etc. 17) Essays of 33th seminar by The Society of Study of Comparative Law are ① Wooyoung Lee, Legal System and practice of oral argument in U.S. (in Korean), ② Junghoo Oh, The principle of oral proceedings in German civil procedure (in Korean) and ③ Kunho Choi, The practice of oral proceedings in Japan (in Korean); Those of 36th seminar are ① Wooyoung Lee, Case management of federal civil procedure in U.S. (in Korean), ② Hwalsub Shim (in Korean), and ③ Jaeho Chung, Oral proceedings and ruling in Germany (in Korean); The Study Group that comprises of the judges who are interested in foreign legal system published the book STUDY OF FOREIGN LEGAL SYSTEM (2) (in Korean) which contained the details of oral argument in U.S., U.K., France, Germany, Japan, China.
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the defendant submits a written pleading within that time limit, the presiding judge classifies the case as one of three categories: preparatory (pre-trial) proceeding, a scheduled oral argument (trial), or an alternative dispute resolution proceeding. This classification is supposed to expediate “fair resolution” through efficient clarification of disputed issues and a concentrated examination of evidence and reaching an “amicable resolution” by mediation and reconciliation. In principle, a case with disputed issues should be brought to preparatory pleadings where the disputed issues and facts will be sorted out.18) The written argument proceeding precedes19) and if necessary, the presiding judge may open a court date for preparatory pleadings (pre-trial hearings).20) It is possible for the court to directly designate a date for an oral argument in trial. However, the “New model” suggests that the court should designate a preparatory hearing date in principle.21) From the standpoint of case management, a summary on strengthening oral proceedings is as follows.
2. Written argument proceeding
According to the “New model”, given two written argument (pleadings) proceedings, the parties have chances to supplement written arguments for their assertions, contentions and evidence. However, this may bring out the problems like
18) Civil Procedure Act Article 258 (Procedures for Preparing Pleadings) (1) The presiding judge shall bring the case straight to the procedures for preparatory pleadings, except for the case where a judgment is rendered without holding any pleadings under Article 257 (1) and (2): Provided, That the same shall not apply to the case where it is not needed to separately take the procedure for preparatory pleadings. 19) Civil Procedure Act Article 280 (Progress of Preparatory Proceedings for Pleadings) (1) Preparatory proceedings for pleadings shall progress, with fixing a period, by means of making the parties submit the briefs and other documents or exchange them between themselves, or letting them apply for examination of evidence to prove the alleged facts. 20) Civil Procedure Act Article 282 (Date for Preparatory Pleading) (1) The presiding judge, etc. may open a date for preparatory pleading and have the parties attend there, if deemed necessary for arranging the allegations and evidences during the progress of the preparatory proceedings for pleadings. 21) The Court Administrative Office, The practice of oral proceedings (in Korean), in BENCHBOOK, at 129.
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hindrance of case processing, lodgings of meritless disputes, or piling of court documents. To cope with these problems, it is necessary to adjust the time restriction of written argument proceedings depending on the parties’ preparation and the character of the case. The presiding judge has the discretion to set a date for a pre-trial hearing with no written argument proceedings if he concludes that written pleadings are in enough detail, describing the facts in issue and assertions so that no additional contentions or raising factual issues are necessary.
3. Sufficient time-allocation for oral argument proceedings
In order to promote oral argument proceedings, sufficient time should be reserved for each case. The “New model” does not suggest a standard time limit, leaving the courts and divisions of courts to exert discretion in allocating appropriate time for oral argument proceedings. Strengthening oral proceedings has great influence on the judges’ working pattern. Judges are supposed to spend more time in the open courtroom or in the pre- trial hearing room for handling cases than in their chambers reviewing the court documents or writing opinions for rendering decisions. This shows that stressing oral proceedings is directly related to the increase in the amount of time spent in the open courtroom proceeding, from once a week to more than twice a week. Stressing oral proceedings also requires the scheduling of court dates in different times for individual cases, since reserving sufficient time is crucial for such proceedings. That is, each case needs its own scheduled court hours, which the judges are required to arrange reasonably. It requires good-prediction of the hours that will be spent on each case in order to allocate enough time for oral proceedings without congestion.
4. Instruction of oral proceedings
Until oral proceedings take deep root into our litigation practice, courts need to emphasize the underlying intent of introducing oral proceedings to the parties, for them to prepare their case in advance, before the notified court date. The notice should include explanation of the detailed procedures of oral proceedings. It should be differentiated depending on whether it is a pre-trial hearing date or an oral
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argument date in trial process. In some cases, the court may serve a court order for the list of preparation items via phone call or e-mail.
V. Presiding court date to reinforce oral proceedings
1. Essential components of oral proceedings
A. Substantial argument about the merits of the case on issue should be made on the court date
Rather than restating the submitted pleading documents, arguments over the substantial merits of the case on issue should be made. The argument should include clear contentions and sound reasoning. The parties should have sufficient time to make such arguments and court proceedings should be managed with consideration.
B. Interactive communications should be achieved
Oral proceedings, as a speech-centered process, pursues sincere, productive communication in order to clarify the core issues and resolve disputes through interactive communication. A proceeding in which the parties present their respective assertions all throughout the trial is undesirable. Likewise, a case where the presiding judge identifies the substantial merits of the case only after he acknowledges them is objectionable. Whoever raises the case first, there should be interactive communication between the judges and the parties and even between the parties themselves to reach a shared understanding. Emphasizing on an “interactive court proceeding, as a new principle of court proceeding, which comes from the understanding converted from substantive justice to procedural justice, is nothing but an outcome of communication among the court, parties and attorneys” or advocating an “adversary system, as a principle, under which the court should listen to parties assertions, delivers an appropriate instruction, allows the parties to contend sufficiently letting the counterparts to make counter- argument,”22) could be understood to be having the same purport.
22) Seokjo Jang, Judicial Reform and International Legal System (in Korean) at 524 (Discussion Essay in 33th
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By adopting this “New model,” we can identify the substantial merits of the cases more easily, increase the chance of harmonious settlement and predict the outcome of the cases better.
C. We should secure the pro se party’s active procedural participation
As an end-user of the court services, the party pro se, should have chances to assert his point of view directly to the presiding judge. This is not regarded as forcing the party to state anything disadvantageous to them, nor is it viewed as infringing lawyer’s right of representation. The court should be considerate of the parties’ needs to present their strong contents, argument, the ground of their feelings to be verified through court proceedings. The court recommends the attendance of the party himself, having him present next to his attorney and urges him to exercise his chances of testimony as his procedural rights.
D. The court proceedings should be open to the parties
Oral proceedings follow the principle of public trial where the assertions, contentions and evidence are presented before the parties’ eyes, so that the courses of the case could be speculated well and parties are able to make prompt responses and adequately manage case dealings. Throughout this process, we will be able to preserve transparency and fairness, while eradicating public distrust and misunderstanding on the judiciary.
2. Summary of the court oral proceedings
A. Types of oral proceedings
Forms of oral proceedings are classified into 3 types; the parties can make one- sided statements (reporting type); the parties can also communicate interactively (interactive type); and the parties can argue over the justifications of their contentions
Seminar by The Society of Study of Comparative Law).
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in front of the presiding judge (argumentative type). In practice, it is necessary to integrate the use of the three types, depending on: the current phase of oral proceedings, the case contents, and the parties’ willingness. Also, with regard to the leading person, we can classify oral proceedings into two types: the party-dominant type and the judge-dominant type. The latter is for cases in which the parties are not well prepared or lack argument capability, and the former is for those in which the parties are willing or are required to take part in the proceeding vigorously. In practice, depending on case types and individual situations of parties, the above proceeding types can be used selectively and are interchangeable.
B. Summary of scheduling the court dates
The oral proceedings operation model suggests a planning method for court dates for which the “New model” developed two categories: “court dates for core-issues examination” and “court dates for concentrating evidence-examination.” The chart below indicates each procedural steps for the proceedings (sectional type). The steps are designed to activate oral arguments while preventing the parties from leaving out core-issues of disputes. On the other hand, we can skip over the steps depending on the characteristics of the cases and present tentative core-points in disputes, by comparing the parties’ contentions and admissibility of the evidence which are to be confirmed as solid ones in disputes (integrated type).
3. Operation of court dates for core-issues examination
Overall proceedings are held in the following order. First, respective assertions from the parties are presented and submitted evidentiary documents are examined. Then, the presiding judge draws out and defines issues in dispute. He can let the parties make arguments if necessary. At this point, the judge should aggressively attempt to seek a legitimate resolution. When the need arises for a witness examination, the court should plan for it following the request of the parties. Details of certain steps that we need to describe are as follows.
A. Presenting contentions
There are two operation types for the proceedings; the “party-leading
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proceeding”, which is proper for a case represented by an attorney; and the “judge- leading type,” which is proper for a pro se case. In practice, the operation would be a mixture of the two types because both types aim to activate oral proceedings. The “party-leading type” presumes pre-review of the filed documents by the judge so that the actual proceeding should be concentrated on the parties’ statements of core assertions. The presiding judge proceeds this step to confirm the core points and necessary evidence by cross-examining to reveal actual causes as well as the different contention of the parties. As for the “judge-leading proceeding”, the presiding judge summarizes the case and the disputed points before he question the parties’ opinions. Even in this case, the judge should lead the case by urging each party to be aggressive in making their arguments about sorted points at issue. The judge should be considerate enough to provide parties with chances to make an active statement of the relevant facts.
B. Examining documentary evidence
In previous court proceedings, judges admitted documents attached to the preliminary pleading or brief as evidence without any doubt, and finished up the proceedings of evidence-proving examination. The parties were supposed to present statements explaining that they are to submit documentary evidence. In other words, the parties do not present arguments but quote written briefs which are previously submitted. However, as a tool of proving the case, documentary evidence can be an issue disputed in many cases and plays a very important role, especially in preparing civil cases. Examining submitted documentary evidence requires thorough oral proceedings, since it is a serious and heavy decision for the judge to make. Examination of documentary evidence should be proceeded in this order; 1) submission of documentary evidence; 2) examination of the authenticity of the documentary evidence; 3) ruling on evidence; and 4) examination of the contents of the documents. If proof by evidence is requested, the judge will request the submitting party to present the object of the proof presented by documentary evidence with core documents and allow the submitting party to make an oral argument if necessary. The other party should have the opportunity to contest the authentication of the other party’s documentary evidence. In this proceeding step, the judge should urge parties to make a statement of
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relevant facts and material issues, such as the object of contesting the authentication in detail, rather than allowing the parties to make conclusive remarks like “unawareness” or “denial.” Unnecessary documentary evidence should be withdrawn. If the party objects to the order of withdrawal, he should be given a chance to make sufficient argument before the court’s denial to accept it as evidence. While in civil cases, examination of documentary evidence can be done merely by reading the documentary evidence, but in criminal cases, it shall be done by making oral statements of the documentary evidence or statements of the relevancy. The judge will direct the parties state the contents and the counter-party to contest. During this process, more material and significant parts should be identified and focused on, and parties’ contesting over the substantial merits of the case or the evidentiary value of the documents should take place.
C. Identifying points in dispute and parties’ arguments
After hearing the arguments and the examination of evidence, the judge will discern the factual and legal points which are relevant to the case. The judge will refuse to consider arguments proven to be false or ungrounded. Such facts are revealed through questionings of parties and it will promote the parties to share a common understanding over the core factual and legal points at issue. It should be the judge who presents the points in dispute. Then, the judge may redefine the points based on the parties’ comments on them. The parties’ oral arguments can proceed either before or after the judge defines the points in dispute. Even when the former helps to clear the points, the latter can stress out the arguments that are more persuasive and evidence that correctly support the arguments.
D. Presenting the judges’ decision-making process
Oral proceedings seek to be an interactive communication between the judge and the parties so that the parties directly or indirectly observe the whole decision- making process made by the judge. Through the proceedings, the parties and the judge can share common understandings over the material facts and legal issues in dispute and avoid unnecessary contentions. Such procedures will encourage resolutions other than judgment and able the parties to foresee the outcome of the
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case and thus the court would become more accountable to the public. Most importantly, the judge should be cautious and restraing himself from making detrimental appearances in court (for instance allowing prejudice to interfere in his decision-making).
E. Seeking alternative dispute resolution
Our oral proceedings model focuses on alternative dispute resolutions like conciliation or mediation, since strengthening oral proceedings in “the court dates for core-issues examination” can create moods for that. It is desirable that we attempt to accomplish an alternative dispute resolution at a stage prior to the planning of examination of evidences other than submitted documents. If it fails or if the fate of the case is foreseeable only after further
Only case summaries and points at issue can be described and the additional Pleading details should be presented in the later stage of identifying issues or adversary arguments.
Parties can apply for examination of documentary evidence. Relevance and Examination of necessity of the examination should be presented by the requesting party and evidence the counter-party may make rebuttals.
Identifying After discerning the facts in disputes from those that are not in dispute, the issues/ judge presents alleged points at issue and defines them reflecting the parties adversary contentions. Adversary oral arguments can be made either prior to or after argument identifying issues.
Alternative If an atmosphere of reconciliation matures through interactive communication Resolution between judges and the parties, an alternative dispute resolution can be Seeking pursued.
Plan for The court summons feasible witnesses and arranges a schedule that spares examining appropriate hours for witness examination. evidence
Opportunity to make statements should be given to the parties at the last phase Parties Making of the court dates for core-issues examination. Nonetheless, judges should Statement allow the parties to make statements even during the proceeding if necessary.
Summary: Operation of the court dates for core-issues examination (pre-trial hearings)
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examination of the evidences, the court can try conciliation or mediation again in the closing-argument phase without notifying the delivery date of judgment. If a judge proposes a settlement plan for the parties, he should explain the reasons or grounds for that. Furthermore, if he is going to make a “settlement proposal of mediation,” which can have the same effect as a final judgment if the parties’ fail to raise an objection within 14 days from delivery, he must see to it that the proposal is not much different from the prospective judgment.
4. Operation of court dates for concentrated evidence-examination
The overall process is as follows. First, previous proceedings in court dates for core-issues examination are summarized and presented so that judges and the parties share common understandings over the core issues in dispute in oder to make the following witness examination efficient. Second, witness examination takes place. Finally, the judge gives the parties a chance to make overall contentions. At this point, the judge should be aggressive in attempting to reach conciliation or
Judges present summary of case in dispute, points at issue and the result of Presenting evident examinations at the pre-trial hearings and remaining methods of Points at Issue evidences (Witnesses).
Witness examination process should take place protecting the parties’ Witness procedural rights and the process should be appropriate in finding factual Examination truth.
Parties Evidence- After the witness examination, the parties should be given a chance to make Proving respective contentions about the results of the examination. Contentions
Pursuing As a result of witness examination, the fate of the case becomes foreseeable Dispute and a renewed attempt at dispute resolution is recommended. Resolution
Closing At the last phase of the trial, judges should give the parties a chance to make Statement final arguments (closing statement).
Summary: Operation of court dates for concentrating evidence-examination (trials)
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mediation, since the merits of the case have been fully revealed to the parties at this stage. The judge should provide the parties with opportunities to closing statements, which are supposed to encompass the overall aspects of the case. The following is a detailed explanation for the necessary proceedings.
A. Presentation of the outcome of the date for preparatory pleadings (pre-trial hearings)
Core-issues examination takes place in the procedure of preparatory pleadings (pre-trial hearings), even though the judge has an option to arrange it on trials. If the core-issues examination takes place in the preparatory pleadings (pre-trial hearings), the outcome of that procedure must be presented in trial, for the procedure may be presided by a commissioned judge without other panel members’ participation and usually it is not held in public.23) This process should be processed by actual oral arguments. In the past, however, it was substituted by formal statements, indicating that the presentation of the result was already made. This presentation process varies between “parties’ statement” and “statement about the outcome of evidence examination” in the preparatory pleadings (pre-trial hearings). In some cases, courts can help the parties foresee the result of the trial just by indicating the substantial facts that are necessary to prove through unexpectedly strong testimonies from crucial witnesses.
B. Witness examination proceeding
Witness examination should be performed in a way that protects the parties’ procedural rights as well as secures the finding of factual truth. Most importantly, the examination should focus on crucial points and should not be substituted by certified documentary statements. Cross-examinations should be made in a manner in which material facts can be argued in detail. It’s main agenda should be to reveal the
23) Civil Procedure Act Article 287 (Pleadings after Conclusion of Preparatory Procedures for Pleadings) (2) The parties shall state the outcomes of the date for preparatory pleadings at the date for pleading after a conclusion of the date for preparatory pleadings.
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relevant circumstances with which the judge could determine the credibility of the witnesses’ testimony. Cross-examinations should not be directed to extract a confession of false testimony. Confrontation of the witnesses, examination of the parties’ testimony and parties’ direct participation in witness impeachment should be considered positively along the course of the proceedings. Also, the judge is to convey to the parties that he is fully aware of the contents of the testimony and the attitudes of the witnesses.
C. Delivering opinions on the result of evidence examination
After completing the examination of witness testimony, the judge provides the parties with chances to deliver their opinions on all the evidence submitted so far. This proceeding should not be omitted, for it has a significant influence on the judge’s decision making. The judge should instruct the parties or the witnesses to ask and give only factual testimonials, and not to quarrel on meritless issues, then give the parties opportunities to make sufficient arguments.
D. Closing argument for summing up the case
Just before finishing argument proceedings, the judges should give each party a chance to make closing arguments for summing up the case. Judges can proceed like it is done in criminal procedure. The parties need to do their best to make impressive closing arguments, putting together all the evidence and information from the previous proceedings.
5. Pro se case
A. Summary
Pro se cases represent a great share of cases and are related to the public trust on the judiciary, since the ordinary individuals’ experience with the judicial system come from court proceedings. In particular, to enhance the public trust and understanding on the judiciary, it should be emphasized that Pro se procedures can satisfy individuals only when the parties are given sufficient chances to argue and
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testify. The party himself or herself, plaintiff or defendant, is the right person to give oral arguments in that he or she, as a party concerned, know the substances of the case more than any others.
B. Considerations according to the characteristics of pro se cases
(1) Writing of pleadings by third hand In many occasions, individuals in pro se cases tend not to write the pleadings himself. Therefore, the court should induce the parties to vigorously participate in giving their own opinions orally and attempt to figure out the underlying actual intents of their claim or defense.
(2) Lack of legal knowledge Daily life expressions should be used in court proceedings and the judges are supposed to explain relevant legal principles using proper examples to the parties, for they might have difficulty in understanding legal issues properly due to lack of legal knowledge.
(3) Argument patterns in pro se cases The parties tend to end up in exchanging verbal assaults and personal attacks clinging to trivial circumstantial facts. In this case, the judge should take appropriate measures taking the following into consideration; the judge can call their attentions on other material legal points to change issues; or the judge can demand parties to follow his instruction of oral argument proceeding to make it orderly.
(4) Expectations and worries about fairness As more and more emphasis is put on oral proceedings, the parties will become
< Statistic of 2005> both parties only one party neither party represented represented represented by counsel by counsel by counsel cases rates cases rates cases rates collegiate panel case 19,209 45.1% 13,822 32.5% 9,531 22.4% single judge case 25,023 11.8% 56,394 26.7% 129,835 61.5% small claim case 1,754 0.2% 85,085 9.7% 789,756 90.1%
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keen to the procedural fairness in court proceedings. All the while a judge must deliberate seriously in giving fair chances to make arguments, showing respectful attitudes when listening, minimizing the risk of misunderstanding on judge’s comments, and peacefully managing the proceedings.
C. Court proceeding preparations
The judge should discourage repetitious and meritless submission of documentary arguments and make an effort to read between the lines of pleadings although they seem fallacious. The judge should develop guidelines for the parties to easily understand the disputed issues and legal points.
D. Court-date operations
Although the judges lead the overall court proceedings, the parties themselves should take part in the proceedings actively. There may be two types of operating the court proceedings: 1) the judge can deliver the case summary based on his or her previous court-file reviewing and then ask opinions from the parties; or 2) the judge can start the oral argument process by letting the parties present their own cases. Meanwhile, the judge should actively involve himself in the argument by clarifying the points in dispute. If either one of the parties is not represented by an attorney, the judge should be extra careful so that the pro se-party does not receive any unnecessary suspicion, and proceed with the case in an adjusted level to which each parties are capable of understanding. In a pro se case, judges can make use of the civil legal services and should be careful not to go too far in operating oral proceedings, considering that he or she may be entitled to proceed in forma pauperis. Using daily life expressions helps ordinary people to understand what judges say; explaining legal issues using common sense or common wisdom is more comprehensible. In a case without any direct evidence, the judge is supposed to re-examine the reasonableness of their arguments through sufficient communication about the circumstantial facts of the case rather than urging them to prove evidence in a businesslike manner.
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VI. Oral proceedings: Present situations and issues
1. Oral proceedings: Present situations and goals of change
A. Changes in judges’ work pattern
In the past, a judge’s main job was to review case-files and write opinions of judgment, and to preside in the open-court proceeding once a week. Currently, however, they are putting in efforts to increase courtroom hours for oral proceedings more than twice a week. In order to have more courtroom oral proceedings, these measures should be taken at the same time: reducing unnecessary documentary-evidence file and simplifying judgment opinions focused on points in disputes. Judges can use the model forms of simple judgment opinions which are posted in the judicial intranet.
B. Changes in courtroom
Court date scheduling in different time-lines has been stressed and the hours consumed for each case has been significantly increased. We can see more cases where the judge gives parties more chances for oral argument rather than recommending them to submit written pleadings. There have been changes in the attorneys’ attitude toward oral arguments since the beginning. Some attorneys are still passive in oral arguments.24)
C. Changes in court proceedings
Several positive effects, such as the parties’ satisfaction with the court proceeding and the recovery of the parties’ trust in the judicial system, can be found. When I look into my recent six-month experience25) in court proceedings and the outcome of local courts’ seminars on oral proceedings,26) the interactive communications among
24) See Exhibit [Survey Result] Questionnaire 3. or 5. 25) See Exhibit [Survey Result]. 26) See Supreme Court homepages, courtnet/resources/civil case/new model: oral proceedings examples.
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the parties and the judges has been substantially improved compared to those in the past. Still, we cannot notice significant changes in statistics, as it has only been about one year since we began emphasizing the importance of oral argument proceedings. The court statistics from 2006 to 2007 are as shown in the appendix: 1) overall, the case handling has been improved; and 2) the number of appeal cases are continuing to decrease.27) The affects of oral proceedings on the court’s decision making could be a controversial issue, though we all agree that oral proceedings are helpful in understanding the case itself. Until now, we do not have a statistics report or evidence showing the outcome. However, we will evaluate the effects as oral proceedings gradually begin to take root in our court system.
2. Merits of oral proceedings
As you see above, the advantages of oral proceedings are as follows: 1) the judge can acquire more accurate information when deciding cases;28) 2) for the parties, more chances are given to them to make arguments and testimonies, and the results of the trials are more easily predicted. As a result, more alternative dispute resolutions are likely to surface and there might be an increase in people’s trust in the judiciary.
(Maximizing court communication) Through oral argument proceedings, the court communication among the people concerned, judges and the parties, can be maximized. Interactive communication can be accomplished by oral argument proceedings, since the proceedings give the judges and the parties (attorneys) a chance to
27) See Exhibit [Court Cases in Nationalwide] 28) These advantages of oral arguments are indicated in the articles about oral arguments in appellate court proceedings in U.S.; Robert J. Martineau, 72. IOWA L.REV 1 (1986) (Martineau criticizes current oral arguments practice in appellate court proceedings in US. He insists as follows: The oral arguments are to become helpful to judges in deciding judgment; Judges should be able to make questions to counsels whenever he need to ask; The parties counsels should be able to answer immediately; Even judges should be able to discuss with counsels if they want.); Myron H. Bright, The power of the spoken word: In defense of oral argument, 72. IOWA L.REV 35 (1986) (Bright emphasized the importance of the oral arguments especially in judges’ judgment decision. He provides some research projects results showing that the judges changed their case decisions, which made only from reviewing the case documents, after having the oral argument proceeding.)
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cast direct questions about ambiguous or doubtful assertions and testimonies on the spot, so that they can even unearth the underlying causes, motives or other unrevealed circumstances of dispute.
(Accurate understanding of complex litigation) Through oral proceedings, a judge or panel can comprehend even the most complex litigation which involves so many technical terminologies that would otherwise be incomprehensible (just by reading the brief, for example), but by oral explanation from parties and other people concerned, it is understandable.
(Helping the judge to make the correct decision) Oral proceedings help the judge make his or her right decisions. Because the judge is able to figure out the overall intentions of the parties, he or she can appropriately evaluate the witnesses’ testimonies and appreciate the parties’ and witnesses’ manners through the oral proceedings.
(Providing sufficient chances to making statements — the Court as a listener) In pursuing “Court as a Listener,” oral proceedings provide a place; where the parties can persuade the judges by making persuasive arguments and presenting compelling evidence; where the parties can reveal their real intentions and situations. A judge should create an atmosphere where active contentions and arguments, rather than plain statements, can be made. A judge should be a serious listener also.
(Helping parties to understand court procedure — the Court as a explainer) During oral proceedings, the court can present and explain its opinion and reasoning to the parties so that the parties can directly figure out towards which direction the court procedure is going. ‘Court as an explainer’, which is one of the core aspects of oral proceedings, can enhance public trust in the judiciary.
(Fostering parties’ alternative dispute resolution) Oral proceedings, through its functioning as ‘court as a listener’ and as ‘court as an explainer’, heightens the likelihood of reaching alternative dispute resolutions. Oral proceedings itself can be the most effective tool to find a way to resolve disputes in ways that the parties exactly want, since a reasonable alternative dispute resolution can be reached not by just waiting for the parties’ reconciliation, but also by exploring common understandings through oral exchanges.
(Improving foreseeability of case-outcome) Although an alternative dispute resolution may not be successful, judges would make their decisions relying on the findings from oral proceedings and the parties would be able to predict what the result of trial will be like. This means that the distrust on the court’s decision could be minimized, since the parties will not argue that they were not given enough chances for contentions or that they were unable to foresee the reasons, when they lose their cases.
(Enhancing effectiveness of case management) Oral proceedings help the judge to do his or her work more easily and effectively, since they can remove meritless contentions from considerations and have the judge to concentrate on the remaining substantial factors when making decision. So, it becomes much easier to comprehend the case in detail and to set up a reasoning to make a decision. Oral proceedings could make the judge’s work tougher due to the increase in courtroom hours and serious preexamination of the court files. However, in the long run, oral proceedings will lighten the workload of judges because of effective case management and fewer appeals arising from the parties’ acceptance of the results (decision) of the trial.
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(Implementing public disclosure) Oral proceedings is the only way to accomplish public disclosure. By way of revealing the issues in dispute in the open courtroom, oral proceedings can make the audience understand the case better and judges will recognize the merits of the case thoroughly. Judges can manage oral proceedings with the principle of equity and by adhering to courtroom courtesies.
3. Criticism and Measures
These are the criticisms of oral proceedings initiatives: 1) the parties’ statements over the case summary in oral proceedings are not so helpful in examining the case, since the judges review the parties written pleadings before the oral proceedings; 2) oral proceedings is not helpful for the parties who are not competent enough to make arguments.29) A survey of judges shows the following: 1) with the present case backlog, judges cannot manage the oral proceedings effectively; 2) oral proceedings itself may add burden to judges, if the parties are noncooperative.30) Oral proceedings is a method of hearing the case where judges try to get something more out of a case than by just reading written pleadings. What we are trying to seek through oral proceedings is similar to what a student strives for when being present at a professor’s lecture compared to what he can achieve reading from a book.31) Therefore, oral proceedings should be focused on communications, which means that it is unnecessary to repeat the submitted pleadings. In a pro se case, judges can run the process by making access to the party and finding out what each party wants and by allowing the party to participate in the proceedings actively. I do not agree with the suggestion that the court should run oral proceedings only for selected cases. oral proceedings is one of the most basic procedural principles; one that should not be left to our own discretion whether to impose it or discard it. The only thing we can do is adjust the level when operating oral proceedings
29) Seung Moon Seul, Arrogance and Modesty: a Thought of Open-Court Oriented Court Proceedings and oral proceedings (in Korean), HUMAN RIGHT AND JUSTICE, at 221 (September 2006). 30) Hong Woo Park, Oral proceedings Initiatives: Current Situations and Action Plan (in Korean), Essay presented at the seminar of oral proceedings in Seoul High Court (May 2007). 31) Kyung Gic Gwack, Ideal Court Proceedings: What should be done (in Korean), THE LAW TIMES, Oct. 30, 2006: “What the oral argument can not be replaced by the brief would be like what the brief can not be replaced by the oral argument. We need both.”
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considering case details, the parties preparations, and the depth of the proceeding. In order to effectuate the oral proceedings principle in our judicial system, we need to do the following: curtail the caseload; take measures for easy grasping case- files; simplify the court decision making proceeding; and secure court facilities.
VII. Conclusion
This article examines the background of oral-proceeding initiatives in the Korean judiciary, the road-map of its progress to reach the goals, and its detailed strategies and plans. oral proceedings initiatives seem to be a motto which urges us to follow one of the most basic legal principles. However, it is also an effort to recover the public’s trust on the judiciary through the reform of court proceedings. It has been about one and a half year since we started to implement oral proceedings in our court system. At this point, belief that we are in need of a stronger oral proceedings system has been widely spread among the members of the legal community. Yet we are still in need fore more guidelines, a detailed manual, and the development of supporting programs and facilities. From now on, we have to develop action plans to implement oral proceedings in actual situations rather than reiterate principle of oral proceedings or develop abstract civil procedure models.
KEY WORDS: Oral Proceeding, Written Argument Proceeding, Concentrated Hearing, Pro Se Party, Core-Issues Examination, Argument Preparation, Concentrated Evidence-Examination, Oral Argument, Settlement
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Exhibit [Survey Result]
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Exhibit [Court Cases in Nationwide] Disposition Dispute Resolution Appeal Court 2006 2007 2006 2007 2006 2007 High Court 94.4% 102.3% 24.2% 28.0% 32.8% 31.5% Appelate Division 89.3% 96.6% 29.1% 28.1% 25.4% 23.3% in District Court Collegiate panel 91.8% 86.6% 20.7% 20.5% 41.5% 40.4% in District Court Single Judge in 80.9% 95.1% 33.7% 31.8% 22.2% 23.2% District Court ** Statistics Period - 2006 Statistics: 2006. 1. 1. - 6. 30. - 2007 Statistics: 2007. 1. 1. - 6. 30. ** Case Classification: According to value of lawsuit - Over 100 Million Won claim: Trial in collegiate panel in District Court, Appeal to the High Court - Below 100 Million Won claim: Trial in single judge in District Court, Appeal to Appellate Division in District Court.
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Against the Viability of Private Enforcement: Focusing on Korean Environmental Law
Hong Sik Cho*
Abstract
This essay concerns whether, how much, and under what condition private enforcement can solve the problem caused by under-enforcement of environmental law. Although the policy debate yields no universal conclusion, this essay concludes that the viability of private enforcement depends upon how well its specific design fits the relevant context. With respect to the design of private enforcement, the following points should be noted. First, the essential question is whether and to what extent private individuals can be allowed to use the judiciary to compel far-reaching changes in society, especially where such changes are directed not at individuals’ rights but at the public’s common interest. Therefore, the question concerns a variety of complicated issues such as the proper role of courts in democratic government, the proper relationship between individuals and the community, and so on. Decisions regarding such issues must derive, at least in part, from a society’s common set of ideological or other commitments. This essay argues that the existing enforcement scheme may properly reflect our society’s common idea about such issues. Second, since the cost of private enforcement is higher than it looks, the decision of whether to adopt private enforcement in a particular context requires a pragmatic balancing that is best undertaken not by courts, but by legislatures responsible for the underlying law being enforced. Having said that, this essay claims that the first step to remedy the under-enforcement problem must be to overhaul and realign the existing enforcement scheme. If this step is not sufficient, then let concerned citizens sue the government (not polluters directly) to correct government wrongful actions and inactions. Only concerned citizens in the context of neighborhood claims can detect legal wrongs easily and cheaply with relatively less cost on the existing enforcement scheme. If the “Private Attorney General (PAG)” type of private enforcement is chosen, then the government should retain the power to structure private settlement and rewards. Given the current circumstances, this essay concludes that there is little likelihood and less need for the Korean government to adopt the PAG type of private enforcement.
*Associate Professor of Law, Seoul National University College of Law. I have benefited greatly from comments on earlier drafts of this essay from attendants in my presentations made at Tsinghua University School of Law, University of Indonesia Faculty of Law, University of Wisconsin Law School, and Waseda Law School.
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I. Introduction
While legal institutions influence social change, the extent of the influence depends upon the context. Although Korea has accomplished modernization of its environmental laws, their implementation, as compared to Korea’s level of economic progress, falls well short of the public’s expectations. In the 1990s, in response to the public’s growing concern for the environment, Korea launched a new environmental law system modeled on that of the United States. One may well say that Korea’s environmental laws, both substantive and procedural, are up to the same level as those of developed countries. However, Korea’s environmental laws are not regarded as having been enforced to the same extent as its economic development-driving laws. A number of issues arise from this disparity between the role of law in economic development and that in environmental protection. Among those issues, I have already explored the causes of the under-enforcement in a previous essay, the title of which is “The Pathology of Korea’s Under-Enforcement of Environmental Law.”1) In that essay I dealt with a number of theories developed to account for causes of under- enforcement that can be found in the three branches of government. Focusing on the applicability of these theories to Korea’s case, I explored whether and to what extent under-enforcement may be attributable to the legislature, for inadequately designed legislation, symbolic legislation, or inadequate funding; to the bureaucracy, for abuse of administrative discretion; and to the courts, for their self-restrained posture. After indicating that all of these theories together fail to account for the whole picture, I pointed out that these theories fail to give enough weight to popular will, the most powerful force underlying Korea’s environmental law regime. I concluded that the structure and process of government concerning Korea’s under-enforcement is still driven by politics and that the Korean people still put more emphasis on the economy over the environment. In this essay I will explore whether and to what extent “private enforcement” (hereinafter, “PE”) can be an effective cure for the environmental under-enforcement problem. This essay proceeds as follows. Part II briefly touches upon the causes for
1) Hong Sik Cho, The Pathology of Korea’s Under-Enforcement of Environmental Law: Is Public Awareness and Deliberation the Key to Success?, 4 UNIVERSITY OF TOKYO JOURNAL OF LAW AND POLITICS, at 47-64 (2007).
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Korea’s under-enforcement of environmental law. Only after becoming informed about the causes of under-enforcement can one begin to conceive of possible policy tools to rectify this problem. By claiming that the primary cause is insufficient environmental funding, this part finds the need to adopt PE that can subsidize government’s insufficient enforcement. Part III describes PE’s pros and cons from policy perspectives. Whether private suits for public interest can or cannot be an effective remedy for under-enforcement should be answered after considering the PE’s own benefits and costs. Part IV summarizes and evaluates the status quo of Korea’s environmental law regime. Costs and benefits of a particular form of private enforcement should be viewed against the backdrop of a state’s existing enforcement scheme. This part proposes some elements to be considered when Korea designs its own PE regime.
II. The Primary Cause of Korea’s Under-Enforcement and Its Policy Implications
1. Under-enforcement can be defined legally as enforcement performed below the level required by the relevant statutes.2) As compared to this seemingly easy definition, it is tremendously difficult to tell in practical terms whether a given case is an instance of over or under-enforcement. It is so because the applicable laws and regulations not only mandate unclear requirements, but also allow some leeway to enforcers. For the purpose of this essay, it would suffice to say that most countries, including Korea, are plagued with under-enforcement because environmental law is not enforced as mandated by the text of environmental statutes. 2. A number of factors may determine the extent of enforcement, and plausible causes may be found in the three branches of government. Among a number of plausible causes for under-enforcement — including the legislature’s inadequately designed legislation, symbolic legislation, the bureaucracy’s abuse of administrative discretion, the courts’ self-restrained posture, and limited funding — my previous
2) Id (quoting Joseph E. Sinnott, The Classic Civil/Common Law Dichotomy and its Effect on the Functional Equivalence of the Contemporary Environmental Law Enforcement Mechanisms of the United States and Mexico, 8 DICK. J. ENVTL. L. & POL’Y 273, 295-96 (1999)).
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study revealed that limited funding is the most critical cause.3) Funding theory is based upon the observation that the structure of government is generally dictated by politics. Among the tools that politicians use to control bureaucracy, budget control is the tool that funding theory focuses on. That is, it attributes enforcement deficiencies to the limited funding devoted to enforcement efforts. The theory was devised to explain why there is a disparity in the respective enforcement effectiveness of U.S. and Mexican environmental laws. Inadequate funding theory persuasively points out that the true reason for enforcement disparity can be found in non-structural influences on the system, particularly funding. Strengthened by evaluating the spending statistics and enforcement data in the U.S. and Mexico, inadequate funding theory shows that Mexico has steadily improved its overall performance as more money has been devoted to enforcement endeavors. Based on the funding theory, my previous study suggested an upgraded version of the inadequate funding theory.4) It observes that in order to improve environmental conditions, a state should improve the ratio of the environmental budget to GDP. It is not the amount but the ratio of funding to GDP that determines the level of the environmental condition. 3. One can find sources of funding mainly in the national budget. Funding is a mirror image of the political will underlying enforcement. The strength of political will is articulated in the specific amount of the environmental budget. Therefore, getting enough funding requires that the general public be aware of environmental problems and be ready to mobilize as a unified voice. However, it takes much time to transform the public’s preference towards a more environment-friendly one. It would not be reasonable to expect politicians to take the initiative regarding environmental matters, at least in part because politicians’ primary goal is re-election rather than pursuit of the common good. If improvement of enforcement level in a relatively short period of time is desired, therefore, the only source to resort to may be environmental activists. If environmentally spirited citizens voluntarily get involved in environmental enforcement by means of litigation, this can provide additional
3) For more in-depth reference, see id. The following relies heavily on id. 4) I first argued this theory in the international symposium held in Nagoya in July 9, 2005, under the theme of “Environmental Law in Asia: From Law-making to Enforcement and Compliance.” Cho, Hong Sik, A Lesson from the Recent Development of Environmental Law Regime: Are Public Awareness and Independent Courts the Key to Success of Environmental Enforcement, PROCEEDINGS OF THE SYMPOSIUM, at 57-80 (2006).
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resources to the government’s efforts. In this sense, the environmental movement can be viewed as a kind of private subsidy to complement the government’s enforcement efforts. Of course, however, private enforcement is not cost-free. Unless one can identify the pros and cons of private enforcement, one should defer judgment regarding private enforcement.
III. Pros and Cons of Private Enforcement
While private enforcement is legally permissible, the practical workability of private enforcement is debatable. Furthermore, when one considers private enforcement as a cure mechanism for the under-enforcement problem, one can develop a variety of forms of private enforcement. Each form of private enforcement has its own attributes. Such different combinations of attributes make each form of private enforcement distinguishable from the others in terms of costs and benefits.
1. Various Conceptions of Private Enforcement
1) The term “law enforcement” can refer to many different forms of enforcement. Here, as a matter of convenience, I divide enforcement into two kinds: private enforcement5) and public enforcement. Legal rules can also refer to many different kinds of rules. Again here, I divide legal rules into subjective rules and objective rules. While a subjective rule aims to protect individual rights, an objective rule aims to maintain public order. Of course, protection of individual rights in a bipolar dispute may result in the maintenance of public order, but it is only an incidental effect of such protection. On the other hand, purposeful enforcement of an objective legal rule also has a secondary effect: it brings some benefit to the general public. However, the benefit is not a vested interest, but a sort of windfall incidentally given
5) Throughout this Article, the term “private enforcement” shall refer only to the private enforcement of public purposes, and not to the private enforcement of private rights by individual victims of illegal conduct. Cf. Landes & Posner, The Private Enforcement of Law, 4 J. LEGAL STUD. 1 (1975); Polinsky, Private Versus Public Enforcement of Fines, 9 J. LEGAL STUD. 105 (1980). In much of the law-and-economics literature, private enforcement refers to all non-government enforcement as “private,” regardless of whether the enforcer is a victim or acts as a “private attorney general.”
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Private Enforcement Public Enforcement Subjective Private enforcement of private rights Government’s Paternalistic Individual by victims of illegal act Intervention into Privacy Rights “Private Law” “Paternalism” Objective Political Losers’ Attack Public enforcement of legal rules Legal Rules against Representative Democracy by the government “Lack of democratic legitimacy” “Public Law”
Matrix 1. The Traditional View
by the government, at most a so-called “reflex interest” in continental terms.6) With these two forms of enforcement and two kinds of legal rules, the four different kinds of law enforcements can be shown as in the above matrix 1. 2) The traditional perspective made a sharp distinction between the protection of individual rights and the enforcement of public purposes, and the latter task was assigned principally to the government.7) Since private citizens were viewed as poor judges of public goods and values, the enforcement of such values has generally been a public monopoly.8) In other words, the purposeful enforcement of objective legal rules has been deemed to belong exclusively to the government. Hence, individuals’ efforts to enforce objective legal rules, no matter how novel their motivation may be, have been viewed as political losers’ illegitimate attempts for political revival to the detriment of representative democracy. Absent a vested entitlement, an individual must utilize not the judicial process, but the political process to voice her cause. Unless an individual is democratically elected, she can effectuate her view of the common good only through her representatives. On the other hand, disposition of a vested right is entirely its holder’s discretion, as supported by the idea of “private autonomy.” If the government seeks to vindicate a citizen’s right without his consent, it is considered to be paternalistic intervention into the private sphere.9) Traditionally,
6) For general reference of “reflex interest,” see e.g. Frank K. Upham, Privatized Regulation: Japanese Regulatory Style in Comparative and International Perspective, 20 FORDHAM INT’L L.J. 396, 414-15 (1996). 7) For example, Michael S. Greve, The Private Enforcement of Environmental Law, 65 TULANE L. REV. 339, 346 (1990). 8) Id. at 349. 9) See, for general discussion, Donald VanDeVeer, PATERNALISTIC INTERVENTION (1986); Robin L. West, Taking Preferences Seriously, 64 TUL. L. REV. 659 (1990).
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Private Enforcement Public Enforcement Subjective Individual Private Autonomy Received Insufficient Attention Rights Objective Public Attorney General (“PAG”) Legal Rules Government’s Traditional Realm A New Policy Tool
Matrix 2. The Modern View
discrete dispute resolution has been viewed as the basic purpose of private litigation. In this way the traditional conceptualization of the public/private distinction tends to raise a basic question about the role of private enforcers across substantive domains, including the domain of environmental protection. However, the modern view begins to regard private enforcement of objective legal rules as “an efficient policy instrument and as a participatory, democratic mechanism” that can complement the government’s efforts by allowing concerned citizens to redress social wrongs.10) This assessment is shared by a large majority of legal scholars and by social activists such as environmental advocates.11) In contrast, public enforcement of subjective individual rights has yet to receive any noticeable attention. 3) As shown in figure 1, there is a broad spectrum of law enforcement ranging from government’s exclusive law enforcement to discrete private litigation. Likewise, one can conceive of a wide variety of private enforcement equipped with different attributes. Here I describe only the “private attorney general” (hereinafter, “PAG”) found in the U.S. citizen suit provisions that authorize “any persons” to sue private parties for noncompliance with statutory provisions or with standards and regulations issued under the statute. Groups and individuals suing under these provisions have sustained no injury or at most, a minimal injury-in-fact. This form of PAG functions as a template for the ensuing discussion herein. Based upon it, it
10) Greve, supra note 7, at 340. 11) See e.g. articles and books cited at id. at 341, fn. 9, 10. Among them, a remarkably thorough and balanced treatment of environmental citizen suit provisions is Boyer & Meidinger, Privatizing Regulatory Enforcement, 34 BUFFALO L. REV. 833 (1985). A prominent critical contribution is JEREMY RABKIN, JUDICIAL COMPULSIONS: HOW PUBLIC LAW DISTORTS PUBLIC POLICY (1989).
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l______l______l______l GovLE PAG CCE PriL
Maintenance of Objective Legal Order Vindication of Private Rights Public Law Litigation ←→ Private Law Litigation Attorney General Victim
GovLE: Government’s Law Enforcement PAG: Private Attorney General CCE: Concerned Citizens Enforcement PriL: Private Litigation Figure 1. A Continuum of Conceptions of Law Enforcement
enables one to can develop a specific form of private enforcement that is aimed at a particular context. 4) The term “private attorney general” denotes “a plaintiff who sues to vindicate public interests not directly connected to any special stake of her own.”12) PGA acts not as a victim who redresses a wrong done to her but as a “private attorney general.” The defining factors of a PGA can be stipulated as follows: i) effectuation of public interest (in other words, purposeful enforcement of objective legal rules, not vindication of a vested entitlement); ii) a high degree of independence from any control. To this list, some commentators add one more factor, a “quasi-private character of enforcement.”13) The “quasi-private character” factor is seen for instance, in cases where citizen-plaintiffs seek to remedy neighborhood pollution. Such cases relate to claims that citizen-plaintiff are concerned with in one way or another. In other words, these cases have certain attributes of a private, remedial lawsuit. The U.S. Supreme Court seems to have taken this view, because the Court has determined that citizens must have some injury in fact, a sort of personal injury, to have standing to file a citizen suit, and that the injury-in-fact requirement is one of the constitutional requirements.14) The remedies sought in PAGs’ actions tend to be broad: Rather than seeking redress for discrete injuries, PAG typically request injunctive or other equitable relief
12) Trevor W. Morrison, Private Attorney General and the First Amendment, 103 MICH. L. REV. 589, 590 (2005) 13) Greve, supra note 7, at 351 ff. 14) Schlesinger v. Reservists to Stop the War, 418 U.S. 208 (1974); Lujan v. Defenders of Wildlife, 540 U.S. 555 (1992).
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aimed at “altering the practices of large institutions.”15) Understandably, the PAG has not been universally admired. While some view it as critical to the effectuation of the public interest, others are concerned about the danger of its abuse. Much of the debate relates to the disagreement about the underlying wisdom of relying on private actors to implement broad public norms. Occasionally in the U.S., arguments emerge about the constitutionality of doing so as well.16)
2. Policy Arguments in Favor of PAG
1) Its proponents claim that the PAG is a “cost-effective means of supplementing resource-constrained public enforcement.”17) They think that private citizens may be able to enforce the law more cheaply than the government because individuals may be in a better position than the government to detect certain violations. Given the limited budget for environmental enforcement, a PAG can be regarded as a kind of private subsidy for governmental enforcement. However, there are responses to the efficiency argument. Laws are usually over- inclusive. Thus, full enforcement of almost any statute would entail far more costs than benefits. More importantly, private citizens are generally poor judges of the interests of others, especially public interests,18) and thus not every statutorily permitted enforcement action would be socially useful and productive. In contrast, public agencies are usually equipped with experts whose discretion is wiser than that of the PAG, and government enforcement is more stable and constrained.19) Unwise private enforcement may also cause a chilling effect on the economy by opening the proverbial floodgates of litigation, meritorious or not. 2. The PAG is also viewed as a participatory, democratic mechanism because an altruistic PAG can ensure that enforcement is not wholly dependent on the current attitudes of public enforcers who have their own institutional and political biases.20) Given that bureaucrats’ policy preferences sometimes deviate from their principal,
15) Morrison, supra note 12, at 590. 16) For example, id. 17) Morrison, supra note 12, at 608. 18) For instance, Greve, supra note 7, at 349. 19) Morrison, supra note 12, at 594. 20) Greve, supra note 7, at 344.
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i.e., the people, and are even “captured” by external forces, a PAG enables citizen self-help and greater participation. However, there are many responses to the participation argument as well. The main argument is that public agencies are superior in terms of public accountability because they are subject to political pressures and budget constraints. The public, through its elected representatives, is able to express its preferences for more or less stringent enforcement. By contrast, there is no leverage with which the public can control the PAG. One cannot negate the possibility that a self-appointed ideologue under the guise of a PAG might use the courts to pursue her own goals and values.
3. Policy Arguments against the PAG
1) The opponents’ arguments against the PAG emphasize the prospect of vexatious and abusive litigation.21) They worry that a PAG might assert marginal or even phony claims to extract settlements. Although efficiency concerns may indicate a delegation of public tasks to a PAG, its opponents observe the need to be alert about the fact that a PAG is not altruistic, but acts on specific ideological and financial motives. In the U.S. experience, enforcement by “concerned citizens” without organized support has turned out to be a rare phenomenon, and substantial portions of settlements between PAGs and the government constitute direct transfer payments to environmental groups, including above-cost attorneys’ fees and payments for credit projects.22) Private enforcement has an inevitably reward-oriented nature, which means there are no altruistic enforcers.23) In the U.S., Congressional support for a PAG is regarded as an outgrowth of interest group politics.24) In other words, a PAG is an off-budget entitlement program for the environmental movement. According to such harsh criticism, a PAG is just a mercenary law enforcer for profiteering or a social advocate who advances political causes, and a PAG is only a means through which selfish individuals advance their own interests under the mantle of the public interest.25)
21) Morrison, supra note 12, at 591, 610-18 22) Greve, supra note 7, at 351 ff. 23) Id. at 366 ff. 24) Id. at 341, 384 ff. 25) Morrison, supra note 12, at 611.
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Worse, the public has no leverage over PAGs. Unlike public institutions, a PAG is not subject to institutional checks such as legislative oversight and public accountability. Uncontrollable PAGs can bring about excessive enforcement because the government cannot stop citizen suits by any means except by instituting its own proceedings. Thus, private parties can force the government into enforcement actions, including pointless or counterproductive ones. In addition, the existence itself of private enforcement weakens the bargaining leverage of the government. For instance, the fact that private settlements can be heavily discounted raises the specter of under-enforcement. This is why the U.S. Department of Justice has insisted that citizen suits and private settlements do not bar the government from bringing its own suit over the same violation. This may cause the problem of the “civil equivalent of double jeopardy.”26) However, there are also responses to these concerns. The proponents of PAGs argue that ideological and pecuniary motivations may count as a virtue. Self-interest is not inherently evil. As Keynes observed, danger may exit not in self-interest, but rather in ideas about how to use self-interest and for what purpose. Whether or not a PAG can contribute to efficient enforcement depends on how well its institutional design fits a certain situation. 2) The bitterest criticism against the PAG may be about the need for coordinated and consistent enforcement.27) Private enforcement could produce piecemeal, sometimes erratic and excessive lawsuits that reflect disparate concerns rather than constitute a coordinated enforcement program, and thus burdening the judicial system as well as the defendants. In contrast, exclusive enforcement authority provides more certainty and specificity regarding a particular enforcement program and centralized and more orderly development of precedents applicable to various facts. A response is that mechanisms can be developed to facilitate doctrinal coordination and coherence without losing the PAG’s deterrence power.28) Citizen suit provisions do not permit the government to preserve its discretion or a coherent enforcement scheme by terminating private actions or by unilaterally adjusting or
26) Greve, supra note 7, at 376. 27) Morrison, supra note 12, at 616. 28) Id. at 617.
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withholding private rewards. In contrast, traditional bounty-hunter (i.e., “Sheriff’s Deputy”) provisions seen in the U.S. granted the government discretionary authority to deny rewards and to terminate private enforcement actions, thereby having the advantage of permitting extensive private enforcement, while tempering its intrinsic dangers.29) Again, a PAG’s efficacy depends on how well its specific design fits the relevant context.
4. Evaluation of the PAG and Policy Implication
1) Contemporary policy arguments for and against the PAG show that views on the matter have changed over time. Although policy debate yields no universal conclusions concerning the utility of the PAG, the U.S. experience leads at least to the following conclusions: i) a PAG’s cost is higher than it looks; ii) evaluation of a PAG depends on the time and place concerned and cannot be made without their regard; and iii) the decision of whether to deploy a PAG in a particular context requires a pragmatic balancing best undertaken not by courts but by legislatures responsible for the underlying law being enforced.30) The U.S. Supreme Court’s attitude towards PAGs has also vacillated through the six decades’ history of the PAG. Over the past decade, however, the U.S. Supreme Court can be viewed to have supported public/private distinction by having limited the power and influence of PAGs in the environmental area by strict new standing requirements, an expansive view of state immunity, and limitations on attorney fees. On the other hand, it has left the government a relatively free hand to enforce the laws directly, thereby favoring direct government enforcement.31) 2) The essential issue concerning the PAG is whether and to what extent private individuals can be allowed to use the judiciary to compel far-reaching changes in the activities of the public, especially where those activities are directed not at individuals’ rights (life, liberty and property) but at the public’s common interest. Therefore, the question of the suitability of the PAG concerns a variety of complicated issues such as the proper role of courts in democratic government, the proper relationship between individuals and the community, and so on. The
29) Greve, supra note 7, at 375. 30) Morrison, supra note 12, at 596. 31) Id. at 595.
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resolution of those issues must derive, at least in part, from a common set of ideological or other commitments. I suppose that the existing enforcement scheme was made to reflect society’s common idea about such issues. Therefore, the first step to remedy the under-enforcement problem must be to overhaul and realign the existing enforcement scheme. If this step is not sufficient, then let concerned citizens sue the government (not polluting entities directly) to correct wrongful government actions and inactions. This step is the cheapest way to solve the problem. Next, when one explores the need to adopt PAG as an alternative tool, there should be, again, a division of labor between private and public enforcers. This division of labor would assign the task of designing and implementing a coherent and efficient enforcement scheme to public officials, and it would direct “concerned citizens” to fill the gaps in the government’s enforcement scheme. Why concerned citizens (rather than any persons)? Only concerned citizens in the context of neighborhood claims can detect legal wrongs easily and cheaply with relatively less adverse impact on the public/ private distinction that I claim should be cherished. Organizations or individuals, not involved in the dispute one way or another, seem to bring more costs than benefits to the overall enforcement scheme, including “holding-up” operations, extortions, and, more importantly, distortion of the political process. Errant or excessive claims have a bad influence on citizens’ consciousness about the significance of environmental protection, thereby harming the environmental movement as well. Therefore, the preferred form of PE would be “concerned citizens” rather than actio popularis citizen suits. In this view, an optimal incentive system would combine very low search and detection costs with a categorical prohibition on above-cost rewards to PAGs.
V. Korea’s Need to Adopt PAG Evaluated against the Backdrop of Its Existing Environmental Enforcement Scheme
1. Korea’s Well-Organized Environmental Enforcement Scheme
The costs and benefits of a particular form of private enforcement should be viewed against the backdrop of each state’s existing enforcement scheme. Only after such consideration can one successfully design an appropriate policy tool. Accordingly, we must carefully evaluate Korea’s environmental law regime.
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A. Constitutional Constraints and Statutory and Institutional Structure
Environmental problems can be viewed as instances of market failure that occur because the market price system fails to reflect and internalize to firms the costs to society of pollution, waste, and other environmental externalities that firms generate in competing for consumer favor. In theory, private law could solve this failure by making firms compensate those injured by such externalities. But due to the intrinsic limitations of civil law,32) private litigation is in practice institutionally unsuited to this task. There are a variety of techniques that legislatures could employ to deal with the failure of market/private law to protect the environment. The overwhelming instrument of choice in Korea, as elsewhere, has been command-and-control regulation.33) Pursuant to legislation, government agencies adopt specific prohibitions or requirements relating to pollution, waste, resource management, land use, and development. These regulations are enforced against firms and individuals through licensing and permit requirements, enforcement actions, and sanctions for violations. Constitutional limits on statutory delegation set the outer contours of Korean administrative law. The Constitution declares the National Assembly as the sole lawmaking organ, although it gives the President authority to “issue presidential decrees concerning matters delegated to him by Act with the scope specifically defined and also matters necessary to enforce Acts.”34) The Constitution adds that no
32) Doctrines of civil law, the equivalent of judge-made common law, allowing recovery in nuisance, negligence, trespass and in some instances strict liability enable a private plaintiff to recover damages when a given defendant’s conduct has caused the plaintiff identifiable, serious injury. However, private litigation has not proven wholly adequate to deal with many of the wide-scale environmental problems posed by industrialization and development. For a general overview of the inefficacy of common law litigation in addressing environmental degradation, see Reserve Mining Co. v. United States, 498 F.2d 1073 (8th Cir. 1974); Reserve Mining Co. v. Environmental Protection Agency, 514 F.2d 492 (8th Cir. 1975) (en banc). The inefficacy of civil law is aggravated in Korea because of its institutional setting. No system of class actions (other than securities class actions), citizens’ suits, or organization actions (the equivalent of ‘Verbandsklage’ in German law) is available in Korea. The availability of injunctions is also very limited in Korea. For an overview of Korean courts’ efforts to respond to the limitations of the private law system, see Hong Sik Cho, infra note 2, at 58-63. 33) For an overview of the options for regulatory instruments, see Nathaniel O. Keohane et al., The Choice of Regulatory Instruments in Environmental Policy, 22 HARV. ENVTL. L. REV. 313 (1998) (applying interest-group theory to explain the content of regulation).
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person can be deprived of life or liberty except according to due process established by law,35) that property rights shall be guaranteed with their content and limitations determined by Act,36) and that local government shall only have the power to enact their own regulations through laws and decrees.37) The Constitution not only provides the Korean people with a right to a healthy and decent environment but also imposes on the government and people a constitutional duty to endeavor to protect the environment.38) Because of all this, agencies may regulate — but only if they stay within constitutionally and statutorily authorized constraints. Korea’s environmental legislation itself, both substantive and procedural, and its legal institutions are at the same level of development as those of developed countries. Since 1990, the Korean government has made a concerted effort to address the country’s mounting environmental concerns.39) The first step was to substantially rework the existing legislation and promulgate new laws addressing pollution and other environmental issues. While Korea’s legal system is heavily influenced by the civil law traditions of Germany, the new environmental law system is modeled on that of the United States. For example, the most important Korean environmental law, the Basic Environmental Policy Act (hereinafter “BEPA”), is based on the National Environmental Policy Act (NEPA) of the United States. Further, just as the United States has a number of medium-specific statutes below NEPA, Korea also has
34) S. KOREA CONST. § 75. 35) S. KOREA CONST. § 12 ① (Providing that “No person shall be punished, subject to preventive restrictions or to forced labor unless it is so authorized by an Act or without due process of law.”); S. KOREA CONST. § 12 ③ (providing that “For arrest, detention, seizure or search a warrant issued by a judge in due process of law upon request of a prosecutor shall be presented ….”) The Constitutional Court held in a series of decisions that Constitution § 12 as a general clause of due process in Korea applies not only to criminal procedure, but also to administrative procedure. To name but a few decisions, Hun-Bup-Jae-Pan-So[HBJPS][Constitutional Court] 88 heonka 6 (Sept. 8, 1989) (S. Korea); HBJPS 92 heonka 8 (Dec. 24, 1992); HBJPS 94 heonma 201 (Dec. 29, 1994). 36) S. KOREA CONST. § 23 ① (providing that “Right of property shall be guaranteed for any citizen. Contents and limitations thereof shall be determined by Act”); S. KOREA CONST. § 23 ② (providing that “Exercise of property rights shall conform to the public welfare.”). 37) S. KOREA CONST. § 117 ① (providing that “Local governments shall deal with administrative matters pertaining to the welfare of local residents, manage properties, and may enact provisions relating to local autonomy, within the limit of laws and regulations.”). 38) S. KOREA CONST. § 35 ① (providing that “All citizens shall have the right to a healthy and agreeable environment. The State and all citizens shall endeavor to protect the environment.”). 39) Regarding Korea’s legislative efforts to address environmental concerns, see generally Hong Sik Cho, supra note 7, at 503-508.
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similar statutes below BEPA. The Act on the Assessment of Impacts of Work on Environment, Traffic, Disasters, etc. (hereinafter, “EIA Act”) is one of those statutes. A number of statutes have been enacted more recently, and the specialization of environmental laws is still underway. As of March 2005, thirty-nine environmental statutes are under the jurisdiction of the Ministry of Environment.40) The President, Prime Minister, and various ministers implement the statutes by issuing regulations in the form of decrees.41) Environmental statutes and regulations are being enforced through gradually increasing criminal and administrative sanctions, as well as through civil liability. In addition, Korean citizens have an array of choices in challenging administrative actions.42) While seeking administrative remedies remains an option, citizens no longer need to exhaust administrative remedies before going to court. They can pursue administrative appeals before a designated commission under the Minister of Legislation, or submit a petition to the National Grievance Settlement Committee under the Prime Minister. Especially with respect to environmental disputes, they can use the National Environmental Dispute Resolution Commission (NEDRC) and Local Environmental Dispute Resolution Commissions located in 16 cities throughout Korea.43) The 1996 Administrative Procedure Act expanded the scope of the formal records that are required when agencies make rules and administrative acts, established a presumption against administrative guidance, and set up extensive notice-and-comment type rulemaking procedures. The Law on Disclosure of
40) See the Appendix. 41) S. KOREA CONST. §§ 75, 95. 42) For more in-depth discussion of Korean administrative procedure reform, see Tom Ginsburg, Dismantling the “Developmental State”?: Administrative Procedure Reform in Japan and Korea, 49 AM. J. COMP. L. 587, 606- 611 (2001). 43) With these accomplishments, Korea has been providing citizens with a structured dispute settlement system that secures the citizens’ rights and mutual benefits even without going through traditional legal proceedings. Between 1991 and 2003, a total of 1,345 environmental disputes were reported and 1,016 of them were successfully settled. The disputes arising from noise and vibration marked 859 cases, which accounted for 84% of the total number of disputes, followed by 97 cases regarding air pollution (10%) and 47 cases regarding water pollution (5%). Among the 1,016 settled cases, 830 negotiation outcomes (approx. 83%) were mutually accepted by the concerned parties. The Commissions aim to further strengthen the expertise of the settlement coordinators while promoting scientific and structured negotiation procedures and increasing the transparency of the decision-making processes. See generally MINISTRY OF ENVIRONMENT, GREEN KOREA 2004: BUILDING AN ECO-COMMUNITY FOR THE 21ST CENTURY 35 (2004).
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Information gives citizens more information on which to base their complaints. These rules reinforce each other to open up policymaking and expand control of administration. Simultaneous with these legislative changes, the Environmental Administration, structurally organized to combat pollution, was upgraded to full ministry status as the Ministry of Environment.44) Moreover, the dispute settlement system specifically designed to resolve environmental disputes was also strengthened.
B. Courts’ Self-Restrained Posture
(1) Public Law As noted earlier, the Constitution sets basic (if loose) constraints on how broadly the legislature can delegate rule-making. Together, the Constitution and various regulatory statutes guarantee most regulated parties a right to a hearing on issues directly affecting their welfare.45) If an agency decides such an issue against a party, the party can usually petition for reconsideration within the agency. Along with administrative review, Korean law also gives courts power to review administrative decisions. Guaranteeing effective legal remedies against wrongful administrative acts is an indispensable element of the rule of law. The Administrative Litigation Act (hereinafter, “ALA”)46) modeled on the 1962 Japanese Law on Litigation of Administrative Disputes, has been strongly criticized for its obsolescence in that it allows too limited judicial review due to strict ripeness and standing requirements, and limited types of remedies enforceable against the state.47) To be reviewable, administrative acts have to constitute formal “administrative disposition,” an exercise of public authority that restricts a plaintiff’s legal rights, and in addition must constitute the final and conclusive stage of the administrative process with immediate
44) Hong Sik Cho, supra note 2, at 505-06. 45) Constitutional Court of Korea declares that a right to a hearing is constitutionally guaranteed on such issues. HBJPS 90 heonka 48 (Nov. 19, 1990). 46) Law No. 3754 of Dec. 15, 1984, amended by Law No. 4770 of July. 27, 1994 (S. Korea). 47) With respect to remedies, permanent injunctions are not available against the state, and temporary injunctions are allowed only in very limited cases. See generally Joon-Hyung Hong, Administrative Law in the Institutionalized Administrative State, in RECENT TRANSFORMATION IN KOREAN LAW AND SOCIETY 47, 56 (Dae-Kyu Yoon ed., 2000).
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effect.48) Moreover, just as United States courts did prior to the Data Processing49) decision, Korean courts presently apply a “legal interest” test for standing, thereby prejudicing environmental interests. In other words, a plaintiff seeking redress for environmental harm must demonstrate injury to a legal interest in order to obtain judicial review of administrative acts. This means that individuals affected by a project cannot sue the government when it grants the permit for the project, because statutes are interpreted to provide not a legal interest to local residents, but at most, “reflex interest” to the general public. Even if one could be successful in overcoming these hurdles, remedial provisions are minimal, so there is little incentive to sue. Furthermore, Korean courts are criticized for having been under such a strong influence of conceptual and formal jurisprudence that they cannot take a positive role in overcoming these limits by an activist interpretation of the statute’s words. Finally, Korean courts are traditionally judged to be very deferential to agencies’ discretionary decisions. All these constraints take many, if not all, disputes involving basic policy issues and a large number of parties out of the ambit of judicial review, causing the courts to handle only the more routine cases.
(2) Private Law Compared to its role in the field of public law, however, Korean courts have played at least an identifiable (though not a major) role in protecting the environment in the field of private law. However, Korean courts’ practices still fall behind the expectations of the Korean people. As noted above, the Constitution provides the people with a constitutional right to a healthy and pleasant environment. However, the Supreme Court of Korea has construed the provision as not self-executing unless a number of preconditions are satisfied.50) In a number of nuisance cases in which plaintiffs based their claims on
48) Concerning the concept of “administrative disposition,” see John K. J. Ohnesorge, States, Industrial Policies and Antidumping Enforcement in Japan, South Korea, and Taiwan, 3 BUFF. J. INT’L L. 289, 399 (1997). 49) Association of Data Processing Serv. Orgs. v. Camp, 397 U.S. 150, 153-57 (1970) (discarding the “legal interest” test in favor of “zone of interest” test). 50) Dae-bup-won [DBW] [Supreme Court] 94 ma 2218 (May 23, 1995); DBW 95 da 23378 (Sep. 15, 1995); DBW 96 da 56153 (July 22, 1997). According to the Supreme Court, “The content of this Constitutional provision is not so sufficient that it cannot be interpreted to give individual people a concrete private right which can be claimed immediately vis-à-vis other individuals. That is because this provision does not provide clearly the content and scope of the environment to be protected, the scope of persons who are to use the right to a healthy and decent
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both the Constitution and property rights, the Supreme Court held that “in order for this constitutional right to be acknowledged as a right to be exercised as a matter of private law, the right’s owner, counter-parties, content, and means of exercise must be explicitly identified by statutory provisions, or must be implicitly established by interpreting the purposes of relevant provisions and using ‘jory’ (from the application of natural reason, an innate sense of justice, and the dictates of conscience).”51) Only in rare cases can a constitutional right to a healthy environment be established as a private right exercisable against others by interpreting tacit provisions and using jory. As a result, unless an environmental suit is based upon a specific statute that provides the parties involved with a legal interest, it must be pursued under tort or nuisance law. Unfortunately, there is a paucity of such precedents in Korea. For example, while the enactment of a bill called “the Wetland Preservation Act”52) was pending, one could not compel developers to consider the ecological value of a given wetland unless one was the owner of adjacent property.53) Except for property claims, one could not find any legal grounds upon which to establish such a claim. Furthermore, according to the Civil Code, Korean courts do not award unforeseen extraordinary damages. Neither do they award nominal, stigma, or punitive damages. However, Korean courts have attempted to respond to the limitations of the private law system by relaxing traditional standards of proof,54) encouraging quasi-class actions,55) and devising creative new remedies.56) Not unexpectedly, these innovations
environment, and so forth. That is also because if the right to a healthy and decent environment is recognized as a concrete private right to be immediately claimed by individuals, it inevitably causes restraints and limits on the exercise of private property rights by counter-parties against whom the right to a healthy and decent environment is claimed. … Basically, the Legislature, representing people, rather than the Court must determine by statute which of the legal interests, ‘preservation of the environment’ or ‘protection of individual freedom for industrial development’ (both of which contradict each other), must be chosen as a priority and how the two interests are to be harmonized and balanced.” 51) Id. 52) Law No. 5866 of Feb. 8, 1999 (S. Korea). 53) See DBW 95 da 23378 (Sep. 15, 1995); DBW 96 da 56153 (July 22, 1997). 54) DBW 72 da 1774 (Dec. 10, 1974) (accepting, for the first time, the so-called “probability theory” by loosening the burden to prove causation between the defendant’s act and environmental damage); DBW 81 da 558 (June 12, 1984) (accepting the probability theory by loosening the burden to prove causation); DBW 89 daka 1275 (July 23, 1991) (the same content). 55) Korean law has no provision for class actions (other than securities class actions). Although parties to a large suit can sometimes choose representative litigants (Civil Procedure Code § 49, Law No. 547 of Apr. 4, 1960, amended by Law No. 5809 of Feb. 5, 1999 (S. Korea)), the judgment will bind only the parties named. I call these
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strain the courts’ traditional institutional role and have proven controversial. Another pitfall of private litigation is the limited availability of injunctions. As noted above, the Civil Code bans injunctive relief in most tort cases.57) Because Korea is a civil law country, the Korean legal system does not have the concept of equity. This absence plays a crucial role in courts forming hostile attitudes toward injunctive relief. In fact, Korean courts seldom grant permanent injunctions against large-scale corporate or governmental projects on environmental grounds. However, Korean courts have begun to expand the exceptions to the damage-only rule. They do so most readily when plaintiffs claim nuisance-related damages. If a plaintiff complains of nuisance from a neighboring building, Korean courts increasingly grant injunctive relief, though they may simply determine the present value of his expected future losses and award him damages instead.58)
C. Recent Developments in the Courts’ Rulings and Judicial Reform Efforts Implemented by the Ministry of Court Administration
(1) Administrative Disposition Korean courts may review an agency determination under the general administrative litigation rules only if it involves an “administrative disposition” — a test paralleling the U.S. doctrine of “ripeness.” “Disposition” does not refer to all actions that an agency might take. Rather, it refers to the actions which a national or public organization (the subject of public powers) takes that directly structure or determine the rights and duties of citizens. This requirement seems enormously nebulous, and has indeed been creating tremendous barriers against people who try to challenge administrative actions for their own interest. The concept of administrative disposition is clear only in routine cases. Typically, if an agency rejects a permit application, it exercises its public powers. It determines the rights of the applicant and thus subjects itself to judicial review under
types of large suits “quasi-class actions.” 56) See, e.g., DBW 90 gaka 5198 (Dec. 27, 1991) (using the relevant statistical data in calculating the amount of damages). 57) Traditionally the only exceptions to this rule appeared in cases where a tortfeasor had sullied the victim’s good name and the courts ordered newspaper notices as relief. See Civil Code §§ 764, 394. 58) See, e.g., DBW 95 da 23378 (Sept. 15, 1995); DBW 96 da 56153 (July 22, 1997).
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administrative litigation rules. By contrast, if an agency buys a fleet of cars on the open market or builds for them a large garage, it exercises only private powers. Necessarily it does not determine the rights and duties of citizens and makes no administrative determination (although the agency must of course follow the usual rules of property and contract). In such case, courts will review its actions under the usual rules of civil procedure. However, there is a gray zone of administrative acts that cause some problems in construing “administrative disposition.” No matter how egregious an administrative act, there is no way to enjoy judicial review unless the act is subsumed within the concept of “administrative disposition.” A variety of types of administrative actions that seem to constitute the exercise of public power have been determined to not fall within the scope of the concept of “administrative disposition.” Consider, for example, an environmental impact assessment (“EIA”), which is deemed not to be an administrative disposition. Since EIAs directly affect only the agency’s internal affairs (though they are one of the important proceedings constituting final administrative actions having outside effects), they are not regarded as administrative dispositions, which keeps the person interested in the content of an EIA from suing the agency involved. From the Korean courts’ point of view, an EIA is a purely intra- agency affair; it does not directly bind the general citizenry. A plaintiff who wants to contest the appropriateness of the procedure and content of an EIA can simply wait for the agency involved to make a final disposition. Then — but only then — will the courts resolve the issue. But as might be expected, the relevant project will often have been completed by the time the court performs judicial review. Then, it is often too late to gather spilt water.59) In response to the criticism aimed at the concept of administrative disposition, the Ministry of Court Administration under the auspice of the Supreme Court has recently proposed a legislative bill (hereinafter, “Amendment Bill”) to amend the ALA. In this bill, the concept of “administrative act” is chosen instead of administrative disposition. Administrative act is supposed to encompass every kind of act driven by administrative agencies, including presidential/ministerial decrees
59) Furthermore, there are a couple of provisions in the ALA which may work for the government’s advantage. For example, even in cases where a demand of the plaintiff is deemed reasonable, if the revocation of an administrative disposition, etc. is deemed extremely inappropriate to the public welfare, the court may reject the demand of the plaintiff. See Administrative Litigation Act § 28.
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and administrative acts devoid of direct legal effect, neither of which is currently included under the concept of “administrative disposition”. The Amendment Bill is considered to follow the French model by allowing objective recourse against excessive power which focuses on control of the legality of all executive decisions except for the “acts of government.” In a procedure of objective recourse, the particular issue of the plaintiff’s rights is not taken into consideration, and the court will not decide on this matter. Since the famous decision of the Conseil d’Etat (Council of State) in the case Dame Lamotte in 1950, the significance of the recourse against excessive power has not been challenged. In the Dame Lamotte decision the Council stated that “this recourse is open even in the absence of a text against any administrative act, and it has the effect to ensure the respect of the legality in accordance with the general principles of the law.” The concept of objective recourse is an original institution of the French administrative system that reflects the significance of the legal order based on the preeminence of sovereign law (“loi”) as opposed to the constitutional protection of individual rights. In this respect the French legal system is inherently in tension between private subjective rights and public order.
(2) Standing For a petitioner to challenge an agency, she must have standing to sue. In Korea, standing is so narrowly formulated that any litigation to vindicate collective interest is not allowed.60) To have standing, a petitioner must have a “legal interest” in the case.61) Again, the routine cases are clear: an agency refuses a petitioner a permit for her store — she has standing; an agency closes her store — she has standing. It is the odd — but important, from the viewpoint of public policy, cases that are unclear. Such unclear cases sometimes seem to follow the “zone of interest” line of inquiry in the United States. As disputes became more complicated in terms of the numbers of parties involved, the complexity of relations among the interests concerned, and so forth, the number of unclear cases is increasing. To explore such unclear cases, let’s consider disputes over nuclear reactors.
60) Joon-Hyung Hong, supra note 29, at 56. 61) See Administrative Litigation Act § 12.
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Although Korea depends heavily on nuclear power, the reactors have their fair share of opponents, both opponents of nuclear power generally and opponents of nuclear power in their backyards. When these opponents challenge the reactors’ permits, their claims are usually dismissed on the grounds that they do not have standing. Crucial for the purpose here, they do not lose on substantive grounds. The courts instead hold that, although the industry regulatory statute emphasizes safety concerns, the safety clause exists to protect the abstract public interest in general rather than any concrete individuals’ interests, and that nearby residents thus do not have standing to challenge the safety of the reactors. To determine whether the applicants have standing, the courts look to the regulatory statutes involved. The nuclear regulatory statute mentions safety concerns only indirectly and does not articulate the interests of neighbors to be protected. Instead, it emphasizes sensible and overall safe design. Given the stress on general public welfare rather than more local and individual concerns, the neighbors are held to lack standing no matter how much they are concerned about the safety of the reactor. Recently, however, the Supreme Court has been gradually changing its attitude toward the environmental activists. In contrast to earlier cases, the Court has begun to confer standing on individuals living within the area of land on which the environmental impact is being assessed (the so-called “environmental impact assessment area”).62) The Court reasoned that individuals living within an EIA area have a concrete, specific interest (rather than an abstract, general interest that any members of the general public can share with others) to be protected by the EIA Act that the developer is alleged to have violated. In 2005, the Supreme Court further relaxed the standing requirement in a similar case.63) In this case, the Supreme Court conferred standing even to individuals living out of the area designated as the “vicinity impact area” by the relevant statute if they successfully prove that there is a fear that their environmental interests are damaged by the allegedly unlawful construction of, in this case, a trash-incinerator. The Court reasoned that the relevant clause is provided to protect concrete individuals’ environmental interests rather than the abstract public interest in general. Furthermore, the “Amendment Bill” no longer sticks to a “legal interest” test for standing. Under the legal interest test, a plaintiff seeking redress for environmental
62) DBW 97 nu 3286 (April 24, 1995) (S. Korea). 63) DBW 2003 du 13489 (March 11, 2005) (S. Korea).
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harm must demonstrate injury to a legal interest in order to obtain judicial review of governmental agency action. Unless an interest is founded in a statute that is interpreted to protect the interest of certain individuals, they cannot seek judicial review of governmental agency action. However, the Amendment Bill discards the legal interest test by cutting out the nexus between the relevant statute and standing. Instead, the Amendment Bill provides a standing clause that confers standing to any one who has “a legally just interest.” Under this clause, judges rather than legislators decide who can file an administrative litigation because judges can ground their determination of whether to confer standing on the Constitution, Constitutional principles, courts’ decisions, and maybe even natural law, not to mention the relevant statute.
(3) Standard of Review Courts review most agency decisions under a standard that leaves the agency substantial flexibility. In administrative cases, the petitioner bears the burden of persuasion. What she must generally prove is illegality or an abuse of discretion. Under the ALA, she must show that the agency acted illegally, or “exceeded the scope of its discretion, or abused its discretion.”64) Generally speaking, Korean courts are very deferential to agencies’ discretionary decisions.65) Therefore, petitioners can challenge an agency’s decisions only if they can show, for example, that the decisions lacked basis in fact or were egregiously inappropriate in the light of prevailing social norms and the agency therefore either exceeded or abused its discretion. Again, however, Korean courts are getting more active in dealing with administrative cases. In the famous Saemangeum case, for instance, the Seoul Administrative Court has ruled in favor of environmental conservation by determining that the relevant agency’s decision lacked basis in fact. As a result, the court ruled it necessary to cancel or change the permit to reclaim the public water area because the environmental, ecological and economic damage expected from the project is huge and irreversible. They listed the following reasons to support their
64) Administrative Litigation Act § 27. 65) For example, DBW 99 du 2970 (July 27, 2001) (upholding an agency’s decision to proceed with a land developing project in spite of its negative environmental impact assessment); DBW 99 du 9902 (June 29, 2001) (the same content).
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ruling to change or cancel the original permit: the possibility of using land reclaimed through the project for agriculture is very low; it is anticipated that the water quality in the reclamation reservoir will be too poor to use for agriculture; estimates of economic benefits to be derived from converting the existing area to agriculture are flawed; and massive damage will be caused to the tidal-flat ecosystem. The court added that no decision has yet been made on the end-use of the land to be reclaimed, but reiterated that it cannot be used for agriculture, as water in the reclamation reservoir created for that purpose will be too polluted. The court did not rule against continuing work to reinforce the existing sea wall, but it did rule against further construction required to close the remaining 2.7 km stretch that remains open. (Earlier, the court had tried to suggest a way forward by recommending that further research be conducted before their final ruling was made.) The court also recommended that the government should halt the project and set up a committee of experts to fully review the potential environmental and economic consequences of the reclamation. The court further suggested that parliament should enact a special law to help iron out such issues. Although, environmental groups and local fisherman welcomed these recommendations, the government and the ruling Uri Party openly rejected them.
(4) Types of Remedies In Korea, environmental victims’ concerns are diverse; they range from recovery of pollution damage to permanent injunctions for environmental preservation. Recently, more attention has been focused on the availability of injunctions. However, constraints inherent in the litigation process keep the courts from playing their expected role. As in Germany and Japan, class actions, pretrial discovery, jury trials, and punitive damages are not available in Korea. Only in limited cases do the Korean courts provide permanent injunction remedies.66) Furthermore, the Korean courts usually concentrate only on dispute resolution, as opposed to the United States courts, which also focus on policy making in addition to dispute resolution.67) These
66) Because Korea is a civil law country, the Korean legal system does not have the concept of equity. This plays a crucial role in courts forming hostile attitudes toward injunctive relief. As a matter of fact, the Korean courts seldom grant permanent injunctions against large-scale corporate or governmental projects for environmental reasons. 67) Sang-Hyun Song, The Roles of Judges in Korea, in KOREAN LAW IN THE GLOBAL ECONOMY 300-05 (Sang-
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obstacles must be overcome in order for environmental victims to enjoy substantial protection from environmental degradation. Given the high level of public awareness about the significance of environmental protection, the courts’ activism and creativity may make a difference in Korea’s environmental quality by filling a void in the law. Again, the “Amendment Bill” provides permanent injunction remedies by adding a new type of administrative litigation in which the courts can obligate the relevant governmental agency to implement its legal duties.
2. Korea’s Need for PAG and Viable Design of Private Enforcement
1) In the field of environmental protection, the Korean legislature has never enacted a PAG. (Hence, Korean courts have never had the chance to decide whether there is a constitutional standing requirement such as a minimal injury in fact requirement as in the U.S.) Korean courts have insisted that only the Legislature can authorize a PAG. Therefore, at least in the environmental area, Korea does not have any PAG. However, in my view, a PAG is not necessary, at least for the time being. First of all, as noted above, Korea is equipped with a well-organized environmental enforcement scheme the modernization and specialization of which is still underway. If means of litigation against the government are needed to strengthen enforcement, the first step is not to adopt a PAG, but to let people use the procedure that exists to correct government wrongful action and inaction. Second, environmental activists are enormously active in Korea. As noted above, by voluntarily monitoring and reporting environment-degrading activities, environmental activists subsidize the governmental efforts to protect the environment. Throughout Korea’s history, nongovernmental environmental organizations have played a major role as “a formidable policy-influencing force and unofficial pollution watchdog.” Since the creation of the Korean Federation for Environmental Movement, the first environmental NGO launched in Korea, diverse NGOs have been born. As of December 2003, more than 300 NGOs are reported to play a role in the field of environmental protection.68) According to a poll, two thirds of Korean people think that Korea’s environmental NGOs make positive contributions to solving
Hyun Song ed. 1996). 68) MINISTRY OF ENVIRONMENT, ENVIRONMENTAL WHITE PAPER 2004, 130.
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environmental problems.69) Third, Korean people have turned out to be extremely litigious, which dilutes the need to devise more incentives for the people concerned to, in the capacity of PAG, sue directly against polluting entities. The number of administrative litigations has rapidly increased from about 22,000 in 2004 to the high level of about 26,000 in 2005. In this context, the Korean government’s recent efforts to liberate justiciability in revising the ALA are noteworthy. Fourth, Korean courts have begun to take an active posture toward welfare rights litigation, including environmental litigation to such an extent that they proposed their own amendment bill to the ALA. Only with judicial follow-up can environmental litigation have an impact on environmental enforcement. Korean courts are so much more (though in a relative sense) isolated from the political process that they may stick more strictly to the texts of statutes enacted to protect the environment. In addition, public involvement by means of litigation means decentralization of the monitoring and enforcing function. Individuals’ suits against bureaucrats can result in informing politicians of bureaucratic failures to follow legislative instructions. The courts can serve as a mechanism to discipline bureaucrats and as a quality-control system in judging whether the public’s claims have merits. 2. In case that private enforcement is found necessary to strengthen the enforcement level in Korea, I would advise the following: First, the legislature in charge of the underlying law must decide whether and to what extent a PAG is allowed. As noted above, private enforcement of public interest brings out a number of complicated policy issues. Only the Legislature that represents the Korean people may and should decide such issues. Second, in deciding whether to deploy and how to design private enforcement mechanisms in a particular context, the Legislature must engage in a kind of pragmatic balancing. Especially in designing the proper form of private enforcement, the Legislature must take into account the relevant costs that are calculated against the background of the existing enforcement scheme. Third, if other conditions are the same, the form of concerned citizen enforcement is preferable over actio popularis type of citizen suits. If PAG type of private enforcement is chosen, then the government should retain the power to structure private settlements and rewards. Why? It is because too much judicial review may not be judicious. The courts’ unreasonable involvement on the side of the activists
69) THE SURVEY OF PUBLIC OPINION, supra note 50, at 26-27.
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may break the balance established among the three branches. It would be fatal to the courts’ integrity if they respond favorably to ideological activists by reaching pro- environment decisions in an unprincipled manner, or altering generally applicable rules to make them to apply differently in environmental cases. In such case, the court would not be a deliberative forum, but a bloody arena that interest groups use to substantiate their negotiating power. The PAG type of private enforcement would augment such possibility for courts to abuse their judicial power. In short, the trial should remain a judicial process, not a political process.
KEY WORDS: environmental law, under-enforcement, private enforcement, public enforcement, subjective rule, objective rule, public law, paternalism, democratic legitimacy, funding ratio, private subsidy, citizen suit, Private Attorney General, actio popularis, concerned citizen suit, pragmatic balancing, judicial power, democratic government
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Litigating in Korea: A General Overview of the Korean Civil Procedure*
Youngjoon Kwon**
I. Introduction
In the aftermath of the Korean War that literally devastated the whole nation a half decade ago, the Republic of Korea miraculously grew up from one of the poorest nations into the 13th economy in GDP as of 2007. Along with an established industrial economy, Korea has also changed dramatically during the last few decades in the political environment, broadening and deepening its democracy. These political and economical infrastructures laid a solid cornerstone for the rule of law. Drawing on the experiences of other nations and creatively adapting these lessons in its own context, the Korean legal system has also been developing into a firm and sound one. Consequently, the Korean judiciary is gradually increasing its scope of influence in response to the enhanced demand of the people calling for more reasonable and fair society. With regard to a dispute resolution, the rule of law seems to play an even more significant role. In the past, based on the Confucian heritage,1) a great number of disputes were settled by de facto, informal mediators like elder members of the community or family without making their way to the court.2) Yet, with western
* The research for this article was funded by the Law Research Institute of Seoul National University College of Law. ** Assistant Professor of Law, Seoul National University College of Law. 1) Nam Hyeon Kim et al., Community and Industrial Mediation in South Korea, 37 J. CONFLICT RESOL. 361 (1993). 2) Lisa Blomgren Bingham et al., Participatory Governance in South Korea: Legal Infrastructure, Economic
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cultures and thoughts gradually gaining grounds in the Korean society and a modern legal system standing firm as a central mechanism of a dispute resolution, more and more disputes are resolved by virtue of law, instead of informal reconciliation. Individuals are showing more willingness to bring their civil disputes to the court. This, in turn, results in the tremendous increase in caseload.3) Accordingly, the body of law governing the civil dispute resolution is becoming even more significant. Arguably, the Korean Civil Procedure Act is the most fundamental and essential field of law in the realm of a dispute resolution. However, it is quite stunning to realize the rarity of the relevant legal literatures in English that offer a general explanation on how Korean civil procedure functions.4) Therefore, it is pertinent that Korean civil procedure be introduced and analyzed in the language people outside the nation can understand. As one might predict at this point, this article intends to be an initial point of reference for foreigners embarking on a study or research of Korean civil procedure law, by providing a general overview of it. Therefore, this article will rather focus on giving readers a general picture of the civil litigation based on the Korean civil procedure, than delving into specific and sophisticated legal issues. Besides outlining the general proceedings of litigation and clarifying their theoretical basis, this article also provides some observations as to the practical aspects of the civil procedure in order to give readers some sense of how litigations in Korea are performed in practice. With this in mind, this article is structured as follows. Part II of the article describes the basic features of the Korean Civil Procedure Act, including its history, guiding principles, and structure. Part III explains the critical concepts and relevant issues regarding the initial stage of the litigation, such as a complaint, parties, jurisdictions and legal costs. Part IV and V deal with pre-trial and trial proceedings. Important issues concerning pleading and evidence will be elaborated on. Part VI
Development, and Dispute Resolution, 19 PAC. MCGEORGE GLOBAL BUS. & DEV. L.J. 375, 381-382 (2007). 3) The total number of civil cases received in the courts nationwide in 2002 was 1,015,894. It increased as high as 1,288,987 in 2006. See http://www.scourt.go.kr/scourt_en/jdc_info for more information. 4) The book titled “Korean Law in the Global Economy” (1996), edited by Song, Sanghyun, a former professor at the college of law, Seoul National University, and currently the honorable judge of International Criminal Court, is by far the most comprehensive literature that features Korean law for English readers. In this book, several articles are devoted to the civil-procedure related subject matters, such as a small claims act, or a commercial arbitration. However, it is not easy to find out an English paper that gives a comprehensive, bird’s-eye view on Korean civil procedure, either in the book mentioned above or other sources.
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outlines the final stage of the litigation as well as other issues to be followed afterward. It illustrates how judgments are rendered, what effects they take, and how one can challenge them. Part VII deals with issues of settlement, enforcement and the recognition of a foreign judgment. Finally, par VIII concludes this article by summarizing what has been explained, as well as adding a short prediction on how Korean civil procedure will make its way in the near future to serve the ideals it declares.
II. Basic Features of the Korean Civil Procedure Act
1. History
A. Pre-modern Era
Korean history dates back to B.C. 2333, when the first state, Kojoseon, was established. The judicial tradition of Korea is as old as this, for Kojoseon had its own statutory law.5) Ever since, Korea has developed its own judicial system. During Chosun dynasty that lasted until 1910, it was governmental officials who were in charge of adjudicating civil law suits. The distinction between civil and criminal procedure was not clear-cut. Appeals were allowed, and the case could go as high as to the King. There were no full-time judges, not to mention a separate judicial branch. It was not until 1894 that the first modern system separating the judiciary from other branches of the state was initially introduced, when King Kojong introduced the 14 articles of Hongbum. Based on this, the first court in a modern context was established in Seoul in 1895.
B. Japanese Colonization Period
In the wake of imperialism haunting all over the world, Japan forcefully annexed Korea in 1910. This colonization period lasted until 1945, the year the Second World
5) This law is consisted of eight articles. Only three articles are available at present. They are about a capital punishment for murder, compensation with grains for personal injury, and the enslavement of thieves.
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War was put to an end. During this period, Japanese laws were in force according to a Japanese government decree. Since Japanese legal system was strongly rooted in the continental civil law system, Korea was also influenced by this tradition. Thus, the Korean civil procedure is said to be based on the continental law system as well. Civil procedure law was no exception to this. From the perspective of comparative law, Japanese civil procedure code was under the influence of German civil procedure act of 1877. This inevitably left indelible footprints on the Korean civil procedure law. It is no wonder that a substantial portion of legal academia on civil procedure is still consulting German literatures in handling domestic issues.
C. The enactment of the Korean Civil Procedure Act
After regaining the independence from Japan in 1945, the law of the formal occupying country needed to be replaced with a new one. The constitution of the Republic of Korea was promulgated on July 17. 1948. Shortly after, a newly formed commission began to work on drafting various acts including a civil procedure act. After many twists and turns, the Korean Civil Procedure Act(hereinafter ‘the KCPA’) was first enacted as of Jul. 1., 1960. Japanese civil procedure law had to remain tentatively in force until the enactment of the new code. Since the enactment of the KCPA, it has been amended fourteen times up to now. The most dramatic reform in the civil procedure has been made in the year 2002, emphasizing the pre-trial phase and the concentration of the trial for the sake of efficiency as well as separating the civil execution part from the code. The KCPA is the most significant body of law that primarily governs the civil procedure in Korea.6) The Rules of Civil Procedure(hereinafter ‘the RCP’) has been promulgated by the Supreme Court of Korea, and is serving as supplemental norms to the KCPA. As mentioned above, the Civil Execution Act has been enacted as of 2002 to govern the area of enforcement. Procedures regarding family litigation are regulated by the Family Litigation Act. Likewise, bankruptcy and restructuring proceedings are governed by the Bankruptcy and Rehabilitation Act.
6) The full text of the KCPA in English can be found in the official website of the Korea Legislation Research Institute at http://www.klri.re.kr.
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2. Guiding Principles
As the article 1 of the KCPA puts it, the court should strive to enhance fairness, swiftness and efficiency in the civil proceedings. This summarizes the guiding principles that permeate the whole process.
A. Fairness
Fairness is the essence of the civil procedure. To find out the truth in a just way is the ultimate purpose of the procedure. It is no exaggeration to say that nearly every provision incorporated in the KCPA is directed at attaining fairness. Substantive fairness-finding out the truth and drawing a just conclusion- is the first type of fairness to be achieved in the civil procedure. To make this goal feasible, parties are allowed to submit every possible argument and evidence to clarify the facts. Moreover, the law obliges the court to acquire information from the parties firsthand (§ 204).7) Whenever it is necessary to clarify facts or the point of pleading, a presiding judge may take suitable measures such as asking questions or urging parties to clarify obscure things (§ 136). Appeals are another means by which true fact-finding and a just conclusion can be secured. Procedural fairness-observing the neutrality and treating parties equally-is another type of fairness to be considered. The principal objective of procedure law is to give parties an equal and fair opportunity to present their cases to a non-prejudiced tribunal. In this context, the Korean civil procedure is based on an adversarial model, as opposed to an inquisitorial model. The parties play a primary role in the process, while the judge plays only a passive role. The court should stay neutral and is not allowed to step in and side with one of the parties. It is also a procedural reflection of self-determination. It is the party who determines the beginning, subject-matter, and the termination of the proceedings. It is also the party who presents facts and submits relevant evidence. Parties should be given the same degree of protection and access to the process. There is delicacy between these two notions of fairness. Tipping toward
7) Unless designated otherwise, the number of the provision refers to that of the KCPA hereinafter.
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procedural fairness might harm the goal of finding out the truth, especially when a party is not capable enough to perform procedural acts properly by himself. Tipping toward substantial fairness might be helpful in drawing a right conclusion, but might endanger the procedural fairness when the court aggressively intervenes in the proceedings to reach what it considers a right conclusion. The KCPA § 136, the clause that provides a basis for the intervention of the court to clarify pleadings by parties as well as setting forth its limitation, is a sort of an equilibrium balancing these two values.
B. Swiftness and Efficiency
Justice delayed is justice denied. The Article 27 of the Constitution of Korea clearly declares that citizens shall have the right to a speedy trial. This idea is implemented throughout the civil procedure. Parties bear responsibility of timely presentation of pleading (§ 146). Failure to make pleadings or appear on the date of pleadings may result in disadvantageous treatments (§ 146, 150, 268). The KCPA also prescribes a certain period for the rendering of the judgment (§ 199).8) Efficiency is another value to be pursued. Although efficiency sometimes needs to be balanced against fairness, reducing the administrative cost of adjudication is arguably one of the most significant ideals to be pursued. The most notable feature of the Korean civil procedure in the context of the efficiency is the ‘Small Claims Trial Act’, which features an expeditious and convenient process.9) This process was first introduced in 1973, mainly to get rid of delay, complexity and costliness of the regular trial by providing the people with an accessible, simple, speedy and inexpensive mechanism for minor dispute resolutions.10) In small claims trial, the plaintiff can institute an action by making an oral statement to the court clerk instead of filing a written petition to the court. Once it is filed, the court may first render a decision recommending the defendant to perform her obligation based on the
8) It provides that judgment shall be rendered within five months from the date of the file. However, this is construed as a recommendatory provision. 9) Small claims cases are cases in which the plaintiff claims payment of money, fungibles, or securities not exceeding 20 million Korean won (equivalent to approximately 21,700 U.S. dollars, as of Nov. 30. 2007). 10) See Ogon Kwon, Small Claims Courts in Korea and the U.S.; A Comparative Analysis, KOREAN LAW IN THE GLOBAL ECONOMY, at 451 (Sanghyun Song ed., 1996).
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complaint, without waiting for the response of the defendant. If the defendant doesn’t want to accept the recommendation as it is, she may raise an objection to the decision. Practically speaking, a great portion of the small claims cases are resolved at the stage of recommendation. A restriction on the legal representative is eased, allowing persons in certain family relations with the party to represent her without permission of the court. Evidence rule is less stringent. Although the judge must give a written judgment at the end of a hearing, she is not required to state the reasons in writing. The grounds for final appeal are strictly limited. Another feature worth of noting is the amendments of the KCPA in 2002, focusing on streamlining the whole process. New casement management model which has been introduced on the occasion of the amendment is focusing on enhancing the efficiency by requiring timely measures of the party at each phase of the proceedings and minimizing the number of hearing dates supported by substantial pre-trial pleadings.
3. Judicial System
Indispensable to an understanding of a civil procedure is familiarity with the judicial system in which the civil procedure lies. Below are the basic features of Korean judicial system, focusing on a court system and judges.11)
A. Court System
According to the article 101 of the Constitution of Korea, courts are endowed with the power to adjudicate all legal disputes.12) To perform this mission, the Court
11) Comprehensive information on Korean judicial system can be found at http://www.scourt.go.kr, the official website of the Supreme Court of Korea, as well as http://www.ccourt.go,.kr, the official website of the Constitutional Court of Korea. See also Young-Hee Kim, Introduction to Korean Legal Materials, 2-1 JOURNAL OF KOREAN LAW 125 (2002) for information on research sources of Korean law in English. 12) However, there are some exceptions as well. The power and authority to adjudicate on the constitutional issues lie in the Constitutional Court. The Constitutional Court deals with cases within following categories; the constitutionality of a law, impeachment, dissolution of a political party, competence disputes between state agencies, between state agencies and local governments, and between local governments; and constitutional complaint. For details, refer to the official constitutional court website at http://www.ccourt.go.kr. Another exception can be found in article 64, which vests the power to examine the qualification and/or to take disciplinary measures against lawmakers in the national assembly.
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Organization Act of Korea sets forth the basic structure of the court system. According to this act, the court operates in a three-tier system. At the root level is the district court. Currently, there are 13 district courts nationwide, each of which representing the respective geographical area. Branch courts, family branch courts, and municipal courts are established under the district courts upon necessity. Family Courts and Administrative Courts are also on the level of District Courts. District courts are the courts of first instance, exercising general original jurisdiction. In principle, a single judge presides over a case. However, a panel of three judges is in charge of cases with amount in controversy exceeding 100 million Korean won13) or incalculable amount. At the appellate level is the high court. The high court serves as the court of appeal. Five high courts are located in major cities of Korea — Seoul, Busan, Daegu, Gwangju and Daejon.14) However, it should be noted that high courts are not the only appellate courts under Korean system. The High courts hear all the appeals from judgments by a panel of three judges, and the appeals from judgments by a single judge when the amount in controversy exceeding 50 million Korean won. Yet, appeals from other judgments that have been rendered by a single judge will be heard by an appellate panel in district courts. In this sense, appellate jurisdiction in civil cases is divided among high courts and district courts. At the highest level is the Supreme Court. It serves as the court of last resort. The Supreme Court is comprised of thirteen Justices, including the Chief Justice. This court hears appeals from the High Courts and the Patent Court. It also hears appeals from District Courts or Family Courts when they adjudicate as courts of appeals. The grounds for appeal to the Supreme Court are limited by the law.15) If the appeal does
13) This equals to approximately 108,500 U.S. dollars as of Nov. 30. 2007. There is an exception to this rule as well. Cases involving the claim for payment of checks or bills, or the claim for repayment of loans by financial institutions will be presided over by a single judge regardless of the amount in controversy. 14) The Patent Court was newly established on March 1. 1998. The major function of this court is to deal with appeals against the decision of Korean Intellectual Property Office (KIPO) with regard to the intellectual property related cases (patent, utility model, design or trademark. Copyright is not handled by KIPO). It is positioned on the level of a high court. Currently, it is located in Daejon. 15) According to the KCPA § 423, the violation of the Constitution, Acts, administrative decrees, or regulations are grounds for appeal to the Supreme Court. Furthermore, the KCPA § 424 enumerates the absolute grounds(meaning that these grounds are deemed justifiable), which includes the participation of the ineligible judge in a trial or violation of an exclusive jurisdiction.
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This image is available on the official website of the Supreme Court of Korea at http://www.scourt.go.kr/.
Figure 1. The Court Organization Chart (As of Nov. 2007).
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not contain the cause enumerated by law, the court dismisses the appeal without further examining the case. Generally, a case is assigned to a petty bench composed of four Justices. A case is decided by the Petty Bench unless it falls within one of the following categories; (i) the Justices fail to reach a consensus on the case, or (ii) any order, rule, or regulation is in violation of the Constitution or Statutes, or (iii) it is deemed necessary to change the former opinion of the Supreme Court regarding the interpretation and implementation of the Constitution, laws, orders, rules, or regulations, or, (iv) when it is deemed that adjudication by a Petty Bench is not appropriate. Notably, Korean courts do not have the common-law concept of stare decisis. In reality, however, the Supreme Court decisions tend to strongly influence decisions by lower courts in similar cases.
B. Judge
At the delegation of the Constitution, the Court Organization Act provides qualifications for the judges. According to the article 42 of the Act, persons who have passed the National Judicial Examination and have completed the two-year training program at the Judicial Research Training Institute or those who have obtained qualifications as lawyers are eligible to become judges. In practice, the common pool of the newly appointed judges was the group of elites among the trainees at the Judicial Research Training Institute. Some judges were selected from the pool of practitioners. However, the number of the second group was relatively small compared to the first group. This method of selection is likely to change in the near future due to the newly introduced law-school system. According the new system, the U.S. style law school will be established by 2009 and the National Judicial Examination will be replaced by a bar examination. Consequently, the current two-year training program by the Judicial Research Training Institute will also be abolished. The most significant feature of the new system is that it is intended to allow most of the law school graduates to become a lawyer after three years of intensive and practical trainings by a law school. It remains to be seen how the appointment of new judges will change in response to this radical change. Judges are appointed by the Chief Justice with the consent of the Council of Supreme Court Justices. Judges have a 10-year service term and can be reappointed. In practice, most of the judges are reappointed upon the lapse of 10 years. The
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retirement age of the judges is 63. No judges shall be removed from office except by impeachment or a sentence of imprisonment without prison labor or heavier punishment. They are not subject to suspension from office, and subject to a reduction in remuneration or other unfavorable treatment except by disciplinary measures.
III. Commencing the Litigation
Having explained fundamental elements that are necessary in understanding civil procedure law, we now get into the illustration of the each step of litigation. Filing litigation is the initial stage. Three basic elements of the litigation-a claim specified in a complaint, parties concerning the claim, and the court to adjudicate-are fixed at this phase. Each element along with related issues will be addressed in turn. Litigation costs also have much to do with access to the court. Therefore, it will also be addressed along with above elements.
1. Complaint
A. The First Step to the Litigation — Filing a Complaint
A civil action begins when the plaintiff files a complaint with the court (§ 248). A Complaint is a written document in which the plaintiff alleges jurisdiction, sets forth facts that entitles the plaintiff to relief from the defendant, and demands relief. Filing a complaint is absolutely essential for a litigation to start and proceed, since a court is mere a passive adjudicator of disputes and neither initiate nor encourage litigation. Moreover, the court is not allowed to render any judgment on matters which have not been claimed by the plaintiff. In this sense, the role of the parties is weighty in the proceedings. In principle, a complaint should be in writing. Filing a lawsuit without submitting a written form is allowed only in small-claim cases. Even in this exceptional case, a court clerk is to write down what has been filed orally, and keep it in the form of a protocol. Therefore, this may be viewed as an altered form of a written complaint.
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B. Things to be stated in a Complaint
Following elements are to be stated in a complaint; the parties, the legal representative or counsel if any, the relief sought for which the action is instituted and cause of actions (§ 249). The relief sought is the ultimate purpose of the litigation. To put it in a different way, it is a specific demand for the relief that plaintiff wants to acquire from the court. This may include, for instance, a demand for the payment of certain amount of money, or a demand for eviction from one’s real estate. The court is not permitted to grant recovery in excess of the relief sought in the complaint. The cause of action refers to the fact patterns that provide the legal basis of the claim and shows that the pleader is entitled to relief. These facts should be concrete enough to contain a sufficiently definite motion. Although other fact patterns that are not necessary to specify the claim need not be included in the complaint, it is a widespread custom to include these facts if the plaintiff deems it necessary to make the claim clearer. The cause of action specified by the plaintiff cannot be changed by the court. In this sense, the plaintiff fully enjoys the right to constitute the claim without the intervention of the court. However, this may put the plaintiff in a more disadvantageous position, in particular when the plaintiff has neither sufficient amount of legal knowledge nor adequate legal support in forming legal claims for his case. Evidence need not be included or attached in the complaint. However, plaintiffs tend to attach substantial evidence, such as a copy of the written contract in a contract-related case. This is also strongly recommended by the Court, for this will facilitate the court and the defendant to clarify the claim as well as to be provided with sufficient information regarding the case.
C. Three Types of Actions
With regard to the relief sought, there are three categories of actions. The first category is the most common type; a performance claim. This is a claim to request the court to order the defendant to do something or to refrain from doing something. Some examples; the plaintiff asks for performance of a contractual obligation or claim damages for the breach of contract. The plaintiff demands the
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defendant to move out of his land or to refrain from trespassing his property. When this type of claim is accepted by the court and become finalized, the plaintiff can enforce this judgment against the defendant. The second category is a declaratory claim. This is to attain a judicial declaration of the existence or non-existence of the disputed legal relationship. Some examples; the plaintiff asks for a judicial declaration of his ownership over land. A liability insurance company demands for a declaration for the non-existence of its duty to pay insurance money to alleged victim of the accident. A claim for a declaratory judgment is open to all persons who have a legitimate interest in the claim. However, it should be noted that this claim is subsidiary to the performance claim. Since this claim is not subject to enforcement, it is only permitted when the plaintiff has a special legitimate interest in obtaining the declaratory judgment. Therefore, this claim is not allowed when the plaintiff can file for the above-mentioned performance claim. Thus, the plaintiff is to file for a payment of debt against the defendant, instead of filing for a declaratory judgment on the existence of his credit. The third and the last category is a formation claim. This is to create or modify a legal relationship by the order of the court. Considering that a legal relationship is primarily established by parties involved without intervention of the court, this claim is exceptional. Statutory provisions are required in filing this type of claim. Revocation of the resolution by a general shareholder’s meeting, or demanding an increase or reduction of rent in a lease contract is the typical example of a claim of this kind.
D. Subsequent Procedure
When a complaint fails to state any of the matters required to be stated, or if stamps as required under the provisions of Acts are not affixed to a complaint, the presiding judge shall order the plaintiff to correct it within a designated period (§ 254 ①). Failure to comply with the order might result in either a re-order by the presiding judge or the dismissal of the complaint, at the discretion of the presiding judge (§ 254 ②). If a complaint has met the necessary requirements, the court serves the defendant with a duplicate (§ 255 ①). It must be served to the defendant in time for the person to take actions in defense. The RCP § 64 ① obliges the court to serve the complaint ‘immediately’ after it has been filed. Along with the copy of the complaint, other
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relevant documents such as the instruction to the civil procedure and the order for the submission of the written answer are enclosed and served together. The service is usually performed by a registered mail. However, a designated court official or a marshal, upon the request of the court or the plaintiff, also serves these documents. If the service turns out unsuccessful due to the incorrectness of the address specified in the complaint, the presiding judge orders the plaintiff to correct it within a designated period. Failure to comply with this order might result in the dismissal of the complaint. If it becomes obvious that specifying the correct address is impossible without negligence of the plaintiff, the presiding judge orders a public notice as an alternative way of service (§ 194). This is done in the way of posting the above documents on the designated court’s bulletin board or in other manners as prescribed by the Supreme Court Regulations (§ 195). The plaintiff may dismiss the case voluntarily after the complaint has been filed. However, the plaintiff needs to get an approval by the defendant in doing so if dismissal is to take place after the defendant has made her pleading on the merit (§ 266 ②). If the defendant does not make objection to the dismissal by the plaintiff within two weeks, she is deemed to have consented to the dismissal (§ 266 ⑥). Voluntary dismissal is without prejudice unless it has been made after the rendition of judgment (§ 267).
2. Parties
A. Capacity for being a Party
Anyone who files a written complaint with the court is called a plaintiff. The opposing party specified in the complaint is a defendant. In this sense, parties are specified by virtue of a complaint. However, it is one thing to specify a party, and another thing to determine whether or not that party has the capacity for being a party. In principle, the capacity for being a party shall be determined by the Civil Act and other relevant Acts. According to the Civil Act of Korea, a natural person and a juristic person hold this capacity. Hence, these two types of persons are eligible to become a party in the civil proceedings. Yet, the KCPA § 52 adds another type to this list. An association or a foundation other than a juristic person may become a party to a lawsuit, as long as it has essential elements of a juristic person. Among these elements are a body of organization for decision-making, a representative or an
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administrator of the association, separate assets for the association itself. Partnership itself is not qualified to be a party unless it satisfies the requirement above.
B. Plurality of a Party
There may be plural parties in a single lawsuit. Therefore, in case where the rights or liabilities forming the object of a lawsuit are common to many persons, or are generated by the same factual or legal causes, these persons may join in the lawsuit as co-litigants (§ 65). The same shall also apply in case where the rights or liabilities forming the object of a lawsuit are of the same sort, or are generated by the same sort of factual or legal causes (§ 65). The KCPA also allows a third party to join existing proceedings. However, the joining party should possess sufficient connection between his claim and the existing proceedings. Addition of the new party is allowed at any stage in the proceedings before the closing of the hearing.
C. Legal Representative and Counsel of a Party
A Minor, a quasi-incompetent person, or an incompetent person, as stipulated in the Civil Act, does not possess litigation capacity. Consequently, they may conduct procedural acts only through legal representatives. Legal representative is determined by the Civil Act or other relevant laws. Parties may have an attorney-at-law as her legal counsel. However, representation by a lawyer is not mandatory in proceedings. In principle, only lawyers admitted to the Korean bar are qualified for the legal representation in the civil procedure. Thus, foreign lawyers are not permitted to act as a counsel for a litigating party. Parties retain the power to discharge their lawyers at any time. There are some exceptions in the cases that are reviewed by a single judge. In the cases where the amount in controversy falls short of a specific amount, the court may permit certain persons other than lawyers to represent the party.16)
16) These persons are those who keep a close living relation with the party and are in a kinship within a specific scope, or those who are in a specific relationship under an employment contract, etc, with the party, such as the handling of, or assistance in, the regular affairs concerning such cases (§88①).
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3. Jurisdiction
A lawsuit should be filed with the court that has competent jurisdiction. Jurisdiction is the power or authority of a court to determine the merits of a dispute and to grant relief. The District courts, including their branch courts, hold original jurisdiction over civil cases. A single judge presides over a case unless the amount in controversy exceeds 50 million Korean won.17) A three-judge panel will take the case in which the amount exceeds the above limit and the cases which have been transferred from a single judge due to its difficulties and complexities. There are some special subject matters that are dealt by a single judge even when the amount in controversy exceeds the limit mentioned above. These matters are enumerated in ‘The Regulation on the Subject Matter Jurisdiction in Civil and Family Litigations’, one of the Supreme Court regulations. Having explained the basic subject matter jurisdiction in Korea, I proceed to give a general illustration on how territorial jurisdiction is established under the KCPA.
A. General and Special Venues
There are a general venue and special venues by which territorial jurisdiction is decided. As for a general venue, the court at the place of domicile of the defendant is competent to decide all claims (§ 2).18) In case the defendant has no domicile or her domicile is unknown, the general forum will be determined by the place of residence. When even the residence is unfixed or unknown, the general forum will be decided pursuant to the last domicile. On the other hand, the KCPA provides numerous special venues in addition. Important among these special venues are a workplace (§ 7), the place of
17) It is equivalent to approximately 54,250 U.S. dollars, as of Nov. 30. 2007. 18) There are some special provisions for the general forums of an ambassador or a minister(§ 4: the place of the Supreme Court-Seoul), a juristic person(§ 5: the place of its principle office), or state(§ 6: the seat of the government agency representing the relevant litigation — the Ministry of Justice in Gwacheon, Gyunggi, or that of the Supreme Court — Seoul).
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performance of an obligation (§ 8), the location of the property (§ 10), the place where a tort was committed (§ 18), the place of registration (§ 21). When there are plural venues establishing the jurisdiction, the plaintiff can bring a suit in one of those venues. In case where several claims are joined in a single lawsuit, it may be brought to the court having jurisdiction over one of those claims (§ 25 ①).
B. Establishing Jurisdiction by Agreement and Pleading
An agreement between parties serves as another basis for establishing jurisdiction. If the parties have agreed in writing as to the competent court of the first instance with respect to a lawsuit based on specific legal relationship, the specified court recognizes the legal effect of such an agreement unless the case is subject to the exclusive jurisdiction of another court. Pleading can be a factor creating new jurisdiction under the KCPA. If a defendant pleads in the hearing or makes statements during the pretrial proceedings as to the merits of a case in the court of first instance without filing any jurisdictional defense, the defendant is deemed to have consented to the jurisdiction of the said court (§ 30). Therefore, the said court shall have the jurisdiction and the defendant who has failed to raise a timely defense shall be estopped from challenging it.
C. Determining International Jurisdiction
The KCPA provides no explicit provision for international jurisdiction. However, courts and commentators have construed provisions of territorial jurisdiction to be the basis for establishing international jurisdiction. The premise for this is that both domestic and international jurisdictions share the same spirit of establishing fair and efficient forum for a dispute resolution. Therefore, they believed that the KCPA provisions, in the absence of applicable provisions, can at least provide basis for international jurisdiction by way of analogy. Yet, Korean courts also acknowledge that mere mechanical application of domestic provisions to international circumstances without considering some notable differences between these two. For this reason, the Supreme Court of Korea added “legal reasoning” as another basis for determining international jurisdiction.19) To sum it up, Korean courts, in determining international jurisdiction, will first look at the territorial jurisdiction clauses in the
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KCPA and attempt to apply or modify, if necessary, the domestic doctrines in light of legal reasoning. Recently, the Korean International Private Law has newly introduced the jurisdiction clause, stating that a Korean court shall have the international jurisdiction when a party or a case in dispute has substantial relationship with Korea.20) It also states that the court is to comply with reasonable principles that are in accordance with the idea of allocation of international jurisdiction, when deciding on the substantiality.21) Jurisdiction clauses in domestic law and the unique nature of international jurisdiction should be considered in determining international jurisdiction, according to the next clause.22)
D. Transfer due to Lack of Jurisdiction or by Discretion
If the court finds that it lacks jurisdiction, it shall transfer the case by its ruling to the competent court (§ 34 ①). Even when the case falls under its jurisdiction, the court may transfer the case to another competent court in order to avoid any significant damage or delay (§ 35).
IV. Pre-trial Proceedings
1. Introduction
The purpose of pre-trial proceedings is to clarify and narrow down the facts and the legal issues to be reviewed. It is designed to prepare an efficient and prompt trial. In this sense, this is a sort of preparatory stage.
2. Pre-trial Pleadings
Once a complaint is served, non-oral pleading takes place. At this stage, the
19) The Supreme Court, 2002Da59788, decided on Jan. 22. 2005. 20) International Private Law § 2 ①. 21) Id. 22) International Private Law § 2 ②.
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parties of the litigation exchange pleadings and written evidence in documents. It is a preparatory stage for a trial.
A. Written Answer by the Defendant
A written answer is a responsive written document in which the defendant makes admission or denials, asserts legal defenses, and raises counterclaims. This should at least contain the answer to the claim. Although the detailed answer to the claims and facts in the complaint is not required by the law, a written answer usually contains specific pleading and defenses as well as substantial evidence to support them. The defendant is required to file a written answer within 30 days from the service of the complaint (§ 256 ①). Broadly speaking, a claim by the plaintiff may be met with three different responses by the defendant. She may dispute or accept the assertion. She may also remain silent, neither rebutting nor acknowledging the claim. If the defendant accepts the claim or admits all the facts, the court may proceed to a judgment without conducting a trial. No express contest to the complaint would lead to the same result. If the defendant remains silent by failing to submit a written answer within the above period, the court may deem that the defendant has admitted the facts in the complaint and render a judgment without holding a hearing. The defendant, of course, may recourse against this judgment by way of appeal. If the defendant submits a written answer, the pleading process will be initiated. If the defendant disputes the claim by submitting a written answer, then the pre- trial pleadings will be initiated. However, the presiding judge retains discretion to skip this process and move on directly to a pre-trial conference or a trial, when appropriate. When the defense is based on procedural defenses, the presiding judge has several options. she may order the plaintiff to clarify or cure the alleged flaws, or dismiss the suit without further pleadings. She may also proceed the pre-trial and trial stages to find out if the motion to dismiss has the proper ground.
B. Pleading Process afterward
After the filing of a written answer, parties will continue to exchange pleading and evidence in writing under the direction of a presiding judge, without appearing in the court. Ordinarily, one or two exchanges of briefs are deemed sufficient. The presiding judge retains discretion on whether or not the case requires further
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pleadings. If so, she will allow the parties to submit further documents. If she thinks this will be enough to make the case ready, she will then summon parties to hold a pre-trial conference. Before the new case management model was introduced in the wake of 2002 amendment, this process was nearly neglected in practice. The court directly moved on to the hearing stage immediately after the complaint was filed. In this setting, hearings were rather sporadic than centralized. A series of isolated hearings took place, and the parties had to keep appearing in the court repeatedly. This incurred grave loss of time and efficiency in proceedings. Thereby, a pleading process was introduced to replace repeated hearings in order to eliminate inefficiency. Instead, hearings are to be held once or twice in principle, during which concentrated oral arguments and witness examinations take place. In order to expedite the proceedings, the presiding judge usually sets a time limit for each pleading. Basically, parties are to present all the arguments and written evidence in support of their claims or defenses at this stage. Failure to abide by the time limit can lead to a sanction of being barred from submitting them in the trial stage. However, this restriction does not seem to be aggressively imposed in practice. It has been a long standing, implicit belief among Korean judges that substantive justice overrides procedural justice. This is the part of the reason that judges have been too much cautious in exercising this authority to block the lately submitted claims or evidence. However, this seems to change gradually. More and more judges are recognizing that imposing this sanction is inevitable in order to promote the purpose of the pleading process. One of the different features of this process in comparison with the U.S. civil procedure law is the absence of discovery. There is no general obligation of the parties to give in documents contrary to her interest. Instead, Korean law possesses alternative procedure: an order by the court to submit a document. The court, upon the motion of the party, may order the holder of a document to submit it under following circumstances (§ 344). The holder of a document shall not refuse the order. In case of refusal by the party of the litigation (§ 349), the court may admit that the claims of the other party in such document to be true. In case of refusal by the third party, she will be sanctioned by fine (§ 351, 318, 311 ①).
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3. Pre-trial Conference
A pre-trial conference is the last step in the pre-trial proceedings. After a thorough pleading process when issues have been made clear and substantial document evidence has been submitted, the presiding judge, or one of the associate judges commissioned by the presiding judge, then holds a pre-trial conference (§ 282 ①). During the conference, the judge discusses the issues of the case with the parties and their counsels. If necessary, they consider the simplification and sharpening of the issues. During the conference, the judge and the parties also develop a plan for the upcoming procedures. For instance, setting the date of hearings and the limitation of the number of witnesses may be discussed and planned. Although this conference is in principle open to the public, it is usually held in a chamber specifically prepared for this purpose in a more casual setting, instead of in a court room. The possibility of reaching a settlement can also be deliberated upon. In practice, the presiding judge frequently makes an attempt to conciliate the case at this stage. Most of the times, this is the stage when issues have been made clear both to the court and the parties, misunderstanding has been mitigated, and the parties have turned less combative. A separate settlement conference may be planned and conducted. Against this backdrop, a considerable number of cases are settled in the form of compromise or conciliation.
4. Balancing the Role of the Judge and the Parties
Before wrapping up the explanation on pre-trial proceedings, it is worthwhile to mention the issue of balancing the role of the judge and that of the parties. Basically, parties are main players in the field of civil litigation. They initiate a lawsuit, determine the claim and present facts. They are in charge of making allegations and presenting evidence to their advantages. They reserve the right to drop the suit or accept the claim, which will consequently lead to the termination of the litigation. This remains true in pre-trial proceedings. It is parties who build up this process. However, it is truly the presiding judge who controls the effectiveness of the pretrial proceedings. The presiding judge is the conductor of the process. She
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reserves the right to oversee the preparation of the case. She has the power to set periods of time for performance of procedural acts and to order any necessary procedural measures. A controversial point is as to how much the presiding judge can render guidance for the pleading. In connection with the role of the judge in the civil procedure, this has been much debated issue. The KCPA § 136 provides that the presiding judge may ask the parties questions, and urge them to prove in order to clarify the legal relations on factual or legal matters. It further states that the court should give the parties an opportunity to state their opinions on legal matters which are deemed to have been evidently overlooked by them. What does this provision have to do with the neutrality and impartiality of the judge? It is not easy to draw a bright line between the active role of the presiding judge mentioned above and the impartiality of the judge from both parties. In particular, it becomes even more complicated when the lawsuit is between an individual with no legal expert and a huge company with the support of a prestigious law firm. Given that the court is bound to the legal ground provided by the plaintiff, and that the court should render a judgment in favor of the firm even when the individual could have won the case only if she has chosen a pertinent cause of action or has submitted a certain evidence, the court might be tempted to reach out to render some useful tips toward this individual. The Supreme Court proposes a guideline to the limit of this by using notions of passive and active elucidation. The passive elucidation, which is intended to clarify what has been alleged, is allowed. However, the active elucidation, which is intended to attract or suggest a new assertion, is prohibited. The exception to this would be the duty of the court to indicate the legal point which the party has evidently missed.
V. Trial Proceedings
1. Making Oral Arguments in a Hearing
After the pre-trial conference is over, the presiding judge designates the date for a trial. The trial proceedings are conducted at oral hearings. In principle, the hearing is held in public unless otherwise designated by the presiding judge. There is no jury system for a civil procedure in Korea. Accordingly, every trial is conducted in the form of a bench trial. Therefore, jury-related issues such as jury
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selection, instruction, or judgment notwithstanding the verdict (JNOV), are not discussed with regard to the KCPA. With the intensification of the pre-trial proceedings, the significance of the trial in terms of making oral arguments has diminished in practice. The arguments should have been made in a timely manner and issues should have been clarified in the pre- trial phase. However, these are meant to be only preparatory works for the trial. Therefore, the arguments that have been made during the pre-trial conference should be stated again in front of the court, though in a simple manner, on the first hearing date. The parties state the outcome of the pre-trial pleadings on the first hearing date. The court should strive to close the whole pleading immediately after going through the first hearing date, unless the nature of the case precludes this. To make this possible, Korean courts ordinarily try to complete all the examinations of documentary evidence during pre-trial proceedings, carry out the examination of witness on the first hearing date, and then end the hearing.
2. Evidence
A. Overview
The facts alleged by the parties need to be proved by evidence. For this reason, evidence is collected and submitted by the parties. However, the facts admitted by the opposing party do not require any evidence. The admission binds both the court and the parties (§ 288). Furthermore, the evident facts or laws themselves do not require any attestation. The court is not allowed to consider evidence that has not been presented by either of the party. Even in an extreme case where the judge clearly knows the existence of the evidence based on her personal knowledge, she has no choice but to judge otherwise if that has not been presented by the party in the proceedings. Application to present evidence may be made either orally or in writing. In doing so, the applying party should identify the facts to be proved by evidence. The court has much discretion with respect to the admission of evidence. Consequently, the court may reject the application for examination of evidence, unless it is the sole evidence for the party’s alleged facts (§ 290). Likewise, assessing the relevance and the materiality of the evidence is fully at the discretion of the court. In practice, the
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admissibility of evidence is very loose and lenient. Virtually any type of evidence can be presented at trial, including hearsay evidence. According to the KCPA, there are six types of evidence; examination of witness, examination of parties, expert testimony, documentary evidence, inspection, and other evidence (drawings, photographs, recording tapes, video tapes, magnetic discs for computers and other articles created to put the information therein). There is no clear-cut rule concerning the probative values of each type of the evidence. In practice, there is a general tendency of placing higher trust on the documentary evidence than testimony by a witness. According to the Supreme Court decision,23) the document by which the juristic act has been performed presumes the existence and the content of that juristic act. Therefore, these documents, such as written contracts or agreements, are usually considered the most powerful evidentiary sources. Submitting documentary evidence and examining them are conducted during the pre-trial stage, whereas examination of witness is conducted during the trial stage.
B. Examination of Witness
Testimony of witness is a very common and significant form of proof. It becomes particularly decisive when there is a small number of relevant documentary evidence. This happens quite often in Korea since a lot of small transactions, especially between individuals, take place orally without producing any documents. Anyone capable is eligible to be examined as a witness (§ 303). However, the litigating parties themselves are not qualified as witnesses. Upon the motion of the parties, the court decides whether or not to accept an application. The motioning party should submit copies of the interrogatories to be served on the opposing party so that she can prepare for the cross-examination in advance. Once summoned, the witness has a duty to appear and to give testimony under oath (§ 319). If the summoned witness fails to appear on the date of examination without any proper reason, the court imposes a fine on the summoned witness, and orders her to bear any increased litigation costs incurred due to her non-appearance (§ 311 ①). If the witness fails again to appear without any proper reason after
23) The Supreme Court, 85Daka1760, decided on Apr. 28, 1987.
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receiving a judgment of a fine, the court punishes the witness by a detention for not more than 7 days (§ 311 ②). A witness may refuse to testify or to take oath if she has justifiable reasons (§ 314, 315, 324). For instance, a witness may withdraw from testifying if she has been entrusted with personal secrets by virtue of her profession or position, such as a lawyer, patent attorney, notary public, certified public accountant, medical experts, pharmacists, or a holder of a religious post, may refuse to testify (§ 315 ①). A witness is examined first by the party who requested her to appear. This is called a direct examination. The opposing party cross-examines the witness after the direct examination is completed (§ 327 ①). Redirect examination may be conducted upon the completion of the cross-examination. Further examination is allowed only with the permission of the presiding judge (RCP § 93 ③, § 92 ④, ⑤). The presiding judge may question the witness after examinations by both parties. However, if necessary, the presiding judge may interpose questions during the direct or cross examination (§ 327 ③). Leading questions are only permissible on cross- examination (RCP § 91 ②, § 92 ②). Testimonies by witnesses are recorded in documents. In case of false testimony, the witness is punished by perjury.
3. Closing a Hearing
The presiding judge has very broad discretion in conducting proceedings. When all the necessary pleading and evidence have been made and the case has been made ripe for the final adjudication, the court closes the oral proceedings and set a date for the rendering of the judgment. In practice, decision is rendered after two or three weeks from the closing of the proceedings unless the nature of the case requires a longer interval.
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VI. Judgment and Appeal
1. Judgment
A. Deliberation
After the closing of the trial, the court deliberates on the case. If the case was tried by the panel of three judges, each of them has the independent status as to the deliberation and the vote. The presiding judge does not have superior authority as far as the judicial decision is concerned. The judgment in this case is made by a majority. No record of the vote shall be open to the public, with the exception of the Supreme Court rulings. Certainly, it is for the court to apply the law to the facts which come before it. With regard to this, whether or not the court is bound by the cause of action presented by the party has been fiercely debated among civil procedure law scholars. There can be multiple legal grounds on which claims can be based, for a single dispute. Let us assume that the taxi driver got into a traffic accident due to the negligent driving, causing a severe injury to the passenger. The victim can claim damages on either ground; a breach of contract24) or torts.25) It is for the plaintiff to decide on which grounds his claim shall be based. Once the legal ground is fixed and submitted by the party, the court is bound to keep to that ground. In the case mentioned above, the court is not allowed to decide on a torts claim when the plaintiff has made his allegation based on the breach of contract.
24) Although there has been no written contract between a taxi driver and a passenger, contract has been made in an implicit sense. Passenger getting into the cab and directing a destination to the taxi driver constitutes an offer, whereas the driver beginning to head for the destination without any explicit refusal constitutes an acceptance, which will in turn create the valid contract between two parties. Korean civil law does not require a contract to be in a written form, unless otherwise specified in the relevant provisions. This contract obliges a taxi driver to keep the duty of care. Therefore, negligence which results in the failure of his obligation to bring a passenger to the designated place consequently gives rise to the breach of contract. 25) According to the Article 750 of the Korean Civil Law, any person who causes losses to or inflicts injuries on another person by an unlawful act, willfully or negligently, shall make compensation for damages. In the above case, the taxi driver was negligent in driving, which is unlawful, and caused injury to the passenger. Therefore, there is a tort case.
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Yet, it is still controversial among scholars whether or not this theory should be upheld. Frequently, parties are not capable of legal classification or categorization of facts particularly when they are devoid of legal aids from legal experts. It is also deemed inefficient and time-consuming to allow other lawsuits on the same incident to take place just because it is based on another cause of action. The Supreme Court decisions are strongly based on a traditional approach. However, there are criticism against this.
B. Decision
The KCPA recommends the court to render a decision within five months after the institution of the lawsuit (§ 199), and within two weeks (or four weeks if the case is sophisticated) after the hearing has been closed (§ 207 ①). Although such time- limits are deemed to have only recommendatory effects, a considerable number of civil cases are handled within the designated period. The judgment must be rendered by the judge(s) present at the final hearing of the case. The following elements should be included in the written judgment; parties and their legal representatives, conclusion, relief sought (and that of the appeal in appeals case), cause of action, date on which the pleadings have been concluded, and the court (§ 208 ①). Yet, it does not specifically provide the detailed form of the judgment, in particular with regard to the main part where the court gives reasons for the conclusion. Consequently, the form of the written judgment in details may differ from case to case. However, judgments in Korea usually take the typical form in practice. First, the court illustrates the facts of the case, and then proceeds to summarize the parties’ claims and their legal basis. Presenting issues out of this, the court then gives the reasons for the conclusion. The decisions in Korea are generally shorter in length compared to those by the federal courts in the U.S. Once the judgment is rendered, the court cannot retract or modify it. Only in case of mere miscalculation, mistype or other similar fallacies are the courts allowed to make corrections.
C. Bearing Litigation Costs
A judgment should also contain a decision as to who bears the costs of the proceedings. Litigation costs include court fees, costs of document delivery, costs
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incurred in the process of evidence examination such as expense for witnesses, and attorney’s fees. The attorney’s fees are compensated within the limit prescribed by the Supreme Court Regulations. Due to this constraint, attorney’s fees are not always fully recovered. In principle, the litigation costs are borne by the losing party (§ 98). As an exception to the principle, the court may impose the whole or part of costs on the prevailing party who conducted unnecessary acts for her own advantage or who caused the delay of litigation (§ 99, 100). In case of a partial defeat, the court determines the parties to bear costs and their percentages (§ 101). Most of the times, the costs are born by both parties with its ratio determined by the court. However, the court may have one party bear all the costs depending on circumstances. The judgment regarding litigation costs does not specify the amount of the costs. Therefore, the party who is eligible to retrieve costs from the other party should file another application with the court. Then, the court determines the specific amount of the costs. This decision containing specific amount becomes the ground for the enforcement on the litigation costs.
2. Appeal and Final Appeal
When a decision is rendered, a losing party is entitled to appeal to the court of next instance for the reversal of the judgment. The appellant must have a legitimate interest in the appeal. To put it in another way, the appellant should have been aggrieved by the judgment. An appeal must be lodged within fourteen days from the date of the service of the judgment on the party in question (§ 396 ①). Cross appeals may also be lodged by the respondent to an appeal or by any other party (§ 403). If the losing party does not appeal against the judgment within the designated time, it becomes final and conclusive. The appellate proceedings in Korea are not substantially different from the original proceedings of the first instance in that parties are allowed to make arguments and submit evidence. New allegations or submissions are permitted so long as it does not infringe upon a time-bar limitation. Therefore, the appellate proceedings have the characteristics of the continuation of the previous proceedings. When the appeal is found correct, the appellate court vacates the judgment and renders its own decision. The appellate court is not allowed to grant more than the party has requested. On the other hand, when the appeals are found groundless, the
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court dismisses the appeal. The judgment of the appellate court may be appealed again to the Supreme Court of Korea. No separate decision by the Supreme Court to hear an appeal from a lower court, such as a writ of certiorari in the U.S. Supreme Court, is required. For that reason, the number of final appeals to the Supreme Court is surprisingly high.26) Although the cause for appeal is limited to the matter of law, the Supreme Court of Korea has been lenient enough to accept the appeal based on the factual issues. This has been possible under the unique doctrine of “the violation of the rule regarding taking of evidence”, justifying the dispute of the facts at the highest level in the form of the matter of law. The Supreme Court either dismisses the final appeal when it is groundless, or remands the case when it is found reasonable. The final decision of the Supreme Court has a binding effect on lower courts with respect to the specific case in issue. Unlike common law jurisdictions, the decision does not have a binding force on later cases of similar nature. However, the Supreme Court decisions seem to influence lower courts to a great extent in subsequent cases. In this regard, the Supreme Court decisions may be said to function as powerful precedents with de facto binding forces.
3. The Effect of the Final and Conclusive Decision
A. Finalization
When the decision is rendered and no appeal is lodged within a designated period, the decision becomes final and absolute. The decision is also made final when the appeal is withdrawn. As mentioned above, the decision by the Supreme Court, the court of last resort, is also final unless the Supreme Court remands the case to the lower court. To sum it up, the decision becomes final when there is no further possibility of appeal. It is at this stage of the procedure that the judgment becomes eligible for enforcement.27)
26) In 2006, the total number of the final appeal to the Supreme Court was 8,859. 27) However, there is an exception to this rule. If the court pronounces the provisional execution at the time of the decision, the plaintiff can enforce the judgment even before it becomes final.
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B. The Effect of Final Judgment — Res Judicata
When the judgment is made final, it has the effect called res judicata. Res Judicata refers to the binding effect that a final adjudication on the merits of a claim prevents the same parties from litigating the same claim again and binds the court to the same conclusion. This effect operates with total disregard for what the truth is. With out this effect, constant relitigations will take place and overburden the court. Persons will not be able to rely on the original decision and plan for the future. Thus, res judicata. is a tool with which legal stability is achieved. There are three aspects concerning the scope of this effect. The first aspect is the scope of the claim (§ 216). Res judicata is only binding on the claim of the case, not the facts or grounds supporting that claim. The second aspect is the scope of the party (§ 218). This effect is binding on the parties, successors of the parties subsequent to a closure of pleadings, or persons possessing the object of claims on their behalf. Thus, persons outside the above category are free to bring the same lawsuit without contradicting this effect. The third and final aspect is the scope of the timing. The scope of the effect is determined as of the final hearing date. Therefore, there can be no relitigation even though there may be some important issues or evidence that were never introduced or considered in the first action.
C. Retrial
As mentioned above, a final judgment is not subject to any modification or cancellation. The only way to make this possible is through a motion for a retrial. However, in order to ascertain public peace and legal certainty, this motion is allowed only under very strict conditions. These conditions are enumerated in the KCPA § 451. Some of the significant conditions include an ineligible judge participating in the judgment, a defect in granting representative power to legal representative, forgery or alteration of the document or any other article used as evidence for the judgment, false statement by a witness, an expert witness or an interpreter, or a contradiction to the final and conclusive judgment which has been previously declared.
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VII. Other Issues
1. Settlement during the Proceedings
Because of the increase in the number of litigation, Korean courts are actively encouraging non-litigation means for disposing the cases. In this regard, the court- annexed settlement programs are frequently used.28) A case can be settled by way of compromise before the judge (§ 220), or it can be settled by way of conciliation proceeding. At every stage, the judge may refer the case to a conciliation proceeding if it is deemed appropriate.29) The KCPA § 225, a newly introduced provision in 2002, plays a significant role in the realm of court-led alternative dispute resolution. This provides the court with the authority to render a ruling recommending parties to settle the case. The parties may object to this ruling in writing within two weeks from the date of service, which in consequence will bring the parties back to the litigation. In the absence of objection within a given period, the ruling takes the same effect as a final and conclusive decision. Thus, the enforcement is made available. There may be some different opinions as to the appropriateness of the court aggressively stepping in for the purpose of settlement. It might be proper to suggest a settlement once the issues of the case are revealed. However, there is a possibility of parties being coerced into the settlement, especially when the court suggesting the settlement is the same court adjudicating the case. This is sometimes the case in Korea. Basically, the conciliating judge or conciliating committee will be in charge of conciliation. However, it is still possible for the adjudicating court to conciliate the case itself. In reality, this is mostly the case. When the court fails to lead parties to a settlement, the very court which was involved in the settlement process will be making a final decision. The Party who has not accepted the suggestion of the court to settle the case may fear disadvantages by the court in the proceedings to come and in the judgment of the case. Although Korean courts are striving to tread a careful
28) Arbitration is another form of ADR. This is done without the intervention of the court. Regarding the Korean Arbitration Act, see Kwang-Rok Kim, How Do You Settle Disputes with Koreans?: The Advent of a New Amendment to the Korean Arbitration Act, 15 TRANSNAT’L LAW 227 (2002). 29) See Civil Conciliation Act § 6.
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line between coercing the parties and helping them to reach the settlement, some reforms in the court-driven settlement system need to be done.
2. Enforcement
Enforcement of civil judgments is governed by the Civil Execution Act, which became effective as of July 1. 2002. Previously, this act was only a part of the KCPA. A final judgment is eligible for enforcement. Also the provisional enforcement order by the court, or foreign judgments recognized by the Korean court are eligible for enforcement. It is only a performance claim that is qualified for enforcement. A monetary claim is enforced by seizing and selling debtor’s nonexempt property in public auction. Claims other than that are enforced in other various forms. A claim for delivery of movables or immovables is executed by a court-appointed marshal. A claim for performance other than giving something is executed by either substitutional execution,30) when it can be performed by a third party, or indirect compulsory performance,31) when it should be performed by a debtor herself.
3. Recognition and Enforcement of Foreign Judgments
Judgments rendered by a foreign court should be recognized in order to be enforceable in Korea.32) Following requirements are to be met for the recognition (§ 217). In the first place, a foreign judgment needs to be final and conclusive in order to be recognized and enforced by Korean courts. It is final when there is no possibility of further appeal within civil procedure. Whether or not this requirement of finality has been met is determined on the basis of the foreign law by which the decision was rendered.
30) Substitutional execution is a way of execution by the third party. The debtor, however, is subject to all the costs incurred in the above process. See Civil Execution Act § 260. 31) Indirect compulsory performance is a performance enforced by ruling where the court clarifies an obligation to perform the debt and an appropriate period for performance, with the order to pay specific amount in proportion to the defaulted period. See Civil Execution Act § 261. 32) For general explanation on recognition and enforcement of foreign judgment, see Sung Hoon Lee, Foreign Judgment Recognition and Enforcement System of Korea, 6 J. KOR. L. 110 (2006).
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Secondly, the international jurisdiction of the foreign court is required. This is determined in light of the acts and subordinate statutes of Korea, or to the treaties. According to the spirit of the Article 2 of the International Private Act, the substantial relationship between the case and the forum is the major standard by which an international jurisdiction is measured. In considering the substantiality of the relationship, the court should consider not only private interests such as fairness, convenience, and predictability of the litigating parties, but also public interests such as adequacy, swiftness, efficiency of the trial as well as the efficacy of the judgment.33) Thirdly, lawful service of a summons or a document is needed. A defeated should have received, pursuant to a lawful method, a service of a summons or a document equivalent thereto, and a notice of date or an order, with a time leeway sufficient to defend himself (excluding the case pursuant to a service by public notice or similar service). When she responded to the lawsuit even without being served, this requirement is deemed to have been satisfied. Fourthly, the foreign judgment should not violate good morals and other social orders. This is to prevent a foreign judgment from being recognized and enforced in contravention of the public policy in Korea. What constitutes the violation of good morals and other social orders is left at the discretion of the competent court. There was an interesting lower court decision that dealt with the acceptability of the punitive damage award by the U.S. court.34) According to this decision, the court stated that the punitive damage award with its function of criminal sanction might violate good moral and social orders in Korea where only compensatory damage for torts is allowed. Subsequently, the court recognized only half amount of the award. Finally, there is a requirement of reciprocity. The foreign judgment will be recognized and enforced only when the Korean judgments are recognized and enforced under the same or more lenient condition in the concerned nation.
33) The Supreme Court, 2002Da59788, decided on Jan. 27. 2005. 34) The East Branch of Seoul District Court, 93Gahap19069, decided on Feb. 10. 1995. This case was appealed and re-appealed afterward. However, the Seoul High Court (95Na14840, decided on Sep. 18. 1996) and the Supreme Court (96Da47517, decided on Sep. 9. 1997) upheld the decision by the court of first instance, without touching on the issue of the acceptability of the punitive damage award in the context of Korean tort law.
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VIII. Conclusion
In this paper, I have so far attempted to give an explanation on various issues regarding Korean civil procedure. Basic features of the Korean civil procedure, such as its history, guiding principles as well as the court system were illustrated in the first place. Then, the main features of civil procedure were explained in sequence, from the commencing of the litigation through pre-trial and trial stages, and finally to the judgment and appeals. The Korean civil procedure contains certain general features and elements prevalent among civil law jurisdictions. In concluding this paper, I would like to add a few possible changes that are likely to take place in the near future. The first would be an emphasis on oral communication between a judge and parties. Recent efforts that have been made by the Supreme Court in fostering an “oral proceeding” are a part of this. In the past, documents were at the center of the procedure. Judges were more focused on reviewing documents to understand the case, instead of heeding to the oral arguments. However, courts are endeavoring to do away with this practice. They are growing more dedicated to the oral proceeding, and to enhancing communication with the parties. In doing so, the Supreme Court even encouraged all the judges to film their own trials and review them, with the help of communication experts if necessary, in order to improve their communicating skills. The second would be the shift of the focus from a judge to counsels in the procedure. In practice, especially when there are parties without any legal counsels, the court tend to step deep into the process in its efforts to find out the substantive truth and come up with a just outcome. In some sense, cultural and historical features may have served as other reasons to explain this. The history of Korean judiciary reveals that the judge, mostly local government authorities, was regarded as almost omnipotent in adjudicating the case. Furthermore, the Confucianism filtered into the minds of people so intensely that it was taken for granted to obey and follow what the government authorities performed on behalf of the King. Although this is not always the case recently, this long-standing tradition might have implicitly influenced the position and the role of the Korean judge even in modern days. However, this is changing. There are more and more lawyers participating as counsels in civil litigations. In addition, new law school system is about to be
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implemented from the year 2009. This will perhaps result in a much higher number of lawyers. More people will have access to legal service concerning litigation. With this change, a judge will have the less need to step into the procedure for parties. Instead, the true spirit of adversary system will be fully realized. These changes reflect what is going on in a modern Korean society, namely a power shift from the public to the private. What this huge trend will bring to the Korean civil procedure scheme in the future remains to be seen.
KEY WORDS: Civil Procedure, Litigation, Korea, Judicial System, Trial, Judgment, Judge
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The Prospect for ISP’s Liability in UGC-Related Cases in Korea*
Jun-Seok Park**
I. Introduction
User Generated Content (UGC), also known as Consumer Generated Media (CGM) or User Created Content (UCC),1) refers to various kinds of media content, publicly available, that are produced by end-users.2) In reality, the concept of UGC can include not only pure creative works and parody, but also mere compilations or collective works based on others’ copyrighted materials, and reproductions of others’ works. Needless to say, such compilations or collective works or mere reproductions should be controlled by copyright owners and are illegal without the copyright owners’ permission, while creative works or parodies have to be protected. The problem at this point is that UGC in many practical cases mostly seem to be illegal usage of copyrighted material, automatically raising concern about the secondary liability of Internet Service Providers (ISP). The issue of the degree of liability to be assumed by an ISP when its users infringe on copyright — through activities such as the illegal posting and sharing of video clips using services delivered by an ISP, for instance — has already become a heated social issue in the US. Viacom v. YouTube is a good example.3) The situation around UGC in Korea is not too different from that of the US.
* The research for this article was funded by the Law Research Institute of Seoul National University College of Law. ** Assistant Professor, Seoul National University College of Law. 1) In Korea, the word UCC is more frequently used. 2) http://en.wikipedia.org/wiki/User-generated_content 3) Viacom International, Inc. v. YouTube, Inc., No. 07CV2103 (S.D.N.Y. March 13, 2007).
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Pandora TV, which has been known as the most popular UGC service in Korea, was sued by copyright owners in Nov. 2007.4) Moreover, one might be surprised to hear that the time Korean copyright owners were grappling with UGC-related disputes was earlier than in the US.5) Pandora TV started its service of video clip sharing in Oct. 2004. It was 4 months before the beginning of YouTube service in US.6) In any case, the legal finding by both countries’ courts for UGC disputes will be based on similar theories and rules that governed in Bulletin Board Service (BBS) or Peer to Peer service disputes. In Korea, the Sori-Bada7) case brought about the country’s most severe legal battle between copyright owners and P2P service providers, as did the Napster case in the US. Sori-Bada has been the most widely used Peer-to-Peer software in Korea and has continuously changed its technical structure from hybrid model P2P service of Sori-Bada 1.0 era to super-node model P2P software in Sori-Bada 3.0 or 5.0 era. In this article, I will discuss the prospect for ISP’s liability in pending or forthcoming UGC-related cases in Korea. In doing so, I will mention the statutory grounds for ISP’s secondary liability in Korea. The leading case decisions related with Sori-Bada 1.0 which was one of hybrid P2P services have firmly set up the principle that any P2P service provider can be liable in certain situation as an aider- and-abettor (in other words, instigators and accessories) for uses’ copyright infringement under Korea Civil Act, while the precedents dealing with “Sori-Bada 3.0” allegedly expanded the above principle to super-node P2P software providers. I will also briefly explore the ISPs’ liability limitation clauses in Korea Copyright Act. In the later part of this article, I will explain that the liability limitation standard for ISPs in Korea has become stricter against ISPs in recent years because of two main reasons. First, recent Korean courts’ interpretation about the statutes related with ISP’s liability seems to be rigorous with ISPs. The best example for such tough interpretation is Seoul High Court’s preliminary injunction decision in Sori-Bada 5.0
4) http://www.zdnet.co.kr/news/internet/entertainment/0,39031275,39163463,00.htm 5) It was because that Korea had been the best-developed country for a few years since 2001, especially in broadband Internet infrastructure. For more details, see Republic of Korea E-Commerce, ‘Korea E-Commerce Infrastructure,’ http://www.ecommerce.or.kr/about/ec_infra5.asp 6) http://itnews.inews24.com/php/news_view.php?g_menu=020900&g_serial=290462 7) Sori-Bada means ‘Sea of Sound’ in Korean. In its glory days of Sori-Bada 1.0 from 2000 to 2003, it had over 10 million members, even though Korea’s total population was just around 50 million.
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cases on Oct. 10. 2007. The court concluded that P2P service providers or P2P software providers should adopt the so-called positive filtering system (the system having only legal music files, which are supplied from license contracts with copyright owners or the like, distributed on P2P networks) by all means, even before copyright owners’ notification. Second, the new article 104 in the Korean Copyright Act 2006 imposes the duty along with penalty upon a specific type of ISP such as P2P service providers to accommodate so-called technological measures for interrupting illegal distribution of copyrighted materials, if copyright owners notice users’ infringement and demand the accommodation of the technological measures to ISPs. As a result of these two events, Korean courts’ ruling toward ISPs related with UGC is likely to become harsher and stricter against ISPs. But the final part of this article suggest that Korean courts should be careful about the difference between carbon copies of copyrighted music in Sori-Bada cases and users’ contents with at least minimum creativity in forthcoming UGC cases.
II. The statutory ground for ISP’s secondary liability in Korea
1. Background
Although intellectual property law in Korea has strongly been influenced by US IP law, it should be noted here that Korea’s legal system has traditionally accommodated civil law, based mainly on the German model. So, there is no traditional case law, such as the principles of contributory liability and vicarious liability. Moreover, there has been no clear line in Korea distinguishing between direct liability and indirect liability. There was much controversy over the matter of which provision should provide the positive legal standard for copyright owners suing an ISP, because the Korean Copyright Act provides only negative legal ground for ISP immunity.8)
8) Korean Copyright Act, Chapter VI: Online Service Provider’s Liability Limitation.
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2. The clause 3 of article 760 of the Korean Civil Act
Thus, Korean courts had to search codified statutes which might provide a standard for ISP’s secondary liability in their cases. Such efforts have revealed that clause 3 of article 7609) of the Korean Civil Act is meant to provide the main standard for ISP liability. Some lower courts’ decisions in the past which dealt with BBS providers’ liability cases (Cocktail 98 case10) and Internet Empire case11)) had not clarified this point. But, a series of decisions about Sori-Bada more and more clarified which provision in Korea’s many statutes could be best-related to ISP secondary liability. Seoul High Court decisions12) and a decision13) by the Supreme Court of Korea in Sori-Bada 1.014) made it an established and irrefutable theory that the clause 3 of article 760 of the Korean Civil Act was the exact statutory ground for ISP liability. In the Sori-Bada 3.0 cases,15) the storage and supply of information accessed by users
9) Korean Civil Act, Chapter V (TORTS), Article 760 (Liability of Joint Tort-feasors) (1) If two or more persons have by their joint unlawful acts caused damages to another, they shall be jointly and severally liable to make compensation for such damages …. (3) The abettor or aider shall be considered as a joint tortfeasor. 10) Seoul District Court Decision 98GaHap111554 delivered on Dec. 3, 1999. In this case, Cocktail 98 was the name of the multimedia authoring computer software developed by the plaintiff. The defendant was a university that operated a website serving the bulletin board, which was open to the public. One day, one of its users uploaded a compressed file of the plaintiff’s software on the defendant’s bulletin board without authority and more than 400 users downloaded that file. Then, the plaintiff sued. 11) Seoul District Court Decision 2000GaHap83171 delivered on Aug. 24, 2001. In this case, the plaintiffs were the copyright holders of certain music videos and the defendant was a company that operated a website, including a bulletin board, for the purpose of music file transfer. Some users transformed the plaintiffs’ music videos into movie files and illegally uploaded these files onto the defendant’s bulletin board. 12) Seoul High Court Decision 2003Na21140 delivered on Jan. 12, 2005 & Seoul High Court Decision 2003Na80798 delivered on Jan. 25, 2005. 13) Supreme Court of Korea Decision 2005Da11626 delivered on Jan. 25, 2007. 14) Sori-Bada 1.0 had been the most famous and gigantic P2P service in Korea since its advent in May 2000. It had over 10 million members within Korea. Its technical structure is a kind of Hybrid P2P and very similar to that of Napster. The essential difference between Sori-Bada 1.0 and Napster is that the central server of Sori-Bada 1.0 does not save so much as even the information on files’ locations; it saves only the information on users’ access. The benefit of this difference is that the Sori-Bada 1.0 central server keeps only essential information for the network and the host can thus save money in maintaining central servers. 15) Seoul Central District Court Decision 2004KaHap3491 delivered on Aug. 29, 2005 (certified in Seoul
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in Sori-Bada 3.0 was allegedly performed by super nodes. But the court applied the same theory as before and held the defendant liable as an aider-and-abettor despite of the defendant’s insistence that there was no longer a central server. Moreover, in petition for preliminary injunction cases16) related to Sori-Bada 5.0, Seoul High Court ruled on Oct. 10., 2007 again that Sori-Bada 5.0 should be liable as an aider- and-abettor for copyright infringement, vacating the lower court’s judgment.
3. Some vagueness remaining in the meaning of an aider-and-abettor
The civil courts in Sori-Bada cases have interpreted clause 3 of article 760 of the Korean Civil Act as that an ISP could negligently as well as intentionally aid its users’ infringing activity17) and be held liable. And the courts have understood that the totality of circumstances should be considered in determining whether or not the defendant had aided its users’ infringing activity. The specific examples of the circumstances are as follows: whether users could transfer files without intervention by the defendant; whether the ISP could block an infringing user if the ISP knew him or her; and whether the ISP had as its purpose, commercial benefit from users’ infringing activity.18) On the other hand, the criminal decision19) by the appellate branch of the Seoul Central District, which concluded that the defendant was not an aider-and-abettor (in other words, not guilty), Court contrasted sharply with the above civil decision by the Seoul High Court. The opposing results in the above two decisions on January 12, 200520) created a sensation and revealed some vagueness existing in Korean courts’ interpretation of the meaning of an aider-and-abettor. But, on Dec. 14, 2007, the Supreme Court of Korea struck down the appellate branch of the Seoul Central District Court’s
Central District Court Decision 2005KaHap3179 delivered on Oct. 26, 2005). 16) Seoul High Court Decision 2006Ra1232, 2006Ra1233, 2006Ra1245 delivered on Oct. 10, 2007. 17) That an aider could negligently as well as intentionally aid infringing activity has been the dominant interpretation of the Korean Civil Act, in contrast to the Korean Criminal Act allowing only for an intentional aider. 18) Some part (‘as its purpose, commercial benefit’) of the phrase might be a vestige of US case law’s influence on vicarious liability theory. There is no provision or theory in Korea that requires for tort the acquisition of benefits or profits by a tortfeasor as well as damages against a victim. 19) Seoul Central District Court Decision 2003No4296 delivered on Jan. 12, 2005. 20) The two decisions were made on same day by coincidence.
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decision.21) The Supreme Court confirmed once again that Sori-Bada 1.0 should be liable as an aider-and-abettor for copyright infringement even in a criminal case.22)
III. The ISPs’ liability limitation clauses in Korea Copyright Act
1. The Outline of ISPs’ liability limitation clauses
The Korean Copyright Act amended in Dec. 2006 includes article 102 & 103 very similar to the preceding article 77 & article 77-2 in the same Act 2003 which were ISP’s copyright infringement liability limitation provisions. Any person who asserts that his or her copyright and other rights have been infringed upon due to the reproduction or transmission of the works, etc. through the utilization of services of an on-line service provider (hereafter referred to as the rights assertor) may demand, by indicating the said facts,23) that the on-line service provider (OSP)24) suspend the reproduction or transmission of the works, etc.25) In cases where there exists such a demand, the on-line service provider shall suspend without hesitation the reproduction or transmission of works, etc., and notify the person who reproduces or transmits the relevant works, etc. (hereinafter referred to as the reproducer or transmitter) of the said facts.26) In cases where the reproducer or transmitter who is in receipt of a notification under article 103 clause 2 indicates that his reproduction or transmission is based on lawful rights, and demands a resumption of such reproduction or transmission, the on-line service provider shall promptly notify the rights assertor of the fact of demanding a resumption and the scheduled date of resumption, and shall have the reproduction or transmission resumed on the said scheduled date.27)
21) Unlike US public prosecutors, Korean prosecutors are comparatively free to appeal any decision including ‘not-guilty’ by a lower court. 22) Supreme Court of Korea Decision 2005Do872 delivered on Dec. 14, 2007. 23) The information, which the rights assertor should include in his vindication, is prescribed by article 40 in the Presidential Decree for the Korean Copyright Act. The contents are very similar to § 512(c)(3)(A)(i-vi) in OCILLA. 24) The Korean Copyright Act uses the word OSP instead of ISP. 25) Korean Copyright Act, Article 103, Clause 1. 26) Article 103, Clause 2. 27) Article 103, Clause 3.
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In case where the on-line service provider has suspended or resumed the reproduction or transmission of relevant works, etc. under clause 2 and 3 of article 103, the online service provider’s liability for the infringement on other persons’ copyrights and other rights protected under copyright act, and the online service provider’s liability for the losses incurred to the reproducer or transmitter, may be mitigated or exempted.28) On the other hand, in cases where an on-line service provider comes to know that the copyright and other rights protected under the copyright act have been infringed upon due to the reproduction or transmission of the works, etc. by other persons in connection with the provision of services related to the reproduction or transmission of the works, etc., and he or she prevents or suspends the relevant reproduction or transmission, the online service provider’s liability for the infringement on the copyright of other persons and other rights protected under the copyright act may be mitigated or exempted.29) In cases where an on-line service provider comes to know the same facts as above, and he or she tries to prevent or suspend the relevant reproduction or transmission, but it is technically impossible to do so, the online service provider’s liability shall be exempted.30)
2. Characteristics of the ISPs’ liability limitation clauses
First of all, all clauses in the chapter Online Service Provider’s Liability Limitation in the Korean Copyright Act were heavily affected by OCILLA31) in the US. Second, ISP liability limitation clauses in the Korean Copyright Act have effect only in the area of copyright infringement.32) In this regard, the legislative method for determining OSP liability limitation is similar to that of the US, and contrasts with
28) The preceding paragraph of clause 5 of article 103. 29) Article 102, Clause 1. 30) Article 102, Clause 2. 31) Online Copyright Infringement Liability Limitation Act. 32) Unlike the US, Korea has a separate law for computer software. Therefore, the Korean Copyright Act is not applied to computer software. But Computer Programs Protection Act in Korea has also similar OSP Liability Limitation clauses which are applied to computer software copyright infringement cases.
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those of the EU, Germany, and Japan, which have unified laws for the overall area including defamation. But, Korea didn’t have a separate law, such as the CDA(Communications Decency Act.) in US, covering defamation area until the article 44-2 of the Act on Promotion of Information and Communications Network Utilization and Information Protection amended in 2007 provides a kind of Notice and Take-down procedure and ISPs’ liability exemption similar to those in Korean Copyright Act. As a result, OSPs involved in defamation cases in Korea had had no defense based on safe harbors until 2007. Third, the attitude of the Korean law, under which there is only a uniform requirement for ISP immunity and no specific requirement according to the type of information technology, such as caching, hosting, search engine, etc., presents a striking contrast to the attitudes of the US, EU, Germany and others. But this difference will be eradicated soon because Korea must amend the present Copyright Act to implement the FTA33) with US which imposes specific immunity requirements according to ISP’s different technology types. Fourth, the effect related to immunity is no more than discretional mitigation or exemption in Korea. The only situation in which ISP liability is sure to be exempted is when it is technically impossible for an ISP to prevent or suspend the infringement even though he or she tries to do.
IV. The new article related with ISPs’ liability in Korean Copyright Act
The Korean Copyright Act amended in 2007 established a new article related with ISPs’ liability. The article seems to be peculiar to Korean Copyright Act. The new article 104 in the Act imposes the duty along with penalty upon a so-called specific type of ISPs whose main purpose is distribution of works by transmission, to accommodate so-called technological measures for interrupting illegal distribution of copyrighted materials. There had been severe disputes about whether the article would really be needed. The said technological measures are different from technological protection measure in article 124 of the Korean Copyright Act. The
33) Free Trade Agreement between the United States and South Korea was concluded in June 2007.
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former means the measures by an ISP to prevent or suspend the reproduction or transmission of works, such as keyword search restriction, while the latter is almost same as technological measure of sec. 1201 in DMCA. The Minister of Culture and Tourism has a mandate to provide which type of ISPs will come under so-called a specific type of ISPs.34) After the new Korean Copyright Act 2007 became effective on June 29, the Minister of Culture and Tourism proclaimed the scope of a specific type of ISP in form of administrative regulation. The regulation provides that a specific type of ISPs means any online service providers (1) which give a commercial benefit or advantage to the uploading user, (2) which offer the downloading function to its users and charge a fee for downloading to its users, (3) which service are based on P2P technology and which obtain a benefit from uploading or downloading function in its service, (4) the main purpose of which are to search others’ copyrighted materials and to transmit those to its users.35) The important thing which can’t be ignored is that copyright owners must previously demand ISPs to accommodate technological measures under article 104 if they want to have ISPs take steps. The form of such a demand is prescribed by the article 45 in Presidential Decree for the Korean Copyright Act. If ISPs don’t accommodate technological measures after such a demand, ISPs would be liable under article 142 of Korean Copyright Act which proscribes the negligence fine. It seems to be more reasonable to rescind article 104 in future amendments of the Act. The reasons are as follows: 1) it is hard to find a precedent in the world for article 104 which is not ISP’s liability limitation provision but ISP’s liability creating provision,36) 2) the scope of article 104 may be improperly expanded to almost all ISPs owing to an ambiguous definition for a specific type of ISP, 3) it is unfair that only an administrative regulation by Korean Ministry of Culture & Tourism or presidential decree will actually determine what the technological measures are to be. In fact, it is still not clear which technological measures should be adopted to satisfy the requirement of article 104.37)
34) Article 104, Clause 2. 35) The administrative regulation by the Minister of Culture and Tourism (No. 2007-24, July 6, 2007) 36) Even US who has put great stress on the copyright protection seems not to have a similar provision to article 104 in Korean Copyright Act 2007. 37) article 46, clause 1 in Presidential Decree for the Korean Copyright Act just proscribes that the
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V. The shock from recent Seoul High Court’s decisions in Sori-Bada 5.0 cases
The recent Seoul High Court’s decision38) about Sori-Bada 5.0 has special meaning in that the decision indicated the detailed standards for the OSPs’ immunity under the liability limitation clauses of Korean Copyright Act, especially in adopting so-called technological measure. After Sori-Bada 3.0 has been shut down according to the preliminary injunction order39) by the court in 2005, the same operators as in the above Sori-Bada 1.0 or Sori-Bada 3.0 cases launched another new business with a new type of super nodes P2P model (Sori-Bada 5.0). In this case, they tried to avoid legal attack from copyright owners not only by abolishing the central server as in the Sori-Bada 3.0 but also by voluntarily accommodating technological measures. It was before the promulgation of new article 104 in Korean Copyright Act 2007 which would impose the duty to accommodate technological measures. While the technological measures included Audio Fingerprinting (or Acoustic fingerprint),40) the technological measure was usually applied only to the music a copyright owner of which already demanded for protection by a notification. This system was called as so-called negative filtering system by Sori-Bada 5.0 court. The notification procedure was similar to the demand or notice procedure under Article 103, Clause 2.41) However, the court’s conclusion was that such accommodation of technological measures was not sufficient to get immunity under liability limitation clauses of
technological measures means all technological measures which can discriminate copyrighted materials from other materials by comparing those titles or characteristics and which can prevent users from searching or transmitting copyrighted materials already discriminated as above. 38) Seoul High Court Decision 2006Ra1232, 2006Ra1233, 2006Ra1245 delivered on Oct. 10, 2007. 39) Seoul Central District Court Decision 2004KaHap3491 delivered on Aug. 29, 2005 (certified in Seoul Central District Court Decision 2005KaHap3179 delivered on Oct. 26, 2005). 40) An acoustic fingerprint is a unique code generated from an audio waveform. Depending upon the particular algorithm, acoustic fingerprints can be used to automatically categorize or identify an audio sample. Practical uses of acoustic fingerprinting include broadcast monitoring, identification of music and ads being played, peer to peer network monitoring, sound effect library management, and video identification. For more detail, see http://en.wikipedia.org/wiki/Acoustic_fingerprint 41) See above III. 1. ‘The Outline of ISPs’ liability limitation clauses’
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Korean Copyright Act. In other words, the court denied the defendant’s defense based on Article 102, Clause 2 of Korean Copyright Act which clarified that a service provider’s liability shall be exempted when it is technically impossible to prevent or suspend the relevant reproduction or transmission. The court rigidly required that P2P service providers or P2P software providers should and, at least in the court’s opinion, could adopt the so-called positive filtering system (the system having only legal music files, which are supplied from license contracts with copyright owners or the like, distributed on P2P networks). Moreover, the court rejected the defendant’s argument that enforcing positive filtering system would make it impossible for UGC to survive. The fierce debate about the soundness of the court’s strict attitude is still progressing in Korea.
VI. Conclusion
The legal theory about ISPs’ indirect liability is, of course, different between the US and Korea. While the starting point in the US has been historically and logically the principle of contributory liability and vicarious liability, Korea has had no case law encompassing contributory liability and vicarious liability theory. Instead, clause 3 of article 760 of the Korean Civil Act has become the positive ground on which copyright holders could sue ISPs. On the other hand, the Korean Copyright Act was intensely affected by DMCA of US when the clauses of the chapter Online Service Provider’s Liability Limitation were formulated. In Korea in recent days, one of the striking characteristics of the rules related to ISP’s legal liability is article 104 which imposes the duty on ISPs to accommodate technological measures under certain conditions. As see above, Sori-Bada 5.0 court made a much more biased interpretation toward copyright owners by demanding the defendant to accommodate technological measures even without copyright owners’ demand or notification for copyright protection. Considering these trends in ISP’s secondary liability rules, Korean courts’ ruling toward ISPs related with UGC is likely to become harsher and stricter against ISPs. While such a trend could be already predictable because Korean copyright industry had experienced more devastating infringement than that of US by well-developed broadband internet users, the attitude of Sori-Bada 5.0 court seems to be unreasonable at least at this time. It is because the liability limitation clauses of Korean Copyright Act are
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basically based on so-called negative filtering principle, not requiring P2P service providers to positively find users’ infringement, and the development of filtering technology is not yet perfect enough to enforce the adoption of specific technologies. Contrary to the Sori-Bada 5.0 court’s insistence, UGC will be endangered under the so-called mandatory positive filtering system because the complicated right- verification procedure will be needed, based on the detailed explanation from the court’s decision. In future decisions, Korean courts should be more careful about the difference between carbon copies of copyrighted music in past Sori-Bada cases and contents made in part by, so to speak, users’ creative sweat in forthcoming UGC cases. Though a majority of video clips on YouTube in US or Pandora in Korea still seems only illegal reproductions of copyrighted material, video clips will become more and more close to creative works as a result of the related technology development that can finally make it possible for users to create original work, not just to produce a derived work.
KEY WORDS: UGC, User Generated Content, ISP, Internet Service provider, OSP, Online Service provider, Sori- Bada, technological measure
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Between Dreams and the Reality: Making of the Administrative Procedure Act in China*
Xixin Wang**
I. Developments of Administrative Procedures since 1989: A Brief Survey
The past two decades of law reforms since late 1970s have seen remarkable developments with respect to administrative procedural system. The ideas of procedural legality, fairness, legitimacy, and procedural rationality have been greatly improved and come into play in China’s administrative process. In the meanwhile, however, the process of the administrative procedural reforms has also revealed a series of problems and challenges ahead. For instance, there exist crying problems in terms of procedural openness, systematization, institutionalization, and procedural reasonableness, to name just a few. The law reformers come to recognize that the
* This article was originally a working report to the Standing Committee Legal Affairs Working Commission of China’s NPC on drafting the China’s Administrative Procedure Act. A more detailed and comprehensive Chinese version of this report can be found in Chinese Legal Science, volume 5, 2003. As one of the major draftsmen of the Chinese APA, the author has been in charge of most of the research and drafting works for this law. Prof Wang Xixin is a Member of China Administrative Legislative Research Group, a Professor of Law at Peking University Law School, and Vice Director of Center for China Public Law Studies. The Author wants to express his deep appreciations and high respect to Members of the Drafting Group led by Professor Ying Songnian and to the foreign experts involved, especially, Professor Paul Gewirtz, Professor Stanley Lubman and Professor Peter Strauss, among others. Leading figures of the foreign expert group, they have been for many years deeply involved in the making of China’s APA and have made tremendous contributions to the drafting process of this law. ** Professor of Law, Peking University Law School.
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making of a unified Administrative Procedure Act, which is now under the way, is of critical importance to the ideas of “administration in accordance with law” and rule of law. Yet it is in no sense an easy job. In fact, the making of APA in China, deemed as an opportunity for “reinventing government”, requires subtle integration of ideas and realities and of fundamental principles and practices of the administrative process. In this regard, it is helpful to begin with a brief survey of developments of administrative procedures, in terms of both ideas and realities, for a better understanding of the context in which the making of administrative procedure act is under its way.
1. Procedural Legality: Legislative Requirement and Its Practice
It is widely believed, in today’s China, that procedural legality is one of the fundamental elements of the Rule of Law. Reforms in contexts of civil, criminal, and administrative procedures have reflected the practical attentions given to legal procedures. The Administrative Litigation Law as adopted by the National People’s Congress in April 1989, which for the first time raised the issue of procedural legality to regulate exercise of administrative power by providing that courts may repeal an administrative action that “violates statutory procedures”. “Procedural rule of law” has since then become an aspect of the practice of the “administrative rule of law”. In the legal reforms of promoting the modernization of the legal system of China, as many believe, the Administrative Litigation Law has been a milestone, for its contribution to the establishment of the system of judicial review over administrative actions. However, there still exist good reasons for us to believe, from the perspective of institutionalization of administrative procedures, that the Administrative Litigation Law has also made another important achievement by highlighting the significance of legal procedures for curbing abuse of administrative power and safeguarding individual rights, as is mentioned here. This law provides for the first time that the court “may repeal through judgment” a specific administrative action that “violates statutory procedures”;1) therefore, the legal requirement of
1) The Administrative Litigation Law of the People’s Republic of China (hereafter “the Administrative Litigation Law”), Article 54.
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Between Dreams and the Reality
procedural legality in the process of exercising administrative power has been established in the form of legislation for the first time.2) However, while the requirement of procedural legality in administrative process by the Administrative Litigation Law should be deemed as a gigantic progress for China’s construction of the rule of administrative law and the modernization of China’s legal system, the practice of procedural legality may be a different story. It can be observed from the current administrative law system that two facts with respect to administrative procedures may practically hamper the functioning of principle of procedural legality. Firstly, the requirement as articulated by the Administrative Litigation Law is limited to the context of “statutory procedures” only. In other words, courts can repeal administrative actions, when, and only when, they believe that agency violates “statutory procedures”. If there were no such “statutory procedures” governing agency actions, it would be very difficult for courts to apply the principle of procedural legality to review agency action. Unfortunately, the reality is that there exist wide varieties of administrative actions that are not governed by “statutory procedures.” Secondly, in the practice of administration, the legal effect of the principles, such as procedural justice and reasonableness, have largely failed to be practically acknowledged and judicially enforceable, and the principle of the rule of procedural law could hardly serve directly as the “statutory procedures” for governing the exercise of administrative power. Therefore, when there is no clear provision in laws and regulations concerning legal procedures for administrative actions, there shall be no “playground” for the principle of procedural legality as established by the ALL. To put it more simply, the ALL, by requiring procedural legality, has left a huge task of developing legalized procedures governing agency actions. As for us, a review of the requirement of procedural legality as described above has also pointed out a direction for administrative procedural reform in this country. With regard to administrative procedures, to take the requirement of procedural legality more seriously, we believe huge efforts must be made primarily in the
2) Of course, before the enactment of ALL, there were some sorts of “policy requirements” of procedures and procedural legality, but such requirements were largely in the bureaucratic system, referring to internal administrative procedures. Procedures governing agency actions affecting individuals were very vague and subject to administrative discretion.
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following two aspects: First, fair and rational procedural rules must be made through legislation to govern any and all administrative actions that may affect rights and interests of private parties or public interest in administrative process, and such legislation should be available at a practically earliest possible time. Secondly, in the practice of administration and judicial review, legal effect must be attached to fundamental procedural principles that aim to guarantee procedural fairness, rationality, and reasonableness, because there exist huge discretion in agency’s procedural activities. In order to curb abuse of discretion, and to ensure procedural fairness and reasonableness, those basic principles of administrative procedure highlighting fundamental values such as impartiality, fairness, consistency, credibility, and reasonableness must be declared and, more importantly, to be judicially enforceable through judicial review.3) In other words, the basic principles of due administrative procedures shall have the same legal effect as statutory procedural rules. In this regard, the making of an Administrative Procedure Act is to govern exercise of administrative powers by providing both governing procedural rules and guiding procedural principles as well.
2. Wakening up of the consciousness of procedural reasonableness
In the early stage of China’s administrative procedure reforms, although the legal system has failed to show concerns for the idea of procedural reasonableness, it should not be taken for granted that awareness of general public and law reformers on procedural reasonableness have been remaining in silence. As a matter of procedural practice, the consciousness of procedural reasonableness in the process of administration has been awakened and constantly increased. The Regulation on Administrative Reconsideration as promulgated by the State Council in 1990 and amended in 1994, and thereafter the Administrative Reconsideration Law, enacted in 1999 by the Standing Committee of China’s National People’s Congress, may be regarded as further efforts made for awakening China’s dormant consciousness of procedural reasonableness and for institutionalization of mechanisms to attain reasonableness. As we have pointed out, although the Administrative Litigation Law
3) For a detailed discussion of the basic principles and requirements of due administrative process, see Wang Xixin, The Basic Requirements of Procedural Fairness Explained, 3 ADMINISTRATIVE LAW REVIEW (2000); Wang Xixin, Due Process and ‘Minimum Impartiality’, 2 LAW REVIEW (2002).
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has provided for the scope and principles as well as an institutional framework for the courts to conduct judicial review over administrative acts, this law also embodies a conspicuous defect — according to this law, it is the general principle that the courts can only review the lawfulness of concrete administrative acts. In other words, to a large degree, the court is not empowered to do anything to review the reasonableness of challenged administrative actions. By comparison, the Regulation on Administrative Reconsideration and the Administrative Reconsideration Law enacted thereafter have empowered the administrative reconsideration organs to review both the lawfulness and reasonableness of a concrete administrative acts.4) Logically speaking, the reasonableness of concrete administrative acts includes both substantive reasonableness and procedural reasonableness. The reconsideration organs may annul any administrative decision if they believe that it has contravened the requirement of procedural reasonableness. As the key issue of procedural reasonableness is, in its essence, procedural fairness, the Administrative Reconsideration Regulation’s concern for the issue of procedural reasonableness implies that procedural fairness has caught attention of the law reformers and the general public as a basic requirement for administrative decision-making. We have great reason to believe that, with the wakening up of public consciousness of procedural fairness, procedural reasonableness will become a focus in the context of administrative procedure reforms.
3. Efforts for Institutionalization of Procedural Fairness
In pace with the wakening of the consciousness of procedural fairness reflected in laws and regulations, institutionalized efforts have been made in administrative procedure reforms to attain procedural fairness. As viewed from the process of administrative decision-making, the basic elements of administrative due process, such as the neutrality of the administrative decision maker, the participation of the affected party, procedural openness, and rationality of decision-making, and so forth, have transformed from concepts of procedural fairness into procedural rules and workable mechanisms to regulate administrative decision-making process. All these may be regarded as institutionalized efforts to attain procedural fairness in the
4) The Regulation on Administrative Regulation, Article 5.
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process administrative decision-making. For example, the Law of the People’s Republic of China on Assembly, Procession and Demonstration as adopted by the Standing Committee of the National People’s Congress in 1989 provides that, for an application for assembly, procession or demonstration, the public security organ shall inform the citizens concerned, at least two days before the date as applied for, of its final decision of approval or disapproval. If the public security organ fails to make a decision within the legally prescribed time limit, it shall be deemed that the application has been approved.5) From the perspective of procedural impartiality, the aforementioned provision has begun to treat seriously some of the basic elements of procedural fairness, say, explaining the reason for the decision, informing the affected party, and providing the legal remedies for the adversely affected parties, among other things. As for the institutionalized efforts to guarantee procedural fairness, the Law of the People’s Republic of China on Administrative Punishment (hereafter the “Administrative Punishment Law”) as promulgated in 1995 is a remarkable starting point in this regard. As we can observe and analyze from procedural requirements concerning imposing administrative penalties by agency, this law has made giant steps for the institutionalization and realization of procedural fairness in the following major aspects:
A. Ensuring the neutrality of the decision maker
The Administrative Punishment Law has for the first time clearly showed its concern to the neutrality of the decision makers in the process of making administrative punishment decisions. According to this law, if the affected party believes that an administrative decision maker has an interest, bias, or prejudice in the administrative punishment decision, he or she is entitled to apply for the withdrawal of that decision maker. A prejudice may be that the maker of administrative punishment decision has a direct interest in the case in question or that the maker has personal relations with the party concerned in the case in question. In the hearing procedure for administrative punishment, the affected party may also
5) The Law of the People’s Republic of China on Assembly, Procession, and Demonstration, Article 9.
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apply for the withdrawal of the presiding hearing officer whom is believed to be biased, interested or prejudiced.6) On the other hand, this law has also tried to prevent and eliminate the preference of the administrative decision maker by separation of functions. For example, this law provides that, in the process of imposing administrative punishment, the officer taking charge of the investigation may not participate in the making of final administrative punishment decision.7)
B. Introducing formal hearing procedures into administrative decision-making
The Administrative Punishment Law has, for the first time, introduced formal hearing as a procedural requirement into administrative decision-making process in the form of legislation. This is, undoubtedly, remarkable progress forward in realizing procedural fairness in the process of making administrative decisions. The establishment of the hearing system makes it possible for the realization of an important procedural right of affected parties, namely, the right to be heard. For administrative organs, when imposing administrative penalty upon individuals, such administrative punishment as revoking a license or imposing a considerably large amount of fine, the affected party shall be entitled to apply for a formal hearing.8) According to this law, in the process of hearing, the private party concerned is entitled to obtain relevant information about the hearing activities within a reasonable period of time, to retain professional legal assistance, to defend herself, to demand the holding of the hearing to be made public, and so forth. The introduction of formal hearing system and the procedural rules aiming at ensuring procedural fairness of the hearing process have provided an institutionalized channel to realize procedural legality and fairness in administrative decision-making process.
C. Separation of functions
Though the Administrative Punishment Law fails to clearly articulate separation of functions as a general principle for decision-making in the context of imposing
6) The Law on Administrative Punishment, Article 42 (4). 7) The Law on Administrative Punishment, Article 38, Article 42 (4). 8) The Law on Administrative Punishment, Article 37.
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administrative penalty, it has nonetheless embodied the spirit of separation of the functions of investigation, decision-making, and enforcement in the process.9) To put it simply, separation of functions is reflected in two aspects. Firstly, according to this law, the officer taking charge of the investigations may not participate in the making of punishment decisions. The essence of this provision is to separate the function of investigation or the function of prosecution from that of making decision, the purpose of which is to prevent the decision maker from being prejudiced that otherwise might occur as result of mixture of functions. Secondly, this law has separated the function of imposing administrative fine from the function of collecting that fine. From the theory of procedures, the former is an “internal separation of functions”, while the latter is an “external separation of functions”. Whatever the form, the purpose of separating the functions is to ensure procedural impartiality. If, under any procedure, the function of investigation and that of decision-making is integrated and vested in the same body, the decision maker would be the “judge of his own case”. If, in the process of making administrative punishment decisions, the person who makes the decision of fine is able to collect the money, it may imply or indicate a fact that the decision maker has a “direct interest” in the final decision that he makes.
D. Reason-giving and pre-notice
These two procedural requirements are not only the requirements of administrative transparency, but also the requirements of administrative rationality. The Administrative Punishment Law provides that before a final decision-making, agency must notice facts, charges, reasons and legal bases for its proposed final decision to the affected party, and inform that affected party of her right to defend for herself, and that when final decision is made, it again must be noticed to the affected party with clearly stated reasons and legal bases. Such procedural requirements are believed to be critical to curb arbitrary use of agency power and to safeguard individual rights, and to facilitate consequent judicial review if the affected party is not satisfied with the final decision.
9) For a discussion of the legislative spirit of the Law on Administrative Punishment, see Wang Xixin, On the Legislative Spirit of the Law on Administrative Punishment, 6 STUDIES IN LAW AND BUSINESS (1996).
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Further, the Administrative Licensing Law, as enacted by the NPC in 2003, has reaffirming the basic principles of procedural openness, fairness, impartiality, and reasonableness in contexts of establishing and deciding on administrative licenses. It has also developed mechanisms of procedures to institutionalize such principles. What is more, the Licensing Law introduced formal hearing procedure and other forms of public participation into policy-making process. For instance, when agency intends to create a licensing regime, the Law requires that some “appropriate sorts forms for soliciting public opinion” must be taken, including formal hearing and some sorts of public notice and comments procedures. In this regard, it is believed that the implementation of the Administrative Licensing Law may contribute to improvements of administrative procedures, in terms of both procedural ideas and practice.
4. The rise of public participation: procedural reforms of the administrative regulatory process and the rule making process
Spurred by the procedural reform in the area of administrative decision-making process, the procedural reform in the administrative regulatory process and the rule- making process of China has also been carried out and some achievements have been scored. Being different from administrative decision-making, the administrative power as exercised in administrative regulatory process may produce an impact on the rights and interests of the general public rather than on particular parties. The typical administrative regulatory acts include the price fixing as dominated by the government in some regulatory contexts, the setting of industrial standards, city planning, management of public facilities, and so forth. The administrative regulatory process is closely connected with the rule-making process, yet there exist some procedural differences between the two processes. The rule making process is, in practice, a process of making administrative regulation and rules, as well as formulating and issuing of administrative normative documents that also bear practical legal effect. There are different procedures governing administrative regulatory policy-making and rulemaking, but generally speaking, rulemaking is required to follow more complicated procedures, while procedures for policy-making are relatively flexible. In both processes, the recent five years have seen the rise of idea and practice of public participation; consequently, it should be no surprise to find that public participation has been increasingly a keyword in the procedural
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reforms. Since the time when the price hearing system was introduced by the Price Law, the means for participation by the general public in the administrative regulatory process has developed from the various forms of hearings into diversified means for public participation. In the process of rule making, the concept of legislative hearing and encouragement of various forms of public participation are provided by the Law on Legislation, and further required by two State Council regulations concerning Procedure of Making Administrative Regulations and Procedure for Making of Administrative Rules, which have introduced legislative hearings into a wider scope of practice, particularly in the practices of rulemaking by local governments. What’s more, a procedural practice similar to notice-comments has also been introduced into the process of rule making by both central and local governments in recent years. The practice of public participation in administrative regulatory process and rule making process, while has shown an exciting new trend of procedural development in terms of rationality and democracy, has also revealed practical problems that are crying for solutions.
II. Major Problems of the Administrative Procedure System: A Summary
While it is acknowledged that, since the reform and opening up policies were carried out and with the efforts of the construction of democracy and rule of law, the administrative procedure system has witnessed much progress, examination from a macroscopic point of view on the legal procedure construction nonetheless indicates the reality that procedural system is yet far from being able to satisfy the demand of the principle “administration according to law and building the rule of law state”, as adopted by the Constitutional amendment in 1999. Therefore, a summary of those procedural problems may be helpful for the ongoing administrative procedural reform. To be specific, major problems plaguing the administrative process may include:
1. The existing administrative procedural rules are sporadic and lack necessary cohesion and uniformity which have resulted in conflicts among the principles or rules within the procedural system; 2. The process of making some important administrative decisions still lack
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statutory provisions of legal procedure, and in the exercise of administrative power too much discretion is left to agency, therefore, it is hard to ensure the fairness of procedure; 3. Procedural rights are not taken seriously by administrative agency, or even courts. In administrative process, agency may give its major attention to substantive matters, such as facts and criteria, but very little attention to respecting individual procedural rights; so is the court in judicial review over agency actions. In addition, procedural mechanisms safeguarding procedural rights are not well developed, leaving those rights largely unrealistic. 4. As compared to the enhancement of the consciousness of the “procedural legality” in the legislation and practice, the value and significance of “procedural reasonableness” has not received enough attention, resulting in arbitrary and capricious use of administrative powers; 5. There are serious conflicts among existing procedural rules, which demonstrates that such procedural rules have been arbitrarily designed and therefore lack minimum consistency; 6. Some of the basic procedural principles containing crucial values of procedural fairness have not been recognized by legislations and their legal effect usually denied by agency and the court; 7. There are no clearly defined and specific conditions for the use of summary procedures, which has left too large rooms for arbitrary exercise of administrative power in procedural operations; 8. The participation of the general public in the administrative regulatory process and rule making process is not sufficiently ensured by law in terms of scope and degree, and the institutionalization of public participation remains to be improved, and the constitutive elements for effective participation (e.g., information disclosure, organization of interest groups, etc.) remain poorly defined; 9. The liabilities for the agency violation of statutory procedures or infringing upon individual’s procedural rights are not defined clearly, and some violations of administrative procedures by agency still remain unaccountable at all; 10. The administrative organs and officials are not equipped with a good sense of procedural legality and reasonableness, instead, the instrumentalism has
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been for a long time a dominant ideology with respect to legal procedures; 11. Consciousness of citizens, legal persons and other organizations concerning procedural rights has been remaining very weak.
As summarized above, the problems faced by the procedural reform may fall into two categories. The first category is problems resulting from subjective factors. Subjectively speaking, the Chinese traditional legal culture has for a long time shown misunderstanding, bias and even indifference to values and functions of legal procedure. For example, agency officials believe that legal procedures are only a means for managing the society and controlling people, and can only govern the “governed” rather than to “govern the governor”, otherwise legal procedures may “bind up agency’s own hands and feet”. They believe that procedures are merely means for attaining administrative ends; therefore, if procedure cannot serve particular administrative ends, they may go beyond the procedures.10) Similarly, the fact that the social members have a faint consciousness of significance of legal procedures, values of procedural rights and procedural fairness is also a problem of procedural ideology. The second category is resulted from objective factors. The objective factors mainly include technical factors, such as empirical research and procedural designing, particularly the insufficient knowledge and mastery of the structure of legal procedures, the conditions for procedural reasonableness and procedural fairness, and the institutional arrangements for attaining due process. All such factors may lead to the corresponding problems in procedural arrangements. Accordingly, we strongly recommend that reform of administrative procedures must also be tackled from the aforementioned aspects.
10) Objectively speaking, all legal procedures serve certain “purposes”. In this sense, the “instrumentalist view of procedure” is not unacceptable, and in fact, in any legal system, legal procedures possess certain instrumentalist functions to a certain degree. But if this is why we believe that legal procedures can only serve substantive results, and when the procedures cannot serve the results and they are not to be observed, then it is not “instrumentalism of procedures”, but “nihilism of procedures”.
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III. Theoretical Research as a Preparation for Making of Administrative Procedures Act: A Review
Chinese scholars have begun to pay remarkable attention to the study of administrative procedures and the practical problems relating to them since early 1990s, resulting in great scholarship on administrative procedures and theoretical proposals of reforming the administrative procedural system. Such theoretical studies are undoubtedly of pivotal guiding significance to the making of Administrative Procedures Act that has been initiated in late 1990s.
To sum up, theoretical studies that have been done are basically focused on the following areas. First, emphasizing of importance and values of administrative procedures and conceptual enlightenment. Studies with regard to this aspect involve the basics of legal culture regarding administrative procedures, the significance of administrative procedures in the rule of law context, concepts of the rule of procedural law and the meanings thereof, procedural fairness and the interpretation of due process, procedural rights, and relations between procedural law and substantive law. Such studies done by the Chinese legal community on the above important theoretical issues may lay a conceptual foundation for the making of Administrative Procedure Act.
Secondly, research on the basic principles and rules regarding administrative procedures. Such studies concern with basic principles and rules for setting the framework of the Chinese APA, including debate over fundamental goals or values of administrative procedural legislation, particularly the potential intension between procedural fairness and procedural efficiency. Thirdly, comparative studies of administrative procedures. The theoretical study done by the administrative law community on the administrative procedure legislation has highlighted a global vision; they have made an all-round investigation and study of administrative procedure legislations and practices of major western countries. The Administrative Legislative Research Group, a group responsible for drafting the Chinese APA under the sponsorship of China’s NPC Standing Committee, has organized many seminars and conference on comparative studies of administrative procedures, plus study tours to many countries, including the United States, the UK, Germany, France, Spain, Japan, and South Korea. Through
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comparative studies, the Chinese administrative law community has not only translated legislative documents of administrative procedure law in major countries, but also studied experiences or lessons from practices of administrative procedure abroad. Such comparative studies have provided necessary reference for China’s legislation on administrative procedures. Finally, studies on format and legislative techniques for the making of APA. Apart from the general theoretical and comparative studies, Chinese administrative law scholars have also conducted some research works directly relating to the making of APA itself. Such studies focused on the formats of the APA, the framework and the structure of the Law, techniques of coordinating uniformity and specialty of administrative procedures. Some scholars have even completed “Model Drafts” of the Administrative Procedure Act.
IV. Empirical Research for the Making of Administrative Procedure Act
It is unimaginable to reform the administrative procedure system and to make a law governing administrative procedures without full understanding of the real situation of administrative procedures. It is widely agreed that empirical studies of administrative procedure is critical to the making of the Chinese APA.11) However, such studies have not been given sufficient attention until now. When the Chinese Administrative Legislation Research Group started its drafting work on the
11) In the history of legislation on administrative procedures in other countries, the relevant positivist research has formed a basis of legislation. To take the making of the United States’ Federal Administrative Procedure Act as an example. In the process of enacting this law, the American Bar Association (“ABA”) organized long-term positivist study, and the relevant authorities also conducted large-scale positivist studies. In 1939, President Roosevelt established an Attorney General’s Committee on Administrative Procedure consisting of outstanding scholars, private lawyers, and judges, aiming at conducting an extensive investigation and study on the status quo of administrative procedures. During the subsequent two years, a positivist study was conducted on the administrative procedures of 27 federal government departments by various ways, including interviewing administrative officials, lawyers, the general public, attending the meetings of administrative organs, consulting relevant archival files, etc., and formed a 474-page-long report in 1941. This report was believed to be “a landmark in the administrative law of the United States”, which has formed an important basis for the making of the Administrative Procedure Act. See: 1941 Final Report of Attorney General’s Committee on Administrative Procedure.
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Administrative Procedure Act in late 1990s, it was fully aware of the significance of systematic empirical studies on situations of administrative procedures. At the “Sino- US International Conference on Administrative Procedure Law” held in Dalian, northeastern city of Liaoning Province in July 2000, the Group proposed that, during the stage of preparing for the drafting of the Administrative Procedure Law, it would be necessary to make a systematic investigation and study on China’s status quo of the rules on administrative procedures so as to enable the draft law to respond exactly to practical problems existing in the area of administrative procedures. This proposal met with the support of the attendees coming from both China and the United States. The objectives of the empirical study are to conduct investigations and studies on the major administrative procedures of the Central Government and those of the selected local governments from the beginning of 2001 to the end of 2002, and to submit a general report and corresponding legislative suggestions to the legislature for reference of legislation.12) Between September 2001 and May 2002, the Group started its investigation of the major administrative procedures of the organs of the Central Government. The main purpose is to make an observation and understanding of the status quo of the administrative procedures in China in an effort to offer an outline of the operation of administrative procedures. Therefore, the purpose of this investigation was not to offer an all-round “knowledge” about the relevant procedural operations. The purpose was to attract the examination and concern of the reformers and the objects of reform, and to call on the legislators to carefully observe and construe the local context of administrative procedures legislation. From the investigations we have identified some key issues to which the coming administrative procedure reforms must respond.
12) The task force “Positivist Study on Chinese Administrative Procedures” was chaired by Professor Ying Songnian with the National Institute of Administration and Dr. Wang Xixin, Associate Professor with Peking University Law School. Over a dozen postgraduates and doctoral postgraduates of Peking University Law School participated in the practical investigation work. For the time being, we have finished the investigation of the administrative procedure rules and practice of some of organs of the Central Government and local governments, and are now in the final stage of writing the investigation report. The Legislative Affairs Committee of the National People’s Congress has provided tremendous support to this study, and the Asia Foundation has also provided funds to the said study.
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1. The necessity for uniform legislation on administrative procedures
Is it necessary to make a uniform law so far as the present situation is concerned? From the data that we have acquired from the investigation in the organs of the Central Government, we believe that the following three aspects may be helpful to our deliberation over this issue. Firstly, at the present time, the ministries and commissions of the Central Government are not short of regulatory provisions regarding administrative procedures; on the contrary, the provisions on administrative procedures are large in amount and plenty in variety and the procedural operations are diversified. The problem is that many of the procedural provisions are overlapping in content; they “check” or even conflict with each other. For example, in the area of foreign trade regulation, the existing administrative procedures include at least the procedures for management of quotas, procedures for management of import and export licenses, antidumping procedures, countervailing procedures, and so on. Let’s take the antidumping and countervailing procedures as an example. The procedure for accepting cases alone concerns the MOFTEC(now the Ministry of Commerce), the State Economic and Trade Commission, the General Administration of Customs, the Tariff Policy Commission of the State Council, and all these government organs have their own procedural provisions. Their different provisions have displayed a procedural network with “mutual check” and conflicts, which has affected the efficiency of administration and the reasonability of control. Secondly, the procedural rules of different departments mostly concern very specific matters, and with the progress of situation, corresponding rules will show much variance. The procedural rules lack governing principles and necessary concerns for continuity and consistency of administrative activities.13) Thirdly, the procedural rules of the departments concerned are not dovetailed well and concerted with each other, and application of procedures by different departments is characterized by inconsistency and arbitrariness. Undoubtedly, all these existing problems indicate practical necessity of making a uniform law on administrative procedures; however, it is no easy task. If uniform legislation is necessary, then how shall we deal with the relationship between
13) See Investigation Report (Concerning the organs of the Central Government, quoted from the materials obtained from the 2002 annual conference of China Administrative Law Society).
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uniform legislation on administrative procedures and the procedural particularities in different administrative areas? How should this relationship be positioned? How can it be concerted through the uniform procedural legislation?
2. Feasibility of uniform legislation on administrative procedures
Is it feasible to make a uniform law on administrative procedures? So far as the present situation is concerned, we believe that it is feasible to make a uniform law on administrative procedures. Firstly, after more than a decade of building the administrative rule of law, the consciousness of “procedural lawfulness” of public power and the exercise of such power is growing,14) which has provided a “manpower” basis for the carryout of lawfulness in procedural operations because the legislative feasibility does not only include the feasibility of making laws but also the feasibility of implementing the laws. Secondly, we have accumulated rather rich experiences during the past years in the relevant legislation on administrative procedures and law enforcement thereof, and some major administrative departments have begun to make a lot of attempts in regularizing their procedures. For example, the customs and the foreign trade departments have made some future-oriented legislative efforts to reform their procedures in accordance with requirements of WTO. Thirdly, some important administrative procedural systems have been established and have produced good results, e.g., the procedures for hearing and the procedures for information disclosure in the antidumping investigations, etc. The establishment and application of such procedural systems has formed the basis and offered important practical experiences for the uniform legislation on administrative procedures.
3. The format of the uniform legislation on administrative procedures.
What format should be employed for the legislation on administrative procedures? Should it be a uniform and detailed code or a legislation of general provisions? With regard to this question a lot of discussions have taken place.15) From
14) This is an initial impression that we get in the investigations and interviews. 15) For representative discussions, see Ying Songnian, Law on Administrative Acts, PEOPLE’S PRESS (1993);
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the practical situation, the format of legislation on administrative procedures should be able to meet the need of the procedural operations. On the one hand, we should be aware that different administrative departments have their substantive and procedural particularities in the administrative regulatory process, therefore a uniformed and detailed procedural code might result in “cutting the feet to suit the shoes” or “attending to one thing but losing sight of another”. On the other hand, though different administrative processes are somewhat different in procedural operations, they are in essence exercise of government power, and such exercise of power should satisfy some common and general procedural requirements, e.g., transparency, consistency, procedural efficiency, and fairness, etc. If these general principles and values are not provided for in the procedural legislation, the legislation itself would be meaningless. Taking these two aspects into consideration, we believe that, in terms of the legislative format, we may adopt the format of “a law on general principles and mechanisms of procedure”, namely, the legislative structure may adopt a model of “principles guided general provisions and special provisions”. The principles shall apply to all the administrative processes, and the general provisions shall apply to all circumstances for which there are no special provisions of law, while the special provisions shall apply to the special administrative processes only. The legislation should be a combination of principles and general provisions and the concretization of particular administrative processes.
4. Institutional innovation of the legislation on administrative procedures
From the present situation of administrative procedures, the Administrative Procedure Act should pay much attention to the following institutional arrangements: Firstly, provisions about the general principles of administrative procedures. For the time being, the diversity of the practice of administrative procedures has reflected the various procedural requirements, but it also has revealed the disarray of administrative procedures. An important objective of legislation on administrative procedures should be offering a basic “model procedure” so as to ensure that the diversified administrative procedures are operated under the guidance of the basic procedural principles, and to promote uniformity with necessary diversity. The
Jiang Ming’an, How Should China Select Its Legislative Mode on Administrative Procedures?, 6 CHINA LEGAL SCIENCE (1995).
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objective of general procedures is also to provide, by setting models, standards for judging the reasonableness of the non-statutory procedures or discretionary procedures and to work out a basic procedural framework for the special procedures of different departments.16) Secondly, the hearing procedures need to be further improved and rationalized. At the present time, the provisions regarding the hearing procedures in administrative processes are diversified in kind but lack basic consistency.17) To this end, the Administrative Procedure Law should include general provisions for the “minimum requirement” for the hearing procedures — the opportunity to be heard. In the meanwhile, the requirements for the hearing procedures under different circumstances should be provided for in other separate laws. By doing so, the principle and flexibility can be balanced. Thirdly, it should articulate the principle of disclosure of government information. Though it is believed that openness and participation are the basic procedural requirements in administrative processes, due to the “concealing” of information by the government, the general public is largely restrained in their participation in administrative activities. Fourthly, the legal liabilities for agency’s violation of procedures should be clarified and made practically accountable. In the relevant legislations on administrative procedures today, the crying problem is that the provisions regarding legal liabilities of the illegal procedural activities of administrative agencies are too vague, and there may even be no corresponding provisions at all. This situation has resulted in the rampancy of various illegal activities in administrative procedural operations, or even procedural nihilism.
V. The Basic Framework and Suggestions for China’s Legislation on Administrative Procedures
With the tremendous support of the Legislative Affairs Working Commission of the National People’s Congress, the Chinese Administrative Legislation Research
16) The Framework of the Administrative Procedure Law, which has been finished so far, has included good provisions in this aspect, which can basically satisfy the aforesaid requirements. 17) According to the statistics done by the authors, there are at least several dozens of hearing procedures. There is sharp difference between the different procedures as well as the provisions of the different regions and different departments.
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Group (the Group) started to work on the framework of the Administrative Procedure Act at the beginning of 2001. At the beginning of 2002, the Group produced the Framework of the Administrative Procedure Act (initial draft). After the Framework was completed, the Legislative Affairs Working Commission of the National People’s Congress held a symposium in Beijing and Tianjin in April and June 2002, respectively, to discuss and solicit advice for revising and supplementing the initial draft. On the basis of this and after making study visits to other countries, the Group absorbed the advices from all sides and completed the expert initial draft of the Administrative Procedure Act, which has been discussed, and advice for it solicited as many as 15 times so far. In December 2004, the Draft Administrative Procedure Act was submitted to the Legal Affairs Working Commission of NPC for intensive review and discussion.
1. Basic features of the content of the Draft Administrative Procedure Act
1) Apart from general provisions that may applicable to all administrative actions, for instance, procedural principles and hearing procedures and general provisions of procedures, the Draft also provides for the specific procedures for particular administrative acts, such as decision-making, rulemaking, and administrative planning, and government contract, thus featuring a combination of generality and particularities. The Administrative Procedure Act is expected to be a general law on the procedures for administrative acts, but it is not a simplistic enumeration of the various administrative procedures. Rather, provisions regarding the common procedural rules for the various administrative acts show that there exists a relationship of overlapping between procedural rules and administrative acts: a procedural rule may be applied to more than one administrative act, and an administrative act needs the application of more than one procedural rule. If the chapters of the Administrative Procedure Law are arranged in such a structure as they are arranged according to specific categories of administrative acts, the result would be that procedural rules must be provided in great detail for each administrative act, and the Administrative Procedure Law so arranged would be a “compilation” of procedural laws for various types of administrative acts and would be verbose, lengthy and overlapping in content, and would not be able to form an organic system. Therefore, some countries, such as the United States, have followed
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the format of providing for the common procedural rules for the various administrative acts in making their administrative procedure laws. The Draft of the Administrative Procedure Act has to large extent taken the practice and legislative model of German administrative procedure law as a reference. It provides general provisions for procedures of making administrative decisions, and procedures for particular types of administrative acts. After careful deliberation, the particular types of administrative acts as provided in the final Draft include administrative rulemaking, decision-making, administrative programs and planning, government contract, and administrative guidance. Considerations on selection of these particular types of administrative actions relate to the fact that previous to the making of Administrative Procedure Act, there are already the Administrative Punishment Law (1995), the Administrative Licensing Law (2003), and the Administrative Compulsory Enforcement Law (expected to come very soon), all of which lay down specific procedures governing corresponding administrative actions and measures; therefore, general guiding provisions on procedures for those specific administrative actions would be enough, leaving detailed and specific procedure provisions to those separate laws. On the contrary, there exist no separate laws providing even guiding principles and general provisions of procedures for administrative actions and measures such as making of administrative normative documents, administrative planning, government contract, and administrative guidance. Meanwhile, procedural problems with these types of administrative actions are among the most serious ones that need to be dealt with in practice.
2) Apart from procedural provisions, the Draft also includes provisions on substantive matters, thus featuring the combination of procedural and substantive provisions. The reasons for this arrangement are that there lack unambiguous legal provisions regarding such important issues as the basic principles, the validity, and the legal effect of administrative acts; there also lack necessary arrangements for principles guiding allocation and exercising of administrative powers within the administrative system; and still, there lack clear and accountable legal liabilities for violations of administrative procedures. With those facts, it would be hard to imagine the practical effect of legal procedures if there are not such substantive provisions concerning the above-mentioned key issues in administrative process.
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3) Apart from external administrative procedures, the Draft also provides for internal administrative procedures, thus featuring the combination of internal and external procedures. From the administrative law perspective, administrative procedures mainly refer to external administrative procedures governing agency actions that may directly affect private parties concerned. However, although agency internal administrative action may not directly affect rights or interests of parties concerned, it may nonetheless influence rights or interests of private parties in terms of procedural fairness and efficiency. Given the fact that in China today there exist huge amount of chaotic and bureaucratic agency internal procedures that usually impose great impacts on private parties in particular administrative context, including, but not limited to conflict of administrative jurisdiction between administrative organs (positives and negative conflicts), and assistance among administrative organs, we perceive a compelling demand for regulating agency internal procedures through the Administrative Procedure Act.
4) The Draft concentrates on laying down prior procedures for administrative actions, but leave posterior procedures such as administrative appeal and judicial review procedures for regulation by other laws. It might be surprising to some US legal scholars that the Draft says nothing about judicial review relating administrative procedures. Yet the fact is that the already existing laws, including the Administrative Reconsideration Law (1999), the Administrative Litigation Law (1989) and the State Compensation Law (1994) have already provided for procedures for administrative appeal, judicial review, and state compensation. There is the call for integration of all these laws into a unified administrative procedure code in the future, but at present stage, the Draft of Administrative Procedure Act remains to be a law concerning procedures of exercise of administrative power within administrative process.
2. Main Contents and Structure of the Framework of the Administrative Procedure Law
From the above description about the Draft, we could see that the draft of the Administrative Procedure Act has a large volume of contents; therefore the lawmaking in this case requires huge legislative techniques in terms of arranging the
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contents scientifically, reasonably and logically. With reference to the experience of other country, we have proposed that the contents of the Law be arranged in the following way:
1) General provisions precede special provisions. Chapter I of the Draft law lay down the general provisions and Chapter II provides for principles governing organization of administrative organs and relations among them; Chapter III contains general provisions for procedures of administrative decision-making. Chapters IV through VIII are provisions for specific types of administrative actions, including administrative rulemaking and making of normative documents, administrative planning, government contract, and administrative guidance. 2) Procedural provisions precede substantive provisions. As for the arrangement of the general provisions, we believe that the administrative acts by which the subjects exercising administrative power makes decisions through certain procedural operations, so the initial draft should take administrative power as the axis, and arrange the relevant contents according to the sequential order of “administrative bodies → procedures governing operation of administrative power → legal effect and consequence of administrative actions”. That is to say, the Draft first lays down basic principles for structure of administrative organs and relations thereof, and then provides for procedures for different administrative actions, and then clarifies conditions for validity and legal effect of administrative actions. 3) Some of the provisions regarding internal administrative procedures are provided in Section 1, Chapter II: “Administrative Organs”.
3. Choice of the legislative format for the Draft Administrative Procedure Act
So far as the structure of the aforesaid contents is concerned, there exists the question of how to choose a legislative format in the entire process of making the Administrative Procedure Act. According to the experience of foreign countries, the legislative forms are mainly as follows:
(1) Highly codified format, as adopted by, for example, Germany and China’s
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Taiwan. The feature of this form is that all the contents relating to administrative procedures are incorporated into the administrative procedure code, and the advantage thereof is that the provisions regarding administrative procedures are unified to the largest possible extent. (2) The format of separate general provisions. This form can make the separate general provisions and other relevant laws form into an integrated system so as to co-regulate the procedures for administrative activities. This form has been adopted by some countries, including Japan and Italy. (3) The format of a separate procedure law with eventual codification, as adopted by, the United States. A feature of this legislative format is that a procedural code of general provisions is formulated first, and then the relevant separate laws are incorporated into the administrative procedure law by means of codification, which may make the administrative procedure law an open-ended legislative process.
The legislative formats as described above have their own advantages and disadvantages. We are holding the view that, to select the legislative format for the Administrative Procedure Act, we should take the following factors into consideration: the costs of legislation, the demands of legislation, the coordination between the administrative procedure act and other already existing separate laws, and practical possibility. Based on these considerations, we have recommended that the Draft Administrative Procedure Act take the format of a separate law of general provisions. That is to say, the Administrative Procedure Act mainly provides for general principles and provisions of procedures governing administrative activities, general procedural rules, and some specific procedural rules. At present stage, it may be unrealistic to make a unified and detailed administrative procedure code. However, we also recommended that along with the administrative procedure reforms, efforts to codifying administrative procedures be made for the concern of attaining uniformity, and consistency of administrative procedure system.
VI. Challenges Ahead: Difficult Issues in the Making of China’s Administrative Procedures Act
While it has received great enthusiasm and intellectual support form legal
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communities both home and abroad, the ongoing process of making China’s APA is still facing great difficulties and challenges ahead. Those difficulties include practical resistance from some government agencies at both central and local level. Since the making of APA intends to regulate administrative process and to control administrative power, it should be no surprise to perceive reluctance or even resistance from the bureaucratic system. In the meanwhile, the process of making APA can also be understood as a process for reallocation of regulatory powers between the central and local governments; therefore, power struggles in the lawmaking process should not surprise either. For the lawmakers, in addition to balance practically involved interests in the lawmaking process, technical and legal issues concerning the law itself also present a huge challenge. With this respect, there still exist a number of key and difficult issues, demanding further comparative and empirical studies and great wisdom for resolutions. Such key issues include at least the following: First, there comes the question concerning the legal effect of the principles of the administrative procedure law. The basic principles of the administrative procedure law are essentially important in legislation. Should these principles bear direct legal effect and binding force? Can courts apply and enforce legal principles of procedures in judicial review cases? How should we deal with them in legislation? How should we coordinate the relationship between the principles? How should we deal with the relationship between the basic principles and the specific procedural rules? Secondly, questions concerning the relationship between the general provisions for administrative procedures and the specific procedures for particular administrative acts. Are the general provisions a “benchmark” requirement for administrative procedures? Or shall the special procedural provisions prevail over the general provisions? Thirdly, questions concerning the relationship between the general administrative procedure act and other relevant laws. Should the relationship be that of one between a new law and old laws, or between a general law and special laws? For example, for administrative licensing and punishment procedures, shall the Administrative Licensing Law and the Law on Administrative Punishment apply, or shall the Administrative Procedure Law apply? Should this relationship be handled and coordinated by the general provisions or by particularized legislations? Fourthly, questions concerning legal liabilities and means of accountability for violations of administrative procedures. What shall be the legal consequences or
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liability for a violation of administrative procedure? What are the means and mechanisms for account agency liabilities for violation of administrative procedures, and what kind of remedies shall be available for individuals to challenge agency’s violations of procedural requirements? Fifthly, questions concerning the choice of legislative format of the APA. Finally, questions concerning the national uniformity and local diversities of administrative procedures. The Draft APA has paid much attention to attaining procedural uniformity for the administrative system. However, given the fact that local governments may also demand procedural flexibility and diversities in local administration, how to coordinate the uniformity dream and diversified realities? Should local government be given authorities to modify general procedural requirements based upon local and practical realities? If that is case, how to maintain a balance between the uniformity and diversity? To sum up, the making of administrative procedure Act in China, while widely believed to be a work of great urgency and importance, is also facing considerable difficulties and challenges. Fortunately, there is the increasing consensus among government leaders and the general public on the demanding need for making of the APA. The process of the lawmaking has been ongoing, and steps seem to be accelerating. All these might again give us reasons and sources for a modest optimism toward the future.
KEY WORDS: Procedural Reform, Administrative Procedure, Administrative Fairness
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The Legal System of Nature Conservation in Japan: From the Viewpoint of Biodiversity
Hisashi Koketsu*
I. Introduction
One of the most important problems in the contemporary society is the conservation of biodiversity. The Convention on Biological Diversity, which acknowledged the conservation of biological diversity as a crucial matter in the international society, was adopted in Rio de Janeiro in 1992. Japan signed the document on this occasion and accepted it the following year. In 1995 the Japanese government decided on the State Strategy on Biological Diversity. In 2002 it was revised and its name was changed to the New State Strategy on Biological Diversity. The New State Strategy divided the crisis of biodiversity into three phases.1) The first crisis is the destruction of the natural environment by a flood of development projects. The second crisis means that the surrounding nature, which has been maintained by the daily use of local people, is diminishing rapidly as people abandon their traditional life style. An example of this is copses. Lastly, the third crisis relates to the preservation of natural spaces, as they are becoming contaminated with chemical substances. Although the government settled on the Strategy, we are still in lack of a systemized body of law which aims principally at the conservation of biodiversity. Therefore we must strive for it within the framework of the existing legal order,
* Professor of Law, Graduate School of Public Policy, University of Tokyo. 1) On November 14th, 2007, the Deliberative Council for Environmental Problems submitted a report to the Minister of Environment. The report proposed the idea of a “100 years plan,” which aims to restore the lost ecosystem in the next 100 years. And the report referred to the climate change (global warming) as the fourth crisis of the biodiversity. On November 27th, 2007, the third version of the Strategy was decided at the cabinet meeting.
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which is built up upon the Basic Environment Law and the Nature Conservation Law. In this paper I will survey the Japanese legal system of nature conservation, and analyze it from the viewpoint of biodiversity.
II. A short history of the legal system of nature conservation
First of all, I will outline the contents of several laws related to nature conservation in historical order.
1. Nature Conservation Law
In 1970, at the so-called Kogai-Kokkai,2) the government presented its standpoint that the state should take necessary measures without delay against surging waves of development projects. In the following year the Environment Agency (now the Ministry of the Environment) was founded as an organization which should take responsibility for expanding works for environmental protection. In 1972, when the UN Human Environment Conference was held in Stockholm, the Nature Conservation Law was enacted in Japan. This act occupies a place of fundamental law in this sphere and entrusts the government with the task to settle on a basic policy. Thus we now have the Basic Policy of Nature Conservation. The policy presents with a lofty tone the principle that we should live our lives without disturbing the delicate equilibrium of nature. On the other hand, this act has a kind of ‘balancing clause’. It states that the act of nature conservation should be carried out with respect for individual property rights and with close attention to a balance between the benefits of nature conservation and other public interests. This clause is said to have a discouraging effect on public officers from taking proper measures for nature conservation.3) In the end, I want to point out that this act includes a provision which requires the government to make an inventory in approximately every five years. This inventory
2) to translate literally, ‘Environmental Pollution Diet’. The Diet session of 1970 is commonly known by this name, because as many as 14 acts relating to pollution control were enacted or amended at this session. 3) See ENVIRONMENTAL LAW (Kankyouhou), at 51 (Yasutaka Abe & Takehisa Awaji eds., 3rd ed. 2006).
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is called the ‘green censas’. The Ministry of the Environment is taking an investigation of biodiversity at the same time as the green census. However, this is far from reaching our goal. It would be necessary to make continual investigations of the fauna and flora on the level of commune.4)
2. Basic Environment Law
In the following year of the Rio Conference, the Basic Environment Law was enacted in Japan. Until then the government had taken various measures against pollution problems in conformity with some pollution control acts that lay under the umbrella of the Basic Law for Pollution-Control Measures of 1967. Moreover, from 1972, the government had made efforts to protect the natural environment according to the Nature Conservation Law and its family.5) However, since the 1980s, the border had become obscure between environmental pollution and nature disruption. We can easily understand what caused such a blend, if only we think of the expansion of our living spaces. With this background, the Basic Law for Pollution- Control Measures and the Nature Conservation Law were remolded into one comprehensive law, the Basic Environment Law of 1993. Then the Basic Law for Pollution-Control Measures was abolished, but the Nature Conservation Law was left to function as the principal law in the sphere of nature conservation. In article 3 of the Basic Environment Law, we can read a clear recognition of the legislature that the natural environment is an ecosystem which can hold itself sound only with a delicate balance kept within itself. Furthermore, according to article 14, the following three points are important in order to conserve the natural environment: ① to maintain the constituent elements of the nature; ② to conserve biodiversity (here we find the notion of biodiversity.); and ③ to keep close contact between man and nature.
4) This is my long cherished theory. See Hisashi Koketsu, Environmental ethics and environmental law (Kankyourinri to kankyouhou), in CHALLENGES OF ENVIRONMENTAL LAW (Kankyouhougaku no Chousen), at 358 (Tadashi Otsuka & Yoshinobu Kitamura eds., 2002). 5) With the word ‘family’ I mean all the laws that have the common purpose as the Nature Conservation Law (especially the Natural Parks Law).
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3. Environmental Impact Assessment Law
The Basic Environment Law requested the state to take necessary steps toward introduction of the environmental impact assessment system. In answer to this request related authorities immediately started to consider the problems toward the establishment of the system. Their efforts bore fruit as the Environmental Impact Assessment Law of 1997. According to this law, those in charge of the development project themselves must assess the impact of the development on the environment before they set to work. A list of matters which should be assessed is given in the so- called ‘the Basic Matters’.6) There we can find three matters related to nature conservation and biodiversity, i.e. flora, fauna and ecosystem. However, judging from the viewpoint of conservation of biodiversity, there are some defects in the EIA system. I want to point out the fact that it is difficult to make a reasonable list of fauna with a short-term investigation. According to an entomologist, the following criticisms are raised regarding the investigation of insects:7) ① the method of the investigation or sampling is improper; ② there are cases of distortion or destruction of data; and ③ the methods of evaluation of the data is improper.
4. Law for the Promotion of Nature Restoration
In order to conserve biodiversity, it is necessary to restore the lost natural environment depending on the situation. In 2002 a law to settle on a scheme for such a restoration project was enacted. The character of this scheme is that various actors, including private sectors, participate in the executing process. But there is a constant risk that the restoration project will spoil the natural environment again.
6) This is an abbreviation for a rule of lower rank which was established by the Minister of Environment in conformity with the EIA Law. 7) See THEORY OF INSECT COLLECTING (Konchusaisyugaku), at 147-48. (Kintaro Baba & Yoshihiro Hirashima eds., the new ed. 2000)
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III. The Legal System of Nature Reserve
If we enclose a certain area and prohibit people from taking certain destructive actions within that area, the nature there will be protected from injury as a result. In this paper I call such an area a ‘nature reserve’. In Japan there are several acts that introduce the system of nature reserve. Here I will only present three acts, the Natural Parks Law, the Nature Conservation Law and the Urban Green Tract Law.
1. Natural Parks Law
A. Purpose of the Law
This law is the successor of the National Park Law of 1931, so the national park system has been a long tradition. The main purpose of the law is to provide people with proper places for recreation by protecting the outstanding landscapes. Thus the law is not so emphasized by the notion of nature conservation. Meanwhile on the occasion of the amendment of 2002, ‘conservation of biodiversity’ was added to the task of the state.
B. National Park
The Natural Parks Law provides three types of parks, i.e. national park, quasi- national park and prefectural natural park. Here I choose to explain national parks.
(a) Designation of National Parks The Minister of Environment designates a certain area as a national park after a hearing from the Deliberative Council for Environmental Problems. The state itself executes the task in accordance with the plan. Not only can the minister designate public8) land, but also private land.
(b) Designation of the special area and the especially protected zone Within the area of a national park, the minister can designate certain parts of the
8) The word ‘public’ means here that the owner of the land is the state, a prefecture or a commune.
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area as a ‘special area’. The rest is called the ‘general area’. The special area is classified into three ranks according to the intensity of control over forestry. Tree- cutting in the first rank area is subject to the strongest control. At any rate, in the special area man is prohibited from taking certain kinds of action, such as building a house, cutting down trees or bamboo, or gathering mineral or stone, without getting permission from the Minister of Environment. As a result the natural environment can be free from injury to a certain degree. The minister can designate certain parts of a special area that is of great importance as the ‘especially protected zone’. In this zone, the control over human action is much stricter. Under the policy that we should leave the ecosystem as untouched as possible, we are prohibited from even gathering fallen leaves and twigs. Of course, release of plants or animals is prohibited completely. Indeed this policy serves to protect the natural environment against development projects, but there remains an awkward problem that we cannot carry on enough research on the wildlife if the remarkable spaces are designated as the especially protected zone. It would be necessary to keep close contact between administrative authorities and various groups of experts in order to ensure the monitoring system.
(c) Some Problems concerning the National Park and Improvement by the Amendment of 2002 of the Natural Parks Law Nature conservation and the use of nature are both the purposes of the Natural Parks Law. Yet greater importance is vested to the latter. There have been some difficulties concerning the fact that ecological viewpoints are not treated with reasonable respect at the stages of designation and management. But there are lots of places that are less beautiful but are of great importance from an ecological viewpoint. Thus the ‘landscape protection treaty’ was introduced on the occasion of the amendment of 2002. The means of the new treaty has a purpose to conserve nature which has supported our traditional daily life. As an actor for the conservation the legislature bore private associations including the NPO in mind, and introduced such associations into the legal system with the notion of ‘park management association’. Such an association attaining enough knowledge of ecology would be a next step. The national park is open to everybody in general. However, if people suddenly crowded into a sensitive space such as a wetland, it would be spoiled. In order to evade such a crisis, it is necessary to manage the space in accordance with its
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capacity. Yet it is difficult in the areas which are under ownership of the private person. Therefore the system of the ‘use-regulation zone’ was introduced by the amendment of 2002. Under this system the number of visitors will be limited in accordance with the capacity of the space. At last in 2006 the first use-regulation zone was established in Nara prefecture. There is only one case. It shows that it is difficult to gain acceptance with local people. In the end I want to point out that the notion of ‘designated animal’ was introduced into the law by the amendment of 2002. Until then capturing animals in the special area was permitted (In the especially protected area, it has been banned from the beginning). Yet several animals were still decreasing in number, and taking immediate steps to avoid extinction was urgent. Thus the Minister of Environment designated a certain species of animal in a certain area as a ‘designated animal’. In 2006 nine species of animals were designated: three species of sea turtles; three species of butterflies; and three species of dragonflies. With respect to these animals we can assume that the dangers of captivity will gradually decrease. The downside is that we cannot minutely observe the behaviors of those animals, especially insects.
2. Nature Conservation Law
A. Purpose of the Law
This law aims to promote the conservation of the spaces which require intense conservation, in cooperation with other laws which also aim for nature conservation. Therefore this law, in comparison with the Natural Parks Law, gives preference to the conservation of nature.
B. Nature Reserve
The Nature Conservation Law provides us with three types of nature reserves: primeval natural environment conservation area, natural environment conservation area, and prefectural natural environment conservation area.
(a) Primeval Natural Environment Conservation Area The Minister of Environment can designate a certain large area that is in primeval condition as a ‘primeval natural environment conservation area’. The minister has
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the power to designate a certain part of the area as a ‘keep-off zone’. Since it can be controlled intensely, the minister can only designate public land as a primeval natural environment conservation area. Public land which is already designated as a forest reserve in conformity with the Forest Law is excluded from the object of designation as the primeval natural environment conservation area. Here we can see the Forest Agency’s pride. The intensity of control in the primeval natural environment conservation area is nearly equal to that of the especially protected zone of the national park.
(b) Natural Environment Conservation Area The minister designates a certain area with a trademark such as a ‘large beech forest’ as a ‘natural environment conservation area’. It is possible to designate the area of a forest reserve. Private land can also be subject to designation, but we have only one case in which a private piece of land was designated as a natural environment conservation area. In the natural environment conservation area people are prohibited from building a house, changing the shape of the land etc., but are allowed to plant trees or bamboos, capture animals, pasture cattle etc. The minister can designate certain parts of a natural environment conservation area that carries great importance for animals and plants as a ‘wildlife protection zone’. In this zone we cannot capture specified animals, nor gather specified plants.
(c) Prefectural Natural Environment Conservation Area This is one of the public establishments that are to be founded on the Local Autonomy Law. The governor of prefecture has the authority to designate such areas. The merit of this system is that one can designate a relatively narrow space. For example, in the northern part of the Kanagawa prefecture there is a small conservation area, which actually serves to protect a kind of swallowtail.9)
9) The scientific name: Luehdorfia japonica Leech, 1889; the japanese name : Gifucho. This is a very lovely butterfly with yellow and black stripes which can be seen only in early spring. A couple of similar species are distributed in Korea and China.
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3. Urban Green Tract Law
A. Purpose of the Law
The purpose of this law is to make a healthy urban environment in cooperation with the other laws (especially the Urban Park Law) that aim to supply the urban environment with natural elements.
B. Definition of ‘Green Tract’
‘Green tract’ in the context of this law means forest, grassland, water’s edge, rocky land, and certain land like these which, by itself or together with its surroundings, constitute a good environment.
C. Nature Reserve
(a) Green Tract Conservation Area Prefectures are given the power to include certain areas into the city planning as a green tract conservation area. Decisions should be made by taking the standpoint of preventing pollution and natural calamities, as well as from the viewpoint of the maintaining the living environment of citizens.
(b) Special Green Tract Conservation Zone Prefectures also have the authority to include certain areas into the city planning as a special green tract conservation zone. This system aims to conserve the habitat of the wildlife.
(c) Some Problems concerning this Law The execution of the Urban Green Tract Law is under the jurisdiction of the Ministry of Land, Infrastructure and Transport. The words of this law do not reveal sincere concern of the legislature for the conservation of biodiversity. So it can be a question as to whether administrators can weave some elements of biodiversity into their interpretation of the law. I think that it conforms to the goal of the law to execute the law from the viewpoint of biodiversity, because the law requires that the
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basic plan under this law be established in accordance with the Basic Environment Plan under the Basic Environment Law. The Third Basic Environment Plan, which was established in April of 2006, enumerates not only the ‘natural parks’ or the ‘natural environment conservation areas’, but also the ‘special green tract conservation zones’, as a means to which public authority should implement in order to promote the conservation of biodiversity.
(d) Practice in Yokohama City Certain big cities are given the authority to execute the law in place of the prefecture. Yokohama city, a huge city in the Kanagawa prefecture, takes charge of matters concerning the ‘green tract conservation area’ and the ‘special green tract conservation zone’. In addition, it makes efforts to conserve the woods around the schools or hospitals etc., by concluding a contract with the manager of those establishments. This contractual method is prescribed in an ordinance (in Japanese ‘jorei’) of the city in order to protect the ‘green environment’ against the rapid urbanization of Yokohama. This ordinance is placed under the Urban Green Tract Law. But, from the perspective of biodiversity, the means of the ordinance has its limit in the fact that the weight is laid on the woods and concern for grassland etc. is not enough.
IV. The Legal System for Preservation of Wildlife
1. Wildlife Protection and Proper Hunting Law
This law is primarily meant to control hunting, but the system of the ‘game protection zone’ functions as a nature reserve. It is a very significant means of protecting the ‘registered wetlands’ under the Ramsar Convention on Wetlands. In Japan, wild animals such as monkey, wild boar, deer etc. frequently appear near human dwellings, causing great damage to the crops. This is a serious problem considering the importance of the symbiosis between man and wildlife. Therefore the legislature took steps to overcome difficulties by amending the law in 2006. To show a point of improvement, farmers can now gain permission for the using traps easily than before.
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2. Cultural Properties Protection Law
This law is put under the jurisdiction of the Ministry of Education and Science. The system of ‘natural monument’ serves to protect the wildlife from extinction. The Minister of Education and Science has the authority to designate certain species of animal or plant as a natural monument. The habitat of the animal or plant can be included into the monument. The law also provides the system of a ‘temporary designation’. It is a prefectural board of education that has the power to designate temporarily. In addition, the director of the Agency of Cultural Affaires can establish a zone and control human actions in it, if he considers it necessary in order to protect a natural monument. However it is said that the directors have not been eager to use this power. Prefectures and communes also have the power to designate a natural monument in conformity with their own ordinance. The above-mentioned swallowtail is designated as a natural monument of the Kanagawa prefecture. This is a successful case. But now and then cases are appearing where local authorities designate only a certain species of animal or plant without limiting a zone. If such a designation is made in a prefecture, we are unable to gather the designated species from the whole area of the prefecture. At first glance it seems to be a desirable control system for the preservation of species. But in fact this way of designation have been receiving a good deal of criticism from experts. Under such a designation style, ordinary people cannot have clear recognition of the fact that the species are designated as a natural monument in that prefecture, and administrative authorities occasionally fail to take necessary steps for habitat conservation.
3. Law for the Conservation of Endangered Species of Wild Fauna and Flora
The first article of this law reads: wildlife is an important element of the ecosystem, and it is inevitable for human life as a significant part of the natural environment. I understand that the legislature laid emphasis on the phrase ‘inevitable for human life’. It means that the Japanese endangered species act stands on anthropocentrism.10) Indeed in Japan, it is very difficult to designate a ‘habitat protection zone’, because administrative authorities cannot easily gain permission
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from land owners. Here we can see a great difference between the ESA of the United States and that of Japan.
V. The System for Protection of Forest
1. Protected Forest
The system of ‘protected forest’ has a long tradition. It is not a ‘legal’ system, because it has been formed by an internal rule of public administration. But it brought about good results from the viewpoint of the protection of forest. From the late 1960s and onwards the thought of a ‘balance between the economic interest and the public interests of forest’ prevailed. At last in 1989, the notion of a protected forest was divided into seven types in accordance with the UN Man- and Biosphere Plan. Among seven types, the ‘forest ecosystem protection area’ is the most remarkable. This is supposed to serve as a means for conservation of the ‘natural heritage’ under the Convention Concerning the Protection of the World Cultural and Natural Heritage, together with the natural environment conservation area under the Nature Conservation Law.
2. Forest Law
A. Forest Reserve
The forest is a place for forestry, but at the same it shares the qualities of various public utilities, such as maintenance of headwaters, defense against disasters, preservation of health, scenic beauty etc. It is necessary to forbid people from cutting trees in order to maintain these utilities. For this purpose the system of forest reserve was established. However, the designation of a forest reserve can be canceled and the so-called Resort Law requires the related administrative authorities to see to it that
10) See Takamichi Sekine, Things alike only in appearance : a comparative study of the japanese and american ESA (Nite hi naru mono: Nichibei “shu-no-hozon-hou” no hikakuhouteki kousatsu), in THE BIRTH AND FUTURE OF ENVIRONMENNTAL LAW (Kankyouhougaku no Seisei to Mirai), at 228-29 (Yasutaka Abe & Takeo Mizuno eds., 1999).
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the project will be promoted. Therefore, environmentalists are afraid that the Resort law will spur canceling of designations.
B. Permission for tree-cutting
Forests designated as a forest reserve are almost state-owned. But private forest has the same usage for the public as state-owned forests. Thus a conclusion was reached that the owner should gain permission from a governor of prefecture if he wants to cut trees in his forest. In cases of building a golf course, issues for permission almost always appear on stage. According to the Forest Law, if the application satisfies four conditions, the governor must give permission. Among those conditions there is one related to environment protection. It requires that the development to not cause considerable damage to the surrounding environment. But administrative authorities usually judge, in conformity with their internal rulings, that the application satisfies the environmental condition, if only it is shown that more than 20 per cent of natural forest will be left. We cannot see any consideration from an ecological viewpoint. According to the books on the conservation of biology or ecology, the act of cutting trees can produce an ‘edge-effect’.11) Now administrative authorities never take such factors into consideration, because the Japanese forest law does not primarily aim to conserve the forest as an ecosystem.
VI. The Legal System concerning Chemical Substances
In order to effectively deal with the third crisis which is said in the New State Strategy on Biological Diversity, we must protect the habitat of wildlife from pollution made by chemical substances. Recently a viewpoint of ‘habitat of wildlife’ was introduced into the Chemical Substances Control Law and the so-called PRTR Law. Regarding the former law, this viewpoint was added to the purpose of the law. I think that it is laudable.
11) If trees are cut down in forest, certain open space are brought into existence. The circumference of that open space is at the same time the edge of the forest which extends around it. Take note of the fact that the environment of the edge is greatly different from that of the internal space. See CONSERVATION BIOLOGY (Hozen Seibutsugaku), at 89-90 (Hiroyoshi Higuchi eds., 1996).
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VII. Conclusion
Respect for private property rights forms the basis of the legal system of nature conservation in Japan. Therefore administrative authorities cannot easily ensure enough area as a nature reserve.12) And it is very difficult for them to judge the environmental condition, when examining to give permission for tree-cutting, in accordance with the precautionary principle. In addition, some important laws concerning the taking of natural resources, such as the Quarrying Law and the Law concerning the Taking of Gravel, lack the viewpoint of environmental protection.13) These laws are under the jurisdiction of the Ministry of Land, Infrastructure and Transport, and aim for the sound development of industry. Therefore administrative authorities cannot take a single viewpoint of nature conservation directly into consideration.14) I think that it is one of the most serious defects of our legal system. I think that we should enact a basic biodiversity law in the near future. If it is impossible, we should write the aim of biodiversity into the Basic Environment Law and place the related laws under its umbrella. Of course the Quarrying Law and the Law concerning the Taking of Gravel belong to the ‘related law’. But there is almost no prospect of success, considering the present situation that such important laws are in the hands of the Ministry of Land, Infrastructure and Transport.
KEY WORDS: Nature Conservation, Biodiversity, Nature Reserve
12) TADASHI OTSUKA, ENVIRONMENTAL LAW (= Kankyouhou) 476 (2nd ed. 2006). 13) TAKEMICHI HATAKEYAMA, LECTURE ON NATURE PROTECTION LAW (= Shizenhogohou Kougi) 157 (2nd ed. 2005). 14) See the decision of 8. May 2007 by the Environmental Dispute Coordination Commission, Hanrei Jihou, No. 1967, at 65.
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The Chinese Financial Conglomerate and Its Company Law Implications
Li Guo*
In the past decade, China took the general position of separating different financial businesses, and putting them under segregated supervision. Nonetheless, recent amendments to the Commercial Bank Law and Securities Law seemed to open the door for financial conglomerate operations. Two models have been considered in particular, namely the “universal bank” model, prevailing in Europe, and the “financial holding company” (FHC) model in the US. Through theoretic analysis and review of the latest development, this paper suggests that at China’s current stage neither the universal bank nor the FHC model should be embraced hastily without a critical eye. While the FHC seems a likely choice, it contains drawbacks and unfitness that merit discussion. Transforming State Owned Commercial Banks (SOCB) to public-held and truly independent entities shall certainly be a prerequisite and propellant to any meaningful structural reform, including the financial conglomerate issue.
I. Law Amendments in China
Before 1978, when China began its reform, banks in China had functioned like government bureaus, playing the role of allocating capital under the central-planned economy scheme.1) Thanks to the market liberation, they groped to learn how to be
* Associate Professor, Peking University Law School. The research benefits from Ministry of Education Research Project (07JZD0010), Peking University PAFIRC and Kiriyama Education Fund. Thanks are also owed to Prof. Cao Fengqi, Prof. Wu Zhipan, Prof. Bu Yuanshi and other colleagues. All errors remain with me. 1) Andrew Xuefeng Qian, Transforming China’s Traditional Banking System Under The New National
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independent and operate like “real banks.”2) To provide the foundation for the development of safe, liquid, and efficient commercial banks,3) China promulgated the Commercial Bank Law in 1995, in which Article 43 provided that:
Commercial banks shall not be permitted to engage in trust investments and stock operations and shall not be permitted to invest in real estate within the territory of the People’s Republic of China that is not for their own use, shall not be permitted to invest in non-banking financial institutions and enterprises within the territory of the People’s Republic of China. In the event that a commercial bank has already invested in non-banking financial institutions and enterprises prior to the implementation of this Law, the State Council shall stipulate implementation measures separately.4)
The principle of separation between banking and securities activities was also reiterated and stressed in the Securities Law enacted in China,5) which mandated that:
Securities business shall be engaged in and administered as a business separate from the banking business, trust business and insurance business. Securities companies shall be established separately from banks, trust companies and insurance companies. (Art. 6)
The flow of bank funds into the stock market against regulations is prohibited. When carrying out business on its own account, a securities company shall use its self-owned funds and funds raised according to law. (Art. 133)
Those articles were designed to curtail the influx of funds from commercial banks, in particular to deter the wholly SOCB from entering China’s then fledgling securities markets. Two stock exchanges (Shanghai and Shenzhen) of China opened successively in 1990 and 1991, formally symbolizing the comprehensive restoration of China’s securities business. Still in an early stage, China’s stock market was
Banking Laws, 25 GE. J. INT’L & COMP. L. 479, 481 (1996). 2) Id. at 488. 3) Commercial Bank Law, art 4. 4) The State Council or the Central Bank through authorization set a timetable for those banks to phase out of the securities business. 5) The law was passed on Dec. 29, 1998 and took effect on July 1, 1999.
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comparatively small and stock prices often volatile. Moreover, state-held corporations made up the majority of listed companies, a fact that explains many unique features of China’s securities market. Unlike that in Southeast Asia, the “hot money” that plagued China’s stock market in the early 1990s was not from foreign hedge funds, since China had yet to open its door to currency convertibility under capital accounts. Actually, loans by commercial banks were blamed as the major source of speculative funds. With economic development, household savings and deposits from enterprises had grown rapidly since 1980s. At the same time, external regulations restricted banks from making loans to their former main clients — state owned enterprises, while internal efforts to control risks made them reluctant to do so.6) Faced with deposits in excess of loans, commercial banks had a strong incentive to divert some funds into speculative outlets and reap more gains.7) Banks often transferred funds to their affiliated Trust and Investment Companies (TICs) that could directly engage in securities activities or re-lend capital to securities companies. By doing so, commercial banks were able to circumvent the then effective credit controls on the banks themselves. Commercial banks played a major role in China’s financial system. Among these banks, the four SOCBs dominated,8) which were described as the “the only financial institutions with muscle.”9) The use of funds from these banks for manipulative securities practices wreaked havoc on China’s emerging stock market, and had the potential to ruin the banks themselves and ultimately the whole economy. These misgivings motivated China to decide in 1995 to separate commercial banking from non-banking activities, either directly or through TICs under their purview. Things change as time passes, and so for policy and law. After Japan and the U.S. successively pulled down their Glass-Steagall walls, which had imposed a strict separation between commercial banking and securities activities, proposals poured in for China to reconsider its position by revising or repealing the related provisions. On December 27, 2003, the Standing Committee of China’s National People’s Congress
6) Solomon M. Karmel, Securities Markets And China’s International Economic Integration, 49 J. INT’L AFFAIRS 525, 526 (1996). 7) Deposit Figures Highlights Progress, S. CHINA MORNING POST, Sep. 14, 1995, at 6. 8) The four state-owned commercial banks are the Industrial and Commercial Bank of China (ICBC), the Agricultural Bank of China (ABC), the China Construction Bank (CCB), and the Bank of China (BOC). 9) Dede Nickerson, Business News, S. CHINA MORNING POST, May 15, 1995, at 4.
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passed thirty-seven amendments to the Commercial Bank Law,10) including an amendment to Article 43:
Commercial banks shall not be permitted to engage in trust investments and stock operations and shall not be permitted to invest in real estate within the territory of the People’s Republic of China that is not for their own use, shall not be permitted to invest in non-banking financial institutions and enterprises within the territory of the People’s Republic of China. The foregoing shall not apply where the State has rules stipulating otherwise. (Emphasis added.)
On October 27, 2005, the amendment to Securities Law brought similar changes to the related provisions:
Securities business shall be engaged in and administered as a business separate from the banking business£¨trust business and insurance business. Securities companies shall be established separately from banks, trust companies and insurance companies. The foregoing shall not apply where the State has rules stipulating otherwise. (Article 6, emphasis added.)
Channels for the flow of funds into the market shall be widened, and the flow of funds into the stock market in violation of regulations is prohibited. (Article 81)11)
Those changes suggest that if and when the State deems appropriate, it can promulgate rules or regulations, authorize commercial banks to cross the line into the securities business, and vice versa.12) Though it is not clear if the State in those amendments is the State Council or some other body, such as National People’s Congress or its Standing Committee, the path seems to be paved for banks and securities companies to evolve into financial conglomerates, either by self expansion or through affiliation. Two different models have been often discussed to achieve
10) All amendments took effect on Feb. 1, 2004. 11) Effective on Jan. 1, 2006. 12) LU Xue, Report: ZHOU Zhengqing Talks on the Forthcoming Revision of Securities Law, at http://www.fsi.com.cn/celeb300/visited303/303_0312/303_03123001.htm (last visited Mar. 16, 2007). Mr. ZHOU Zhengqing is the former chairman of China’s Securities Regulatory Commission (CSRC), and currently serves as the Associate Chairman, Fiscal & Financial Sub-Committee, Standing Committee of China’s National People’s Congress. He was also in charge of the then ongoing amendment to Securities Law.
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such transformation — the European universal bank model and the US financial holding company model (FHC).
II. The Universal Bank Model
Traditionally, in those European countries such as Germany, Italy, Switzerland and the Netherlands, commercial banks were licensed to participate in the securities services and a broad array of other financial services. Under the German model, universal banks “can perform a wide variety of financial services including taking deposits, making loans, underwriting securities issues, dealing in precious metals and collectible coins, and brokering real estate.”13) Acclaiming such banks as the “backbone of the rapid and successful German industrialization of the late nineteenth century”,14) William L. Horton, Jr. identified four specific characteristics of the German banking system that contributed to its successful development:15) (1) close ties to industry;16) (2) independent decision making; (3) competent central bank and active regulatory support; (4) specialization of functions. The EU Second Banking Directive (SBD) in 1989 provided that17) EU banks, securities firms and most foreign institutions participating in the “single market” may engage in a qualified “universal banking,” which allows a bank to transact commercial and investment banking functions within the same corporate entity.18) To create a “level playing field”, the SBD embraced three principles:19) (1) Mutual
13) William L. Horton, Jr., The Perils of Universal Banking in Central and Eastern Europe, 35 VA. J. INT’L L. 683, 684 (1995). 14) Id. at 685. 15) Id. at 692. 16) For example, German universal banks often gained membership on the board of directors of their industrial customers and assumed a large influence over the firm’s governance by exchanging capital for large equity stakes in their clients. 17) Formally speaking, the SBD has been superseded by Directive 2000/12/EC of the European Parliament and the Council, March 20, 2000, that codified the SBD along with other legislation relating to banking, e.g., the Capital Adequacy Directive. However, the substance of the SBD remains unchanged. 18) Joseph J. Norton & Christopher D. Olive, The Ongoing Process of International Bank Regulatory and Supervisory Convergence: A New Regulatory — Market “Partnership,” 16 ANN. REV. BANKING L. 227, 252 (1997). 19) George S. Zavvos, Banking Integration and 1992: Legal Issues and Policy Implications, 31 HARV. INT’L L. J. 463, 482 (1990).
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Recognition, which mandates that if a service can be provided legally under specific conditions in one EU country, it cannot be proscribed under similar conditions in another EU country;20) (2) a Single Banking License, which means that once a bank is licensed by the proper authorities in its home country to engage in certain activities, it is permitted to transact those same activities in any other Member State under the single banking license, without need to get permission in the host country;21) and (3) an agreed-upon list of banking activities. Article 18 (1) of the SBD provides that EU countries must allow the activities listed in the Annex to the Directive to be carried on within their territories, and those activities are covered by home state authorization.22) These specified activities include not only the traditional banking services of accepting deposits and lending, but also most of the services that investment banks traditionally provide such as trading and underwriting securities, portfolio management, corporate finance, and mergers and acquisitions services.23) The application of these principles resulted in competition for deregulation between the regulatory agencies of each member country, because one country’s bank may achieve a competitive advantage over another country’s bank by providing domestic customers with products that domestic banks are proscribed from offering, but that are permitted by the SBD.24) Thus, all other EU countries had a strong incentive to move towards the least restrictive German universal bank model,25) which actually resulted in a competitive de-regulation of the financial services in the EU financial services industry.26) The SBD illustrated some fundamental ideas. First, the EU believes that diversification, through participation in the securities industry, adds depth and liquidity to commercial banks.27) Second, the EU assumes that the securities activities of banks help them maintain overall earnings when the conventional banking business is suffering from decreased profits.28) Third, the EU views the more flexible
20) ALFRED LEWIS & GIOIA PESCETTO, EU AND US BANKING IN THE 1990S 12-13 (1996). 21) Id. 22) Id. 23) Norton & Olive, supra note 18, at 253. 24) LEWIS/PESCETTO, supra note 20, at 12. 25) Zavvos, supra note 19, at 483. 26) LEWIS & PESCETTO, supra note 20, at 13. 27) Zavvos, supra note 19, at 481. 28) Id.
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universal banks as a powerful means to compete in the global financial marketplace.29) Some academic research also showed that shares of universal banks embody substantial franchise value, which serves to inhibit extraordinary risk- taking.30) The SBD left supervision to the home countries. Then a 1992 Council Directive established the principle of consolidated supervision of the various entities within a banking group.31) In April 2001, the European Commission proposed a Directive to deal with financial conglomerates, which was then agreed upon by the Council in May 2002.32) Among other things, this Directive seeks to insure that the same capital is not used to support different regulated institutions, as well as to address supervisory concerns on intra-group transactions. At first glance, both Germany and China seem to have an underdeveloped securities market.33) Like the age-old question of whether the chicken or the egg came first, the relationship between uncompetitive securities markets and universal banks runs in such a self-reinforcing cycle,34) which supports the idea that China ought to adopt that model. In terms of scale and degree of concentration, China’s banking system also resembles the German banking system more closely than that of the US.35) Particularly in the above four characteristics pinpointed by William L. Horton, Jr., “ties to industry”36) and “specialization of functions” are characteristics of
29) Id. at 482. 30) Rebecca S. Demsetz, et al., Banks with Something to Lose: The Disciplinary Role of Franchise Value, 2 FED. RES. BANK OF N.Y. ECON POL’Y REV., Oct. 2, 1996, at 1-4. 31) 92/30/EEC (April 28, 1992). 32) John F. Mogg, Regulating Financial Services in Europe: A New Approach, 26 FORDHAM J. INT’L LAW 58 (2002). 33) Gerhard Wegen, Colloquium: Transnational Financial Services- Current Challenges for an Integrated Europe, 60 FORDHAM L. REV. 91, 104 (1992). This article states that in Germany, of 2,500 stock corporations, only 650 corporate entities were listed on any German stock exchange by May 1992; of these listed corporations, approximately thirty account for three fourths of all turnover on the German stock exchange. Comparatively, Germany has approximately 350,000 limited liability companies, 30,000 general partnerships and 130,000 limited partnerships. 34) Amy Chunyan Wu, PRC’s Commercial Banking System: Is Universal Banking a Better Model?, 37 COLUM. J. TRANSNAT’L L. 623, 634 (1999). 35) YANG HAIQUN, BANKING AND FINANCIAL CONTROL IN REFORMING PLANNED ECONOMIES 76 (1996). 36) Although legally Article 43 of Commercial Bank Law bans commercial banks from investing in enterprises within the PRC, historically, state specialized banks and state owned enterprises maintained an intertwined relationship. Even now, to some extent and in some form, such interconnections still remain.
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both countries. However, the dissimilarities in the other two characteristics cast serious doubt on the appropriateness of the universal bank model for China. Created as private entities, German banks are free from control by the government or their clients. While they maintain close ties with their customers, they are not known to shy away from asking tough questions when making loans. In addition, German bankers have the skills and experience to make efficient allocation decisions.37) Notwithstanding legislative provisions emphasizing the independence of banks,38) China’s banks lack the autonomy and capacity of their German counterparts. Moreover, the establishment of the universal bank system in Germany benefited from the presence of an active and competent central bank to ensure the system’s stability.39) Both People’s Bank of China as the central bank and China’s Banking Regulatory Commission as the current major banking regulator clearly still have a long way to go in this respect. Furthermore, concerns have also been raised that because the universal bank model features a close connection between banks and industries, it might drag China back to the old track of the planned economy, or to the bank-enterprise distress chain that obsessed Japan.
III. The Financial Holding Company Model
By comparison, the US style FHC approach seems more innovative and has gained more popularity during the past few years in China. Some comprehensive financial holding group companies have emerged in China: for instance, the Everbright Group, which had two banks, two securities firms, and one life insurance business in cooperation with a Canadian insurance company, officially announced its exploration as FHC in the summer of 2007. Other cases include the renowned China International Trust and Investment Corporation Group (CITIC Group), the Ping An Insurance Group derived from an insurance giant, etc. They are at the forefront of the development of US-styled FHCs in China and constitute a very influential interest group lobbying for legislative accommodation and administrative adjustments.
37) Horton, Jr., supra note 13, at 696. 38) For example, Commercial Bank Law, art. 4. 39) Horton, Jr., supra note 13, at 700.
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With the Glass-Steagall Act passed in 1933, banking, securities and insurance in the US were for decades carefully segregated with separate regulation.40) However, recent legislation has relaxed restrictions on affiliations among companies in these different fields and emphasized operation of different functions from separate companies within a group of related companies. The Gramm-Leach-Bliley Act (GLB Act, Financial Modernization Legislation) enacted on November 12, 1999 substantially overhauled the Glass-Steagall Act, and brought about some fundamental changes. First, the GLB Act expressly repealed Sections 20 and 32 of the Glass-Steagall Act, eliminating the restrictions on banks and securities firms from affiliating and sharing personnel. Second, it created a holding-company structure by amending the Bank Holding Company Act to include a provision applicable to financial holding companies. Under the GLB Act, companies engaged in commercial banking, investment banking and insurance activities may be owned and operated by a single FHC as long as the business conducted is “financial in nature or incidental to such financial activity, or complementary to a financial activity and does not pose a substantial risk ….” Third, purporting to streamline the FHC supervision, the GLB implicitly designated the FRB as the umbrella regulator of FHCs, with functionally
Qualified Financial Holding “Financial in nature” New § 4(k), BHCA Companies (FHCs)
Securities Affiliate “Financial in Bank nature (with restriction)” § 121-122 GLB Operating Financial Subsidiary Subsidiary Insurance Affiliate
Figure 1. The Gramm-Leach-Bliley Regime.
40) The Glass-Steagall Act was actually the popular name for §§16, 20, 21 & 32 in the Bank Act of 1933.
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regulatory authority over the commercial banks, investment banks, and insurance companies in the structure delegated to the appropriate regulators. As a whole, the US stock market reacted positively to the passage of the GLB Act. When President Clinton announced the Act, both commercial and investment bank stocks rose.41) Studies also showed that the market responded most favorably to the shares of BHCs that had already engaged in some securities businesses (those with Section 20 subsidiaries allowing limited investment banking activities).42) On the other hand, doubts remain relating to the soundness of such changes. For instance, was the repeal of Glass-Steagall appropriate? Some critics in the US remain suspicious that safeguards designed in the GLB are not sufficient to eliminate hazards such as conflicts of interest, and even less safeguards are available to resolve emerging problems such as undue encroachment upon consumer privacy.43) In their view, the “subtle hazards” that justified the Glass-Steagall wall are still legitimate concerns and are not being handled appropriately by the GLB.44) As once expressed by the US Supreme Court in Investment Company Institute v. Camp,45) such “subtle hazards” that occur when a commercial bank enters into the business of investment banking directly or indirectly through an affiliate include: (1) an adverse effect on public confidence if the bank or affiliate performs poorly because of the association in the mind of the public; (2) the risk of unsound loans to the ailing affiliate in an effort to raise public confidence; (3) the risk that the bank may provide credit more freely to companies in which the affiliate has a vested interest; (4) the risk that the bank may act more as a salesman than as an unbiased source of credit; (5) the risk that customer goodwill will diminish if losses are incurred because of the affiliate; (6) the loss of reputation for prudence and restraint because of investment banking needs; (7) the temptation to make loans merely to facilitate the purchase of more securities; (8) conflicts of interest between the need to offer impartial advice as a
41) Cara Lown, et al., The Changing Landscape of the Financial Service Industry: What Lies Ahead?, 6 FED. RES. BANK OF N.Y. ECO. POL’Y REV., Oct. 2000, at 39-55. 42) YU Li, On the Wealth and Risk Effects of the Glass-Steagall Overhaul: Evidence from the Stock Market, New York University (2001) (unpublished manuscript, on file with author). 43) House Commerce Wrangle with Privacy in Approving Financial Services Measure, 72 BANKING POL’Y REPORT (1999). 44) Joan M. LeGraw & Stacey L. Davidson, Glass-Steagall and the “Subtle Hazards” of Judicial Activism, 24 NEW ENG. L. REV. 225, 225-28 (1989). 45) 401 U. S. 617 (1971).
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commercial bank and the salesman’s interest as an investment bank.46) In 2003, the US Congress considered whether to cut back on the GLB due to concerns about conflicts of interest between the banking and securities businesses of FHCs, for example, the concern that banks were tying loans to underwriting. Similar “mixed bundling” abuses included that the price of lending was dependent on the client also taking another service, like M&A advice. Nevertheless, some opined that such worries were unfounded because such tying would have already been prohibited by the anti-tying provision of the BHCA (§ 106), at least where a bank “coerces” a customer to buy the tied product.47) Moreover, such coercion could not exist unless the bank had more leverage in the lending market, which is unlikely in the current situation. As of April 2003, there were 639 FHCs formed in the US, including about twenty by foreign banking organizations. Only a small number of large FHCs have purchased securities firms since the enactment of the GLB. Instead, FHCs have mainly been used to free holding companies from restrictions placed on existing securities affiliates, such as limits on underwriting and dealing twenty-five percent of the securities affiliate’s revenue. Similarly, no FHC has acquired a large insurance company since the Citi-Travellers, which was prior to the enactment of the GLB. Moving back to the focus of this paper, should and could China continue to follow the US’ suit and readily embrace the FHC model? Further concerns deserve attention. First, some inherent problems of FHCs have to be carefully dealt with, for instance, those relating to capital adequacy, corporate governance, and risk control: (1) Capital adequacy: A poorly regulated holding company might finance the capital of its subsidiaries through the excessive issuance of debt instruments, or a subsidiary might use its assets to capitalize its affiliate, which would lead to double or even multiple accounting of limited capital within the FHC. (2) Corporate governance: Diversified businesses present more challenges to the internal control of improper interest transfers, and the endogenetic systematic risks of the financial industry make the problem even subtler. (3) Risk control: Based on US data from 1971 to 1987, a test of hypothetical mergers showed that mergers between BHCs and insurance companies could have reduced risk, while mergers between BHCs and securities
46) Id. at 630-37. 47) FEDERAL RESERVE BOARD, PROPOSED INTERPRETATION OF SECTION 106 OF THE BANK HOLDING COMPANY ACT, (Aug. 25, 2003).
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firms could have increased risk.48) The problem of conflict of interest deserves particular attention. In 2001 and 2002, even Citigroup and J.P. Morgan were troubled by US corporate scandals involving conflicts of interest, and both lost over a third of their market value in a short period. In the meantime, the issue of transparency eventually forced a breakup of GE Capital’s organizational structure. Preventing conflicts of interest inherent within the FHC proves expensive, since compliance systems are costly to maintain, and various types of separation mechanisms between business units can have high opportunity costs, because they give rise to inefficient uses of information and other resources within the organization. Moreover, the contagious character of loss of reputation can be quite severe.49) It demands enormous effort to strike a subtle balance and accommodate various interests properly. For a country like China lacking prior experience and preparation in this field, a long period of trial and error might well be necessary. Second, the vast differences between the US and China should not be underestimated when deciding what approach to take. As a whole, the GLB of 1999 was intended to level the playing field and enhance competition in the financial service industry50) by affording disadvantaged commercial banks a means of competing with powerful securities firms. In China, the situation is quite different. There is no Goldman Sachs, Merrill Lynch, Morgan Stanley, or similar sophisticated investment players. Before the 1995 separation, China’s largest securities firms were supported by state-owned commercial banks.51) Even now, the scale tips heavily in favor of commercial banks. In China, to the extent that they are subsidized or supported informally by the government, SOCBs have a strong incentive to make speculative bets because any gains will be fully recouped, whereas losses will be partially shared with the government.52) Conceivably, such a strong interest will challenge the accountability
48) John Boyd, et al., Bank Holding Company Mergers with Non-bank Financial Firms: Effects on the Risk of Failure, 17 J. FIN. ECO. 43-63 (1993). 49) INGO WALTER, STRATEGIES IN FINANCIAL SERVICES, THE SHAREHOLDERS, AND THE SYSTEM: IS BIGGER AND BROADER BETTER? BROOKING-WHARTON PAPERS ON FINANCIAL SERVICES 21 (Brookings Institution Press 2003). 50) See Preamble of this Act. 51) Nickerson, supra note 9. 52) However, legally speaking, Commercial Banking Law Art. 4 specially made banks responsible for their profits and losses.
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of the FHC, which has never been stringently checked in this way in the US. The related Too-Big-To-Fail (TBTF) and moral hazard problem exist in the US,53) and many other countries.54) However, the feature of state ownership in China with respect to the four SOCBs and major securities firms would render the TBTF problem even worse. Among the four SOCBs, China Construction Bank (CCB) became a joint stock company in 2004 and was listed on the Hong Kong Stock Exchange in 2005. The year of 2006 first witnessed the triumph of the Bank of China (BOC) in its oversubscribed public offer and listing consecutively in HK and Shanghai. Subsequently, Industrial and Commercial Bank of China (ICBC) set the new world record for IPO capitalization. With ease, recapitalized and rejuvenated commercial banks paled by comparison those troubled securities firms. Eliminating the separation completely and immediately in China may have the potentially undesirable effect of decreasing competition, rather than the opposite. Furthermore, I believe that for those banks, there are changes equally or even more crucial and urgent than simply transfiguring into an FHC or re-expanding into the capital market. First, in tandem with the divestiture by the State, these banks should undertake a thorough reform and become publicly held corporations with sound governance structures. Second, they should keep improving their operating efficiencies and cutting down non-performing loans. After all, in most cases how things are done is more important than what things are done. Studies suggest that the way banks are run is of more weight than their size or the type of business they pursue.55) At the same time, empirical research has failed to find significant cost economies of scope in financial industries.56) Third, potential regulatory restructuring presents another pragmatic problem in China. Back in 1992, as the central bank, People’s Bank of China was the sole regulator in the financial area. In October 1992 and November 1998, China
53) Maureen O’Hara & Wayne Shaw, Deposit Insurance and Wealth Effects: The Value of Being “Too Big to Fail”, JOURNAL OF FINANCE Dec. 1990, at 1587. 54) See, e.g., US GENERAL ACCOUNTING OFFICE, DEPOSIT INSURANCE: OVERVIEW OF SIX FOREIGN SYSTEMS, GAO/NSIAD-91-104 (1991). 55) E.g., Allan N. Berger, et al., The Efficiency of Financial Institutions: A Review and Preview of Research Past, Present and Future, 17 J. BANKING & FIN. 221-49 (1993). 56) E.g., Chris Stefanadis, Specialist Securities Firms in the Gramm-Leach-Bliley Era, Federal Reserve Bank of New York (2002) (unpublished manuscript, on file with author).
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Securities Regulatory Commission (CSRC) and China Insurance Regulatory Commission (CIRC) were established successively, and have been in charge of supervising the securities and insurance industries, respectively. The latest structural adjustment occurred on April 2003, when the newly formed China Banking Regulatory Commission (CBRC) officially started operations. The CBRC is authorized to supervise and regulate banks, assets management companies, trust and investment companies and other deposit-taking institutions, with the aim of safeguarding the legitimate and sound functioning of the banking industry. Now People’s Bank of China’s main mandate is to formulate and implement monetary policy. Obviously, the full range of businesses engaged in by the FHC calls for a higher degree of cooperation and coordination among banking, securities, and insurance regulators. The current form of linkage between China’s regulators is a joint forum, which can barely meet this requirement. With the development of FHCs, who should become the main, or umbrella, regulator (if taking FRB model)? Or should they undergo another round of merger and functional re-streamlining (if taking FSA model)?57) Resolving regulatory conflicts might be knottier than it first appears, when activities and transactions begin to straddle formerly distinct jurisdictions. On the one hand, from a historical and philosophical viewpoint, a centralized approach seems better suited for countries like China and Japan. Their experience is markedly different from the US’s strange and stubborn sense of federalism and checks and balances, which result in certain powers being intentionally divided and kept to the states or separate agencies. But, will an FSA-styled bureau in China repeat the failure of the PBOC in the early 1990s to oversee the whole financial market, which has increased greatly in volume and become more complex in nature? Needless to say, a cost benefit analysis will be taken by the decision maker, not only from an economic perspective, but also in political and personnel terms. Chinese traditional wisdom states, “a long time of integration leads to separation, whereas a long time of separation leads to integration.”58) For many people, a
57) In May 1997, the United Kingdom announced a total restructuring plan of its regulatory regime for financial services, including combining banking supervision and securities regulation under a new agency called the Financial Supervisory Authority (FSA), which was implemented in 1998. Japan, Taiwan and others took similar action. 58) “He2 Jiu3 Bi4 Fen1, Fen1 Jiu3 Bi4 He2”.
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uniform FSA suggests an immediate reverse of the just completed specialization process. As in the US and other foreign countries, redistributions of interest and power shifts will raise new debates and struggles, making a consensus difficult to reach in the near future. On the 19th and 20th of January 2007, a group of Chinese top level governmental officials gathered in Beijing and held the Third National Financial Work Conference chaired by Premier Wen. This Conference decided to postpone any plan to merge the currently separate financial regulatory bodies into one single agency. Rather, People’s Bank of China and the three regulatory commissions would continue to operate separately, and work on improving their effectiveness and professional capability, as well as enhancing collaboration therewith. Fourthly, two categories of latest development increased concerns regarding the FHC and its hybrid. For governmental experiments, China’s central government set up the SAFE Investments — Huijin through foreign exchange reserve injection, which modeled Temasek or GIC in Singapore and gradually controlled commercial banks such as CCB, BOC and ICBC, as well as some major securities firms, and possibly China Development Bank in future. Plan has it to merge Huijin into and make it as the subsidiary of the newly established China Investment Co. Ltd. At local levels, similar or even more aggressive movements took place. For instance, Yufu Asset Management Company was established in Chongqing, the largest municipality of China. Yufu started to buy bad assets from local banks and sell them back to local businesses at a discount. Backed by loans from China Development Bank, Yufu has dramatically expanded its business, reorganizing struggling SOEs and restructuring local financial institutions. In 2006, the company has also begun to make strategic investments on behalf of the Chongqing government.59) Some critics believe that such action works to blur the line that should be drawn between financial and industrial sectors, and represent a possible retrogradation towards the all-around and inefficient governmental entity. Private companies that probed the FHC style too with the desire to maximize their interest, often fell into the abyss of disgrace and crime, among which the most notorious example is the Delong Group. Initially incorporated in Xinjiang (Sinkiang) Vygur Autonomous Region and then headquartered in Shanghai, Delong’s story
59) LI Zhigang, et al., Report: Chongqing Builds Financial Holding Firm, CAIJING MAGAZINE, Apr. 3, 2006, at 73-81.
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started with three siblings beginning an ambitious grass-root entrepreneurial business that engaged in maverick business expansion and disastrous stock speculations. Market manipulation and loss created a desperate desire to control and exploit financial institutions for its subsidiaries’ parasitic survival. Therefore, Delong strived to control TICs, securities firms and local banks through acquisition, and eventually became the de-facto private financial conglomerate.60) Subsequent investigation discovered that Delong proved to be a huge financial black hole and had accumulated more than two billion US dollars in un-payable losses. When things went sour and its controlled stock prices nose-dived in 2004, twenty billion RMB in market value evaporated within ten days. The head of Delong — Mr. TANG Wanxin, stood trial on April 29, 2006 on charges of illegal public deposit taking and manipulating stock prices. He was convicted and sentenced to an eight year imprisonment and a 400,000 RMB personal criminal fine. As for the Delong Group, a 1.3 billion US dollars company was imposed, which was deemed as most likely uncollectable by analysts. The Delong incident demonstrated what devastation can occur when the FHC becomes off the track, as well as the failure of the current supervision of such companies.
IV. Japan: A Parallel Explorer
The Japanese banking system is highly specialized and segregated, with each type of banking institution specializing in particular market or product segments.61) For about half of a century, Japan was known as the only other major developed country that followed the US model for regulatory separation.62) Upon the insistence of the US during its occupation of Japan following the second world war, Japan enacted Article 65 of the Japanese Securities and Exchange Law which, imitating the Glass- Steagall Act, imposed a strict separation between commercial banking and securities activities.63)
60) LING Huawei, et al., Report: Finale in Sight for Delong Sage, CAIJING MAGAZINE, Jan. 9, 2006, at 38-63. 61) Norton & Olive, supra note 18, at 279. 62) Peter J. Ferrara, The Regulatory Separation of Banking from Securities and Commerce in the Modern Financial Marketplace, 33 ARIZ. L. REV. 583, 615 (1991). 63) Some, however, opined that the Keiretso in Japan actually bypassed such segregation through cross holding
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Since the 1980s, Japanese banks have been seeking entry into the securities business. They lobbied for ending Article 65 barriers, whereas securities firms were resistant.64) During the 1990s, the Japanese government took steps to make a change.65) The Financial System Reform Law of 1993 abolished in principle the firewall between banks and securities firms.66) Securities firms were permitted to offer some products with features like bank accounts, such as automatic deposits, demand deposits, and automatic payments. Nevertheless, due to strenuous Ministry of Finance (MOF) licensing procedures, the entry of banks into the securities business remained slow and heavily controlled.67) In March 1998, financial firms were allowed to create holding companies for “one-stop shopping” financial conglomerates (i.e., companies that included banking, brokerage and insurance functions under one roof).68) In 1999, there was a further reduction of the barriers preventing banks, trust banks and securities firms from entering each other’s markets.69) Now Japanese banks are permitted to engage in a full range of securities and insurance activities through subsidiaries. Japanese holding companies have been permitted, but only a few banking organizations have established them. The activities that banks and non-bank holding companies can engage in are the same.70) At the regulatory level, the new Financial Service Agency (FSA) was created in 2001. The FSA amalgamated its two transitional predecessors, the Financial Supervisory Agency and the Commission for Financial Reconstruction, which controlled government funds injected into the banks. Now the FSA licenses, inspects
between each other. 64) Richard Katz, Japanese Phoenix: The Long Road to Economic Revival, M.E. SHARPE, at 212 (2003). 65) J. Barth, et al., Commercial Banking Structure, Regulation and Performance: An International Comparison, Office of the Comptroller of the Currency Economics Working Paper (1997) (unpublished manuscript, on file with author). 66) Sarah A. Wagman, Laws Separating Commercial Banking and Securities Activities as Impediment to Free Trade in Financial Services: A Comparative Study of Competitiveness in the International Market for Financial Services, 15 MICH. J. INT’L. L. 999, 1013 (1994). 67) Katz, supra note 64, at 213. 68) Id., at 214. 69) Id. 70) S. Kawai & K. Muraoka, Banking Regulation in Japan and the Treatment of Foreign Banks, in REGULATION OF FOREIGN BANKS: UNITED STATES AND INTERNATIONAL, at Chapter 18 (Michael Gruson & Ralph Reisner eds, 4th. ed. 2003).
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and supervises banks, securities firms, and insurance companies, as well as managing and resolving financial crises. MOF continues to make policy and draft financial legislation.
V. Conclusion
The deregulation of the financial industry is a global trend, particularly because it satisfies clients’ need for easy access to comprehensive, value-added and prompt financial services. Hence changes to China’s financial regime seem inevitable in the future. Whatever the conglomerate model adopted, the unified and highly centralized control of the financial system by the State or its agents must change. China has paid too much for it. In the planned economy era and for many years thereafter, SOEs made up the majority of clients of the state-owned specialized banks, and their successors, the SOCBs. The nature of the loan was of policy, not of business. The primary character of such policy-natured loans was that the bank did not give much consideration to the risk, efficiency, and negotiability of the loan program. With respect to loans to the SOEs, what the SOCBs mainly considered was the execution of the national macro-economic policy, the purpose and the effect of national macro- control. Therefore, many loans were deemed as part of the government’s administrative management rather than a business operation. In more and more situations, the SOEs could not repay the principal and interests accrued due to various reasons. Thus, the huge Non-Performing Loans of the SOCBs were accumulated up. I hope that through incorporation and listing, the former SOCBs will begin to refuse to lend for reasons other than pure credit evaluation. Moreover, listed companies and securities firms should become owned by diverse investors and approach the capital market on an objective market basis. Without breaking the present monopoly and curing the current system dysfunctions, China’s financial system would be worsened by the immediate bet on either the FHC or the universal bank model. First, short term profits might reduce the incentives and retard the process of fundamental restructuring. Second, conflicts of interest would become uncontrollable because they are inherent and self-intensified. Third, if the banks bring their traditional mind-set into the capital markets, it is not hard to imagine how the capital markets will perform. In some sense, the form is merely a secondary
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issue. In short, China is unlikely to adopt the universal bank model. Promising as it is, the FHC model presents legitimate doubts as well. A cautious and evolutionary approach to change should therefore be expected. Through conglomerate experiments such as Everbright, CITIC, and Huijin, the FHC model has to adapt and perfect itself gradually to the specific circumstances of China. The Chinese should overcome their universal anxiety for change, namely we have to do something, although it is far from clear what should be done and how to do it. Furthermore, a real restructuring of the SOCBs seems more meaningful and crucial. After all, bigger is not necessarily better and old wine in a new bottle doesn’t taste different.
KEY WORDS: Financial Conglomerate, Legal Regulation, Supervision Restructuring
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Environmental Public Interest Litigation: When will it Flourish in China?
Jin Wang*
I. Environmental Public Interest Litigation: Current Situation in China
Research on the issues of public interest litigation started during the 1990s in China. Before that, as Environmental Law developed in China, some scholars had introduced citizen suits, which are popular in American environmental law, in their translation book. For example, a large portion of Environmental Law (1986) introduced cases of American citizen suits, the issues of standing, jurisdiction of the disputes, standards of judicial review and methods of remedies etc. However, since there were no traces of western law tradition in Chinese legal history, the legislations on the civil and administrative litigation were still under construction and the situation of the national legal system poor; consequently research on environmental public interest litigation in western countries was not appreciated in legal profession. Thus litigation based on public interest is still viewed as a Utopian doctrine only in text books that teach environmental law, especially in the compositions that introduce American law execution. Since the 1990s, as the issue of Administrative Procedural Law (April, 1989) and emendation of the Amendment to Civil Procedural Law (April, 1991), fundamental legal systems in China have been consummated. Then, the Administrative Reconsideration Law (April, 1999) was enacted in order to prevent and redress illegal or inappropriate concrete administrative action, to protect the citizens,
* Professor of Law, Peking University Law School.
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artificial person and other organizations’ rights; the Legislation Law (March, 2000) was enacted in order to regulate legislation activities (including administrative regulations enacted by the State Council and its departments). Since the 1990s, local governments made illegal programming, authorized illegitimate sanctions, and inadequately performed legal supervision and responsibilities, in order to pursue huge growth in GDP. Such actions resulted in various environmental damages. Subsequently, the rights of citizens were seriously infringed and administrative cases against illegal approval and nonfeasance quickly increased. In the Economic Law area, jurisprudential discussions on public interest and economic public interest litigation (consumer right protection, labor right protection, anti-monopoly litigation and anti-unfair competition) emerged. Besides, Jurisprudence scholars often discuss questions about public interest. Chinese scholars’ opinions on public interest litigation differ, due to the vagueness of the concept. For example, there are: theory of Administrative Litigation, theory of Civil Litigation, theory of Civil or Administrative Public Prosecution, and theory of Criminal Litigation on the recognition of the nature of public interest litigation. As most environmental litigations are limited to civil damage litigation area, legal profession, especially procedural law, paid little attention to Environmental Law research and the discussion on public interest litigation is limited to Environmental Law area.
II. Analyzing the Existing Problems of Environmental Public Interest Litigation from Several Typical Environmental Public Interest Cases
1. Three case studies about lawsuit on Environmental Public Interest
At the end of 2000, a few citizens in Qingdao City filed the first administrative lawsuit which had the characters of environmental public interest litigation in China. They acclaimed that the Programming Bureau in Qingdao unjustly authorized the construction of residential communities in urban music square, and demolished the view seen from the square and the beach. In October, 2001, two citizens in Nanjing City brought forward an administrative
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litigation which had the characters of environmental public interest litigation. They claimed that the Programming Bureau in Nanjing authorized the construction of a sightseeing stand in Zijin Mountain, a famous place of interest, and demolished the natural landscape. In the former case, the court decided that the plaintiff had no standing. In the latter case, the court decided that it is not under the jurisdiction of the court since it did not have significant impact on its jurisdictional area. Although the judgments of the courts are not satisfying, more and more people gradually realized the intimate correlation between environmental pollution, national damage, and poor supervision, improper programming and illegal sanctions. In consequence, there is more and more legal research in progress centering on the issue of environmental public interest litigation. The State Council clearly stated that the social organizations should play a part in the movement. The Council encouraged impeachment and reporting of various illegal behaviors against the environment, and promoted environmental public interest litigation in Decisions on the Implementation of Scientific Outlook on Development and Promotion of Environmental Protection issued on December 3rd, 2005. In Dec. 2005, based on the serious water pollution in Songhuajiang River caused by the explosion in the benzene factory of China Petroleum & Chemical Corporation, Jilin Branch, three law professors including myself and three graduate students at Peking University Law School filed an environmental public interest civil litigation against PetroChina Company Limited etc in the name of Songhuajiang River, sturgeons, and the Sun Island, to the High Court of Heilongjiang Province. The plaintiff requested the defendant to pay the damages of RMB 10 billion in order to set up a pollution abatement fund for Songhuajiang River, which would be used to recover the biological balance in Songhuajiang River, protect the living right of sturgeons, right to environmental cleanliness of Songhuajiang River and Sun Island and the right of landscape appreciation and wonderful imagination for the national persons including the plaintiffs. However, the court declined to accept the case and the reason was that “the water pollution in Songhuajiang River has no connection with the plaintiffs and it was up to the State Council to make any decision.” In fact, Barriers on public interest litigation practice exist in other Civil Law tradition countries. For example, in Japan, which have a good environmental litigation system, administrative litigation may include some environmental public interest litigations, many environmental public interest litigation, which is different from ordinary public interest litigation in nature and content, cannot be put into
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practice because of theoretical barriers. The barriers are formed by juristic theory and institutional arrangement of public interest litigation, which is different from China. In China, as the need for social stabilization grows, there are limitations in the existing litigation regulations about public interest litigation and group suit. Recently, as the socialistic economy develops and social conflict spread due to insufficient supervision, public interest litigation is appearing in the form of ordinary administrative litigation or civil suits. Environmental public interest litigation is rare.
2. The Systematic and Legal Barriers of Implementing Environmental Public Interest Litigation System in China
A. The barriers caused by the political system and systematic imperfection
China implements a socialist system, which is led by the China Communist Party. The construction system of China Communist Party and the agency system of national power are almost parallel. Theoretically speaking, the advantage of such a system is to ensure timely implementation of the Party’s policy in legislation, judicature and administration. The disadvantage is that the Party’s good wills and objectives are hard to realize in the areas which have been arranged by the legal system. However, in the areas in that are yet to be provided by the legal system, the implementation of the policies made by the Communist Party depends on the individual or group wisdom of the specific official (specifically referring to the people in charge of the legislative, judicial and administrative agencies). Over the past twenty years, the performance of the local governments and officials have been mainly decided according to the GDP increase and social stability under the instruction of the development policy, which considers the economical construction as a central part of growth. Although the political goals accord with the general will of the public, the conflicts in the implementation of policies always have different results, due to different understandings of individuals or groups. For example, a large-scale state-owned enterprise can both be an important source of tax locally or nationally but at the same time it can also be a main cause of pollution, engendering serious environmental pollution and ecological destruction in the local area. Most local governments’ major officials (they are always the core members of the local party organizations, and thus the party’s political power and administrative power are compounded) put up with such behaviors, in order to
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pursue GPA’s increase. This has resulted in loss of local environmental interest and damage to the people’s health and property. The personnel and finance of local environmental protection agencies and judicial agencies are dominated by local party agencies, which is the main reason why legal responsibilities of the environmental protection agencies and judicial agencies are interfered. Consequently, it is the attitude and behavior of the local party officials that lead to lack of supervision and insignificant judicial protection. Generally, the policy of the local government portrays the will of some officials and plays the role of a mouthpiece for related interest groups. In such system, incomplete legal system has been the “Jingu Stick” held by local officials: when “rule by law” is needed, they evaded it with an unsubstantial excuse such as consideration of “the situation of China,” even though such considerations are not necessary in implementing the law. These flaws of the Chinese political system and mechanisms directly indicate that there is no practical remedy available when there is ubiquitous disinterest among the public concerning environmental public interest. For example, when the public complain to the government or the supervision agency about environmental pollution and damage, in words, the government and its administrative agency in charge usually agree to resolve the issue. However, due to the reasons mentioned above, the issue will most likely not be resolved. Then the public may turn to litigation, but the court may decline to accept the case for various reasons. Sometimes it accepts the case, but it won’t hear it, or it won’t make a decision after the hearing, or the decision won’t be implemented. If the unsatisfied public holds a group protest, the local government will penalize them in the name of disturbing social order or destroying social stability.
B. The barriers caused by the legislative system
The legislation of public interest litigation has long been advocated by legal scholars and the central government in various documents. The system of environmental public interest litigation is a double-edged sword to the existing political system. It will cause the existing decision-making system to waver and raise costs to the administrative and judicial agencies while protecting citizens’ basic rights and environmental interest. So improving the legislation of the litigation system regarding public interest is a difficult task. The concerns of the legislators are as follows: first, since the establishment of
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public interest litigation system will breach the restrictions of standing, it may cause a boom of complaints; second, there is no persuasive opinion on the definition and scope of public interest; third, due to the limitation of the research on the issues of litigation interest, the interest of public interest litigation is not clear; fourth, there is not enough research on the practical difficulties and problems of public interest litigation in judicial practice, so we can not make thorough systematic arrangements and guarantees; fifth, the status and function of the NGOs are limited in China; sixth, the construction of rule of law in China is still in a very low level and thus the establishment of public interest litigation system before the establishment of many fundamental national laws may lead to legislative and practical confusion. Also, the opinions of the national judicial agencies (specifically referring to the Supreme Court and the Supreme Procuratorate) differ. The Supreme Court is concerned that the establishment of the public interest litigation system will increase the number of cases and raise work pressure to levels of people’s courts. Their position is based on a conservative outlook on the system. On the other hand, the Supreme Procuratorate advocates the establishment of the public interest litigation system. Moreover, it advises that we should strengthen the national public prosecution system, which is represented by the procuratorate. Since the matter of legislation relate to different social interests, the laws in China will result in consequences such as coming in conflict with the interests of legislators sometimes. Some consequences result from the balance of different departments’ interest, but some from justice yielding to unrighteousness. Take the legislations of environmental protection for example. Firstly, there are a lot of legal systems in confliction with legal principles among the legal provisions of environmental protection. For instance, the Environmental Protection Law (1989) provides that if the enterprises pay the fee, it is not illegal to dump the waste over the standards; the Environmental Impact Assessment Law (2002) provides that it is not illegal if the company takes the environmental impact assessment after the construction project is complete. Secondly, although the laws assign responsibilities to the government, they don’t provide legal liability that must be activated when the government doesn’t perform these responsibilities. Consequently, the laws are not complied by the local government. For example, the Environmental Protection Law provides that the local governments are responsible for the environmental quality in their jurisdictional area. Yet, during the past twenty years, the governments have not carried out their
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responsibilities. Neither have they acknowledged their responsibility for environmental deterioration; the Environmental Impact Assessment Law provides that the programming made by the government and its administrative departments in charge should be assessed. However, the programming made by the government and its administrative departments have rarely been assessed. So it is not strange that the first-year objective of consumption and emission reduction in the Eleventh Five-Year Plan is impossible to achieve. Local governments cooperate frequently with the industry and when interests conflict, they often stand up for the benefit of the industry instead of the public. Moreover, the government or its administrative departments usually object to admitting the liabilities of government officials in the legislative Procedure. As a result, illegal actions or nonfeasance by the administrative are often neglected. Thirdly, regarding the procedure of making special environmental protection laws, the common practice is to entitle the administrative departments in charge of the State Council to draft the law. The problem is that the administrative agencies focus on strengthening the implementation of administrative laws, instead of the methods and measures of resolving environment disputes by judicial methods. Consequently, besides the outbreak of the provisions of traditional law, it is already difficult to provide for the articles of citizen suit or environmental public interest litigation under the legislative procedure controlled by the administrative department.
C. barriers caused by the judicial system
On account of the existing Administrative Procedural Law and Civil Procedural Law, since both present such strict restrictions on the issue of standing, there is no legal basis for environmental public interest litigation in China at the present. For example, Article 41 of Administrative Procedural Law exhibits the conditions of raising a lawsuit: (a) the plaintiff should be the citizens, legal persons or other organizations who consider that the concrete administrative action violates their legal right and interest; (b) there is a specific defendant; (c) there is concrete claim and fact; (d) it’s within the scope of accepting cases of the people’s court and under the jurisdiction of the court which accepted the case. However, citizens can raise administrative environmental public interest litigation by third-party litigation or revocation litigation in administrative litigation when implementing the judicial interpretation of the Administrative Litigation Law.
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According to Article 12 of The Interpretation of Several Issues on the Implementa- tion of Administrative Procedural Law of P.R. China issued by the Supreme Court in November, 1999, the citizens, legal persons or other organizations that have legal interest on the concrete administrative action and are unsatisfied with the action could file administrative litigation. Item 4 of Article 13 provides that the citizens, legal persons or other organizations that have legal interest on the dismissal or modification of a concrete administrative action could file administrative litigation according to the law. Article 108 of the Civil Procedural Law provides that the conditions of raising a lawsuit includes: (a) the plaintiff should be the citizen, legal person and other organizations who have direct interest on the case; (b) there is a specific defendant; (c) there are concrete claim, fact and causes; (d) it’s within the scope of accepting cases of the people’s court and under the jurisdiction of the court which accepted the case. Therefore, even when one is attempting to raise a civil environmental public interest litigation about damage on environmental interest, the conditions do not accord with the regulations specified in the Civil Procedural Law. Although the conditions of raising a lawsuit are strictly limited by the Administrative Procedural Law and the Civil Procedural Law in China, some plaintiffs who satisfy the conditions can raise environmental administrative or civil litigation under strict limitations. Since the end of the 20th century, social conflicts became prominent along the process of development in China, resulting in an increase of major cases appealed to the court. In order to protect social stability and reduce adverse social impacts from several significant cases, the Supreme Court issued the Notice on the Issue of the People’s Court Accepting Joint Litigation. The notice interprets the provisions on joint litigation and jurisdiction in Civil Procedural Law in the following two aspects: first of all, the court can accept the cases separately if one party or both parties are composed by many people; and second, the cases which have significant impact in the jurisdictional area of the high court should be accepted by the intermediate court. Actually, the notice issued by the Supreme Court sets two restrictions on environmental litigation that has the nature of a joint litigation: firstly, it advises the local courts to separate the joint civil litigation raised by the victims of the environmental pollution damage caused by reasons that are alike, which not only increases the economical burden of the plaintiff, but also breaks the legislative intention of joint litigation provided in Civil Procedural Law; secondly, considering
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that the second trial is also the final trial in Chinese litigation law, the provisions in the notice actually appoints the intermediate court to accept only the cases which might be accepted by the high court in the first trial and thus it eliminates the possibility of other cases being appealed to the Supreme Court. Directed by this notice, environmental pollution joint litigations are “separately accepted”. 1721 Famers of Pingnan County, Fujian Province v. Fujian Province Rongping Chemical Limited Company, which was chosen as one of “2005 China Ten Most Influential Litigations,” is a representative case. The case was a joint litigation, but was separated to several cases by the court. Besides, some local courts at the provincial level have some inner regulations to limit the “new-type, sensitive and puzzling” or “broad influential, strongly sensitive and socially concerned.” For example, The Opinions on the Acceptance of New-type, Sensitive, puzzling Cases at the High People’s Court in Shandong Province (trial implementation) provides “the acceptance of new-type, sensitive and puzzling cases should comply with the principles of considerable acceptance, timely establishment of the case, cooperation among different levels of courts, and make overall plans by taking all factors into consideration.” “The acceptance of the new-type, sensitive and puzzling cases should be decided by taking a thorough view of the whole situation. The court should be sensitive and have the wisdom to look ahead, in order to avoid the judicial difficulty caused by the improper acceptance of the cases.” “The new- type, sensitive and puzzling cases should be considered separately in the aspects of legal background, social background and adaptability of the court system.” Another example is Article 41 of The Provisions on Strengthening the Administration of Trial Time Limit by the High Court in Beijing (trial implementation), which provides: “cases which have significant impact around the city, the country or the world, and politically sensitive cases and group dispute cases should be reported to the high court.” The inner provisions of the court actually restricted or eliminated the legal rights of the parties to file cases. In conclusion, the judicial interpretations and inner provisions are also capable of seriously breaching the laws or fundamental legal principles. Under the context of the judicial interpretations mentioned above, it is not unexpected that many environmental public interest cases are denied by the courts. Take the Songhuajiang River Case for example. Actually, article 112 of Civil Procedural Law provides: “When a people’s court receives a motion of complaint or
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an oral complaint and finds that the complaint meets the requirements of a civil lawsuit after reviewing the complaint, the court shall accept the case within seven days and notify the parties involved; if the complaint does not meet the requirements of a civil lawsuit, the court shall, within seven days, make a ruling to reject the complaint.” Even if the case was accepted, it will be rejected for not meeting the requirements of a civil lawsuit according to article 112 of the Civil Procedural Law. Most of the time, the Civil Procedural Law was fully respected and implemented. Unfortunately, the High People’s Court in Heilongjiang Province declined to accept the case without legal basis.
III. Conclusion: Hopes for Environmental Public Interest Litigation to Flourish in China
The legislative agencies in China are working on the amendments for the Administrative Procedural Law and Civil Procedural Law at the present. For example, in the draft amendment of the Civil Procedural Law proposed by legal scholars, the public interest litigation system is established as a content of the revised version. Additionally, the draft amendment plans to change the reviewing system of filing cases to a registering system of filing cases, which means that the courts cannot refuse to accept the complaints filed by the public. In addition, when the victims do not file the litigation or it is burdensome to confirm the victims, the people’s procuratorate, other government agencies, social organizations and faculty in state- owned enterprises, in order to protect the public interest, can file civil litigation against the infringer to stop the tort and ask for remedies for the victims. In my opinion, in order to reform the existing administrative and civil litigation system and establish environmental public interest litigation system in China, there are more issues needed to be specified in legislations such as the following. First of all, when amending the Administrative Procedural Law and the Civil Procedural Law, we should add the principle articles of the environmental public interest litigation system to the section of general principles, amend the provisions of standing, and expand the plaintiff’s standing. Environmental public interest litigation that can be raised by the procuratorate should be established. Besides, the law should provide citizens, juridical person or other organizations with an appropriate atmosphere in which each can raise environmental public interest litigation when
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they think that concrete administrative action has infringed the public’s environmental interest. For example, the law can provide that “when environmental public interest is or may be infringed, procuratorates, social groups, or citizens that have conflicts of interest can raise a lawsuit.” Since the U.S.A established the Citizen Suit System, cases did not explode in China, despite the worries of the legislators. Therefore, it would be helpful to take the example of the statistical data provided by the US Judicial Bureau. In the federal level, the number of citizens suits raised according to the Clean Water Act was 43 in 1996, 53 in 1997, and 49 in 1998. The number of citizen suits raised according to the Clean Air Act was 3 in 1995, 7 in 1996, 4 in 1997, and 2 in 1998. I think that in order to avoid the sudden increase of cases, a provision can be added while amending the Administrative Procedural Law. A possible solution can be reached in this way: if the interested person considers that the concrete administrative action of the administrative agency violated or might violate the environmental public interest, he or she should first turn to the administrative agencies in paper. Afterwards, when there is no concrete reply during the given legal period, then he or she should file the administrative litigation. In order for this system to work, we should specify the burden-shifting principle between the plaintiff and the defendant on the issue of evidence in environmental public interest litigation in the Administrative Procedural Law and the Civil Procedural Law, or the Civil Evidence Law enacted in the future. In the environmental public interest litigation, the plaintiff only has the obligation to provide the prima facie evidence that the environmental public presently suffers or may suffer from the infraction, in order to facilitate the environmental public interest litigation. Secondly, when making or amending environmental laws in the future, we should add special provisions on environmental public interest litigation. In related material laws, besides the provisions on the contents of citizens’ environmental rights (such as clean air right, tobacco detesting right, clean water right, peace right, sunlight right, ventilation right, overlooking right, viewing right and other rights), they should also provide the related procedural contents for various environmental tort cases, in order to be in coincidence with the amended provisions on standing in administrative and Civil Procedural Laws. What’s more, we should externalize the provisions in the existing environmental protection laws on the citizens’ right to impeach and sue the enterprises or
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individuals polluting and demolishing the environment and provide special basis for the establishment of the citizens’ standing in environmental public interest litigation. Since the environmental public interest litigation is mainly for the well being of the public, the court fee for the plaintiff should be reduced as much as possible. In addition, if the defendant loses in the environmental public interest civil litigation, the defendant should be required to pay the court fee and attorney fee and other costs brought to the plaintiff because of the litigation. Finally, we should add protective measures for environmental public interest litigation. For example, provide grounds for the court to issue injunctions on environmental public interest torts according to its own responsibilities, or permit plaintiffs to apply for it themselves.
KEY WORDS: Environmental Public Interest Litigation, Barriers Cause, Legislation, Judicature
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New Regulatory Framework for Units of Non- regulated Collective Investment Schemes in Japan
Hiroyuki Kansaku*
I. Introduction
Collective investment schemes (CIS), including hedge funds and private equity funds that are not strictly regulated by special laws and regulations for CIS (hereinafter “non-regulated CIS”), are at the center of international debate as to how they should be regulated. According to the reports of the International Organization of Securities Commissions (IOSCO)1) and Financial Stability Forum (FSF), there is over US$1.6 trillion in hedge fund assets under management worldwide and the number of funds has steadily grown to more than 9000,2) the vast majority managed in the USA and the United Kingdom.3) Hedge funds are not legally defined in any country, and are characterized by high management fees and a number of different complex and active strategies aiming for a high yield. They are frequently structured in such a way as to avoid or minimize regulation. They are therefore usually exempt from direct regulation and are not constrained by regulatory capital requirements and
* Professor of Law, University of Tokyo. 1) IOSCO is an international policy forum consisting of 109 securities regulators as of the end of February, 2008. 2) Financial Stability Forum, Update of the FSF Report on Highly Leveraged Institutions, May 19, 2007. In 2006 it is estimated that 1,518 new funds were introduced and 717 liquidated. The rate of growth of hedge fund management has been more rapid in Europe and Asia than in the United States. The share of hedge fund assets managed in Asia has risen from 5% in 2002 to 8% in 2006, while the share managed in Europe has doubled, to 24%, over the same period. While assets managed in the US have grown sharply in absolute terms, the US share of the global total has correspondingly declined, from more than 80% in 2002 to about 65% in 2006. 3) Technical Committee of the International Organization of Securities Commissions, The Regulatory Environment for Hedge Funds: A Survey and Comparison, Nov. 2006.
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public disclosure requirements.4) The 1997-1998 Asian financial crisis was possibly caused by the huge short sale of hedge funds. This indicates that the activities of large hedge funds might impact significantly on financial markets and international financial systems. Furthermore the collapse of one hedge fund could threaten the integrity of financial markets and increase systemic risk worldwide, as the case of the Long-Term Capital Management crisis demonstrated.5) At present, hedge funds again appear to be closely involved in the so-called sub-prime loan problem. Using hedge funds, a number of financial institutions have invested in asset-backed securities. The underlying assets of these securities are mortgage loans to borrowers who do not qualify for the best market interest rates because of their relatively inferior creditworthiness. The European Central Bank, Federal Reserve Board and Bank of Japan have adopted measures such as injecting cash into the money market to address liquidity shortage at commercial banks. On the other hand there is a sort of non-regulated CIS in Japan which invests in a particular business engaged in by the scheme or member of the scheme. The units of such non-regulated CIS are sometimes distributed not only to professional investors but also to the public, and might result in huge financial loss to them. The scheme itself might be fraudulent and deceitful, because the business plan invested in by the fund is entirely fictitious or very faulty from the beginning.6) This article focuses on collective investment schemes that are not regulated by special laws and regulations, covering a broad spectrum from hedge and private equity funds to fraudulent schemes. In Japan, the activities and behavior of such non- regulated CIS have garnered great attention. At one end of the spectrum there are some non-regulated CIS that are equivalent to fraud. At the opposite end of the spectrum there are hedge and private equity funds that make full use of advanced
4) Financial Stability Forum, Report of the Working Group on Highly Leveraged Institutions, Apr. 5, 2000, at § 20-33. 5) According to the survey by the Japanese Financial Agency, the number of financial Institutions investing in hedge funds is 348, and the amount invested therein was 7,438 billion yen as of March 31, 2006. 348 financial institutions were investing in hedge funds, totaling 7.4 trillion yen as of March 31, 2006, Japanese Financial Services Agency, Hedge Fund Survey Results (2006) [Hedge Fund Chosa no Kekka (2006)], Mar. 2007, at 4. 6) In recent years the World Ocean Firm that solicited for investment in shrimp farming business and Heisei- den-den that solicited for investment in leasing business in the form of an undisclosed partnership based upon the Japanese Commercial Code are notorious cases where many investors suffered financial loss.
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financial technology. Hedge and private equity funds play a remarkable role in recent M&A transactions and the restructuring process of corrupt firms in Japan. However, some of them have little transparency and might involve violation of laws and regulations, such as insider dealing and manipulation. These cases have provoked a wide-ranging discussion in Japan, whether and how the non-regulated CIS should be regulated. In 2006, the Japanese Securities and Exchange Law of 1948 was completely amended and even the name of the law was changed to the Japanese Financial Instruments and Exchange Law (hereinafter called “JFIEL”). JFIEF came into force on September 30, 2007. It established the general definition of a collective investment scheme, to cover any unit of CIS comprehensively as a “security” under the law. Article 2 Paragraph 2 No. 5 of JFIEF states that a unit of a CIS is to be deemed as “security,” when the scheme (a) collects money or similar properties from two or more persons, (b) conducts business using the money contributed, and (c) distributes profits or properties originating from the business to investors.7) A unit of non-regulated CIS that should be deemed as a “security” falls into a category of second-class “security.” Therefore, a person who engages in fund related business (for example, offering and distributing the units of a non-regulated CIS) is in principle to be registered with the Japanese Financial Services Agency and to be subject to the regulations under JFIEL. This article proceeds as follows: Part II will survey the status of various types of collective investment schemes that are not regulated by special laws and regulations in Japan. The typical legal structure of non-regulated CIS such as hedge funds and private equity funds will be introduced, especially the legal form of the fund itself and the legal position of investors in the scheme. Part III describes and analyzes some recent cases in which non-regulated CIS took an active role in the battle for corporate control. Part IV describes a new regulatory framework for units of non- regulated CIS under the Japanese Financial Instruments and Exchange Law of 2006. Each unit of a non-regulated CIS is deemed a second-class “security” under the law. JFIEL requires registration for any party that engages in self-offering of the units of non-regulated CIS or self-investment-management of assets contributed from
7) JFIEL, Article 2, Paragraph 2, No. 5. A unit of collective investment scheme in foreign countries should be also included under the definition of security under the law. See JFIEL, Article 2, Paragraph 2, No. 6.
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investors. Private offerings to one or more qualified institutional investors or less than 50 ordinary investors are required to be filed with the Japanese Financial Services Agency. Part V notes the framework for international cooperation of authorities for supervising securities markets; namely multilateral memorandum of understanding concerning consultation and cooperation and the exchange of information (MOU) in IOSCO. The Japanese Financial Services Agency became signatory of the IOSCO MOU this February. Part VI is a conclusion.
II. Status, Functions and Risks of Non-regulated CIS in Japan
1. Status of Non-regulated CIS
In Japan, there are two categories of collective investment schemes (CIS): strictly regulated CIS and non-regulated CIS. Strictly regulated CIS should be subject to special laws, regulations and administrative rules which regulate arrangement of the scheme, the structure and organization of the vehicle, business conduct of obligations of related parties, etc. Most important are the Law of Investment Trust and Investment Corporation and the Law concerning Asset-backed Securities, Real Estate Syndication Law and the Law concerning the Regulation of Commodity Investment. On the other hand, the extent of non-regulated CIS is not clear. There was no legal definition of non-regulated CIS, including hedge funds and private equity funds, under the former Japanese Securities Instruments and Exchange Law. According to research by the Japanese Financial Services Agency, non-regulated CIS in Japan consist namely of hedge funds, activism funds, private equity funds, venture capital funds, restructuring funds, REIT (Real Estate Investment Trusts) and others that invest directly in a particular business (Table 1). Examples of this last type might be investing in business of making film (contents fund), and in leasing business for telecommunication facilities, or running a chain of Chinese noodle restaurants (fund for business). In Japan, the number of venture capital funds is 470, and the total number of buy-out funds and restructuring funds is fifty-seven.8) The total assets
8) Material No. 1-4 for the meeting of the 1st Subcommittee of the Sectional Committee on Financial System in Financial System Council in the Financial Services Agency of Japan on Nov. 24, 2005.
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Table 1. Non-regulated Investment Funds in Japan Total and number Legal form of funds Main investor of funds Hedge fund Limited partnership and trust Institutional investors N.A. established in foreign countries Business companies REIT Stock Company Institutional investors 4.2 trillion yen Undisclosed partnership Contents fund Limited partnership, Partnership Related business parties N.A. Undisclosed partnership Individual investors Trust Fund for business Undisclosed partnership Individual investors N.A. Venture capital Limited partnership, Partnership Institutional investor 1.3 trillion yen fund Undisclosed partnership Individual 420 funds Buy-out fund Limited partnership, Partnership Institutional investor 1.1 trillion yen Undisclosed partnership 57 funds Restructuring fund Limited partnership, Partnership N.A. N.A. Undisclosed partnership Regional restructuring Limited partnership, Partnership Local financial institutions 190 billion yen fund Undisclosed partnership Local government
under the management of Japanese venture funds and buy-out funds are about 2.3 trillion yen. The data about hedge funds is not available because many involving business in Japan are registered in offshore financial centers such as the Cayman Islands.9)
2. Typical Legal Forms and Structures
The non-regulated CIS in Japan could take a number of legal forms and structures. Civil law partnership (Minpô-kumiai), undisclosed partnership (Tokumei- kumiai) based upon the Japanese Commercial Code, and for-profit or non-profit corporation or trust are usually taken as legal forms for non-regulated CIS. When a non-regulated CIS does not invest in securities but engages in business by itself (business-type CIS), it usually takes the form of civil law partnership or
9) It is possible in Japan for a strictly-regulated CIS to take active strategies with leverage. The number of such privately placed hedge funds is 231 and assets under their management amount to about 800 billion yen. IOSCO, supra note 3, at 20.
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undisclosed partnership based on the Japanese Commercial Code. In these cases a general partner (as in the case of a civil law partnership) or a firm (with whom undisclosed partners conclude an undisclosed partnership contract in the case of an undisclosed partnership), engages in a particular business by using assets contributed by investors. The non-regulated CIS whose assets are managed by investment managers (investment-type CIS) normally takes a legal form of corporation or trust. The fund is required to protect its assets from the bankruptcy of the related parties, such as the fund manager (so-called bankruptcy remote) or other funds invested by the same manager. Therefore, the asset of the fund is to be separated from the investment managers and is held by a special purpose vehicle (SPV) for the scheme. This is the reason why corporation and trust are normally used as a SPV. The structure of a hedge or private equity fund is complex. Although the fund governing body has its own investment portfolio, investments could be allocated across the funds invested by the same investment manager. The portfolios require to be rebalanced when investors enter or exit individual funds. To avoid the reallocation and rebalancing, a Master-Feeder structure is generally used. The portfolio is held and traded at the level of the master fund, and the returns of the master fund will be reflected in the net asset value of the feeder funds. A master fund is often structured as a corporation or a trust, often in offshore financial centers aiming for tax-exemption, and its feeder funds are established as the undisclosed partnership based on the Japanese Commercial Code. The assets of CIS established in offshore centers are invested by the fund manager. The fund’s investment management agreement might contain the investment restrictions, investment policies, and fees to be paid to the manager. The manager delegates the investment powers to an investment manager and monitors the investment manager as a service provider. The fund manager may also distribute the units of the CIS under the investment management agreements or an additional separate distribution agreement.
3. Functions and Risks
The functions and roles of non-regulated CIS are generally accepted. They provide investors with opportunities aiming at high return. They contribute furthermore to the efficiency of capital markets and the market for corporate control.
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There are several examples where corrupt firms were acquired by an investment fund and their shareholder value increased dramatically through M&A transactions and/or restructuring. This is often considered an important indicator of the quality of corporate governance. After Japan’s bubble economy burst in the 1990s, many financial institutions and businesses either went bankrupt or were forced to reorganize. International hedge funds and private equity funds acquired the shares of some corrupt companies and tried to reorganize them. Some have been successfully reorganized and their shares are again traded on the stock exchange. On the other hand, the business-type CIS have sometimes caused many investor protection problems in Japan. Recently, the units of non-regulated CIS, which engaged in the leasing business or shrimp farming business, were distributed to the public, and many non-professional investors suffered huge financial loss. The units represented the position of an undisclosed partner in undisclosed partnership contract based on the Japanese Commercial Code. The units were sold to the public without applying securities laws and regulations because the legal position of the undisclosed partner at that time was not deemed as “security” under the former Japanese Securities and Exchange Law, unless the purpose of the undisclosed partnership was to invest in securities. These cases brought to light that there were crucial loopholes in the former Japanese securities laws and regulations from the viewpoint of investor protection. Moreover, for some non-regulated CIS that use highly developed financial technologies, often together with borrowing, it is recognized that there is little transparency and this might involve violation of laws and regulations, such as insider dealing and manipulation. I introduce some cases in Part III, where investment funds played great role in the struggle for corporate control and caused heated disputes and legal issues.
III. Recent Cases in Japan
1. Background
Since 1960, there have been several fights for corporate control or hostile takeovers in Japan. In most of these cases, it was pointed out that green-mailers had aimed to sell shares back to the target company at a substantial premium above the
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fair market price. Target companies defended the fight for control by issuing new shares to the main bank or interested parties such as group member companies. This was done in order to decrease the shares owned by the aggressors. Japanese corporate law states that the issuance of shares or the sale of treasury shares should be ceased in cases where the law or the articles of incorporation is violated, or in instances where such share issue or disposition of treasury shares is effected by using a method which is extremely unfair, if shareholders are likely to suffer disadvantage.10) Those intending to acquire the target company often took legal action to demand cessation of the issuance of shares to the particular third party. The courts have adopted “main purpose tests,” whether the issuance aims mainly to retain incumbents’ control or to raise funds to develop business. The courts have relatively easily recognized that the main purpose of issuing shares was fund-raising rather than retaining incumbents’ control. The majority of Japanese corporate lawyers and scholars support the case-law because successful hostile takeovers by green-mailers would decrease or ruin the value of the target company.11) Since the 1990s, however, international and domestic investment funds and publicly-held corporations have begun to attempt hostile takeovers. Some of the target companies intend to retain control over incumbent management by issuing shares or distributing share options to the main bank or companies belonging to the same group of companies. However, in these cases, it is likely that the court would decide that the main purpose of issuance of shares was retaining incumbents’ control. A number of Japanese publicly-held corporations have therefore begun to adopt defensive measures to prevent hostile takeovers such as so-called poison pills or rights plan in advance. Some non-regulated CIS are actively involved in such battles for corporate control. Clearly, there are several risks associated with such behavior.
2. The Livedoor and Murakami Fund cases
Fuji Television Network, Inc. was originally a subsidiary of Nippon Broadcasting System, Inc. However, the total shareholder value of Fuji Television Network was
10) Japanese Company Law, Article 210 in the case of issuance of shares and Article 247 in the case of issuance of offered share options. 11) KENJIRO EGASHIRA, LAWS OF STOCK CORPORATIONS [Kabusiki Kaisha Ho], 691-93 (2nd ed., 2007) (available only in Japanese).
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higher than that of Nippon Broadcasting System. In order to correct the reversed parent-subsidiary company relationship,12) Fuji Television Network intended to acquire all shares of Nippon Broadcasting System in accordance with the tender offer system under the Japanese former Securities and Exchange Law. During that time, the Murakami Fund and Livedoor were acquiring Nippon Broadcasting System shares both on the stock exchange and outside of the stock exchange. The Murakami Fund was founded and managed by Yoshiaki Murakami, a former Japanese Ministry of Economy, Trade and Industry bureaucrat. Mr. Horie, a founder, CEO and major shareholder of Livedoor, decided informally to acquire control of Nippon Broadcasting System and consequently control of Fuji Television Network. Livedoor established several investment funds and through them secretly acquired the major shareholding of Nippon Broadcasting System. Meanwhile, the Murakami Fund continued to acquire shares of Nippon Broadcasting System. Suddenly, both entities appeared as major shareholders.13) Such behavior was severely condemned because it would damage the fairness and transparency of the capital markets. Moreover, it was suspected that such investment funds might engage in insider dealing or giving false information regarding financial statements. Mr. Horie was ultimately prosecuted for falsifying annual accounts and employing fictitious devices using investment funds that contravened the Japanese Securities and Exchange Law. In the first instance, the court found the accused guilty.14) Meanwhile, Mr. Murakami was also prosecuted for insider dealing. As a fund manager, he was closely involved in the contest for corporate control of Nippon Broadcasting System between Fuji Television Network and Livedoor. Murakami was convicted of insider dealing15) by the Tokyo District Court. According to the Court,
12) In Japan a parent company and its subsidiaries are often listed together on the stock exchanges. KENJIRO EGSHIRA, LEGISLATION AND CONSTRUCTION REGARDING TO THE LAWS OF COMBINED CORPORATIONS [Ketsugo-kigyo- ho no Rippo to Kaishaku] 1-2 (1995). 13) The reason that it was possible for the institutional investors to acquire and dispose of major holdings of the target company secretly was the relaxation of application of the requirements for the reporting of acquiring and disposal of major holdings. In consideration of the administrative workload for institutional investors engaged in a large volume of trading as part of daily business activities, a lower frequency of reporting is required. The frequency of reporting is strengthened for the institutional investors under JFIEL. 14) Judgment of the Tokyo District Court on March 16, 2007. 15) Criminal sanctions were imposed on Mr. Murakami including penal servitude for 2 years and a 3 million yen penalty with 1.1 billion yen assessment. Judgment of the Tokyo District Court, on July 19, 2007.
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the attempt to take over Nippon Broadcasting System by Livedoor was based on “inside information.” Had this information been made public, it would likely have significantly affected the price of Livedoor shares. The Livedoor and Murakami Fund cases have raised questions concerning deficiencies in the Japanese legal system regarding the capital market. In response to these cases, on February 17, 2006, the Liberal Democratic Party of Japan proposed ten recommendations for moving towards a fair and transparent capital market.16) These recommendations included review of the regulatory framework for non- regulated CIS, a tender offer system and mandatory reporting system of the acquisition and disposal of major holdings. These recommendations were a direct result of the behavior and activities of non-regulated CIS that might hurt the integrity of the capital market, such as in the Livedoor and Murakami Fund cases.
3. The Bull-Dog Sauce case
Recently, the Bull-Dog Sauce Co., Ltd. case became the focus in both Japanese professional and public arenas. Even though Bull-Dog Sauce was not in bad financial straits, the reputable company was attacked by an offshore investment fund, namely Steel Partners Japan Strategic Fund. Steel Partners and its allies had acquired about 5.05% of Bull-Dog’s outstanding shares, and on May 18, 2007, the tender offer was published according to the Japanese Securities and Exchange Law. The offer price included a premium of about 15% in order to acquire all Bull-Dog Sauce shares. The owners of Bull-Dog Sauce were greatly diversified among public investors. The Bull-Dog Sauce Board of Directors was against accepting the tender offer by Steel Partners; then on June 24, 2007, Bull-Dog Sauce shareholders decided to alter the articles of incorporation concerning the distribution of share options without payment to each shareholder17) and they added a discriminate exercise clause. According to the discriminate exercise clause, Steel Partners and its allies could not exercise the share options that were distributed free because they were regarded as disqualified shareholders who were likely to devalue the company. Instead, they could receive the fair value of the distributed share options in cash.
16) Financial investigation committee and sub-committee for corporate accounting in Democratic Party of Japan, Moving towards fair and transparent capital market, on February 17, 2006. 17) Japanese Corporate Law, Article 277.
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The shareholders’ meeting of Bull-Dog Sauce Co. decided on the introduction of the plan and on the concrete distribution of three units of share options to each share. However, Steel Partners claimed that the distribution of the share options with the discriminate exercise clause should be suspended because it would be against the principle of equal treatment of shareholders and the share options would be issued in a extremely unfair manner. On June 28, 2007, the Tokyo District Court rejected the plaintiff’s claim. The reason that the discriminate exercise clause does not contravene the principle of equal treatment of shareholders is that the clause ensures equal treatment regarding economic interests. According to the decision, approval at the shareholders meeting for executing the takeover defense in question is to be respected, and the measure was not disproportionate to the end, preventing a decrease in the shareholder value of the company. Both the Tokyo High Court and the Supreme Court of Japan rejected Steel Partners’ appeal.18)
IV. Regulatory Framework for Units of Non-regulated CIS
1. Risks of Non-regulated CIS
Risks inherent in non-regulated CIS have raised three main regulatory issues in Japan. The first is investor protection problem. In the process of solicitation and sale it should be ensured that appropriate and correct information shall be provided and dealing of the units of non-regulated CIS should be in accordance with the best interests of the client, especially when non-professional investors are involved. The business should be conducted with clients fairly and in good faith. For example, in the investment management business, there are various conflicts of interest between fund managers and fund investors, between investors in separate funds that are managed by the same managers, and in cases of leveraged buyouts between investors
18) Decision of the Tokyo High Court on July 9, 2007; Decision of the Supreme Court of Japan on August 7, 2007. The Tokyo High Court decided that Steel Partners has used and treated the contest for corporate control of Bull-Dog Sauce Co. in such a way as to impair seriously the enterprise values of Bull-Dog Sauce Co. But this judgment was harshly criticized because of lack of enough evidence. The Supreme Court of Japan did not tell whether Steel Partners would impair the value of Bull-Dog Sauce Co. or not, but respected the approval of shareholders’ meeting with over 80% majority.
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and managers and an employee acting as a director of a target company owned by the fund. Advisers and leveraged finance providers face significant conflicts between their proprietary and advisory activities and among their different clients. The second issue is to ensure the stability of financial markets and financial systems. The possible collapse of a large and leveraged investment fund would pose grave danger to the stability of the international financial market. Investment funds’ activities would especially impact small and medium-sized markets. The discussion of how international non-regulated CIS like hedge funds should be regulated is heated on the international level. It seems that the mainstream considers that the direct regulation of non-regulated CIS by strict laws and regulations is less preferable to self-regulation. For the time being the European Commission, the Financial Stability Forum and a G8 Summit Declaration all require indirect supervision through stronger counterparty risk management, enhanced regulation of credit providers and increased risk sensitivity in regulating bank capital rather than direct supervision of non-regulated CIS.19) But the authority should have a power to collect and analyze information about the status and activities of non-regulated CIS, including international hedge funds. The third issue is to ensure the transparency of capital markets. This is closely related to the second issue.20) The opacity of non-regulated CIS makes it unclear who will ultimately bear the risk. There is further widespread suspicion that non-regulated CIS might involve violation of laws and regulations, for example insider dealing and manipulation, which might injure the integrity of the market.
2. A Regulatory Framework for Units of Non-regulated CIS under JFIEL
A. Second-class Security
In Japan, there are two categories of collective investment schemes (CIS): strictly
19) GROWTH AND RESPONSIBILITY IN THE WORLD ECONOMY SUMMIT DECLARATION (G8 Official Document), Jun. 7, 2007, at § 7-8; Financial Stability Forum’s (FSF) update of its 2000 Report on Highly Leveraged Institution. 20) For the principles and guidelines for the valuation and disclosure, see Technical Committee of IOSCO, Principles for the Valuation of Hedge Fund Portfolios — Final Report —, Nov. 2007, http://www.iosco.org/library; Hedge Fund Working Group, Hedge Fund Standards: Final Report, Jan. 2008, at § 6.2-6.3, http://www. pellin.co.uk/HFWG/Final-Report/pdf; AIMA, Guide to Sound Practices for European Hedge Fund Managers, § 3.5- 3.6, http://www.aima.org/uploads/GuidetoSoundPracticesforEuropeanHFMMay2007.pdf
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regulated CIS and loosely or non regulated CIS. Regulated CIS should be subject to strict laws, regulations and administrative rules. Most important are the Law of Investment Trust and Investment Corporation, the Law concerning Asset-backed Securities, the Real Estate Syndication Law, and the Law concerning the Regulation of Commodity Investment. These laws regulate a particular type of collective investment scheme comprehensively. Namely, they regulate such matters as setting up the scheme, the structure and organization of a special purpose vehicle (SPV) in the scheme, filing and overseeing of the fund, and the business code of conduct of related parties (for example, arrangers or management of SPV, disclosure and the qualification of fund managers). The units of strictly regulated CIS for investment trust and asset-backed securitization has already been deemed as “security” by the amendment of the Japanese Securities and Exchange Law in 1990 and is therefore subject to the regulations of the law, for example, disclosure requirements and prohibition of unfair dealing. Outside strictly-regulated CIS there are various types of non-regulated CIS that are formed, such as civil law partnerships, undisclosed partnerships based on the Japanese Commercial Law, trusts, or for-profit or non-profit corporations.21) The units of some types of such CIS were at most partly regulated as “security” by the amendment of the Japanese Securities and Exchange Law in 2004, as far as the scheme purports to invest in securities. The Japanese Financial Instruments and Exchange Law of 2006 (JFIEL) expanded the definition of non-regulated CIS dramatically to cover any collective investment scheme which (a) collects money or similar properties from two or more persons, (b) conducts business using the money contributed, and (c) distributes profits or properties originating from the business to investors.22) These factors of non-regulated CIS are very similar to the Howey-test in American case law to define “investment contract” under the definition of “security”.23) In the United States the term “investment contract” had been broadly construed so as to afford the investors a full measure of protection. In the interpretation, the legal form is not regarded for substance, and emphasis is placed on
21) See Table 1. 22) JFIEL, Article 2, Paragraph 2, No. 5. A unit of collective investment scheme and any similar unit established in foreign countries should be also included under the definition of security under the law. See JFIEL, Article 2, Paragraph 2, No. 6. 23) SEC v. W. J. Howey Company, 328 U.S. 293 (1946).
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economic reality. An investment contract thus came to mean a contract or scheme for the placing of capital or laying out of money in a way intended to secure income or profit from its employment.
Just as with the Howey-test, under JFIEL the legal form of a fund is irrelevant, whether a unit of non-regulated CIS should be subsumed in the definition of “security.” Moreover, the sorts of assets and properties that a fund invests in and holds are irrelevant to the definition of “security.” It is however worth noting that a CIS is exempt from the law, when (a) all the investors are involved in the business,24) or (b) there is no distribution of profits or properties to investors beyond the amount of original investment. The Japanese Financial Services Agency made public its opinion concerning (a) that this exemption is restricted to the case where operations relating to the business for investment are conducted with the consent of all equitable partners and that all equity partners either engage in the business on a full-time basis or contribute to the business professional skills that are indispensable for maintaining that business, although not on full-time basis.25) According to that opinion, the exemption of (a) will be exceptional. Concerning (b), concrete rights or interests, for example, the right based on an insurance contract, are exempted.26) Due to this reform, the loopholes in regulations under the former law will be closed.27) JFIEL makes the structure of regulatory framework more flexible and substance
24) JFIEL, Article 2, Paragraph 2, No. 5. 25) http://www.fsa.go.jp/en/news/2007/20071119.html 26) JFIEL, Article 2, Paragraph 2, No. 5. Under the exemption in the text mentioned (b) any of the following classes of securities are exempted from applying JFIEL: (1) other securities, (2) the right based on an insurance contract, mutual aid contract under the Agricultural Cooperative Law, mutual aid contract under the Small and Medium-Sized Enterprise, (3) the right based on cooperative associations in which participation is restricted to certified public accountants, lawyers, judicial scriveners, land and house surveyors, certified administrative procedures specialists, certified tax accountants, certified real estate appraisers, certified social insurance labor consultants or patent attorneys and those whose exclusive businesses for investment constitute the operation of such businesses, (4) the right based on a stock ownership plan, (5) the right relating to capital contribution for a corporation established in accordance with laws and regulations of Japan (except for a limited liability intermediate corporation) and (6) the right based on a contract relating to shared forest systems based on the Special Measures Law Concerning Shared Forest Systems. 27) Hideki Kanda, The Fundamental Legal Concepts in Japanese Financial Services Act [Tôshi Sâbis Hô ni okeru Kihongainen], in DESIGN FOR THE JAPANESE FINANCIAL SERVICES ACT [Tôshi Sâbis Hô heno Kôsô], at 10-15 (Hideki Kanda ed., 2005).
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of regulations more sophisticated.28) The concept of “security” under JFIEF is classified into two groups from this point of view; namely “first-class security” and “second-class security.” While the first-class security is characteristic of higher liquidity in the securities market, the second-class security is less liquid. They conform to different type of rules with respect to disclosure requirements and financial instrument business regulations.
B. Disclosure Requirements
The disclosure requirements for first-class security have to be fulfilled through Electronic Disclosure for Investors’ Network (EDINET29)), to make available important information about issuer and security to the public. However, it is not in principle required for second-class security like a unit of a non-regulated CIS to disclose information through EDINET.30) The reason that there is no disclosure requirement for a second-class security is due to lack of high liquidity. However, if a non-regulated CIS invests mainly in securities under JFIEL, then the disclosure requirements for first-class security could be easily avoided. Therefore, the unit of such a CIS should be subject to the disclosure requirements in the same way as first-class security through EDINET, when the scheme invests mainly in securities and more than 500 investors participate in it.31) In that case, the concept of “offering” of units of non-regulated CIS is different from that of first-class security. The first-class security “private offer for a small number of investors,” that is exempt from applying disclosure requirements, means any attempt to solicit and offer to dispose of to less than 50 investors. On the other hand for the second-class security private offering means that less than 500 investors participate in the scheme and hold the units in the end.
28) THE JAPANESE FINANCIAL INSTRUMENTS AND EXCHANGE LAW [Kinyu Shôhin Torihiki Hô] 19-23 (Hidenori Mitsui & Tadakazu Ikeda eds., 2006). 29) Available at, https://info.edinet.go.jp/EdiHtml/main.htm 30) JFIEL, Article 3, No. 3, Article 2, Paragraph 2, No. 5. 31) JFIEL, Article 3, No. 3 and Order for Implementing the Financial Instruments and Exchange Law, Article 1- 7-2.
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C. Conduct of Business Obligations
A firm engaging in the units of non-regulated CIS that fall under second-class security should be in principle subject to financial instruments business regulations. This type of business is labeled “second-class financial instruments business” under JFIEL. Second-class financial instruments business includes offering to the public or privately, placement, handling offering and placement with issuer’s commitment, sale, executing and transmitting client orders regarding the units of non-regulated CIS.32) Registration is required with the Japanese Financial Services Agency33) to commence the business. Secondly, the financial instrument firm has to comply with capital requirements.34) The financial instrument firm, including its management and employees, owes an obligation of good faith and fair practice to clients.35) It should collect information about each client and conclude the financial instrument transaction contract in respect of his or her knowledge, experience, assets and the purpose of the client’s investment.36) The firm should not provide inaccurate information or conclusive recommendation about units of non-regulated CIS37) and is subject to the restriction on advertisements.38) These regulations should also be applied to foreign firms that engage in the units of non-regulated CIS. Although the significant information about second-class security cannot be found for investors or prospective investors through EDINET, it is provided directly to an investor by a financial instrument firm with whom he or she concludes a financial instrument transaction contract. A person involved in units of non-regulated CIS should deliver a written document prior to entry into a financial instrument transaction contract,39) where matters relating to risks and accounting of the CIS are
32) JFIEL, Article 28, Paragraph 2. 33) JFIEL, Article 29. 34) JFIEL, Article 29-4, Paragraph 1, No. 4 and Order for Implementing the Financial Instruments and Exchange Law, Article 15-7, Article 1, No. 4. The minimum capital requirement is 10 million Yen for the second- class financial instruments business. 35) JFIEL, Article 36. 36) JFIEL, Article 40 states so-called suitability rule. 37) JFIEL, Article 38, No. 1 and 2. 38) JFIEL, Article 37. 39) JFIEL, Article 37-3 and Cabinet Office Ordinance on Financial Instruments Business, Article 82. On the
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to be described. An investor can obtain information to ensure that he or she could make a decision on the contract properly and rationally. Moreover, the financial instrument firm has to deliver a written document at the closing of the transaction.40) An investor might confirm the contents of his or her financial instrument transaction contract and keep the evidence of the contract.41) There was no regulation under the former Japanese Securities and Exchange Law on offering of the units of non-regulated CIS and investment management of the assets of the CIS by the fund itself or its members. Under the former law neither offering nor investment management by an issuer itself or its members was considered as securities business because no regulation seemed necessary for these activities. Therefore, a business company itself could issue securities and invest its assets mainly in securities without applying securities laws and regulations. However, JFIEL has introduced regulations on the self-offering of the units of non- regulated CIS42) and self-investment-management of the assets of the CIS contributed
document the following matters are to be described: (a) Corporate name or, in the case of an individual, full name and address, (b) the fact that it is a financial instrument firm and its registration number, (c) contents of the financial instrument transaction contract, (d) matters relating to the fees and similar considerations to be paid by clients, (e) matters relating to risks, (f) notice that a client must read and understand the contents thereof, (g) outline of taxation relating to financial instrument transaction contracts, (h) outline of the financial instrument firm and the Financial Instruments Business to be carried out, (i) means for clients to contact the financial instrument firm, (j) whether or not the financial instrument firm is a member of a financial instruments business association and if applicable, the name of the association, (k) when there are any restrictions on the transfer of securities, the fact and details thereof, (l) matters relating to accounting of the CIS, (m) the following matters when the CIS is formed under foreign laws and regulations; (i) name and content of the law that governs the CIS, (ii) name and major operations of the foreign authority that supervises the issuer of the interests of the CIS, (iii) handling of remittance of dividends under the foreign exchange control in question, (iv) whether or not the foreign CIS has an attorney who has the right to represent the issuer in Japan and if applicable, his or her full name and other names, and (v) the court that has jurisdiction over lawsuits regarding the scheme. 40) JFIEL, Article 37-3 and Cabinet Office Ordinance on Financial Instruments Business, Article 99. On the document the following matters are to be described: (a) corporate name or in the case of an individual, full name, (b) name of sales office or other office, (c) outline of the financial instrument transaction contract and the date of the closing of the transaction contract, (d) matters relating to the fees and other considerations to be paid by the client, (e) client’s full name or denomination, (f) methods for clients to contact the financial instruments business, (g) selling or purchasing, name of issue, contracted volume, price, the amount to be paid by the client and types of trading. 41) JFIEL has categorized investor according to its attribute; professional investor and non-professional investor. To the professional investors the most provisions about conduct of business obligations under JFIEL do not apply. JFIEL, Article 45. 42) JFIEL, Article 2, Paragraph 8, No. 7, Article 28, Paragraph 2, No. 2.
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by investors.43) The reason that JFIEL regulates self-offering and self-investment management is explained in that these activities are virtually directly for the investors because the scheme is just a formality and therefore should be neglected. According to the regulation, a person engaging in self-offering or self-investment-management has to be registered with the Japanese Financial Agency, irrespective of the categorical attributes of its counterparty, for example a qualified institutional investor, professional investor or non-professional investor. The regulation for the second-class financial instruments business, as stated above, ought to be applied to self-offerings. The regulation for investment management business should be applied to self-investment-management. When a firm engages in investment management of assets of a non-regulated CIS, it must be registered with Japanese Financial Services Agency, and it has to obey not only regulations for the financial instruments business but also special regulations for the investment management business. Generally, an investment manager owes fiduciary duty, namely duty of loyalty and duty of care.44) As a concrete rule, the investment manager of a non-regulated CIS should manage the assets of the fund properly separated from the assets of the manager or other investment funds.45) The rule regarding conflicts of interest is in detail embodied in the law and regulation. The following types of conduct should be prohibited for the investment manager:46) (a) investing in transactions through its own accounts or those of its directors or executive officers, (b) investing in mutual transactions between portfolio assets, (c) engaging in transactions that are not in the rational course of investment in respect to specific financial instruments, financial indexes or options for the purpose of obtaining benefits for a third party other than itself or authorized beneficiaries by utilizing the fluctuations of prices, indexes, figures or an amount of consideration that would result from such transactions, (d) investing in transactions for which the terms and conditions are different from usual transactions and would be detrimental to the interests of investors, and (e) selling or purchasing securities or engaging in other transactions in one’s own account by utilizing information obtained in the course of transactions made as an investment management business.47)
43) JFIEL, Article 2, Paragraph 8, No. 15, Article 28, Paragraph 3, No. 3. 44) JFIEL, Article 42. 45) JFIEL, Article 42-4 and Cabinet Office Ordinance on Financial Instruments Business, Article 132. 46) JFIEL, Article 42-2.
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D. Special Rules for Funds for Qualified Institutional Investors
In the case of funds involving qualified institutional investors, only notification, not registration, will be required. This will enable the Japanese Financial Services Agency to collect data for non-regulated CIS, including hedge and private equity funds. Conduct of business obligations will not be in principle applied to a fund unless it involves non-professional investors.48) The code of conduct requirements shall be satisfied where fund units will be solicited and sold only to non-professional investors, to more than 50 non-professional investors, or to more than one qualified institutional investor. On the other hand, only limited regulations could apply to funds involving professional investors. This is meant to help compensate customers for their losses and to prohibit the provision of false information.49) Minimum regulations are considered necessary for ensuring the fairness of transactions. Therefore, the prohibition of false reports and the compensation for losses apply to a person who is filing for special business activities for qualified institutional investors.
V. IOSCO MOU
In principle, the regulatory framework for non-regulated CIS conducting their business on cross-border bases should be established according to a risk-based approach. The introduction of special regulations for hedge and private equity funds should be examined in connection with the problems that they might actually raise. Therefore, fact-finding would provide a useful and important starting point. For the appropriate monitoring and regulating of international non-regulated CIS, international cooperation and exchange of information play an important role. Since the majority of international hedge funds and private equity funds distributed in Japan are established and managed overseas, it is necessary to enhance cooperation
47) JFIEL, Article 42-2 and Cabinet Office Ordinance on Financial Instruments Business, Article 128-130. 48) JFIEL, Article 34 to 45. 49) JFIEL, Article 63 to 63-4.
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with foreign regulators. According to the increasing international activity in the securities markets and the corresponding need for mutual cooperation and consultation, IOSCO established the Multinational Memorandum of Understanding (MOU) among IOSCO members to ensure compliance with and enforcement of their securities laws and regulations.50) IOSCO adopted in 2005 the effective implementation of IOSCO Principles and of IOSCO MOU, which are considered primary instruments to facilitate cross-border cooperation, reduce global systemic risk, protect investors and ensure fair and efficient securities markets. It is necessary for a competent authority to participate in MOU to be recognized by IOSCO as the authority with full legal powers and competence to enforce and secure compliance with its laws and regulations. The Japanese Financial Services Agency finally became a signatory to the IOSCO MOU on February 19, 2008. One of the reasons that the participation of the Japanese Financial Services Agency in MOU was so late might be because of the Japanese legal system, especially Article 189 of the Japanese Financial Instruments and Exchange Law.51) Article 189 of JFIEL refers to cooperation and provision of information required by foreign competence authorities for the purpose of assisting in their administrative investigation. However, it prohibits the provision of information for the purpose of assisting in prosecuting a crime in foreign countries. The lack of authority to provide information of the Japanese Financial Services Agency to assist in a criminal prosecution might hinder international cooperation in this area. On the other hand, IOSCO has adopted new strategy that, by January 1, 2010, all IOSCO members should be a signatory to the IOSCO MOU. Research by IOSCO suggested that the inability to meet the IOSCO MOU requirements is the greatest impediment to joining the MOU.52) Therefore, IOSCO would apply the MOU requirements not strictly on judgment whether an authority has full legal powers and competence to enforce its laws and regulations. Although It was perhaps lucky the Japanese had competent authority to participate in the IOSCO MOU earlier than
50) IOSCO, Multinational Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information, May 2002. 51) Article 189 of JFIEL is substantially the same as article 189 of the former Japanese Securities and Exchange Law. 52) Emerging Markets Committee of IOSCO, Obstacles to Joining the IOSCO MOU, Apr. 2007, at 16.
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expected, the legal problems still remain unsolved. Article 189 of JFIEL might have to be reviewed to enforce and secure the international cooperation between securities regulators appropriately and expeditiously. In using information provided or exchanged by the IOSCO MOU about the conduct of non-regulated international CIS, especially international hedge and private equity funds, we should carefully observe their particular risks, which might require additional regulation.
VI. Conclusion
The Japanese Financial Instruments and Exchange Law, which took effect on September 30, 2007, established a comprehensive definition of non-regulated collective investment schemes. The units of non-regulated CIS, including hedge funds and private equity funds established in offshore financial center, could fall within the definition of “second-class securities,” unless they meet the requirements for exemption.53) Although his reform is noteworthy because loopholes in the securities regulations are going to be closed, the regulations of funds for qualified institutional investors are not at all strict. The most important regulation of such a fund is the mandatory notification of self-offering or self-investment-management with the Japanese Financial Services Agency. The notification might enable the Japanese Financial Services Agency to collect and analysis information about the status and conduct of such a non-regulated CIS. This means that the fact finding about the non-regulated CIS might lead to re-examination of the additional regulatory framework for particular types of funds (for example, hedge funds and private equity funds), notwithstanding that the present Japanese legislation has no special regulation. Finally, I point out two legal issues that might require additional regulation of non-regulated CIS: the disclosure problem and the conflicts of interest problem. First: The Japanese Financial Instruments and Exchange Law deems generally a unit of non-regulated CIS as a “second-class security.” A person engaging in a non-
53) THE JAPANESE FINANCIAL INSTRUMENTS AND EXCHANGE LAW [Kinyu Shôhin Torihiki Hô], supra note 28, at 218-19.
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regulated CIS should consequently deliver a written document prior to entry into a financial instrument transaction contract and at the closing of the transaction also a financial instrument to enable potential or actual investors directly to make well- informed decisions. On the other hand, the rigid public disclosure requirements about “second-class security” through the Japanese Electronic Disclosure Network are in principle exempted. It needs to be discussed whether the present disclosure requirements relating to the units of non-regulated CIS are sufficient in breadth, clarity and frequency. Second: A non-regulated CIS often has a complex legal structure and many related parties participate in it. There might be many types of conflicts of interest not only between investment manager and investors but also between other participants, such as the prime broker and investors or among investors. The conflicts of interest problem might raise a huge risk to the integrity of the securities market and the trustworthiness of investors in the securities business and financial instruments. The rules and regulations have to be sophisticated without disturbing financial evolution and innovation. It is worthwhile mixing the regulation and self-regulation adequately to develop the best practice.
KEY WORDS: Collective Investment Scheme, Hedge Fund, Private Equity Fund, Securities, Securities Regulation
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