The Shipping Law Review: Japan
Commercial overview of the shipping industry
Japan is the world's second-largest ship-owning country (it owns and controls more than 2,500 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 2,500 vessels with more than 180 million deadweight tonnage are owned or operated by Japanese companies or special-purpose companies established in Japan or elsewhere, such as Panama, Liberia, Singapore or the Marshall Islands.2
General overview of the legislative framework
Japan has ratified most of the basic maritime conventions, such as:
- the Protocol to amend the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading 1968 (the Hague-Visby Rules);
- the latest version of the Convention on Limitation of Liability for Maritime Claims 1976 (the LLMC Convention 1976) with its 1996 Protocol;
- the International Convention on Civil Liability for Oil Pollution Damage 1969, replaced by 1992 Protocol (the CLC Convention);
- the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage (the Fund Convention);
- the International Convention for the Prevention of Pollution from Ships 1973 (as modified by the Protocol of 1978) (MARPOL (73/78)) with its Annexes;
- the International Convention for the Safety of Life at Sea 1974 (SOLAS); and
- relevant rules and regulations that are incorporated or codified by local laws and regulations.
According to an announcement from the Ministry of Land, Infrastructure, Transport and Tourism (MLIT), the Nairobi International Convention on the Removal of Wrecks 2007 (the Nairobi WRC 2007) and the International Convention on Civil Liability for Bunker Oil Pollution Damage 2001 (the Bunker Convention) are scheduled to be ratified by 1 October 2020,3 resulting in amendments to the Act on Liability for Oil Pollution Damage4 and other related domestic laws that are scheduled to enter into force on 1 October 2020. Amendments to the Act on Liability for Oil Pollution Damage mainly purport to aim to bring it in line with the conventions, such as (1) expanding the scope of the vessels that are required to have compulsory insurance;5 (2) admitting a direct claim against the insurer for compensation for losses or damages arising from bunker oil or a wreck;6 (3) limiting defence arguments of the insurer other than the defence that the owner might have been entitled to invoke against the claimant;7 and (4) recognition and enforcement of the judgments of the state parties under the Bunker Convention.8
With respect to domestic law, the reform of the Commercial Code came into effect on 1 April 2019, and has changed the legislative framework in Japan in line with the current global maritime standard, with the result that a part of the Act on International Carriage of Goods by Sea (JCOGSA)9 and other related acts have also been amended to make them consistent.
The reform of the Civil Code,10 which came into effect on 1 April 2020, will also have some effect on maritime law. Inter alia, the reform includes rules regarding standard form contracts to the effect that general terms and conditions should be incorporated into contracts. It will have a commercial impact on maritime-related contracts, particularly contracts of carriage and bills of lading.
Forum and jurisdiction
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 Procedure11 and the Act on General Rules for Application of Laws.12 In the event that two vessels collided within Japanese territorial water or that a vessel damaged in a collision reached 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.13 Exclusive jurisdiction clauses in contracts, which are normally considered to be valid, would make it clear that the designated courts have the competent jurisdiction.14
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 the time the creditor becomes aware of the possibility to exercise its right15 and tort claims are subject to a three-year period,16 from the time 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.17 Importantly, shorter time limits apply to specific claims, such as claims for carriers' liability for breach of carriage of goods contract,18 shipowners' claims against charterers, shippers or consignees,19 and claims arising from collision,20 salvage21 and general average.22
ii Arbitration and ADR
The Tokyo Maritime Arbitration Commission (TOMAC), which is located in the Japan Shipping Exchange (JSE), 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).23 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).24 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 such costs.
iii Enforcement of foreign judgments and arbitral awards
The following requirements must be met for foreign judgments to be enforced in Japan:
- the jurisdiction of the foreign court is recognised under laws, regulations, conventions or treaties;
- 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;
- the content of the judgment and the court proceedings are not contrary to public policy in Japan; and
- a mutual guarantee exists.25
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 countries 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.26
Japanese shipyards have been constructing high-quality and high-tech commercial vessels for a long time. Owing to the recent global depression in the shipbuilding market, however, some Japanese shipyards have decided to consolidate their business or form alliances to withstand this global recession.
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 same 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 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.27 In contrast, contracts of domestic carriage of goods by sea are subject to the Commercial Code.
Under JCOGSA, the carrier is obligated 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.28 In the event of damage to cargo during a voyage due to 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.29
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 such nature of the good together with other information necessary to carry it safely.30
The Supreme Court31 has affirmed a judgment by the Tokyo High Court,32 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.33 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 air transportation, land transportation or sea transportation, depending on the period in which the cause of the loss or damage occurs.34
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 such 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.35 If there is an issue regarding the identity of the carrier, the Supreme Court36 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,37 although the requirements for the incorporation is as yet unclear. 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.38
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.39 The prevailing view is that determination of the value should be consistent with the cost, insurance and freight value.40 JCOGSA also includes a package limitation that is identical to that set out in the Hague-Visby Rules.41
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.42
Under the Act, an applicant for limitation of liability must be a 'Shipowner, etc.',43 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 also have to 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.44
Once decisions have been reached about the filed claims and the limitation fund has been distributed accordingly, the proceedings are deemed to be completed.
i Ship arrest
The arrest of a vessel may be based upon a maritime 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 maritime lien, the following claims have a statutory lien over the vessel:
- a claim stipulated in Article 842 of the Commercial Code (e.g., claims for death or personal injury, salvage and general average, taxes, pilotage, towage, those arising from the necessity to continue a voyage, and mariners' claims arising from their employment contracts);
- a claim subject to a limitation held in accordance with the Limitation of Liability Act;45 and
- a claim pertaining to the damage caused by oil pollution resulting from the spill or discharge of oil from a tanker.46 Maritime liens are superior to ship mortgagees and other creditors.
The provisional attachment order and general civil enforcement make it possible to arrest sister ships; however, associated ships may not be arrested unless the arresting party succeeds in piercing the corporate veil, which is not easily granted.
Only when arresting a vessel by way of a provisional attachment order, the arresting party must provide security, such as cash, a bank guarantee or club letter of undertaking. In this event, the court will determine the security amount at its discretion, which may be, say, one-third of the vessel's value.
If a creditor arrests a vessel by provisional attachment order, the arresting party is normally expected to file an action on the merits in Japan. In contrast, when arresting a vessel by execution of a lien, mortgage or settled claim, legal proceeding on the merits commences only if the debtor files an objection against the execution.
ii Court orders for sale of a vessel
The arrest of a vessel based upon a maritime lien, ship mortgage or general civil enforcement is commenced by a court order as part of the compulsory judicial auction procedure.47 This means that private sale is not allowed in these procedures. Therefore, if the arresting party wishes to hold a private sale, this is only possible if the vessel is sold immediately after the arresting party withdraws its petition.
The hcaja in the context of cross-border insolvencies
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.48
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.49 To date, the Tokyo MOU has launched concentrated inspection campaigns with other PSC MOUs each year, which generally last for three months. Since 1 January 2020, the Tokyo MOU and the Paris MOU have collaboratively held inspections on compliance of vessels to the new sulphur limit requirements on marine fuel oil, which prohibit usage and carriage of non-compliant fuel. On its website, the MLIT publishes a monthly list of the vessels detained in Japan.50
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.51 Only Japan-flagged vessels are able to call at closed ports or conduct coastal transportation of cargo and passengers.52
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 ratified the CLC and Fund conventions, which have been incorporated in the Act on Liability for Oil Pollution Damage. This Act imposes on owners and charterers of tankers and other types of vessels, including bulk carriers, the obligation and liability relating to the discharging of bunker oil in Japanese territorial waters and its exclusive economic zone. Japan has not yet ratified the Bunker Convention;53 however, it is currently under the ratification procedures as stated in Section II. Once Japan ratifies the Convention, the reform of the Act on Liability for Oil Pollution Damage54 in line with the Convention is scheduled to be enforced on 1 October 2020.
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 time bar, 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,55 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.56 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. On the other hand, liability for all damages imposed by domestic law could be held jointly and severally.57
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 JSE 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.58
With regard to wreck removal, under the current Japanese legal system, various domestic laws and ordinances prohibit owners or other interests from leaving the wrecks in the sea, in ports or harbours and, where necessary, grant authority to remove them at the cost of the owner or others who are responsible for them. However, as stated in Section II, such domestic laws and ordinances will be replaced with the reformed Act on Liability for Oil Pollution Damage, which is scheduled to be enforced on 1 October 2020 in line with the Nairobi WRC 2007, which is to be ratified shortly.
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 mainly due to delay.59 The burden of proof on the exercising of due care by the carrier or its employees lies with the carrier.60
vii Seafarers' rights
Japan has ratified the Maritime Labour Convention 2006 with its amendment of 2014 and has introduced it into the Mariner's Act.61 For instance, the Mariner's 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 the vessels. The Mariner's 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.62
Japanese maritime laws and regulations and their amendments are generally in line with international conventions. However, because substantial reforms of the Commercial Code and the Civil Code have just been enforced, and the reforms of the Act on Liability for Oil Pollution Damage will be enforced in the near future, 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.
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 2019–2020, issued by the Japanese Shipowners' Association.
3 These conventions are undergoing the approval procedure of the parliament (as at March 2020).
4 Law No. 95 of 1975.
5 Articles 41 and 49 of the reform of the Act on Liability for Oil Pollution Damage.
6 Articles 43(1) and 51(1) of the reform of the Act on Liability for Oil Pollution Damage.
7 Articles 43(2) and 51(2) of the reform of the Act on Liability for Oil Pollution Damage.
8 Article 39(2) of the reform of the Act on Liability for Oil Pollution Damage.
9 Law No. 172 of 1957.
10 Law No. 89 of 1896.
11 Law No. 109 of 1996.
12 Law No. 78 of 2006.
13 Article 3.3(viii) and (ix) of the Code of Civil Procedure.
14 Article 3.7 of the Code of Civil Procedure.
15 Article 166(1) of the Civil Code.
16 Article 724 of the Civil Code.
17 Article 724 bis of the Civil Code.
18 Article 15 of JCOGSA, Article 585(1) of the Commercial Code.
19 Article 15 of JCOGSA, Article 586 of the Commercial Code.
20 Article 789 of the Commercial Code.
21 Article 806 of the Commercial Code.
22 Article 812 of the Commercial Code.
24 Articles 44 and 45 of the Arbitration Act (Law No. 138 of 2003).
25 Article 118 of the Code of Civil Procedure.
26 Article 46 of the Arbitration Act.
27 Article 1 of JCOGSA.
28 Article 5 of JCOGSA.
29 Judgment of the Tokyo District Court dated 30 November 2012, The 'Cougar Ace'.
30 Article 15 of JCOGSA and Article 572 of the Commercial Code.
31 Judgment of the Supreme Court dated 12 December 2015, The 'NYK Argus'.
32 Judgments of Tokyo High Court dated 28 February 2013 (claim against the shipper) and 29 October 2014 (claim against the cargo manufacturer).
33 Article 741(2) of the Commercial Code.
34 Article 15 of JCOGSA and Article 578(1) of the Commercial Code.
35 Article 15 of JCOGSA and Article 581 of the Commercial Code.
36 Judgment of the Supreme Court dated 27 March 1998, The 'Jasmine'.
37 Judgment of the Osaka District Court dated 11 May 1959, The 'Tribeam'.
38 Judgment of the Supreme Court dated 28 November 1975, The 'Tjisadane'.
39 Article 8 of JCOGSA.
40 Judgment of the Tokyo District Court dated 27 October 2008, The 'Keiyo'.
41 Article 9 of JCOGSA.
42 Act on Limitation of Shipowner Liability (Law No. 94 of 1975).
43 Article 2(1)(ii) of the Limitation of Liability Act.
44 Articles 19 and 20 of the Limitation of Liability Act.
45 Article 95(1) of the Limitation of Liability Act.
46 Article 40(1) of the Act on Liability for Oil Pollution Damage.
47 Articles 114(1) and 189 of the Civil Execution Act (Law No. 4 of 1979).
48 Act on Preventing Collision at Sea (Law No. 62 of 1977).
51 Article 1 of the Ships Act (Law No. 46 of 1899).
52 Article 3 of the Ships Act.
53 As at March 2020.
54 Law No. 95 of 1975.
55 Article 724 bis of the Civil Code and Judgment of the Supreme Court dated 20 April 1915.
56 Article 789 of the Commercial Code and Judgment of the Supreme Court dated 21 November 2005.
57 Article 719(1) of the Civil Code.
58 Article 15 of the JCOGSA and Articles 793, 805 and 806 of the Commercial Code.
59 Article 591(1) of the Commercial Code.
60 Article 590 of the Commercial Code.
61 Law No. 100 of 1947.
62 Article 1(1) of the Mariner's Act.