The International Arbitration Review: Japan
i Structure of arbitration law in Japan
Arbitration in Japan is governed by the Japanese Arbitration Act (JAA),2 which was substantially modified from the old law, the Law Concerning Public Peremptory Notice and Arbitration Procedure.3 The JAA came into effect on 1 March 2004. The JAA applies to '(a)rbitral proceedings where the place of arbitration is in the territory of Japan' (Article 1), regardless of whether the proceedings are domestic or international. The JAA is largely based on the UNCITRAL Model Law on International Commercial Arbitration (1985) (Model Law). Some distinctive features of the JAA compared with the Model Law are set out below.
Japan is a member state to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NY Convention), with a declaration to apply the NY Convention to the recognition and enforcement of awards made only in the territory of another contracting state (in accordance with Article I.3 of the NY Convention). The recognition and enforcement provisions of the JAA closely mirror those of the NY Convention and the Model Law. While Japan is not a party to any other convention on the recognition and enforcement of arbitral awards, Japanese courts are generally considered to take a pro-arbitration approach to the enforcement of domestic and international arbitral awards.
ii Distinctive features of Japanese arbitration law
This section sets out some distinctive features of arbitration in Japan arising from the JAA and other local laws that may be of interest to practitioners.
Validity of arbitration agreements and specific exceptions
Article 13 of the JAA sets out the requirements for and the effects of arbitration agreements, which substantially mirror the Model Law. However, there are some special rules in the JAA that apply to specific categories of disputes. For example, labour-related disputes (as described in Article 1 of the Act on Promoting the Resolution of Individual Labour Disputes4) are excluded from the scope of arbitrable cases under the JAA (Article 4 of the Supplementary Provisions to the JAA). Consumers are also at liberty to cancel arbitration agreements between themselves and business operators (Article 3.2 of the Supplementary Provisions to the JAA).
Article 24.1 of the JAA provides that an arbitral tribunal may, upon the request of a party, order any party to take such preliminary or interim measures as the arbitral tribunal considers necessary. However, interim orders rendered by arbitral tribunals are not generally considered to be enforceable in Japan, and the JAA does not have any provision to give parties appellate rights against an order by an arbitral tribunal regarding interim measures. Under Article 45.2(vii) of the JAA, the fact that an arbitral award has not yet become final and binding is a ground to deny the enforceability of such an award in Japan. Therefore, the parties usually apply for interim measures to arbitral tribunals with the expectation of voluntary compliance by the parties; our experience in practice is that parties usually do comply with interim orders by arbitral tribunals.
Separately, parties to an arbitration agreement are at liberty to apply to Japanese courts for interim measures at any time. Although Article 14.1 is clear that Japanese courts are not to entertain actions on the merits where a dispute falls within the ambit of an agreement to arbitrate, Article 15 of the JAA provides that an arbitration agreement does not preclude the parties from filing a petition before a Japanese court, before or during arbitration proceedings, for interim measures in respect of the dispute subject to the arbitration agreement.
Qualifications of counsel
Parties are free to be represented in any international arbitration seated in Japan by lawyers, including Japanese lawyers, foreign lawyers practising outside of Japan and registered foreign lawyers practising in Japan (note, however, in order for foreign lawyers practising outside of Japan to represent a party in an international arbitration in Japan, it is required for them to have been engaged in a foreign jurisdiction). However, neither foreign lawyers practicing outside of Japan nor registered foreign lawyers practicing in Japan are allowed to act as counsel in a domestic arbitration in Japan.
For these purposes, the term international arbitration is narrowly defined in Article 2(xi) of the Act on Special Measures concerning the Handling of Legal Services by Foreign Lawyers (Foreign Lawyers Act5) 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'. This definition has given rise to issues in respect of arbitrations between wholly-owned Japanese subsidiaries of foreign parent companies, as such an arbitration may not meet the above definition, preventing the parties to such a case from choosing to be represented by foreign counsel. This problem is one of the reasons for the recent consideration of amendments to the Foreign Lawyers Act described in Section II.
Tribunal involvement in settlement
It is worth noting that, under the JAA, an arbitral tribunal is explicitly permitted to assist in the settlement of civil disputes subject to arbitral proceedings if both parties have consented in writing (Article 38.4 and 38.5 of the JAA). This reflects Japanese court procedures that allow a judge to attempt to settle a dispute even if that has not been requested by the parties (Article 89 of the Japanese Code of Civil Procedure). Under the JAA, the parties may at any time withdraw their consent to the tribunal's involvement in settlement, but such withdrawal of consent must also be in writing (Article 38.5 of the JAA).
iii Structure of the courts
The Japanese courts' jurisdiction over arbitral proceedings is limited by Article 4 of the JAA to the matters explicitly set out in the JAA. For example, the Japanese courts have jurisdiction over matters relating to the service of notice (Article 12), the appointment or removal of arbitrators (Article 17, 19, 20), challenges to an arbitral tribunal's decision that the tribunal has jurisdiction (Article 23), assistance with evidence-taking (Article 35) and setting aside or enforcing arbitral awards (Article 44, 46), but only when the requirements provided in these corresponding provisions of the JAA are satisfied.
Japan's court system has three tiers – district courts, high courts and the Supreme Court. Under Article 5 of the JAA, jurisdiction over arbitration-related matters is given to the district courts, and under Article 7 of the JAA, an appeal to a higher court regarding a district court's decision is allowed only when the JAA specifically grants the parties appellate rights and only in the form of immediate appeals, subject to a filing deadline of two weeks from the original decision of the district court. For example, a party with an interest affected by a district court's decision on the court's assistance with evidence-taking (Article 35.4) or on setting aside or enforcing arbitral awards (Article 44.8, 46.10) may file an immediate appeal regarding the district court's decision.
There are no specialised arbitral divisions in the Japanese court system.
iv Japanese arbitral institutions
Japan's primary arbitration institution is the Japan Commercial Arbitration Association (JCAA). The JCAA was established in 1950 as part of the Japan Chamber of Commerce and Industry with the support of six other business organisations, including the Japan Federation of Economic Organisations, the Japan Foreign Trade Council and the Federation of Banking Associations of Japan, to settle commercial disputes and promote international trade.
Recently, the JCAA amended its arbitration rules, and there are now three sets of arbitration rules that came into force on 1 January 2019. These new arbitration rules are the Commercial Arbitration Rules (JCAA Commercial Arbitration Rules), the Interactive Arbitration Rules (JCAA Interactive Rules); and the Administrative Rules for UNCITRAL Arbitration (together with the UNCITRAL Arbitration Rules 2010, JCAA UNCITRAL Arbitration Rules; and together with the JCAA Commercial Arbitration Rules and the JCAA Interactive Rules, JCAA Rules). The JCAA Commercial Arbitration Rules will apply if an arbitration agreement provides for JCAA arbitration without specifying the applicable arbitration rules (Article 3.2 of the JCAA Commercial Arbitration Rules). An outline of these new JCAA rules is set out in Section II.
Other than the JCAA, Japan has the Tokyo Maritime Arbitration Commission of the Japan Shipping Exchange, which only deals with maritime disputes, and which has a three-track system of arbitral rules depending on the value of the dispute.
v Trends relating to Japanese arbitration
The Japanese arbitration market has historically been less active than many others in Asia, such as Singapore or Hong Kong, but that has recently begun to change, and in some instances, drastically so. In 2017, the Cabinet Office established a government committee to discuss ways to foster the growth and development of international arbitration in Japan. Although these programmes remain nascent, several standout examples of progress include the establishment of the Japan International Dispute Resolution Centre (JIDRC) and the substantial amendments of the JCAA Rules in 2018 and 2019 that were mentioned above. The details of these new developments of Japanese arbitration are set out below.
The year in review
i Developments affecting international arbitration
Recent years have seen several important updates and amendments to the Japanese legal rules; however, few to date have targeted international arbitration. The primary counterexample would be the amendments to the Foreign Lawyers Act that have been under discussion at the Diet, and that are expected to come into effect by the end of 2020.
Two of the main purposes of the amendments under consideration are to respond to the growing need in Japan for foreign legal services, which accompanies a corresponding increase in international transactions by Japanese corporations; and to foster growth in the Japanese arbitration market. To achieve these objectives, the amendments include:
- relaxing the definition of international arbitration (i.e., so that cases with international elements can be considered international even if all of the parties have addresses and head offices in Japan);
- permitting foreign lawyers to act for parties in the newly defined category of proceeding designated an international mediation case;
- relaxing the requirements for foreign lawyers to become registered in Japan (i.e., to give credit for up to two years spent providing legal services in Japan toward the three-year practical experience requirement); and
- establishing a joint corporation system for law firms (i.e., to enable an establishment consisting of both Japanese lawyers and registered foreign lawyers).
There were several important developments in 2019 and early 2020 with respect to the JIDRC, which was established in 2018.
First, the first arbitration hearing at the JIDRC's hearing facility in Osaka took place in March 2019. As the JIDRC's space in Osaka was the first dedicated set for arbitral hearing facilities in Japan, their successful use was a welcome development within the market.
Perhaps more significantly, in March 2020 the JIDRC opened an additional facility in Tokyo, centrally located in Toranomon. While the disastrous covid-19 pandemic has thus far necessitated an indefinite closure of this facility, it is expected to become, upon its reopening, Japan's premier venue for arbitration hearings.
New JCAA rules
As noted above, on 1 January 2019 the JCAA amended its suite of rules. There are now three sets of arbitration rules for parties to choose among: the JCAA Commercial Arbitration Rules, the JCAA Interactive Rules, and the JCAA UNCITRAL Arbitration Rules. As set out below, each has a distinct character and purpose.
JCAA Commercial Arbitration Rules
Historically, the JCAA Commercial Arbitration Rules have closely tracked the UNCITRAL Model Rules. The 2019 version provides several welcome modernisations. The role of the presiding arbitrator is now clearly defined, and there are explicit rules governing the involvement of tribunal secretaries. In addition, there is an innovative prohibition on the disclosure of dissenting opinions by arbitrators.
JCAA Interactive Rules
These new rules aim to reconceptualise arbitration to incorporate more elements of the civil law tradition, and to address the perception that arbitration has become too expensive and adversarial (a perception that is perhaps particularly widespread among Japanese companies, which are accustomed to Japanese court practices), by mandating more active communication between arbitral tribunals and parties about the core issues in dispute, and adopting a fixed system for arbitrators' remuneration. It is our understanding that, despite their recent introduction, the JCAA has already begun administering an arbitration that is proceeding under these new rules.
JCAA UNCITRAL Arbitration Rules
These rules are intended to ensure compatibility between the JCAA's administrative functions and the substantive provisions of the UNCITRAL Arbitration Rules, which were originally drafted to be functional in ad hoc settings. For example, the JCAA UNCITRAL Arbitration Rules allow the JCAA to maintain and make use of its list of arbitrators in order to maintain the level of service quality that it aims to provide to parties.
Finally, a welcome additional development is that the JCAA has updated its website to increase transparency for potential users, with a goal of making it easier for non-Japanese parties to learn about the practical aspects of JCAA arbitration. Considerable statistical data is now disclosed on the website,6 and it is now possible to access the JCAA's panel of arbitrators, who are listed in a searchable database.7
ii Arbitration developments in local courts
While everyone has been keen to see the outcome of the well-known case regarding the setting aside of an arbitral award on the grounds of an arbitrator's failure to disclose a potential conflict, which was remanded by the Supreme Court to the Osaka High Court on 12 December 2017, the decision has not yet been made publicly available.
Beyond that case, the past year did not see any notable cases relating to arbitration in the Japanese courts.
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, the Energy Charter Treaty (ECT), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). As at April 2020, it is a signatory to 33 bilateral investment treaties (BITs) (of which 29 are currently in force) and 18 free trade agreements and economic partnership agreements (EPAs) that include provisions pertaining to investment protection. Most of these instruments include investor–state dispute settlement provisions that permit investors to initiate arbitration directly against the contracting states, with the Japan–Australia EPA and the EU–Japan EPA (mentioned below) as notable exceptions.
In the past decade, Japan has sought to increase the number of investment treaties and other investment-related agreements to which it is a party. Since 2016 in particular, Japan has signed BITs with Iran, Israel, Kenya, Armenia, Argentina, Jordan, Morocco and the UAE; the CPTTP; and the EU–Japan EPA (albeit with the investor–state dispute settlement provisions excluded, pending further discussion). It has also ratified several previously-signed agreements.
Despite the increase in investment agreements to which Japan is a party in recent years, the involvement of Japan and Japanese entities in investor–state dispute settlement remains relatively low, particularly when compared to its smaller neighbour, South Korea. As of April 2020, Japan has yet never been a respondent in an investment treaty arbitration. Furthermore, we are aware of only seven investment treaty arbitrations in which a Japanese investor entity is, or was, involved. Of these arbitrations, five are ongoing and two are historical.
Four of the ongoing investment treaty arbitrations involve Japanese entities as claimants: ITOCHU Corporation v. Kingdom of Spain,8 JGC Corporation v. Kingdom of Spain,9 Eurus Energy Holdings Corporation and Eurus Energy Europe BV v. Kingdom of Spain10 and Nissan Motor Co Ltd v. The Republic of India.11 All three of the cases against Spain are administered by the International Centre for the Settlement of Investment Disputes (ICSID) and were brought under the ECT, whereas Nissan's claim was brought under the India–Japan EPA and is being conducted in Singapore under the UNCITRAL Rules, under the administration of the Permanent Court of Arbitration. In late 2019, a 29 April 2019 decision on jurisdiction in Nissan v. India was made public, revealing that the tribunal had accepted jurisdiction over Nissan's claims; that decision has since been subject to a challenge initiated by India in the Singapore courts, which had not been resolved at the time of writing. This decision is notable as the first publicly released interpretation by a tribunal of a bilateral treaty with investment protections to which Japan is a party, and which includes similar wording as that found in some of Japan's BITs.
In addition, there is at least one ongoing investment treaty arbitration where the investor is a wholly-owned subsidiary of a Japanese company: Bridgestone Licensing Services, Inc and Bridgestone Americas, Inc v. Republic of Panama,12 which is also administered by ICSID, and is which is proceeding under the United States–Panama investment promotion agreement. Owing to the transparency provisions of that agreement, much of the materials from that arbitration have been made public; the case appears to be nearing completion, as the parties submitted post-hearing briefs in October 2019.
As for past investment treaty arbitrations, Japanese investors were involved in Saluka Investments BV v. The Czech Republic,13 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,14 conducted through ICSID and brought under a Netherlands–Indonesia BIT. The latter case was withdrawn in 2014 a month after filing.
Outlook and conclusions
Despite the small number of cases newly filed with the JCAA in 2019, our view is that Japanese companies are becoming more inclined to engage in international arbitration. In practice, we see more arbitration clauses (than jurisdiction clause) in contracts and represent clients in more cases than ever. More generally, interest in the field continues to increase. We expect that the amendments to the Foreign Attorney Act that are under consideration in the Diet will, when adopted, stimulate this trend and further promote the development of the Japanese international arbitration market.
1 Yuko Kanamaru and Yoshinori Tatsumo are partners and Daniel Allen is a foreign lawyer at Mori Hamada & Matsumoto.
2 Act No. 138 of 2003.
3 Act No. 29 of 1890.
4 Act No. 112 of 2001.
5 Act No. 66 of 1986 as amended in 2016.
8 ITOCHU Corporation v. Kingdom of Spain (ICSID case No. ARB/18/25).
9 JGC Corporation v. Kingdom of Spain (ICSID case No. ARB/15/27).
10 Eurus Energy Holdings Corporation and Eurus Energy Europe BV v. Kingdom of Spain (ICSID case No. ARB/16/4).
11 Nissan Motor Co, Ltd v. Republic of India, PCA case No. 2017-37.
12 Bridgestone Licensing Services, Inc and Bridgestone Americas, Inc v. Republic of Panama, ICSID case No. ARB/16/34.
13 Saluka Investments BV v. The Czech Republic (PCA 2001-04).
14 Nusa Tenggara Partnership BV and PT Newmont Nusa Tenggara v. Republic of Indonesia (ICSID case No. ARB/14/15).