TAKEAWAYS
- Since 2017, Japan has been actively working to promote international arbitration.
- The updates to the Arbitration Act of Japan should help boost the country’s popularity as an arbitration seat.
- Likewise, reforms to the rules of the Japan Commercial Arbitration Association should help to position Japan as an alternative to other regional arbitration seats such as Singapore and Hong Kong.
The Japanese Ministry of Justice states on its website that it is “actively promoting international arbitration in Japan,” a policy first announced in 2017. This article takes a look at past and present reforms by the Japanese government, as well as other related developments and promotional activities by industry participants and considers whether these might entice users of international arbitration to make Japan a jurisdiction or seat of choice.
The most recent Queen Mary University International Arbitration Survey, published in 2021, did not mention Japan as a popular choice of seat, despite 86% of cases filed with the Japan Commercial Arbitration Association (JCAA) between 2018 and 2022 involving one or more non-Japanese companies or Japan-based foreign subsidiaries. It did, however, reveal that 54% of respondents included Singapore as one of several “most preferred seats,” putting the city-state tied for first place with London, with Hong Kong following closely behind with 50%.
Amendments to the Arbitration Act of Japan
The Arbitration Act of Japan was enacted in 2003 and was based on the 1985 UNCITRAL Model Law on International Commercial Arbitration. Despite the Model Law having later been amended in 2006 (the “2006 Model Law”) and the amendments adopted by a number of jurisdictions, Japan did not follow suit for many years.
It was only on April 21, 2023, that the Japanese Diet formally approved the Act Partially Amending the Arbitration Act (Act No.15 of 2023) (the “Amended Arbitration Act”), thereby adopting the changes made in the 2006 Model Law as regards the matters that we discuss in more detail below.
Interim Measures
Article 24(1) of the Amended Arbitration Act is based on Articles 17 and 17A of the 2006 Model Law and establishes a system enabling the Japanese courts to enforce interim measures ordered by a tribunal, while also setting out the types of interim measures that a tribunal may order, including:
- To preserve assets to satisfy claims;
- To prohibit actions that may harm or prejudice the arbitration process;
- To maintain the status quo pending determination of the dispute; and
- To preserve evidence that may be relevant and material to the resolution of the dispute.
It must be noted however that the interim measures that may be ordered are limited to those i) set out in the Amended Arbitration Act and ii) issued by an arbitration tribunal. The Amended Arbitration Act, just like the 2006 Model Law, is silent as regards interim measures ordered by emergency arbitrators.
Translations of Arbitral Awards and Other Documents Required for Arbitration-Related Court Proceedings
The Amended Arbitration Act gives Japanese courts discretion on whether to waive (fully or partly) the requirement that documents relied on, including the award, be translated into Japanese. Provided that the Japanese courts exercise this discretion, this could significantly reduce the time and cost involved in enforcement and other arbitration-related proceedings in the Japanese courts.
Article 30(4) of the Amended Arbitration Act is unchanged from the Arbitration Act and provides that tribunals “may order that any documentary evidence is to be accompanied by a translation […]”.
Jurisdiction over Arbitration-Related Court Proceedings
The Amended Arbitration Act enables the Tokyo and Osaka District Courts to exercise jurisdiction over arbitration-related proceedings, where previously three types of district courts would have had jurisdiction (the district court agreed between the parties, or that having jurisdiction over the place of arbitration, or that having jurisdiction over the location of the “general venue of the respondent”). Concentrating arbitration-related cases in two District Courts should over time increase their expertise and ensure that cases can be dealt with efficiently.
Act on Special Measures Concerning the Handling of Legal Services by Foreign Lawyers (the “Foreign Lawyers Act”)
In May 2020, the Japanese Diet approved amendments to the Foreign Lawyers Act, which governs the provision of legal services by foreign lawyers in Japan. The most notable amendment insofar as arbitration is concerned is the expansion of the definition of “international arbitration case,” the effect of which is to permit foreign lawyers to act in arbitrations between Japanese companies provided there is an international connection, i.e.:
- One or both of the parties is more than 50% owned by a foreign company;
- The parties have agreed that the law governing the dispute is not Japanese law; or
- The seat of arbitration is a country other than Japan.
These reforms offer Japanese arbitration users a wider pool of legal expertise to choose from.
Other “Pull Factors” Making Japan an Attractive Arbitration Center
The JCAA
Keen to keep up with other international arbitration institutions, the JCAA in 2021 updated its Arbitration Rules (the “2021 Rules”). The 2021 Rules introduced the following welcome reforms as regards expedited arbitration:
- The 2021 Rules increased the threshold below which the expedited arbitration procedure can be used from JPY 50 million (approximately USD $334,000 at the time of writing) to JPY 300 million (approximately USD $2 million), bringing it closer to the thresholds of other major institutions. For example, the threshold for the International Chamber of Commerce (ICC) is USD $3 million where the arbitration agreement was concluded on or after January 1, 2021, and otherwise USD $2 million; but the 2021 Rules threshold is below the thresholds of APAC institutions such as the Singapore International Arbitration Centre (SIAC), which is approximately USD $4.4 million, and the Hong Kong International Arbitration Centre (HKIAC), which is approximately USD $3.2 million. Parties can also agree to expedited arbitration irrespective of the amount in dispute, although it is important to note that this procedure takes place “on the papers,” i.e., without a hearing, unless the tribunal considers one is required after consulting with the parties and if all parties agree.
- The 2021 Rules also removed an exclusion which had prohibited expedited arbitration where parties had in their arbitration agreement provided for a three-member tribunal. That change brings the 2021 Rules in line with ICC, SIAC and HKIAC expedited arbitration procedure.
While parties are free to select arbitrators, the JCAA has a database of over 400 arbitrator candidates, of whom approximately two-thirds are non-Japanese.
In addition to the 2021 Rules, the JCAA continues to offer UNCITRAL Rules (i.e., ad hoc) arbitration as well as “Interactive Arbitration Rules,” which are said to adopt a “more ‘civil law’ approach.”
Lower Cost
Taking as an example a USD $10 million arbitration to be determined by a three-person tribunal, the JCAA’s calculator indicates an administrative fee of JPY 5.28 million and an upper limit of arbitrator fees of JPY 35 million, i.e., a total of approximately USD $267,000 at the time of writing.
This compares favorably to the following estimated costs of a similar sized arbitration administered by other institutions, no doubt in part due to the presently weak Japanese Yen:
- The SIAC calculator estimates average fees of approximately SGD $420,000 and maximum fees of approximately SGD $560,000, i.e., between USD $306,000 and USD $408,000;
- The HKIAC calculator estimates fees of approximately HKD $3.1m, i.e., USD $396,000; and
- The ICC calculator estimates fees of approximately USD $397,000.
Arbitration Duration in Line with Other Regional Centers
The JCAA’s statistics indicate that, between 2013 and 2022, the average length of arbitral proceedings was 12.9 months.
This is in line with other regional arbitration centres such as SIAC (13.8 months) and the HKIAC (15 months).
A Nascent Litigation Funding Industry
Unlike, for example, Singapore and Hong Kong, where its use has for several years been expressly enshrined in law, Japan does not at present have any laws either permitting or prohibiting third-party litigation funding.
That may soon change, however. A number of litigation funders have begun operating in Japan, and Japanese companies have used third-party funding in both international investor-state proceedings as well as in domestic litigation. We would expect legislation to follow the position taken by Singapore and Hong Kong.
A Mid-Point between no or Limited Discovery and Full, “U.S.-Style” Discovery
The Japanese Code of Civil Procedure does not contain a discovery procedure similar to that which exists in common law jurisdictions such as the United States or England.
The discovery process in arbitration is the subject of agreement between the parties, or at the discretion of the tribunal, which in our experience usually—though not always—results in the International Bar Association’s Rules on the Taking of Evidence in International Arbitration being adopted. These provide for discovery that falls somewhere between that ordered in common law legal systems and the narrower discovery ordered in civil law jurisdictions such as France and Germany.
Taken together, these legislative and other reforms should gradually increase Japan’s attractiveness as an arbitration center. Provided that the Japanese government pursues its policy of encouraging the use of international arbitration, Japan may one day feature as a preferred seat alongside its more established counterparts.
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