I INTRODUCTION

i Arbitration law in Japan

Arbitration in Japan is governed by the Arbitration Act,2 which came into effect on 1 March 2004. It applies to all arbitral proceedings seated in Japan, including both domestic and international arbitration, and any enforcement of foreign awards in Japan. Judicial proceedings related to arbitration are also covered by the Supreme Court Rules on Procedures of Arbitration Related Cases.3

The Arbitration Act is largely based on the UNCITRAL Model Law on International Commercial Arbitration (1985) (Model Law). Amendments of note to the Model Law are set out in subsection v.

ii Recognition and enforcement of awards

Japan is a contracting state to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (New York Convention). The recognition and enforcement provisions of the Arbitration Act closely mirror the recognition and enforcement provisions of the New York Convention and the Model Law. Japanese courts have generally taken a pro-arbitration approach to enforcement of domestic and international arbitration awards.

iii Structure of the courts

Japan's court system has three tiers – district courts, high courts and the Supreme Court. Under Article 5 of the Arbitration Act, jurisdiction over arbitration-related matters is given to the district courts, the decisions of which can be appealed to the high courts. In limited circumstances, High Court decisions can also be appealed to the Supreme Court.

There are no specialised arbitral divisions within the Japanese court system.

iv Japanese arbitral institutions

The two primary Japanese institutions for international commercial arbitration are the Japan Commercial Arbitration Association (JCAA) and the Tokyo Maritime Arbitration Commission of the Japan Shipping Exchange (TOMAC).

The JCAA has existed in its current form since 1953 and handles both domestic and international commercial arbitration. Following a consultation exercise, the JCAA overhauled its procedures. Starting from 1 January 2019, the JCAA now offers three distinct sets of arbitration rules. TOMAC, on the other hand, deals with maritime disputes and has a three-track system of arbitral rules depending on the value of the dispute. Arbitrations pursuant to the rules of the International Chamber of Commerce (ICC) are also seen in Japan.

An outline of the new JCAA rules and a discussion of new international commercial arbitration and dispute resolution facilities that have recently opened are set out in Section II.i.

v Distinctive features of Japanese arbitration law and practice

This section sets out some distinctive features of arbitration in Japan arising from the Arbitration Act and other local laws and practices that may be of interest to practitioners.

Validity of arbitration agreements

Under Article 13 of the Arbitration Act, arbitration agreements are valid only in respect of 'a civil dispute that may be resolved by settlement between the parties (excluding that of divorce or separation)'. In addition, arbitration agreements between a consumer and a business are not binding on the consumer, and arbitration agreements between an employee and an employer in respect of individual labour-related disputes are void.4

Arbitration agreements must be in writing but do not have any other requirements of form – for example, email correspondence between parties may give rise to an arbitration agreement in the absence of a formal contract.

Interim measures

Although Article 24 of the Arbitration Act empowers an arbitral tribunal to make interim orders, for example for the preservation of evidence or assets, or for security for costs, such orders are not enforceable as awards.5 Article 15 also allows parties to an arbitration to seek interim measures of protection from the courts to preserve their rights. The court has jurisdiction in such cases notwithstanding the existence of an arbitration agreement. This is consistent with Article 9 of the Model Law, which similarly provides that applying to a court for an interim measure is not incompatible with an arbitration agreement.

Stay of proceedings and anti-suit injunctions

If an action is brought in a Japanese court regarding a matter subject to an arbitration agreement that should properly have been arbitrated, the court will typically dismiss the proceedings. However, Article 14 of the Arbitration Act provides that the defendant must file a motion to dismiss the court proceedings before it advances an argument on the merits of the case at a court hearing or preparatory hearing. The motion is usually made in writing, and the parties may be invited to file further written submissions to elaborate on the motion to dismiss. The concept of an anti-suit injunction does not exist in Japanese civil procedure, and courts will not make any such order preventing domestic or foreign court actions commenced in breach of an arbitration agreement.

Court intervention

The courts' jurisdiction over arbitral proceedings is limited by Article 4 of the Arbitration Act to the matters explicitly set out in the Arbitration Act. Broadly speaking, the courts have jurisdiction over matters relating to:

  1. the service of notice;
  2. the appointment or removal of arbitrators;
  3. challenges to an arbitral tribunal's ruling on its own jurisdiction;
  4. judicial assistance with evidence-gathering;
  5. interim measures of protection; and
  6. setting aside, recognising or enforcing arbitral awards.

Costs

The Arbitration Act allows parties to agree the apportionment of costs. In the absence of any such agreement, the arbitral tribunal will not default to a 'costs follow the event' framework. Rather, the presumption under Article 49 of the Arbitration Act is that each party will bear his or her own costs notwithstanding the outcome of the proceedings.

In practice, most international arbitrations seated in Japan are institutional arbitrations, with the relevant institutional rules giving arbitral tribunals the power to apportion costs. For example, the new JCAA Commercial Arbitration Rules, like other institutional rules such as those of the ICC, grant tribunals the power to allocate costs, including legal fees and expenses, based on (among other things) the parties' conduct, the outcome on the merits of the dispute and any other relevant circumstances (Rule 80).

Appointment of arbitrators in multiparty arbitrations

Article 17 of the Arbitration Act provides that the district court will, on the request of any party, appoint the arbitral tribunal in cases where three or more parties to an arbitration have not agreed a process for the appointment of arbitrators or where that process fails. Pursuant to Article 16, the court retains the power to decide the number of arbitrators where there are three or more parties to an arbitration and no agreement on the number of arbitrators has been reached.

Qualifications of counsel

Generally speaking, parties are free to be represented in any international arbitration seated in Japan by Japanese lawyers, foreign lawyers practising outside of Japan and registered foreign lawyers practising in Japan.

However, an international arbitration case is defined in Article 2(xi) of the Foreign Lawyers Law6 (as amended in 2003) as 'a civil arbitration case which is conducted in Japan and in which all or part of the parties are persons who have an address or a principal office or head office in a foreign state'. In certain cases, we have seen this argued to mean that an arbitration between wholly owned Japanese subsidiaries of foreign parents is not an

international arbitration for the purposes of Japanese law, and that foreign counsel should therefore be restricted from acting.

Qualifications of arbitrators

The Arbitration Act does not impose any requirements for the qualification or residency status of arbitrators acting in Japan-seated arbitrations. However, the failure of an arbitrator to possess specific qualifications agreed upon by the parties can be a ground for challenge under Article 18(1)(i).

Taking evidence

Article 35 of the Arbitration Act permits an arbitral tribunal, or parties to an arbitration with the approval of the tribunal, to apply for assistance from the courts with taking evidence. This may include, among other options, examination of witnesses, expert testimony and investigation of documentary evidence. In these circumstances, the arbitral tribunal is permitted, with the permission of the presiding judge, to put questions to witnesses and examine documents or objects.

The Arbitration Act does not provide guidance on the disclosure of documents. The parties may either agree on whether there will be any document disclosure in the arbitration, and if so, the rules for disclosure; or the arbitral tribunal may determine those questions. Practitioners from common law jurisdictions should be aware that full common law-style disclosure is not a feature of Japanese civil procedure. Where the parties have not agreed on disclosure rules the tribunal may, depending on the individual arbitrator's legal background and experience, be inclined to order only limited document production. However, it should be noted that Japanese practitioners are becoming increasingly familiar with general document production practices in international arbitration, including the IBA Rules on the Taking of Evidence, meaning that broader document production is possible.

Tribunal involvement in settlement

It is common practice in domestic Japanese arbitration for an arbitrator to take a hybrid mediator and arbitrator role, and to actively participate in the settlement of a matter. As such, Article 38 of the Arbitration Act allows an arbitral tribunal to attempt to settle the dispute that is the subject of the proceedings. However, the arbitral tribunal may only attempt to settle the dispute with the written consent of all parties. This is also a feature of the new JCAA Interactive Arbitration Rules, which permit an arbitrator to also act as a mediator in the same dispute where the parties agree this in writing (see Section II.i).

Substantive law of disputes

If the arbitration agreement is silent as to the governing law of a dispute, Article 36 of the Arbitration Act provides that it will be 'the substantive law of the State with which the civil dispute subject to the arbitral proceedings is most closely connected'. This is a departure from the equivalent provisions of the Model Law and, unlike the Model Law, does not refer to any conflict of law rules.

Time limit for correction of award

An application by a party for the correction of any non-substantive error in an award must be brought within 30 days of the award under Article 41 of the Arbitration Act. Unlike the

Model Law, the Arbitration Act does not prescribe a time limit within which the arbitral tribunal may correct an error in an award on its own initiative.

Confidentiality

The Arbitration Act does not require that arbitration be conducted on a confidential basis. However, the local practice is that arbitrations are generally regarded as confidential unless otherwise agreed by the parties, and Rule 42 of the JCAA Commercial Arbitration Rules imposes confidentiality obligations. Practitioners should ensure that, where needed and if not in the relevant arbitration rules, appropriate confidentiality provisions are included in arbitration agreements.

vi Trends in Japanese arbitration

The JCAA handles the majority of international arbitrations seated in Japan, and its statistics suggest that the absolute number of its cases has remained relatively constant over the past five years. More than half of claimants and respondents are Japanese.

As can be seen from the following data provided by the JCAA, the number of JCAA cases finally determined in the past four years had been gradually decreasing but spiked upwards in 2018:

  1. in 2011, 16 awards were rendered and two cases were withdrawn;
  2. in 2015, 13 awards were rendered and five cases were withdrawn;
  3. in 2016, 12 awards were rendered and eight cases were withdrawn;
  4. in 2017, seven awards were rendered and four cases were withdrawn; and
  5. in 2018, 18 awards were rendered and eight cases were withdrawn.

The incoming caseload has decreased consistently over the past four years, while the ongoing caseload of the JCAA, having previously been fairly consistent, dropped significantly in 2018:

  1. in 2011, there were 19 new cases and 32 ongoing cases at year's end;
  2. in 2015, there were 20 new cases and 27 ongoing cases at year's end;
  3. in 2016, there were 18 new cases and 25 ongoing cases at year's end;
  4. in 2017, there were 14 new cases and 28 ongoing cases at year's end; and
  5. in 2018, there were 13 new cases and 15 ongoing cases at year's end.

The demographics of the cases recently handled by the JCAA show that JCAA arbitrations involve more Japanese parties than any other nationality, as both claimant and respondent. This reflects a trend, discussed below, for international parties to arguably favour Japan as an arbitration venue only where there is a direct connection to the subject matter of the arbitration.

2016: determined and ongoing cases 2017: determined and ongoing cases 2018: determined and ongoing cases
Frequency of claimant nationality Frequency of respondent nationality Frequency of claimant nationality Frequency of respondent nationality Frequency of claimant nationality Frequency of respondent nationality
Japan 29 Japan 25 Japan 25 Japan 23 Japan 31 Japan 24
China* 4 China* 6 Taiwan 3 Taiwan 3 Taiwan 3 China 7
Thailand 4 Korea 4 Thailand 3 Thailand 3 Thailand 3 Taiwan 3
Korea 3 Thailand 4 China 2 China 3 UK 1 Thailand 3
US 1 US 3 US 1 US 2 Kuwait 1 US 2
Chile 1 Taiwan 3 UK 1 France 1 Korea 1 UAE 2
Saudi Arabia 1 India 2 Korea 1 Korea 1 Malaysia 1 Nigeria 1
Kuwait 1 British Virgin Islands 1 British Virgin Islands 1 Nigeria 1 British Virgin Islands 1 Saudi Arabia 1
Mexico 1 Kuwait 1 Mexico 1 Saudi Arabia 1 US 1 Kuwait 1
Taiwan 1 Saudi Arabia 1 Kuwait 1 Kuwait 1 UAE 1 Malaysia 1
Brazil 1 Malaysia 1 Malaysia 1 Saudi Arabia 1 Bangladesh 1
Saudi Arabia 1 Bangladesh 1 Myanmar 1
Myanmar 1 Laos 1
Jordan 1
Total 46 Total 51 Total 40 Total 42 Total 45 Total 49

* Including Hong Kong and Macao

In terms of the value of cases heard by the JCAA during the past three years, consistently, slightly under half of all cases have been in the ¥100 million to ¥1 billion range, with only four to five cases in each respective year being worth more than ¥10 billion.

The downward trend in the number of JCAA-administered cases in recent years matches a decline in Tokyo's ranking as a preferred seat of international arbitration, as other cities have increased in popularity as seats for international arbitration according to a well-known independent study. In the '2010 Choices in International Arbitration' survey of arbitration practitioners conducted by Queen Mary University of London and White & Case, Tokyo was ranked the fourth-most-preferred seat of arbitration, with 7 per cent of respondents preferring it. In the '2015 International Arbitration Survey' and '2018 International Arbitration Survey' conducted by the same partners, however, Tokyo disappeared entirely from the list of the top seven most preferred seats. The results from the three surveys are set out below.7

2010 survey 2015 survey 2018 survey
Seat Preferred by (%) Seat Preferred by (%) Seat Preferred by (%)
London 30 London 47 London 64
Geneva 9 Paris 38 Paris 53
Paris 7 Hong Kong 30 Singapore 39
Tokyo 7 Singapore 24 Hong Kong 28
Singapore 7 Geneva 17 Geneva 26
New York 6 New York 12 New York 22
Other 34 Stockholm 11 Stockholm 12

The top five criteria for seat selection among respondents to the 2018 survey (in order) were:

  1. reputation and recognition of the seat;
  2. neutrality and impartiality of the local legal system;
  3. national arbitration law;
  4. track record in enforcing agreements to arbitrate and arbitral awards; and
  5. availability of quality arbitrators who are familiar with the seat.

Tokyo's prominence as a centre of international arbitration has fallen in recent years. This decline is likely due to the surge in popularity of Singapore (in particular) and Hong Kong as arbitral venues in Asia, and also in part as a result of Japan's high ratio of outbound to inbound foreign investment.

ii THE YEAR IN REVIEW

i Developments affecting international arbitration

New facilities and institutions

In June 2017 the Cabinet Office approved the 'Basic Policy on Economic and Fiscal Management and Reform 2017', and in September 2017 established a government committee to discuss ways to develop international arbitration in Japan. In collaboration with private sector stakeholders, this eventually led to the establishment of the Japan International Dispute Resolution Center (JIDRC) in February 2018, and soon afterwards the opening of new arbitration facilities in Osaka (JIDRC-Osaka) in May 2018. JIDRC-Osaka is designed to be used for international arbitrations and other alternative disputed resolution (ADR) processes. The first arbitration hearing at JIDRC-Osaka occurred in March 2019, with at least one additional hearing currently scheduled for 2019. JIDRC-Osaka has also reportedly been used many times during its first year for ADR-related seminars and workshops by various entities, including the Asia-Pacific Economic Cooperation, the Kansai Economic Federation, the Japan Association of Arbitrators, the Japan Sports Arbitration Agency and the Osaka Bar Association. The JIDRC has also stated that it aims to establish a JIDRC-Tokyo 'in the very near future', although no substantive plans have been revealed. The government recently set aside approximately ¥290 million of its national budget for the fiscal year that started in April 2019 for developing the infrastructure necessary for international arbitration. Most of this money is intended to be used to set up an arbitration facility in Tokyo, expected to open by March 2020 in time to host the ad hoc division of the Court of Arbitration for Sport at the 2020 Olympic Games. It is currently unclear whether an existing entity will set up and operate the facility or whether a new entity will be created.

The International Arbitration Center in Tokyo (IACT) was launched on 1 September 2018 as an arbitral institution that specialises in resolving complex intellectual property disputes. IACT has published its own specialist rules and a closed list of 23 available arbitrators. At the time of writing, no caseload figures were available.

Further, on 20 November 2018, the Japan International Mediation Centre (JIMC) was launched in Kyoto to host and regulate the mediation of international disputes. The JIMC is jointly managed by the Japan Association of Arbitrators and Doshisha University, with its headquarters and hosting facilities at the University's campus in Kyoto. Similarly to the Singapore International Mediation Centre, the JIMC has published its own comprehensive set of rules and a list of recommended resident and international mediators for parties to choose from. At the time of writing, no usage statistics for the JIMC were available.

New JCAA rules

As previously noted, on 1 January 2019 the JCAA changed its suite of rules, amending its pre-existing Administrative Rules and Commercial Rules and creating a new set of Interactive Rules.

Each set of rules has a distinct purpose: the Administrative Rules are designed to permit the JCAA to administer arbitrations under the UNCITRAL Arbitration Rules; the Commercial Rules are the JCAA's main set of institutional rules for typical commercial arbitrations; and the innovative Interactive Rules provide for inquisitorial arbitration and fixed arbitrator fees where the parties prefer a more civil-law style of arbitration.

The main change to the Administrative Rules is to give the JCAA broader discretion over arbitrators' hourly rates. In an effort to ensure that the most prominent international experts agree to serve on arbitral tribunals under the Administrative Rules, the new rules allow the JCAA to designate higher rates for the most experienced arbitrators in the most complex cases.

The update to the Commercial Rules takes the opposite approach to arbitrator fees and actually places heavier restrictions on rates, fixing a blanket default hourly rate of ¥50,000 regardless of an arbitrator's experience or the complexity of the case. Separately, the JCAA added a number of other interesting changes, including:

  1. a prohibition on the publication of dissenting arbitrator opinions;
  2. an explicit right of the tribunal to reject evidence that is not produced in a timely manner;
  3. an explicit right for one of the appointed arbitrators, with the agreement of the parties, to act as a mediator in the same dispute (using the JCAA's International Commercial Mediation Rules);
  4. clear guidelines on the appointment and role of tribunal secretaries; and
  5. imposing explicit duties on arbitrators to conduct a reasonable investigation into potential conflicts of interest (and make any necessary disclosures) both prior to accepting an appointment and on an ongoing basis during their appointment.

Beyond these updates, the Commercial Rules broadly mirror the rules of other major arbitral institutions in that they cater for, inter alia, joinder, consolidating multiparty arbitration, appointment of emergency arbitrators and expedited procedures.

The Interactive Rules are based on the Commercial Rules but with two key differences. First, tribunals are empowered to take an interventionist approach, including sharing their preliminary views on the factual and legal issues at an early stage in proceedings. Second, the arbitrators' fees are payable as a fixed fee (fixed depending on the value of the claim), regardless of the number of hours eventually worked. The Interactive Rules appear to draw on similar sentiments to the Prague Rules (launched on 14 December 2018), which similarly encourage inquisitorial arbitration. While we would expect the Interactive Rules to make arbitrations cheaper and shorter, practitioners might have concerns over whether the expression of preliminary views could infringe the parties' right to a fair trial, and whether the fixed fee structure could put off high-quality arbitrators from accepting appointments.

Further, in 2018, the JCAA published on its website a database of arbitrators and mediators appointed to JCAA proceedings. The database includes such information as the years in which each individual received appointments; whether they were appointed as sole arbitrator, chairperson, party-appointed arbitrator or mediator; and their nationalities and language capabilities.

ii Arbitration developments in local courts

In 2016, for only the second time, a Japanese court set aside an arbitral award.

The first time a Japanese court set aside an arbitral award was in 2011. That case involved a Japanese company and a US company in a dispute regarding the enforceability of certain terms requiring a payment to be made to the US company. The tribunal found in favour of the claimant US company, but in its reasoning stated that a particular fact was undisputed by the parties, which was not the case. The Japanese company challenged the decision on the basis that the award was in conflict with 'the public policy or good morals of Japan',8 and consequently should be set aside.

The Tokyo District Court9 found in favour of the Japanese company and set aside the award, stating that the tribunal had failed to give the Japanese company adequate opportunity to dispute an important fact, which is inconsistent with Japanese procedural public policy. The US company appealed this decision to the Tokyo High Court,10 which approved the District Court's decision that the arbitral proceedings had been conducted in a manner that violated the procedural public policy of Japan.

The Court also held that the language of Article 44(1)(viii) of the Arbitration Act gives scope for parties to argue procedural grounds of challenge. Therefore, Japanese courts are able to judge whether an award is against Japanese public policy from a domestic legal standpoint, which, if established, necessitates that an award be set aside.

The more recent decision to set aside an arbitral award and the results of the subsequent appeals are set out in further detail below.

Osaka District Court, 17 March 201511

The presiding arbitrator of the tribunal for the award that was challenged was a lawyer in the Singapore office of a law firm. Approximately 18 months after the arbitration commenced, a new lawyer moved to the San Francisco office of the same law firm as the presiding arbitrator. Prior to his move to the firm, the new lawyer had represented the sister company of the applicant in an unrelated antitrust class action in California, and continued to represent the sister company following his move. The presiding arbitrator failed to disclose this fact.

Before his appointment by the party arbitrators, the presiding arbitrator had submitted a statement of independence to the JCAA with a reservation that, according to his firm's policy:

It is possible that [the] law firm may in the future act for or advise the parties in this arbitration or their affiliates in matters unconnected to this arbitration. For the duration of this arbitration, I shall neither involve myself in such mandates nor be provided with information relating to the same, and I believe that there is no possibility that such mandates may have any effect on my independence or impartiality as an arbitrator in this arbitration.

The applicant applied to have the arbitral award set aside on the grounds that the presiding arbitrator's failure to disclose the circumstances in question meant that the composition of the arbitral tribunal was:

  1. in violation of Japanese laws and regulations (in breach of Article 44(1)(vi) of the Arbitration Act), in particular the ongoing obligation on arbitrators to disclose without delay to parties any circumstances likely to give rise to justifiable doubts as to their impartiality or independence under Article 18(4) of the Arbitration Act; and
  2. in conflict with public policy (in breach of Article 44(1)(viii) of the Arbitration Act).

The District Court dismissed the challenge on the basis that the circumstances in question did not give rise to any justifiable doubts regarding the arbitrator's impartiality or independence.

The applicant appealed this decision to the Osaka High Court.

Appeal to the Osaka High Court, 28 June 201612

The Osaka High Court allowed the appeal and set aside the arbitral award. The High Court found in particular that:

  1. arbitrators have an ongoing obligation during the course of proceedings to disclose without delay all facts that would likely to give rise to justifiable doubts as to their impartiality or independence under Article 18(4) of the Arbitration Act. An advance declaration and waiver of potential future conflicts of interest was considered too abstract, and lacked the factual specificity required to enable parties to determine whether or not to challenge the appointment of an arbitrator; and
  2. arbitrators have an ongoing duty to identify disclosable facts. The High Court took the apparent view that, in this case, the potential conflict could have been identified with minimal difficulty through the arbitrator's law firm's conflict check processes. The High Court found that, regardless of whether the conflict had not been identified, or had been identified and cleared but not disclosed, the arbitrator had breached his obligation, and this had led to grave procedural defects in the arbitral process. This was deemed sufficient ground to set aside the award under Article 44(1)(vi) of the Arbitration Act.

At the time, the High Court's decision attracted significant attention from arbitration practitioners. While the Japanese courts are perceived as pro-arbitration and have a track record of dismissing arbitral award challenges, this decision marked a strict approach being taken to the disclosure of conflicts, with breaches of disclosure obligations potentially leading to the setting aside of arbitral awards, even if unintentional and not affecting the final arbitral result.

The High Court's decision was further appealed to the Supreme Court.

Appeal to the Supreme Court, 12 December 201713

On 12 December 2017, the Supreme Court found as follows.

It agreed with the High Court's decision that the duty of disclosure was an ongoing one, and that the purpose of this obligation was to ensure the effectiveness of the process for challenging arbitrators. Merely telling parties in the abstract that circumstances under Article 18(4) of the Arbitration Act could potentially arise does not constitute proper disclosure, as it lacked the necessary specificity to enable parties to challenge an arbitrator's appointment.

It also found that the disclosure obligation was not limited to facts that an arbitrator was actually aware of, but extended to circumstances that an arbitrator would normally have become aware of had a reasonable investigation been conducted. In this sense, the Supreme Court also agreed with the High Court judgment.

However, the Supreme Court found that, in this case, it was unclear whether the arbitrator had in fact been aware of the conflict before the award was rendered; whether the arbitrator's law firm was aware of the conflict; and what sort of conflict-checking system was in place at the arbitrator's law firm.

On that basis, it did not consider that the facts as presented were sufficient to allow the High Court to conclusively find that the arbitrator could have become aware of the potential conflict, had a reasonable investigation been conducted.14

The Supreme Court therefore set aside the High Court's decision and referred it back to the High Court for further determination. Although most practitioners do not expect the High Court to set aside the award again in light of the Supreme Court's findings, its eventual decision (not yet issued as at time of writing) is eagerly awaited.

iii Investor–state disputes

Japan is a contracting state to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States and to the Energy Charter Treaty (ECT). As at April 2019, it is a signatory to 32 bilateral investment treaties (BITs) (of which 28 are currently in force) and 18 free trade agreements and economic partnership agreements (of which 15 are currently in force). Japan was a signatory to the Trans-Pacific Partnership (TPP), from which the United States withdrew on 23 January 2017. Led by Japan, the remaining 11 parties signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in March 2018. Japan ratified the PTTP on 6 July 2018, and it came into force on 30 December 2018. The revised CPTPP retains all of the original tariff reductions and eliminations from the original TPP concluded by the 11 countries and the United States, but suspends 22 provisions that the United States had previously pushed for.

Compared to other major capital-exporting nations, Japan has entered into fewer investment treaties and free trade agreements relative to its high levels of outbound foreign direct investment. However, in 2013, as part of its Japan Revitalisation Strategy, the government announced that it aimed to raise the ratio of free trade agreements with its trading partners from 19 to 70 per cent by 2018. The government reiterated its commitment to additional investment agreements in its publication of the Japan Revitalisation Strategy 2016, stating its aim of signing up to investment-related agreements covering 100 countries and regions by 2020. In a sign of this commitment to investment agreements, since 2016 Japan has:

  1. signed BITs with Iran, Israel, Kenya, Armenia, Argentina, Jordan and the UAE;
  2. ratified the Japan–Mongolia Economic Partnership Agreement (which came into force in June 2016);
  3. signed the EU–Japan Economic Partnership Agreement (which came into force on 1 February 2019); and
  4. signed the CPTTP.

Despite the increase in investment agreements to which Japan has become a party in recent years, the involvement of Japan and Japanese entities in investor–state dispute settlements remains very low. As at April 2019, Japan has never been a respondent to any investment treaty arbitration. Furthermore, we are aware of only six investment treaty arbitrations to which a Japanese investor entity is, or was, a party, none of which were brought pursuant to a Japanese BIT. Of these arbitrations, four are ongoing and two are historical.

The four ongoing investment treaty arbitrations involving Japanese entities are ITOCHU Corporation v. Kingdom of Spain,15 JGC Corporation v. Kingdom of Spain,16 Eurus Energy Holdings Corporation and Eurus Energy Europe BV v. Kingdom of Spain17 and Nissan Motor Co Ltd v. The Republic of India. All three cases against Spain are being administered by the International Centre for the Settlement of Investment Disputes (ICSID) and have been brought under the ECT, whereas we understand that Nissan's claim has been brought under the India–Japan Economic Partnership Agreement, and is being conducted under the UNCITRAL Rules with its seat in Singapore. All the cases are currently pending with constituted arbitral tribunals, and have no Japanese tribunal members.

As for past investment treaty arbitrations, Japanese investors were involved in Saluka Investments BV v. The Czech Republic,18 conducted through the Permanent Court of Arbitration and brought under a Netherlands–Czech Republic BIT with a final partial award in favour of the Japanese investor, and Nusa Tenggara Partnership BV and PT Newmont Nusa Tenggara v. Republic of Indonesia,19 conducted through ICSID and brought under a Netherlands–Indonesia BIT. The latter case was withdrawn in 2014 a month after filing.

The reasons for the low level of Japanese involvement in investor–state dispute settlements are not clear. One possibility is that Japanese investors will tend to avoid commencing claims where the relationship with the host government is extant. Another potential contributing factor is that the government may assist Japanese investors with difficulties with host states through advocacy, advice or financial assistance only until an investor files a request for arbitration. In our experience, Japanese parties are certainly becoming more active in structuring their investments to obtain the benefit of relevant treaties, and are more often considering available protections once issues arise. Japanese involvement in investor–state dispute settlements is likely to increase in the near future as Japanese investors become more aware of their rights and as the investment agreement target in the Japan Revitalisation Strategy 2016 is approached.

iii OUTLOOK AND CONCLUSIONS

While there was concern that the Supreme Court might uphold the Osaka High Court's decision to set aside the arbitral award as set out in Section II.ii, its ruling and referral of the decision back to the Osaka High Court has reaffirmed the general pro-arbitration stance of the Japanese courts.

In recent years, however, Japan has clearly fallen further behind regional rivals such as Singapore and Hong Kong when it comes to attracting international arbitrations. Historically, the explanation for this has been that Japanese companies do not have an appetite for contentious matters and will look to avoid formal disputes as much as possible. However, this explanation is no longer appropriate: we have significant experience of Japanese companies being regular users of international arbitration, albeit with the majority of these arbitrations held overseas at neutral venues.

There are a number of reasons why Japan has not become a prominent seat for international arbitration, despite corporate Japan adopting a more pro-arbitration attitude:

  1. foreign companies are reluctant to agree to Japan as an arbitral seat partly because, in the event of court involvement, judicial proceedings are conducted in Japanese;
  2. Japanese companies do not push for a 'home advantage' when negotiating arbitration agreements, and tend to either recognise the benefits of a neutral venue or readily agree in negotiations to a non-Japanese seat;
  3. Japan is seen as an expensive place to conduct an arbitration hearing; and
  4. Japan has not promoted itself as aggressively to companies and arbitration practitioners as countries like Singapore and Hong Kong. This was most apparent in 2017 when Singapore and Hong Kong both enacted legislation to clarify the use of third-party funding in their respective jurisdictions. There is a degree of uncertainty under current Japanese legislation on the legality of using third-party funding, which would greatly benefit from clarification.

Although Japan may not match Singapore or Hong Kong as an arbitral hub in Asia in the near future, it has great untapped arbitral potential. However, this potential will only be realised once the international business community is persuaded to think of Japan as a centre for international arbitration, which will only occur if international companies have as positive an experience as possible in the limited number of arbitrations that are conducted in Japan. The JCAA's new 2019 rules are a welcome and innovative attempt to broaden the appeal of JCAA arbitration, but this alone will not be enough. To ensure a positive experience, arbitral conditions must be improved through government support for arbitration (the JIDRC and JIMC are a good start, although their true impact is not yet measurable), the availability of better and more cost-effective venues to hold arbitrations (particularly in Tokyo, as both the JIDRC and JIMC facilities are in the Kansai region), and an increased number of Japanese and foreign practitioners versed in international arbitration matters. A virtuous circle can be completed
by Japanese organisations using their negotiation powers to insist on Japan-seated arbitration.

While we hope for more international arbitrations seated in Japan and for Japan to become a more popular arbitral hub, it is important not to lose sight of the fact that arbitration is now seen as a standard choice for Japanese companies' international business. We are also seeing a gradual increase in the number of arbitration practitioners at both domestic and foreign law firms. Arbitration is also being taught as a subject at Japanese law schools. This has not always been the case, and there has been a marked increase in awareness of arbitration over the past 20 years. The virtuous circle is in motion, even if at a relatively slow pace.


Footnotes

1 Christopher Hunt and Elaine Wong are partners and Ben Jolley and Yosuke Homma are senior associates
at Herbert Smith Freehills. The authors are indebted to Mr Mugi Sekido and Ms Yuko Kanamaru of
Mori Hamada & Matsumoto and Sam Beer, an associate at Herbert Smith Freehills, for their assistance with this chapter.

2 Arbitration Act (Law No. 138 of 2003).

3 Supreme Court Rules on Procedures of Arbitration Related Cases (Supreme Court Rule No. 27, 26 November 2003).

4 See Articles 3 and 4 of the Supplementary Provisions to the Arbitration Act.

5 Pursuant to Articles 45 and 46 of the Arbitration Act.

6 Foreign Lawyers Law (Law No. 66 of 1986).

7 Note that in the 2015 survey, respondents were asked to select three preferred seats, and five seats in the 2018 survey, which is why the cumulative results exceed 100 per cent.

8 Article 44(1)(viii) of the Arbitration Act.

9 Tokyo District Court Heisei 21 (chu) No. 6.

10 Tokyo High Court Heisei 23 (ra) No. 1334.

11 Osaka District Court, 17 March 2015, 2014 (arb) No. 3, 2270 Hanrei Jiho 74.

12 Osaka High Court, 28 June 2016, 2015 (ra) No. 547, 2319 Hanrei Jiho 32.

13 Japan Supreme Court, 12 December 2017, 2016 Kyo No. 43.

14 The additional requirement at Article 24 of the new JCAA Commercial Arbitration Rules (mentioned above) to conduct a reasonable investigation into potential conflicts of interest (both before and on an ongoing basis thereafter) is thought to have been included as a result of this finding.

15 ITOCHU Corporation v. Kingdom of Spain (ICSID case No. ARB/18/25).

16 JGC Corporation v. Kingdom of Spain (ICSID case No. ARB/15/27).

17 Eurus Energy Holdings Corporation and Eurus Energy Europe BV v. Kingdom of Spain (ICSID case No. ARB/16/4).

18 Saluka Investments BV v. The Czech Republic (PCA 2001-04).

19 Nusa Tenggara Partnership BV and PT Newmont Nusa Tenggara v. Republic of Indonesia (ICSID case No. ARB/14/15).