Lessons from Recent Developments in Arbitration in Japan

The arbitration scene in Japan resembles that of the Philippines in many ways, and this is not at all surprising considering that just like the Philippines’ Alternative Dispute Resolution Act of 2004 (“ADRA”), Japan’s arbitration law - the Japanese Arbitration Act of 2003 (“JAA”) - is also based on the UNCITRAL Model Law on International Commercial Arbitration [1985] (“Model Law”). Thus, the JAA expressly acknowledges “party autonomy”, and the separability and competence-competence of arbitration, among other salient features of the Model Law. As in the Model Law, it also provides that no court can intervene in arbitral proceedings, unless otherwise provided by law.


Because Japan is also a member of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”), foreign arbitral awards are also enforced in accordance with the New York Convention, and the grounds for a court to refuse the enforcement of an arbitral award under the JAA are also limited. Japanese courts are likewise generally considered to take a pro-arbitration stance to the enforcement of domestic and international arbitral awards.


Just like the ADRA, there are provisions in the JAA that are not found in, or that even deviate from, the Model Law. For instance, unlike the Model Law, which is limited to international commercial arbitration, the JAA applies to both domestic and international arbitration. In contrast, the ADRA makes a distinction between domestic arbitration and international arbitration and stipulates that international commercial arbitration shall be governed by the Model Law [Art. 19, ADRA].


As in Section 6 of the ADRA, labor-related disputes (Art. 4, Supplementary Provisions to the JAA) as well as those relating to civil status of persons are also excluded from the scope of arbitrable cases under the JAA. Aside from this, the JAA also has special rules on arbitration agreements between a consumer and a business operator that allow the consumer to cancel the arbitration agreement between them (Art. 3.2, Supplementary Provisions to the JAA), which are not found in the ADRA. These rules are supposedly meant to protect individuals from business operators by allowing them the option to proceed with court litigation since arbitration involving individuals is not common in among the Japanese and is perceived to be much more expensive than going to court.


While the Model Law and the JAA require the arbitration agreement to be in writing, only the JAA expressly recognizes electromagnetic records (i.e., email transmissions) to be in writing (Art. 13.4, JAA). The 2006 amendment to the Model Law has already addressed this and considers electronic mail to be in writing, but both the JAA and the ADRA have yet to incorporate these amendments.


Another difference worth nothing is that, unlike the Model Law that provides that the arbitral tribunal must apply the law determined by the conflict of laws rules that it considers applicable if parties fail to agree on substantive law, the JAA provides that arbitral tribunal will apply the substantive law of the state with which the civil dispute subject to arbitral proceedings is most closely connected (Art. 36.(1) and 36(2), JAA). The ADRA is silent on this and merely refers to the Model Law.


Arbitral Institutions


Japan's equivalent of the Philippine Dispute Resolution Center Inc. (“PDRCI”) is the Japan Commercial Arbitration Association (“JCAA”), which was established in 1950. The JCAA was established as part of the Japan Chamber of Commerce and Industry to settle commercial disputes and promote international trade. The JCAA is the most prominent arbitral institution in Japan with a panel of more than 400 arbitrators, two-thirds of whom are non-Japanese, and from more than 50 countries.


Apart from the JCAA, Japan also has the Tokyo Maritime Arbitration Commission of the Japan Shipping Exchange, which is resolves disputes arising under bills of lading, charter parties, contracts relating to the sale and purchase of ships, shipbuilding, ship financing and manning; Committee for Adjustment of Construction Work Disputes (Cf. Construction Industry Arbitration Commission), organized under the Ministry of Land, Infrastructure and Transportation, and each prefecture in Japan, to resolve disputes arising out of construction agreements; Japan Intellectual Property Arbitration Center (“JIPAC”), which resolves intellectual property rights disputes; and Alternative Dispute Resolution Centres of Bar Associations, organized under each local bar association which deals with all kinds of disputes, big or small.


Recent Trends in Japan


Despite their being reliable arbitration jurisdictions, both Japan and the Philippines are sadly lagging behind their other Asian neighbors when it comes to arbitration. Based on the latest available data, PDRCI only receives about 8 requests for arbitration while the JCAA receives only about 10 to 20 requests for arbitration every year. In contrast, the Singapore International Arbitration Center (“SIAC”) receives about 450 applications, 80% of which involves international business disputes while Hong Kong International Arbitration Centre handles more than 200 petitions a year.


Recently, however, as part of its broader initiative to enhance its status as an international financial center, Japan has taken various efforts to promote itself as a preferred venue for international arbitration. These efforts include: (1) the establishment of the Japan International Dispute Resolution Centre (“JIDRC”); (2) investing in the training of young practitioners through training videos, seminars, and opportunities to serve as interns at renowned arbitral institutions; and (3) amendments to laws and arbitration rules to make them more conducive for arbitration.


Established by lawyers and other legal professionals in February 2018, the JIDRC was founded “to contribute to the further activation of international arbitration and international mediation in Japan” by providing affordable exclusive facilities as the venue for hearings to arbitration and mediation institutions all over the world as well as ad hoc proceedings. It operates two facilities: one in Osaka, which opened in 2018, and another in Tokyo, which just opened last year. These facilities are fully equipped with state-of-the-art technologies that support the various needs of arbitration proceedings, such as video conferencing and real-time translation services.


Through its Ministry of Justice, Japan has also started investing in training its young arbitration practitioners through seminars and videos and providing them opportunities to serve as interns at other arbitral institutions abroad. It has also facilitated practitioners to teach at universities to share their knowledge and increase interest in international arbitration. It has also been organizing events for businesses and lawyers in and outside Japan, including seminars in partnership with SIAC, UNCITRAL, and other arbitral institutions.


Japan has also undertaken efforts to make its laws more conducive for arbitration. Last year, it amended the Act on Special Measures Concerning the Handling of Legal Services by Foreign Lawyers (“Foreign Lawyers Act”), relaxing the professional experience requirements for Registered Foreign Lawyers and broadening the scope of “international arbitration cases” that they could act on.


Under the Foreign Lawyers Act, Registered Foreign Lawyers may not represent clients in Japanese court or give legal advice on laws other than those of their jurisdiction of qualification, but they may act in an “international arbitration case,” which before the amendment was defined as “a civil arbitration case which is conducted in Japan and in which all or some of the parties are persons who have an address or a principal office or head office in a Foreign Jurisdiction (i.e., outside Japan).” Consequently, Registered Foreign Lawyers were only allowed to act in arbitrations seated in Japan if at least one party was not a Japanese company, and not when all parties were Japanese, even if those parties were Japan-based affiliates of non-Japanese corporations, and even if the governing law of the contract at issue was not Japan. With the amendment, “international arbitration case” has been expanded to mean arbitration cases where at least one of the parties is over 50% owned by a non-Japanese corporation, the governing law of the contract at issue is not Japanese law, or the seat of arbitration is not Japan. As a result, companies arbitrating in Japan will have more freedom to choose counsel who is qualified to practice outside Japan even when all the parties are Japanese parties, for as long as there are certain foreign elements.


The Committee on the Reform of International Arbitration in Japan has also been reviewing the JAA to make the law more arbitration-friendly and to ensure conformity with the 2006 amendments to the Model Law. Early this year, it released the interim draft proposals, which include proposed revisions on the enforcement of interim measures, expanding the Tokyo and Osaka District Courts’ jurisdictions to hear arbitration-related cases, and permitting the courts to discretionarily waive the requirement for Japanese translations of awards and/or exhibits.


Finally, the JCAA has amended its arbitration rules and now has three sets of arbitration rules effective in 2019. These are the Commercial Arbitration Rules (“Commercial Arbitration Rules”), the Interactive Arbitration Rules (“Interactive Rules”); and the Administrative Rules for UNCITRAL Arbitration. The Commercial Arbitration Rules apply if an arbitration agreement provides for JCAA arbitration without specifying the applicable arbitration rules (Article 3.2, Commercial Arbitration Rules).


Designed to make arbitration more accessible to everyone, the Commercial Arbitration Rules incorporates the latest features in other institutional rules, such as interim measures by an emergency arbitrator, expedited arbitration, consolidation and joinder, and mediation in the course of the arbitration. The provisions on expedited arbitration are undergoing revision to include disputes involving higher amounts. It also includes cost-saving features such as provisions on the appointment of the tribunal’s secretary and the prohibition against dissenting opinions to reduce the time spent by arbitrators in drafting their award.


The Interactive Rules overlaps with many provisions of the Commercial Arbitration Rules. By requiring the tribunal to take an active role in identifying issues and communicating its preliminary views to the parties – thus, making the proceedings more predictable and increasing the chances of settlement - it is intended to appeal to businesses that have historically preferred litigation in courts and perceive arbitration as too expensive.


Meanwhile, for international parties who prefer to arbitrate in Japan with rules that they are more familiar with, they have the option to choose the UNICITRAL Arbitration Rules 2010 and Administrative Rules for UNCITRAL Arbitration 2019.


Conclusion


While it is too early to say, there is a significant potential for growth for international arbitration in Japan considering its pro-arbitration stance and its ongoing efforts. Add to that, Japan’s independent and efficient judiciary, a growing talent pool of qualified lawyers and practitioners, the JIDRC’s extensive infrastructure and support, and the JCAA’s excellent track record of case management and high rate of enforceability for its awards, it may not take long before it catches up with Singapore or Hong Kong.


Considering the many parallels between Japan and the Philippines, we have much to learn from its ongoing efforts to boost its status as a preferred venue for international arbitration. To be sure, PDRCI and other practitioners in the Philippines have been working very hard to do this as well, but there remains much to be done for the Philippines to be a choice jurisdiction for ADR.


Just like Japan, the Philippines would do well to establish more state-of-the-art facilities as the venue for hearings to arbitration and mediation institutions as well as ad hoc proceedings; conduct more training and seminars for its practitioners, especially the young ones; amend its laws and arbitration rules to incorporate the 2006 amendments to the Model Law and other best practices found in other arbitral institutions; and finally, provide more government support for the promotion of arbitration.