Japanese Arbitration: Green Tea and Sympathy?

167 Japanese Arbitration: Green Tea and Sympathy? by MARK GOODRICH* ABSTRACT The relatively low involvement of Japanese parties in arbitration is a perennial puzzle which has drawn attention for decades. This article examines some recent statistics in order to evaluate theories about the perceived reluctance of Japanese parties to engage in arbitration and Japan s arbitration infrastructure. Comparisons are drawn in relation to equivalent statistics for the neighbouring country of South Korea to better situate the Japanese experience within a wider international context. I. INTRODUCTION In the Western popular imagination, Japan is a place both mysterious and inscrutable. Things are different there. Although questions of dispute resolution perhaps hardly have the abiding interest of samurai and geisha, there is certainly an element of mystery about arbitration in Japan. This is not due to any lack of knowledge of the law or to the rules of the leading local arbitration institution, the Japan Commercial Arbitration Association (JCAA), both of which are modern and suitable for pursuing arbitration. The mystery is why more Japanese companies do not take advantage of this positive environment and pursue arbitration as a method of dispute resolution. Indeed, this mystery is well known to academics and practitioners and, indeed, the author has spent much time drinking green tea and expressing sympathy to talented Japanese lawyers who would like to see much more use of arbitration in Japan. II. HISTORY Japan has a surprisingly long history with arbitration. The Code of Civil Procedure (Law No. 29 of 1890) 1 makes provision for arbitration. The Code (and hence the arbitration provisions) was substantially modelled on the German Code of Civil Procedure. * Mark Goodrich is Partner in White & Case LLP s arbitration group, now located in the Seoul office with nearly a decade of experience in Japan. The author would like to acknowledge the assistance of Catherine Yoon, Yeseung Jang and Michael Richter with this article and would like to thank Toshiyuki Nishimura of the Japanese Commercial Arbitration Association and Seonmin Lee of the Korean Commercial Arbitration Board for their provision of the highly useful statistics for their respective institutions. All views expressed in this article are the author s own. 1 That said, there does not seem any immediate plan to update the Arbitration Law to reflect the subsequent changes to the UNCITRAL Model Law in 2006. 2017 TURKISH COMMERCIAL LAW REVIEW, Vol. 2, No. 2, Winter 2016

168 The Turkish Commercial Law Review Volume 2 Issue 2 Winter 2016 However, arbitration was never really embraced as a method of dispute resolution and, tellingly, the arbitration provisions of the Code of Civil Procedure remained unchanged for over a century. Gradually, some interest grew in trying to establish Japan as an attractive place for commercial arbitration and in 2003, the Arbitration Law (Law No. 138 of 2003) was passed. This was based on the UNCITRAL Model Law and is modern and fit for purpose. Similarly, the JCAA has regularly updated its arbitration rules, most recently in a set of rules that took effect as of 10 December 2015. These latest amendments are relatively minor but the previous revision in February 2014 was a comprehensive amendment developed by a respected committee. The committee produced a set of rules which swept away certain peculiarities that existed in the previous rules in favour of a set of rules which compare well with any of the leading arbitration institutions. 2 The current set of rules contains: provision for an emergency arbitrator; 3 liberal rules for consolidation and joinder; 4 the opportunity to apply expedited procedures by agreement of the parties 5 as well as their automatic application for claims valued at JPY20 million or less; 6 a requirement to draw up a list of issues at an early stage with an optional terms of reference; 7 and carefully thought through rules for the use of mediation in arbitration proceedings. 8 In terms of the wider legal environment, the Japanese courts have generally taken a pro-arbitration stance. Although the number of court cases is (predictably) low, there have only been two arbitration awards set aside under the new Arbitration Law. 9 The first set-aside has been subject to some criticism 10 as to the outcome whereas the second 2 For a detailed description of the changes, see The Key Points of the 2014 Amendment to the Commercial Arbitration Rules, JCAA Newsletter, Number 31, March 2014. 3 Rules 70 to 74. 4 Rules 15, 42, 52 and 53. 5 Rule 75. 6 This was the previous rule and, arguably, an opportunity was lost by not increasing this threshold either in February 2014 or December 2015. 7 Rule 40. 8 Rules 54 and 55. 9 Tokyo District Court, 13 June 2011, Heisei 21 (chu) No. 6. 10 Nicholas Lingard and Akiko Yamaguchi, JAPAN: Public Policy and Procedure Collide to Sink An Arbitral Award, Global Arbitration Review, Volume 7, Issue 2.

Japanese Arbitration: Green Tea and Sympathy? 169 decision 11 is more in line with international norms, being based on a perception of arbitrator bias. However, perhaps a more serious issue is the length of time these cases take to resolved, especially if the parties choose to exercise appeal rights up to the Japanese Supreme Court (an option which is open to them). Indeed, the length of time taken to resolve set-aside cases is a persistent cause of concern. 12 The author has previously suggested that a solution to this problem would be to set up a specialist division of the Japanese courts for all arbitration cases which would develop expertise accordingly. 13 As yet, there is no sign of this or any other steps being taken to deal with the time taken on set-aside applications. However, although the time taken to resolve set-aside applications is a concern (not least because of the opportunity it gives parties to stall enforcement), in other respects Japan is a modern arbitration jurisdiction. In a detailed description of the arbitration regime in May 2012, Nakamura and Nottage concluded that arbitration amply meets global standards. 14 As the Queen Mary 2015 Arbitration Survey reveals: preferences for certain seats are predominantly based on their appraisal of the seat s established formal legal infrastructure: the neutrality and impartiality of the legal system; the national arbitration law; and its track record for enforcing agreements to arbitrate and arbitral awards 15 Despite meeting these global standards, the number of arbitration cases taking place in Japan is strikingly low. III. CURRENT STATE OF JAPANESE ARBITRATION In this section of the article, the number of arbitration cases both seated in Japan and involving Japanese parties is considered alongside the equivalent figures for South Korea. South Korea is chosen as the basis for comparison for the following reasons: geographical proximity; similarity of legal system; and similar slant to the economy (i.e. both countries are strong in manufacturing and technology). 11 Osaka High Court, 28 June 2016. Original of the judgment available at http://www.courts.go.jp/app/ files/hanrei_jp/062/086062_hanrei.pdf. 12 For example, see the length of time for a first instance decision in Dismissing the Application for Setting Aside an Award, Tokyo District Court, July 28, 2009, 292 Hanrei Times 1304, JCAA Newsletter, Number 24 (May 2010). 13 Mark Goodrich, Japanese Arbitration Much Work Done; Much Still To Do, JCAA Newsletter, Number 27 (January 2012). 14 Tatsuya Nakamura and Luke Nottage, Arbitration in Japan, Sydney Law School Legal Studies Research Paper No. 12/39 (available at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2070447>). 15 Queen Mary University of London and White & Case, 2015 International Arbitration Survey: Improvements and Innovations in International Arbitration, 11.

170 The Turkish Commercial Law Review Volume 2 Issue 2 Winter 2016 Of course, no comparison is perfect and, in particular, it should be borne in mind that Japan s economy is nearly three times the size of the Korean economy. 16 All things being equal, this could be expected to have a commensurate effect on the number of Japanese and Korean parties in arbitration. 17 There are two sets of comparisons the first are taken from the records kept by the JCAA and the Korean Commercial Arbitration Board (KCAB) which is the premier domestic arbitration institution in Korea and therefore the approximate equivalent of the JCAA. 18 The second 19 are taken from the ICC Statistical Reports from 2006-2015. 20 a) JCAA and KCAB Statistics Arbitration cases commenced 2006-2015 at the JCAA Year Domestic International Total 2006 0 11 11 2007 3 12 15 2008 0 12 12 2009 1 17 18 2010 6 21 27 2011 2 17 19 2012 1 18 19 2013 2 24 26 2014 3 11 14 2015 0 20 20 16 OECD (2016), Gross domestic product (GDP) (indicator). https://data.oecd.org/gdp/gross-domesticproduct-gdp.htm (Accessed on 24 November4 2016). 17 The use of Korea and Japan as seats would be driven by a wider set of factors, including those identified in the Queen Mary 2015 Arbitration Survey, i.e. the neutrality and impartiality of the legal system; the national arbitration law; and its track record for enforcing agreements to arbitrate and arbitral awards. 18 It is worth noting that the KCAB receives considerably more support from government and that Seoul also has a dedicated hearing venue in the Seoul International Dispute Resolution Centre (SIDRC). 19 The hard work of extracting the data and combining them into useful charts was carried out by Yeseung Jang. 20 As noted in Queen Mary University of London and White & Case 2015 Arbitration Survey, p. 17, the ICC remains comfortably the most popular arbitral institution. Also, on the basis of the author s experience, it is similarly popular amongst Japanese and Korean companies with no significant discrepancy between the two countries.

Japanese Arbitration: Green Tea and Sympathy? 171 Arbitration cases commenced 2006-2015 at the KCAB Year Domestic International Total 2006 168 47 215 2007 261 59 320 2008 215 47 262 2009 240 78 318 2010 264 52 316 2011 246 77 323 2012 275 85 260 2013 261 77 338 2014 295 87 382 2015 339 74 413 It is apparent from the tables above that there is a huge discrepancy in the total number of cases. In 2015, the KCAB had 413 cases over twenty times the number of cases at the JCAA. However, the discrepancy between domestic and international arbitration is also significant. In that regard, the JCAA and KCAB categorise international and domestic arbitration differently. The JCAA categorises an arbitration as international if at least one party is non-japanese, and domestic only if both parties are Japanese. 21 The KCAB s definition for international arbitration is wider (and hence narrower for domestic arbitration). The KCAB International Arbitration Rules state that an arbitration is international if: (i) at least one of the parties to an arbitration agreement, at the time of entering into that agreement, has its place of business in any state other than Korea; or (ii) the place of arbitration set out under an arbitration agreement is in any State other than Korea. 22 Despite the comparatively wider definition for domestic arbitration, the figures for domestic arbitration at the JCAA have been extremely low throughout the period, nor are they showing any signs of increase. In contrast, the KCAB maintains an extremely healthy domestic caseload indeed, far in excess of its international caseload. It can 21 In addition, please note that a dispute which is governed by foreign law (but between Japanese parties) would be categorised as domestic as would a case involving the Japanese subsidiary of a foreign company in dispute with a Japanese company. 22 See Article 2(c) of the KCAB International Arbitration Rules.

172 The Turkish Commercial Law Review Volume 2 Issue 2 Winter 2016 also be seen that the KCAB s domestic caseload is increasing more rapidly than the international caseload. Equally, however, it should be noted that the KCAB s international case load is around four times the size of the JCAA s international case load. b) ICC Statistics Turning to statistics from the ICC, the numbers are much closer together so it is possible to plot them together on a single chart. As shown in the above chart, there is very little difference between the number of ICC arbitrations seated in Japan and Korea. Both countries are rarely chosen as the place of ICC arbitration and the numbers are so low that any attempt to see a trend in them would be pointless. However, it is striking that whilst the KCAB s international arbitrations are now running at approximately 70-80 a year, ICC arbitrations with their seat in Korea are in single figures. This might be due to the fact that many people seem to link a seat with its local institution in other words, assuming that if they have a seat in Japan or Korea, they should also use a local institution, perhaps on the basis that they will benefit from their local knowledge. Although it would be perfectly conceivable to have an ICC arbitration with a seat in Japan or Korea, it seems that this combination is simply not selected frequently by users. c) Japanese and Korean Parties In Arbitration Number of Japanese Parties in Arbitration Number of Korean Parties in Arbitration Year Claimants Respondents Total Claimants Respondents Total 2006 8 7 15 19 18 37 2007 11 9 20 10 30 40 2008 4 9 13 20 10 30 2009 13 13 26 15 16 31 2010 7 14 21 9 14 23

Japanese Arbitration: Green Tea and Sympathy? 173 2011 13 11 24 12 14 26 2012 8 9 17 15 26 41 2013 6 15 21 10 14 24 2014 11 8 19 13 22 35 2015 11 10 21 10 25 35

174 The Turkish Commercial Law Review Volume 2 Issue 2 Winter 2016 These statistics relating to the nationality of parties are striking for two main reasons. First, despite the relative sizes of the respective economies, Korean parties are more regularly seen in ICC arbitration than Japanese companies. In fact, there were more Korean companies involved in ICC arbitration in every single year in the statistics. Writing in 2011, Richter also found that the number of Japanese parties in international arbitration were less than would have been expected by reference to Japanese GDP. 23 Accordingly, it would be reasonable to assume that these ICC statistics will apply more generally to Japanese participation in international arbitration. Secondly, the statistics do not give support to the commonly held view that Japanese companies are particularly unlikely to commence arbitration. In fact, although the number of cases in which Japanese companies were respondents is slightly higher than the cases when they were claimants, in five out of ten years, Japanese companies had more cases as claimant. Again, this is not an isolated finding. Over a slightly earlier and longer period, Richter found that Japanese companies were rather more likely to be claimants than respondents in ICC arbitrations. 24 In fact, in the statistics above, it is the Korean parties who showed a clear tendency to be Respondent in arbitration cases, with more cases as respondent in all but two of the years. In short, this particular perception of Japanese parties in arbitration looks to be out of date and should be consigned to history. It is also instructive to look at the results of a JCAA survey carried out in 2007 Survey of International Commercial Dispute Resolution Practices of Japanese Companies (Japanese Company Survey). 25 This survey demonstrates that, even back in 2007, Japanese companies attitudes to international commercial arbitration were converging with other international companies resulting an approach which was in line with other nationalities. 26 For example, the Japanese views on the advantages and disadvantages of international commercial arbitration were in line with contemporaneous indications from other surveys. 27 The survey did not cover Japanese companies attitudes to domestic dispute resolution. Given the differences between the domestic/international arbitration by the JCAA and KCAB discussed above, such a survey would likely produce different results. It is likely that Japanese companies have a different approach to international dispute resolution precisely because of its international nature and the requirement to interact with foreign counterparties. The author has been involved in several cases in 23 Michael Allan Richter, Attitudes and Practices of Japanese Companies with Respect to International Commercial Arbitration: Testing Perceptions with Empirical Evidence, Transnational Dispute Management, Volume 8, Issue 5 (December 2011), 16. 24 Richter, Attitudes and Practices of Japanese Companies, 27-30. 25 Despite being nearly ten years since the survey, no subsequent surveys has been carried out. Please note that the author has used and relied on the Richter article, Attitudes and Practices of Japanese Companies, referenced above for translating and summarising the key elements of the Japanese Company Survey. 26 Richter, Attitudes and Practices of Japanese Companies, 52-53. 27 Richter, Attitudes and Practices of Japanese Companies, 36.

Japanese Arbitration: Green Tea and Sympathy? 175 which multiple Japanese companies were involved and there was a striking difference between how his clients approached Japanese companies and how they approached non- Japanese companies. With other Japanese companies, the tendency was to talk endlessly at various levels to avoid formal dispute proceedings even if, to Western eyes, the talks were going nowhere. This did not apply to the same extent in relation to non-japanese counterparties. There are other signs that Japanese parties are continuing to modify their behaviour in relation to international commercial disputes. For example, in 2007, Japanese companies were selecting courts in their contracts at a significantly higher rate than international companies. 28 However, the use of domestic courts in international contracts by Japanese parties has been continuously declining due to the efforts of the JCAA, bengoshi 29 and foreign lawyers in educating the users on the difficulties of enforcement of Japanese court judgments in many overseas jurisdictions. 30 When the author first worked in Japan in 2000, it was entirely usual to see Tokyo District Court as the forum for dispute resolution in international contracts: it is now highly unusual. Accordingly, it is likely that this particular quirk has largely passed into history during the last ten years. In international commercial arbitration, it seems that the Japanese now subscribe to the motto that Arbitration is the worst form of international dispute resolution, except for all those other forms that have been tried from time to time. 31 IV. CONCLUSION Japan has a long-established history in allowing for arbitration in its Civil Code and now has both a modern arbitration law and an arbitral institution with up-to-date and even innovative arbitration rules. Despite some issues in relation to setting aside of arbitral awards, Japan can be regarded as an arbitration-friendly jurisdiction. However, the local arbitral institution in question receives almost no domestic arbitration cases. 32 That is a surprising state of affairs and contrasts dramatically with the situation in Korea where a very active domestic caseload is driving the KCAB s total volume of arbitration ever higher. Why has arbitration between Japanese companies remained vanishingly rare? A comprehensive answer will likely only come when we have a survey which covers Japanese companies attitude to domestic dispute resolution as well as to international dispute resolution. However, it seems likely that part of the explanation may come from cultural attitudes which find arbitration even less acceptable than courts as a method 28 Richter, Attitudes and Practices of Japanese Companies, 13. 29 The name for a Japanese-qualified lawyer. 30 Goodrich, Japanese Arbitration, 1-2. 31 Quoted at p. 10 of the 2015 International Arbitration Survey. 32 See statistics above as noted, even amongst those few domestic arbitrations, there will be cases with international elements.

176 The Turkish Commercial Law Review Volume 2 Issue 2 Winter 2016 for resolving disputes. 33 A further likely explanation is historical path-dependency it has not been the traditional way of resolving disputes and, without powerful reasons to move, both Japanese companies and bengoshi prefer to stick with what they know. 34 In contrast to the situation with domestic disputes, the inability to enforce Japanese court judgments internationally has proved a strong motivating factor in relation to international commercial disputes, leading to the use of arbitration in international contracts. However, as the statistics also demonstrate, the level of involvement of Japanese parties in international arbitration is still relatively low compared with the size of its economy. The reasons for this are also unclear given the fact that Japanese parties increasing include arbitration clauses in their contracts. Again, looking at the Japanese Companies Survey, the approach to contract infringement seems robust with 89% saying that they would initiate arbitration if there was a breakdown in negotiations rather than give up their claims. 35 The reasons for the discrepancy between the stated attitude and the statistical evidence are likely to be complex. However, part of the answer is the difficulty of capturing the complexities of an approach to commencing arbitration in a binary question. In the author s experience, Japanese companies are just as likely as any other company to commence arbitration if they feel they have reached an impasse. The difference is that they are usually much less ready to accept that the parties are at an impasse they continue to look for ways to keep discussions going and find solutions which are mutually acceptable. Whilst the mystery of (the lack of) Japanese arbitration may never be fully solved, it seems clear that a significant factor is the absence of experience for Japanese parties in domestic arbitration cases. Although Japanese companies have accepted international commercial arbitration as a pragmatic solution to the issues of dealing with international counterparties, the lack of a background in domestic arbitration means that the concept will always feel slightly alien to many Japanese companies. 36 This is, in turn, is likely to inhibit the further growth of arbitration in Japan. 33 In that regard, the view Tom Carbonneau, Cases and Materials on Commercial Arbitration (New York: Juris Publishing,Inc., Vol. 1, 1997), 411 (cited at Richter, Attitudes and Practices of Japanese Companies, 10) that the Japanese regard arbitration has an unauthorised form of dispute resolution in which a third party performs the role of a judge may still be accurate as regards domestic arbitration. 34 The author s conversations with bengoshi colleagues and contacts have confirmed this. Whilst they quickly grasp that enforcement is a powerful reason in favour of arbitration in a commercial context, there find no such imperative in the domestic context. 35 Richter, Attitudes and Practices of Japanese Companies, 27. 36 An exception may be the most internationally focused companies such as the trading houses.