The Shipping Law Review: Japan

Commercial overview of the shipping industry

Japan is the world's second-largest shipowning country (it owns and controls more than 3,500 ocean-going vessels) and one of the top three shipbuilding countries in terms of tonnage. Japan has a unique maritime cluster that comprises three large shipping companies (NYK, MOL and Kline), several prominent and high-quality shipbuilding companies and individual shipowners, which are mainly located in Tokyo and Imabari, with the remainder in the Shikoku, Chugoku and Kyushu regions. The cluster is supported by banking, leasing corporations and trading houses, which are quite active in investing not only in domestic companies but also in overseas companies through schemes such as operating and finance leases. Of approximately 50,000 ocean-going commercial vessels in the world, roughly 3,500 vessels with more than 225 million deadweight tonnage are owned or operated by Japanese companies or special-purpose companies established in Japan or elsewhere, such as Panama, Liberia, Singapore and the Marshall Islands.2

General overview of the legislative framework

Japan has ratified most of the basic maritime conventions, including:

  1. Protocol to amend the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading 1968 (the Hague-Visby Rules);
  2. International Convention on Civil Liability for Oil Pollution Damage 1969, replaced by 1992 Protocol (the CLC Convention);
  3. International Convention for the Prevention of Pollution from Ships 1973 (as modified by the Protocol of 1978) (MARPOL (73/78)) with its Annexes;
  4. International Convention for the Safety of Life at Sea 1974 (SOLAS);
  5. the Convention on Limitation of Liability for Maritime Claims 1976 (the LLMC Convention 1976) with its 1996 Protocol;
  6. International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage 1992 (the Fund Convention);
  7. the International Convention on Civil Liability for Bunker Oil Pollution Damage 2001 (the Bunker Convention);
  8. Nairobi International Convention on the Removal of Wrecks 2007 (Nairobi WRC 2007); and
  9. other relevant rules and regulations that are incorporated or codified by local laws and regulations.

Forum and jurisdiction

i Courts

There are no special courts dedicated to handling shipping disputes. The district courts are competent to handle shipping matters in the first instance. Disputes may be appealed to the High Court and then to the Supreme Court. In general, civil litigation that is initiated in a district court would take one to two years from commencement of the lawsuit to judgment. A successful party is not entitled to recover legal costs from the losing party, unless the court exceptionally finds that a part of legal costs should be recoverable in the case of a tort claim (in general, up to 10 per cent of the admitted amount).

Whether Japanese courts have jurisdiction in international disputes is determined pursuant to the Code of Civil Procedure3 and the Act on General Rules for Application of Laws.4 In the event that two vessels collide within Japanese territorial water or that a vessel damaged in a collision reaches a Japanese port as the first port after the collision, the resulting tort claims can be brought to Japanese courts, regardless of the vessels' flags.5 Exclusive jurisdiction clauses in contracts, which are normally considered to be valid, would make it clear that the designated courts have the competent jurisdiction.6

Prescription periods as set out in substantive laws (i.e., the Civil Code or the Commercial Code) vary depending on the nature of the claim. In general, claims arising from contracts are subject to a five-year prescription period from when the creditor becomes aware of the possibility to exercise its right7 and tort claims are subject to a three-year period,8 from when the victim first becomes aware of the damage and the identity of the wrongdoers. Tort claims for damages caused by death or personal injuries are subject to a five-year prescription period.9 Importantly, shorter time limits apply to specific claims, such as for carriers' liability for breach of carriage of goods contract,10 shipowners' claims against charterers, shippers or consignees,11 and those arising from collision,12 salvage13 and general average.14

ii Arbitration and ADR

The Tokyo Maritime Arbitration Commission (TOMAC), which is located in the Japan Shipping Exchange, is the only arbitral tribunal in Japan for resolving shipping disputes. It has a long history and a prestigious reputation, in particular with regard to disputes relating to the NIPPONSALE contract. The TOMAC is recognised as being the more popular choice for dealing with shipping issues than the International Chamber of Commerce Japan, which tends to deal with more general commercial disputes.

The TOMAC has drawn up three types of arbitration rules: (1) Ordinary Rules; (2) Simplified Rules (claims up to ¥20 million); and (3) Small Claims Arbitration Procedure (SCAP) Rules (claims up to ¥5 million).15 These rules all have a basic concept that the smaller the claim amount is, the lower the costs that will be borne by the arbitration and the quicker the arbitration proceedings are resolved. The average length of arbitration proceedings is about 13 months under the Ordinary Rules, three to five months under the Simplified Rules and five to 10 weeks under the SCAP Rules.

Under the Ordinary Rules, which are similar to those of other arbitral organisations, after one or three arbitrators have been nominated and appointed, the parties can exchange defence statements and supplemental statements in English, and then move to the hearing, which is conducted in English. An arbitral award is issued within 30 days of the conclusion of the hearing being announced.

An arbitral award has the same effect as a final and binding judgment and an appeal to the court to set aside the arbitral award is allowed only on narrow grounds (such as violation of the arbitration procedure or public policy).16 One of the advantages of arbitration by the TOMAC in comparison with court proceedings is that the successful party is entitled to recover legal costs from the losing party to a reasonable extent upon application for recovery of those costs.

iii Enforcement of foreign judgments and arbitral awards

The following requirements must be met for foreign judgments to be enforced in Japan:

  1. the jurisdiction of the foreign court is recognised under laws, regulations, conventions or treaties;
  2. the defeated defendant has been issued with a summons or order as required for the commencement of the lawsuit, or has appeared without receiving any summons or order;
  3. the content of the judgment and the court proceedings are not contrary to public policy in Japan; and
  4. a mutual guarantee exists.17

To date, judgments on point (d) have concluded that a mutual guarantee exists between Japan and the United Kingdom, Japan and Singapore, and so on, whereas a mutual guarantee between Japan and China is denied.

As Japan is a contracting state of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention), arbitral awards rendered in signatory states of the Convention would be enforceable in Japan, as long as the requirements of the Convention have been fulfilled. On the other hand, enforceability of arbitral awards in non-party states would be subject to the conditions set out in the Arbitration Act.18

Shipping contracts

i Shipbuilding

Japanese shipyards have been constructing high-quality and high-tech commercial vessels for a long time. Owing to the intense global competition in the shipbuilding market, however, some Japanese shipyards have decided to consolidate their business or form alliances to survive this competition.

Most shipbuilding contracts with Japanese shipyards are based on the SAJ Form issued by the Shipbuilder's Association of Japan, with some amendments. The key elements of a contract using the SAJ Form are payment and title transfer, and a performance guarantee. A refund guarantee for security of advance payments may be furnished by the shipyard or its bank. Payment of the purchase price is made in three or four instalments. Title of the vessel is transferred to the buyer at the time of delivery, which is usually a trigger for payment of the final instalment.

ii Contracts of carriage

Contracts of international carriage are governed by the Act on International Carriage of Goods by Sea (JCOGSA), which incorporates the essence of the Hague-Visby Rules, though with some variations. JCOGSA has force of law for carriage of goods by sea when either the port of loading or the port of discharge, or both, is located outside Japan, whether or not the bill of lading is issued.19 In contrast, contracts of domestic carriage of goods by sea are subject to the Commercial Code.

Under JCOGSA, the carrier is obliged to exercise due diligence to ensure the vessel is seaworthy in three respects, namely the physical condition of the vessel, the efficiency of the crew and equipment, and the vessel's cargo-worthiness.20 In the event of damage to cargo during a voyage resulting from unseaworthiness, the carrier is liable for damages unless it can successfully prove it has fulfilled all aforementioned aspects of due diligence. If a vessel runs aground as a result of errors by the crew in managing or controlling her ballast water, causing significant damage to the cargo, the Tokyo District Court has concluded that the carrier is liable to pay for damage occasioned by unseaworthiness in the sense that the seafarer who had managed and controlled the ballast water was not competent to bring about a safe voyage and the carrier was not able to exercise due diligence.21

Turning to the shipper's duty, if the good has a flammable, explosive or other dangerous nature, the shipper is obliged to notify the carrier of this and provide additional information as necessary to carry the good safely.22

The Supreme Court23 has affirmed a judgment by the Tokyo High Court,24 in which it ruled that the shipper and the cargo manufacturers are liable for damage to the vessel and the cargo caused by the fire on the container of the cargo in question, on the basis of tort and product liability, respectively.

Under Japanese law, unless the consignee pays for the freight and costs relating to carriage and anchorage, the shipowner is entitled to exercise a possessory lien on the cargo and the master has a right to detain the cargo.25 Unlike under English law, however, a contractual lien on cargo owned by a third party is not recognised.

The Commercial Code sets out provisions for multimodal transport and bills of lading, under which the liability of the multimodal carrier is determined by the laws that are applied to transportation by air, land or sea, depending on the period in which the cause of the loss or damage occurs.26

iii Cargo claims

Under Japanese law, the lawful holder of a bill of lading is entitled to sue the carrier for loss or damage to the cargo based on the contract of carriage written on the bill of lading. Even if a bill of lading is not issued, the consignee has title to make claims against the carrier after the cargo reaches the port of discharge, since the consignee is supposed to take over the shipper's title at that time.27 If there is an issue regarding the identity of the carrier, the Supreme Court28 has established basic rules that the carrier shall be identified on the basis of the description on the bill of lading, concluding that the shipowner shall be considered to be the carrier on the ground that the bill of lading included a signature 'for the Master', a demise clause on the reverse side and a statement of receipt of freight by the agent of the shipowner or master, despite the time charterer's logo being on the face of the bill of lading. It is also considered by this Supreme Court judgment that demise clauses would essentially be enforceable.

When a bill of lading has clear clauses or wording for incorporation of the terms set out in a specific charter party, the incorporation of those terms (including dispute resolution clauses) into the bill of lading would be adopted by the courts,29 although the requirements for incorporation are unclear as yet. In this context, the courts are inclined to broadly accept an arbitration clause or an exclusive jurisdiction clause on a bill of lading, which means the courts will dismiss a claim brought under a contract of carriage covered by such a bill of lading.30

JCOGSA sets out the rules for calculation of damages, which state that the amount shall be either the current market price or, if there is no available market, the normal value at the place and time at which the goods should have been discharged.31 The prevailing view is that determination of the value should be consistent with the cost, insurance and freight value.32 JCOGSA also includes a package limitation that is identical to that set out in the Hague-Visby Rules.33

A claim for damaged or lost cargo is subject to a time limit of one year from the date of delivery of the cargo, or the date when the cargo should have been delivered in the case of total loss of the cargo. An agreement on extension of time to sue the carrier can be made between the shipper and the carrier and used to avoid unnecessary court proceedings.

iv Limitation of liability

Japan is a party to the LLMC Convention 1976 and the LLMC Protocol 1996, both of which have been implemented into the Limitation of Liability Act.34

Under the Act, an applicant for limitation of liability must be a 'Shipowner, etc.',35 which is widely construed to include voyage charterer, time charterer and slot charterer as well as shipowner. The applicant must file an application to the district court to initiate limitation proceedings, and must establish a limitation fund either in cash, equivalent to the liability limit, or in the form of a guarantee made by a bank, insurance company or protection and indemnity club.36 Under the Limitation of Liability Act, a complex calculation is required to find the limitation funds, but the basic concept for the calculation is that (1) the limitation figure is calculated based on gross tonnage of the vessel and (2) two types of limitation figures are set out, one being for claims arising out of only property damage and the other for all other claims (including those arising out of death and personal injury).

Once decisions have been reached about the filed claims and the limitation fund has been distributed accordingly, the proceedings are deemed to be completed.

Remedies

i Ship arrest

Japan has not ratified either the 1952 International Convention Relating to the Arrest of Sea-going Ships (the 1952 Arrest Convention) or the 1999 International Convention on the Arrest of Ships (the 1999 Arrest Convention); thus, a vessel arrest is carried out under the domestic laws of Japan. Under Japanese law, creditors may arrest vessels on a lien, a ship mortgage, a provisional attachment order or general civil enforcement of a settled claim that has been proven by, for instance, a judicial settlement agreement or a final and binding judgment.

With regard to a lien, 'maritime lien' is not formally recognised under common law, such as the laws of England and Wales or the laws of Singapore. There is also no distinction between maritime claims and non-maritime claims. However, claims for death or personal injury, for salvage and general average, for pilotage, towage or voyage-related taxes, for necessity for continuation of a voyage and mariners' claims arising from their employment contracts are covered by statutory liens that enable the claimants to arrest the vessel more easily than other measures. Thus, these claims have a similar nature to maritime claims that are covered by maritime liens. However, to arrest a vessel on a maritime lien, Japanese courts may also require that (1) the governing law of the contract from which the claim arises, or (2) the law of the country where the vessel was located when the claim arose or the flag state of the vessel (or both) recognise and grant an arrest on the lien.

In addition, a claim subject to a limitation held in accordance with the Limitation of Liability Act37 and a claim pertaining to the damage caused by oil pollution resulting from the spill or discharge of oil from a tanker38 are also covered by a statutory lien.

In relation to an arrest by a lien, the threshold for the argument of wrongful arrest may be lower than that for an arrest by provisional attachment order. The main requirement for such an argument is negligence or wilful misconduct of the arresting party in the course of filing and arresting the vessel. The reason for this is that, since the arrest of the vessel by a lien is easier than for another normal attachment order procedure, the arresting party is required to be more cautious and should carry out sufficient analysis, both factual and legal, to avoid damage being incurred by innocent or irrelevant parties such as the owner who is not liable in personam.

ii Court orders for sale of a vessel

The arrest of a vessel based on a lien, ship mortgage or general civil enforcement is commenced by a court order as part of the compulsory judicial auction procedure.39 This means that private sale is not allowed in these procedures.

Regulation

i Safety

Japan has ratified, accepted or acceded to major conventions for ship safety, such as SOLAS, and relevant codes, including the International Maritime Dangerous Goods Code 2004 (the IMDG Code), the International Maritime Solid Bulk Cargoes Code 2011 (the IMSBC Code), the International Code for the Construction and Equipment of Ships carrying Dangerous Chemicals in Bulk (the IBC Code), the International Safety Management Code 1998 (the ISM Code) and the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers 1995 (the STCW Convention). Japan has also introduced the International Regulations for Preventing Collisions at Sea 1972 (COLREGs) and the International Convention for Safe Containers 1972 into domestic legislation.40

ii Port state control

Japan has entered into a Memorandum of Understanding on Port State Control (PSC) in the Asia-Pacific Region (the Tokyo MOU), which comprises 21 countries.41 The Tokyo MOU has announced that the number of inspections conducted during 2020 was significantly decreased because of the covid-19 pandemic. Considering those circumstances, the Tokyo MOU has decided to launch remote PSC inspections from April 2021 when a physical PSC inspection is not practically possible or appropriate. Further, since the effects of pandemic on the shipping industry have been enormous, the Tokyo MOU has adopted interim guidance relating to covid-19 circumstances, consisting of (1) preventive measures to halt the spread of covid-19, (2) ship certification issues and (3) crew-related issues.42

The Ministry of Land, Infrastructure, Transport and Tourism publishes a monthly list of the vessels detained in Japan on its website.43

iii Registration and classification

For a vessel to be eligible to fly the Japan flag, its owner must be (1) a Japanese authority, (2) a Japanese citizen, (3) a company incorporated under the law of Japan with all its representatives and at least two-thirds of its executive officers being Japanese nationals, or (4) an entity other than a company as described in point (3) all of whose representatives are Japanese nationals.44 Only Japan-flagged vessels are able to call at closed ports or conduct coastal transportation of cargoes and passengers.45

iv Environmental regulation

Japan has ratified the Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter 1972 (the London Dumping Convention), MARPOL (73/78) and the International Convention on Oil Pollution Preparedness, Response and Co-operation 1990 (the OPRC Convention), including the Protocol on the Preparedness, Response and Co-operation to Pollution Incidents by Hazardous and Noxious Substances 2000 (the OPRC-HNS Protocol). These were implemented by the Act on Prevention of Marine Pollution and Maritime Disaster. This Act applies to all vessels and marine structures in Japanese territorial waters and all Japan-flagged vessels. The Act prohibits anyone from discharging oil and other harmful substances from the vessels. A person who breaches the Act, even without negligence, may be held liable for criminal punishment. If there is discharge of oil or harmful substances from a vessel, and the shipowner does not or could not carry out effective measures against it, the Commandant of the Japan Coast Guard may conduct necessary actions to prevent pollution by oil or harmful substances, as well as requesting the related authorities or local government to take the necessary action for the same purposes.

Japan has been promoting and engaging in the reduction of greenhouse gas emissions globally, which has been reflected in the adoption of the International Maritime Organization's Marine Environment Protection Committee's amendments the MARPOL Convention, including the requirement for existing ships to achieve specific carbon intensity by meeting the criteria under the Energy Efficiency Existing Ship Index (EEXI). There seem to be several options available to achieve this EEXI, including limiting the engine output, changing the fuel, or changing parts of the ship or engine. This new MARPOL regulation will become effective in Japanese territorial waters undoubtedly, and may affect a long-term charter party. Therefore, the development of the discussion should be observed cautiously. The new regulations are not expected to be enforced until 2023 at the earliest.

v Collisions, salvage and wrecks

Japan has ratified the Convention for the Unification of Certain Rules of Law with respect to Collisions between Vessels 1910 (the Collision Convention 1910), which was promulgated and enforced as a domestic law. The major differences between the Collision Convention and domestic law have been in the rules of time bar and joint and several liability. As regards the former, the Collision Convention stipulates a two-year time bar starting from the date of the collision. Under domestic law, a claim based on death or personal injury is time-barred for five years from the time the victim is first aware of the damage and the perpetrator,46 and a claim based on property damage is time-barred for two years from the time the victim is first aware of the damage and the perpetrator.47 As regards joint and several liability, the Collision Convention stipulates that damage caused to the cargo or the property of the crew, passengers or other persons on board are borne by the vessels separately, based on the proportion of fault. However, liability for all damage imposed by domestic law could be held jointly and severally.48

Japan has ratified the Brussels Convention for the Unification of Certain Rules of Law respecting Assistance and Salvage at Sea 1910 (the 1910 Salvage Convention), but not the International Convention on Salvage 1989 (the 1989 Salvage Convention). The Lloyd's Standard Form of Salvage Agreement (LOF) and the Japan Shipping Exchange Form of Salvage Agreement, which has similar terms to the LOF, are the two forms most widely used for salvage operations in Japan. When there is no specific agreement between the parties, the Commercial Code applies. In that event, the principle of 'no cure, no pay' is generally sustained, the labour and costs incurred as a result of any necessary measures to prevent or reduce environmental pollution are taken into account in determining the amount of salvage reward, and the time bar for the claim for the salvage reward is two years from the time of salvage.49

vi Passengers' rights

Japan has not ratified the Athens Convention on the Carriage of Passengers and their Luggage by Sea 1974 (the Athens Convention). The rights of the passenger against the ocean carrier are governed by the passenger transportation agreement and the Commercial Code. With regard to liability for death or personal injury of passengers, there is no legislative limitation in favour of the carrier. Further, any agreement that releases a carrier from its liability for death or personal injury of passengers is deemed to be null and void, except for damages resulting mainly from delay.50 The burden of proof on exercising due care by the carrier or its employees lies with the carrier.51

vii Seafarers' rights

Japan has ratified the Maritime Labour Convention 2006 with its amendment of 2014 and has introduced it into the Mariners Act.52 For instance, the Mariners Act stipulates the shipowner's obligations, such as delivery of documents and explanation with regard to the working conditions on each specific voyage, repatriation of employees at its own cost, limitation on working hours, minimum age requirements, and establishment of procedures for handling complaints arising on board vessels. The Mariners Act also stipulates the procedures for inspection of employment conditions to be conducted by the authorities. The Act applies to mariners on board Japan-flagged vessels and other vessels stipulated by the Act that are in a similar condition to Japan-flagged vessels.53

Outlook

Japanese maritime laws and regulations and their amendments are generally in line with international conventions. However, substantial reforms of the Commercial Code, the Civil Code and the Act on Liability for Oil Pollution Damage have recently been enforced and, therefore, a close watch should be kept on how the changes affect shipping practice. Nevertheless, the shipping and shipbuilding industries in Japan will continue to have a significant presence worldwide, especially in Asia, in its competition with China, Hong Kong, Taiwan and South Korea.

Footnotes

1 Jumpei Osada and Masaaki Sasaki are partners and Takuto Kobayashi is a senior associate at TMI Associates.

2 The relevant data is taken from Shipping Now 2020–2021, issued by the Japanese Shipowners' Association.

3 Law No. 109 of 1996.

4 Law No. 78 of 2006.

5 Code of Civil Procedure, Article 3.3, Paragraphs (viii) and (ix).

6 id., Article 3.7.

7 Civil Code, Article 166(1).

8 id., Article 724.

9 id., Article 724 bis.

10 Act on International Carriage of Goods by Sea [JCOGSA], Article 15; Commercial Code, Article 585(1).

11 JCOGSA, Article 15; Commercial Code, Article 586.

12 Commercial Code, Article 789.

13 id., Article 806.

14 id., Article 812.

16 Arbitration Act (Law No. 138 of 2003), Articles 44 and 45.

17 Code of Civil Procedure, Article 118.

18 Arbitration Act, Article 46.

19 JCOGSA, Article 1.

20 id., Article 5.

21 Judgment of the Tokyo District Court dated 30 November 2012, The 'Cougar Ace'.

22 JCOGSA, Article 15; Commercial Code, Article 572.

23 Judgment of the Supreme Court dated 12 December 2015, The 'NYK Argus'.

24 Judgments of Tokyo High Court dated 28 February 2013 (claim against the shipper) and 29 October 2014 (claim against the cargo manufacturer).

25 Commercial Code, Article 741(2).

26 JCOGSA, Article 15; Commercial Code, Article 578(1).

27 JCOGSA, Article 15; Commercial Code, Article 581.

28 Judgment of the Supreme Court dated 27 March 1998, The 'Jasmine'.

29 Judgment of the Osaka District Court dated 11 May 1959, The 'Tribeam'.

30 Judgment of the Supreme Court dated 28 November 1975, The 'Tjisadane'.

31 JCOGSA, Article 8.

32 Judgment of the Tokyo District Court dated 27 October 2008, The 'Keiyo'.

33 JCOGSA, Article 9.

34 Act on Limitation of Shipowner Liability (Law No. 94 of 1975).

35 Limitation of Liability Act, Article 2(1)(ii).

36 id., Articles 19 and 20.

37 id., Article 95(1).

38 Act on Liability for Oil Pollution Damage, Article 40.

39 Civil Execution Act (Law No. 4 of 1979), Articles 114(1) and 189.

40 Act on Preventing Collision at Sea (Law No. 62 of 1977).

44 Ships Act (Law No. 46 of 1899), Article 1.

45 id., Article 3.

46 Civil Code, Article 724 bis; Judgment of the Supreme Court dated 20 April 1915.

47 Commercial Code, Article 789; Judgment of the Supreme Court dated 21 November 2005.

48 Civil Code, Article 719(1).

49 JCOGSA, Article 15; Commercial Code, Articles 793, 805 and 806.

50 Commercial Code, Article 591(1).

51 id., Article 590.

52 Law No. 100 of 1947.

53 Mariners Act, Article 1(1).

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