Arbitration Yearbook Japan

By: Yoshiaki Muto,1 Joel Greer,2 Tetsuo Kurita,3 Takeshi Yoshida,4 Michael Dunmore5

A. Legislation, Trends and Tendencies

A.1 Legislation

International arbitration in Japan is governed by the Japanese Arbitration Law, which came into effect on 1 March 2004 (the “Arbitration Law”). The Arbitration Law is based on the UNCITRAL Model Law and has not been amended since its enactment.

B. Cases

There have been several court decisions in Japan relating to arbitration in the last year, as discussed further in the sections that follow.

B.1 Determination of the Law of the Arbitration Agreement

A decision rendered by the Tokyo District Court on 17 October 2014 involved a dispute relating to unpaid software license fees and damages for losses under a software distribution agreement, the dispute resolution clause of which provided (noncompulsorily) for arbitration.6 The governing law clause in the software distribution agreement stipulated the laws of the State of Arizona and the laws of the United States of America.

While one party commenced arbitration in Tokyo under the Japan Commercial Arbitration Association Rules (JCAA Rules), the other party filed an action in Tokyo District Court. The court held that the parties were obliged to resolve their dispute by arbitration and also addressed the issue of the law to be applied to the arbitration agreement. Regarding the latter, the court further held that the applicable law should be determined by an implied agreement between the parties, absent any express agreement in this respect. The court ruled that an implied agreement existed between the parties to apply the laws of Arizona and the United States to the arbitration agreement because those laws governed the software distribution agreement. This conclusion is consistent with earlier court precedents in Japan with respect to the principle that, when determining the law applicable to an arbitration clause, the court first looks to see if there is an express agreement between the parties, and if one does not exist, then looks for an implied agreement.7 Earlier Japanese court precedents, however, had put more emphasis on the place of arbitration, rather than the governing law of the contract as a whole, when determining whether an implied agreement between the parties existed as to the law applicable to the arbitration agreement.8

In a second case decided by the Tokyo District Court on 28 January 2015,9 the court had to determine the law of an arbitration agreement where the claimant sought payment of charterages against the trustee of the respondent under a time charter party, after reorganization proceedings were ordered against the respondent pursuant to Japan’s Corporate Reorganization Act. In response, the trustee sought to dismiss the action, alleging that the charter party contained an agreement that provided for the parties to refer the dispute to arbitration in London and for English law to be the governing law of the charter party.

The court found that there was an implied agreement between the parties to apply English law to the arbitration agreement because the governing law of the charter party was English law and London was the designated place of arbitration. The court further relied on English law to uphold the principle of separability in finding that the arbitration agreement was valid, notwithstanding any cancellation of the charter party by the trustee under the Corporate Reorganization Act.

B.2 Binding a Third Party to an Arbitration Agreement

In a decision dated 23 January 2015, the Miyazaki District Court was faced with a dispute about binding a third party to an arbitration agreement.10 A ship owned by a Hong Kong shipping company was stranded off the coast of Miyazaki City and subsequently was abandoned. The shipping company had entered into a third-party liability insurance contract with a Russian insurer to insure the operations of the ship. A fisheries cooperative association operating where the ship was abandoned claimed to be subrogated to the insurance claim that the Hong Kong shipping company had against the insurance company. The shipping company did not attend the hearing, and the cooperative association’s claim for subrogation against the shipping company was upheld.

The Russian insurer subsequently asserted that there was an agreement between itself and the shipping company to refer the dispute under the insurance contract to the Maritime Arbitration Commission at the Chamber of Commerce and Industry of the Russian Federation in Moscow. As a result, the insurer requested the court to dismiss the cooperative association’s claim in favor of arbitration.

The fisheries cooperative association countered that it was not bound by the arbitration agreement because it was not party to this agreement. The Miyazaki District Court rejected this argument and held that the dispute concerning the insurance claim was covered by the arbitration agreement, and that the arbitration agreement extended to a party that had become subrogated to an insurance claim.

B.3 Denial of Application to Set Aside an Arbitral Award

In a 17 March 2015 decision, the Osaka District Court was faced with an application to set aside an arbitral award.11 The dispute arose under a sale and purchase agreement and various other related agreements.

After the arbitral award was rendered, the claimants applied to set aside the award on three separate grounds. The first ground was that the Singapore-based chairman of the tribunal was not impartial because he belonged to a global law firm and did not disclose to the parties that an attorney in his San Francisco office represented an affiliate of one of the respondents in a dispute in California.

The second ground was that the tribunal had rejected the claimants’ constitutional right to property by rejecting their claim for compensatory damages, thereby allegedly offending Japan’s public policy. Additionally, the claimants contended they had not been given the opportunity to exercise their due process rights to respond fully to the issues because the tribunal found that the claimants had waived their claim by failing to assert it in a timely fashion. The third ground was that the award also offended Japanese public policy because it purportedly focused on the wording of one the underlying contracts to the dispute and did not adequately consider other factors concerning the interpretation of the agreement.

The Osaka District Court affirmed the validity of the award. As to the first ground, the court found that no circumstances existed that gave rise to justifiable doubts as to the chairman’s impartiality. Regarding the second and third grounds, the court held that the arguments put forth were insufficient to set aside an arbitral award and the award did not offend Japanese public policy.

C. Costs in International Arbitration

C.1 Allocation of Costs

The Arbitration Law goes further than the Model Law in relation to costs in arbitration, specifically in Articles 47 to 49 of the former, each of which deals with issues related to costs. Article 47 concerns arbitrator fees and provides that, where the parties have not agreed on arbitrator remuneration, the arbitral tribunal shall determine such remuneration, which shall be “for an appropriate amount.” Article 48 provides that (unless otherwise agreed by the parties) a tribunal may order parties to “deposit” an amount the tribunal determines to be a rough estimate of the costs of the arbitration. If ordered to make deposits and the parties fail to do so, the tribunal may suspend or terminate the arbitral proceedings.

Article 49 of the Arbitration Law addresses how costs are to be allocated between parties, providing as follows:

“(1) The costs disbursed by the parties with respect to the arbitral proceedings shall be apportioned between the parties in accordance with the agreement of the parties; (2) Failing an agreement as described in the preceding paragraph, each party shall bear the costs it has disbursed with respect to the arbitral proceedings; (3) In accordance with the agreement of the parties, if any, the arbitral tribunal may, in an arbitral award or in an independent ruling, determine the apportionment between the parties of the costs disbursed by the parties with respect to the arbitral proceedings and the amount that one party should reimburse to the other party based thereon; (4) If the matters described in the preceding paragraph have been determined in an independent ruling, such ruling shall have the same effect as an arbitral award; (5) The provisions of Article 39 [which outlines the formal requirements of an award] shall apply to the ruling described in the preceding paragraph.”

As set out above, Article 49 of the Arbitration Law provides that parties must bear their own costs, failing an agreement otherwise. However, parties may agree that the tribunal may make a determination on apportionment of costs.

In addition, the JCAA Rules include detailed provisions on costs and expressly provide for the arbitrator(s) to determine the allocation of costs.12 In particular, Rule 83.1 provides:

“The costs of the arbitration include the administrative fee, the arbitrator(s)’ remuneration and expenses, and other reasonable expenses incurred with respect to the arbitral proceedings; and the Parties’ legal fees and expenses to the extent the arbitral tribunal determines that they are reasonable.”

Rule 83.2 empowers an arbitral tribunal, in its award, to apportion between the parties the costs specified in Rule 83.1, taking into account the parties’ conduct during the arbitral proceedings, the determination on the merits of the dispute and any other relevant circumstances.

Regarding administrative fees, JCAA Rule 14.5 stipulates that, when it files the request for arbitration, a claimant is to pay the entire administrative fee calculated based on the amount of its claim as set out in the JCAA’s Administrative Fee Regulations,13 rather than this fee being shared among the parties. If the respondent files a counterclaim, the respondent must pay a separate administrative fee based on the amount of its counterclaim.14

C.2 Security for Costs

In line with international standards, the Arbitration Law and JCAA Rules both permit a tribunal to order any party to provide security for costs where that party has requested the tribunal to order interim measures.15

C.3 Recovery of Costs

Under both the Arbitration Law16 and JCAA Rules,17 a tribunal has wide discretion to provide for the recovery of all costs related to an arbitration. Insofar as the authors are aware, there has been no case law to date addressing the scope of a tribunal’s discretion in this respect.

There is no law or rule in Japan requiring parties to disclose whether they have paid the costs of arbitration, or whether counsel has incurred such costs. Similarly, there is no Japanese law expressly authorizing or prohibiting third party funding. To the best of the authors’ knowledge, there has been little if any third party funding in Japan to date. Contingency fee arrangements are permitted in Japan, although it is unclear whether or how often they have been used in international arbitration.

  1. Yoshiaki Muto is a partner in the Dispute Resolution Group in Baker & McKenzie’s Tokyo office.
  2. Joel Greer is a partner in the Dispute Resolution Group in Baker & McKenzie’s Tokyo office.
  3. Tetsuo Kurita is a counsel in the Dispute Resolution Group in Baker & McKenzie’s Tokyo office.
  4. Takeshi Yoshida is an associate in the Dispute Resolution Group in Baker & McKenzie’s Tokyo office.
  5. Michael Dunmore is an associate in the Dispute Resolution Group in Baker & McKenzie’s Tokyo office.
  6. Azbil Corporation v. Honeywell Japan Inc. and Honeywell Pte. Ltd., 1413 Hanrei Taimuzu 271, Tokyo District Court, 17 October 2014.
  7. See, 1994 (O) #1848, the Supreme Court, on 4 September, 1997.
  8. Id.
  9. Polestar Ship Line, S.A. v. The Sanko Steamship Co., Ltd., 2258 Hanrei Jiho 100, Tokyo District Court, 28 January 2015.
  10. X v. Y1 and Y2, 2012(Wa)#606, Miyazaki District Court, 23 January 2015.
  11. Companies X1 and X2 (United States) v. Companies Y1 (Japan) and Y2 (Singapore), District Court of Osaka, Case No. 2015(Chu) 3, 17 March 2015.
  12. JCAA Rules (2014), Rules 61.4, 61.5 and 83.
  13. See table in Article 1 of the JCAA Administrative Fee Regulations.
  14. JCAA Administrative Fee Regulations, Article 6, and personal communication with the Secretariat of the JCAA.
  15. Arbitration Law, Article 24.2; JCAA Rules (2014), Rule 67.
  16. Arbitration Law, Article 49.
  17. JCAA Rules (2014), Rule 83.