1. Background

In 2003, Japan enacted a new law on arbitration, which came into force in 20041. Originally, Japan's rules on arbitration were contained in the Code of Civil Procedure, which was enacted in 1890. When a new code was enacted in 1997, the section dealing with arbitration remained unchanged but was made into a separate law. This law was superseded by the 2003 law, which was based upon the UNCITRAL Model Law on International Commercial Arbitration.2

The new arbitration law was intended to galvanize arbitration, which had been seldom used as a means of resolving both internal disputes and cross-border disputes involving Japanese entities. That unpopularity was often attributed to the obsolete law, which in Japan, unlike other industrialized countries, had remained unchanged for over a century.

Other reasons too explain why arbitration was little used for resolving disputes. Firstly, effective alternatives to arbitration already existed in Japan. One such alternative was conciliation (or mediation) conducted by a judge and civil conciliation commissioners in summary and district courts. It had the advantage of being neither over-costly nor time-consuming. Around 270,000 conciliation cases are handled by the summary courts every year. Parties not content with the outcome of conciliation can subsequently initiate formal court proceedings3. Thus, arbitration was never a preferred method of dispute resolution other than in areas such as construction and shipping where it was not uncommon. A survey on international arbitration has pointed out that a significant number of corporations based in Japan (as in the United Kingdom and the USA) favour mediation and other ADR mechanisms.4

Secondly, a system based on party autonomy tended to be regarded with scepticism, whereas a system involving the prerogative power of the State through the courts was perceived to be more reliable. This is reflected in the fact that ADR tends to succeed best in Japan when there is some State involvement, as in the court-administered conciliation mentioned above. Some in-house counsel have commented that, were they to opt for arbitration, they would find it difficult to justify their preference vis-à-vis their management. [Page10:]

Thirdly, companies were apprehensive of a system of dispute resolution that lacked a means of appeal. This explained their preference for litigation, which moreover is affordable in Japan and has recently benefited from reforms substantially reducing the length of proceedings (albeit not by half, as targeted). Even in cross-border contracts Japanese companies often insisted on a dispute clause that provided for the jurisdiction of the Tokyo District Court. In the area of intellectual property, the creation of an Intellectual Property High Court has been an added incentive to resort to the courts rather than arbitration.5

In cross-border disputes, however, the desire of Japanese companies to resort to the courts is often thwarted by their counterparty's preference for arbitration. Naturally, the choice of a means of dispute resolution in cross-border disputes depends on various factors, such as the nature of the transaction/investment, the nature of the counterparty, and the place of enforcement in the event of a successful outcome. Furthermore, as the number of foreign law firms advising Japanese companies in international trade and investment rises, it can be assumed that clauses providing for arbitration are likewise increasing.

The number of Japanese parties in cases filed with the ICC International Court of Arbitration ranged between 7 and 31 per year during the years 1998 to 2009. There would appear to be no discernable trend towards an increase or a decrease as the 2010 figure of 21 remains within that range. As for the Japan Commercial Arbitration Association (JCAA), which is the primary international arbitration institution in Japan, it used to handle less than ten cases each year, but since the year 1999 it has regularly received more than ten cases per year6. The adoption of the 2003 law would not appear to have had a great effect on these figures. The number of arbitration cases filed with the JCAA in 2010 reached a record high of 27, but it is not clear whether this figure reflects the increasing popularity of arbitration or is due to a rise in the number of disputes owing to the current global economic climate.

Although arbitration is not yet widely used in Japan, Japanese courts have a tradition of arbitration-friendliness. Even before the new law came into force, they took a fairly positive approach. Since the enactment of that law, although limited in number, suits brought in the courts notwithstanding the existence of an arbitration agreement have been consistently dismissed in all cases but one7. Under the new law, there have been [Page11:] no cases concerning the enforcement of awards so far. However, a notable judgment was rendered in 2009 concerning the setting aside of an award. In this article, we shall review the judgments of the Japanese courts on the enforcement and setting aside of foreign arbitral awards in the past three decades, including the 2009 judgment.

2. Relevant legal instruments

Prior to the 2003 law, Japan's rules for enforcing foreign arbitral awards were far from perfect. The provisions on the enforcement of awards referred to those on the setting aside of awards, which listed the following as grounds for setting aside:

• the case concerns a situation in which arbitration is not permitted;

• the award obliges a party to effect an act that is unlawful;

• a party has not been lawfully represented in the proceedings;

• a party has not been heard in the proceedings;

• no reasons have been stated in the award;

• there are grounds justifying a retrial.

The first ground was a rather sweeping provision intended as a blanket clause. It was construed as covering a wide range of situations, such as where the arbitration agreement was invalid or non-existent, the award exceeded the scope of the arbitration agreement, the matter was not arbitrable, or the selection of the arbitrators contravened the law.8

The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards entered into force with respect to Japan in 1961. From that date, as one judgment put it, the Convention became part of Japanese law and thus prevailed over the then existing law.

In addition, Japan has entered into a number of bilateral treaties that provide for the enforcement of arbitral awards. Article IV, § 2 of the USA-Japan Treaty of Friendship, Commerce and Navigation9, which was ratified in 1953, provided as follows:

Awards duly rendered pursuant to any such contracts [contracts entered into between nationals and companies of one Party and nationals and companies of the other Party, which provide for the settlement of disputes by arbitration], which are final and enforceable under the laws of the place where rendered, shall be deemed conclusive in enforcement proceedings brought before the courts of competent jurisdiction of either Party, and shall be entitled to be declared enforceable by such courts, except where found contrary to public policy. When so declared, such awards shall be entitled to privileges and measures of enforcement appertaining to awards rendered locally.

The Treaty on Commerce between the USSR and Japan10, which was made on 19 October 1956 and continues to apply between Japan and the Russian Federation, provided that both parties have an obligation to enforce arbitral awards resulting from commercial contracts between entities of both countries (Article 14). This treaty is more specific in that it lists grounds on which enforcement may be refused, which include:

a) the award has not become effective as a judgment under the law of the country where it was made; [Page12:]

b) the award requires a party to perform actions that are not permissible under the law of the country where enforcement is sought;

c) the award contravenes public policy in the country where enforcement is sought.

The Trade Agreement between China and Japan11, which was concluded on 22 June 1974 before the New York Convention entered into force in relation to China, provided as follows in Article 8, para. 4:

Both parties are under an obligation to enforce arbitral awards via the relevant agency in compliance with the requirements of the law where the enforcement is sought.

The treaty referred only to disputes arising between Japanese juridical and physical persons and a Chinese 'foreign trade organization' (Article 8, para. 1). In one case, this led a Japanese court to refuse to apply the treaty as the Chinese party was not a foreign trade organization, and to apply the New York Convention instead. 12In other cases, however, the treaty has been applied where the Chinese party was a development company or a construction company but not strictly a foreign trade organization.

As far as the relationship between the New York Convention and bilateral treaties is concerned, Article VII(1) of the Convention provides as follows

The provisions of the present Convention shall not affect the validity of multilateral or bilateral treaties concerning the recognition and enforcement of arbitral awards entered into by the Contracting States nor deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon.

It therefore follows that the validity of the bilateral treaties mentioned above was unaffected the New York Convention.13

However, to what extent those treaties have significance remains questionable, since they were all made before the Convention entered into force in relation to those countries. According to one school of thought, a bilateral treaty prevails over the New York Convention only when it makes enforcement easier than under the Convention. Of the three treaties mentioned above, only the 1953 treaty between the USA and Japan satisfied this condition, since it provided that after an award has entered into force the only ground on which enforcement may be refused is if it breaches public policy. In practice, only the treaties with the USA and China have been relied on by the courts.

The 2003 arbitration law distinguished between the recognition, enforcement and setting aside of arbitral awards along similar lines to the UNCITRAL Model Law on International Commercial Arbitration. The grounds for refusing recognition and enforcement are the same as those for setting aside awards; the former taking their cue from the New York Convention and the UNCITRAL Model Law and the latter from the UNCITRAL Model law.

Article 45 of the 2003 law lists the following as grounds for refusing to recognize an award: [Page13:]

• the arbitration agreement is invalid due to restrictions upon a party's capacity;

• the arbitration agreement is invalid on other grounds under the law chosen by the parties to govern it;

• a party was not given proper notice of the arbitration proceedings or the procedure for selecting arbitrators, as required by the law of the place of arbitration;

• a party was unable to defend its case in the arbitral proceeding;

• the award exceeded the scope of the arbitral agreement or the submissions made during the proceedings;

• the composition of the arbitration panel or the arbitration procedure was not in accordance with the law of the place of arbitration;

• the award has not become effective under the law of the place of arbitration, or has been set aside or suspended by the authorities in the country of the place of arbitration;

• the content of the award is contrary to Japanese public policy and morality.

The same grounds are referred to in the provision on enforcement (Article 46, para. 8) and set out in the provision on the setting aside of awards (Article 44, para. 1).

It should be noted that under Japanese arbitration law, a conflict between the content of an award and Japanese public policy and good morals is a ground for refusing to recognize or enforce an award and for setting aside an award. In this respect, the law differs from the New York Convention and the UNICTRAL Model Law, which do not specifically refer to the content of the award. Whether a breach of procedural public policy is covered by this provision is still a matter of controversy in Japan.14

Another difference between the Japanese law and the UNCITRAL Model Law is that the former requires parties to be given the opportunity to attend and be heard in proceedings for setting aside, recognizing and enforcing awards (Article 44, para.5; Article 46, para. 10).

3. Court decisions on the enforcement of awards

There have not been many court cases in which the enforcement of a foreign arbitral award was contested and none at all in which the enforcement of a foreign arbitral award was sought under the new law. Prior to the enactment of 2003 law, however, there were several cases in which Japanese courts enforced foreign arbitral awards. The author has found no cases in the past 30 years in which the enforcement of a foreign arbitral award was refused by a Japanese court.

In 1987 a court relied solely on the 1953 USA-Japan treaty (with no reference to the New York Convention) to allow enforcement of an award issued by the American Arbitration Association (AAA). According to this judgment, if the award has been lawfully made in accordance with the arbitration agreement, has become effective under applicable law and is enforceable in the USA, it should be enforceable in Japan unless contrary to public policy. The respondent had argued that the person who signed the agreement had no power to do so. The court held that in this case the respondent should have respected the time limit laid down by the law of the place of arbitration and filed a motion to set aside in the Honolulu court within 90 days of the date on which the award was rendered. 15[Page14:]

A 1999 judgment relating to an award of the China International Economic and Trade Arbitration Commission (CIETAC ) found that the relationship between the New York Convention and the 1974 China-Japan trade treaty was that of a general and a specific law and that the treaty, as the specific law, should be applied. However, the court pointed out that Japanese law was applicable to enforcement in Japan on the basis of Article 8, para. 4 of the treaty, and that since the New York Convention had been ratified by Japan and was part of the Japanese legal system, the Convention should therefore be applied. 16

In this case the respondent argued that the arbitration agreement was invalid, since it had been terminated by consent of the parties, but this was not accepted as a legitimate ground upon which to contest enforcement under the New York Convention. It was also contended that there was no translation accompanying the notice served upon the respondent by CIETAC and that CIETAC failed to take the necessary steps to assist the respondent in its defence and that this constituted a breach of Article V(1)(b) of the New York Convention. The court held that failure to serve notice in Japanese was not a breach of the Convention.

In a case decided in 1993, the Japanese court relied on both the New York Convention and the China-Japan trade treaty to allow enforcement of a CIETAC award.17 The Japanese respondent had opposed enforcement, arguing that the principle of reciprocity required that the provisions relating to the enforcement of foreign awards in the Chinese Code of Civil Procedure should be compared with those in the Japanese Code of Civil Procedure. The respondent alleged that the Chinese claimant had applied for enforcement in Japan after the expiry of the time limit laid down in the Chinese Code of Civil Procedure, which was six months from the date set for voluntary enforcement. The court rejected this argument and held that reciprocity in the New York Convention concerned the scope of the awards to be enforced or recognized, not procedural requirements for enforcement.

In another case relating to the enforcement of a CIETAC award also rendered in 1993, the court referred to Article 7 of the New York Convention, applied the China-Japan bilateral trade treaty and, on the basis of the then Japanese Code of Civil Procedure, allowed enforcement.18 Another similar judgment, likewise applying the China-Japan treaty and the Japanese Code of Civil Procedure, followed in 1994.19

In cases involving the enforcement of CIETAC awards, respondents have sometimes argued that a fair arbitration cannot be expected of CIETAC since it is affiliated to the State. This was an argument put forward by a respondent in a case where the claimant was a Chinese State enterprise and all the arbitrators were Chinese communists. The court rejected the argument as a ground for refusing enforcement under the Convention.20

In another case, the respondent claimed that since the claimant foreign trade organization was a business arm of CIETAC's parent body, the Chinese State department in charge of the international economy and trade promotion, the impartiality of the award could not be ensured. Applying the New York Convention (no reference was made to the bilateral treaty), the court ruled that CIETAC was the only permanent arbitration institution in China in the trade and economic sector, that the impartiality of the arbitration could not be called into question by the mere fact [Page15:] that the claimant was a State enterprise, and that this could not be a ground for refusing enforcement under the New York Convention.21

Apart from the CIETAC cases, only one other case has been found in which the enforcement of an award issued by an arbitration institution has been contested. It was an award from a cereals and food trade organization based in London, whose enforcement was allowed. 22The court looked to the UK-Japan Commerce, Residence and Navigation Treaty, which, according to the court, merely confirmed the obligation of both countries to implement the New York Convention, without adding any additional requirements. Therefore the Convention was applied.

One of the matters contested in this case was the validity of the arbitration agreement. The respondent contended that, under the New York Convention, it was a matter to be decided by the arbitral tribunal, not by the court. The court rejected that argument, pointing out that, according to the Convention, the existence of a valid arbitration agreement was a prerequisite to enforcement. The respondent failed to appoint an arbitrator to the three-member panel and refused to participate in the proceedings as it considered the arbitration agreement to be invalid. The court ruled that the respondent had been provided with opportunities to defend its case, but had failed to do so. Therefore, there was no reason to apply Article 5(1)(b) of the New York Convention.

4. Court decisions on the setting aside of awards

Article 44 of the 2003 arbitration law provides for the setting aside of arbitral awards. The grounds listed in this provision largely coincide with the UNCITRAL Model Law on International Commercial Arbitration. Unlike the recognition and enforcement of awards, there is no international treaty-whether multilateral or bilateral-relating to the setting aside of awards. Prior to the enactment of the 2003 arbitration law, the structure of the law was such that in relation to the enforcement of awards it merely stated that if there was a ground for setting aside an award, then it could not be enforced. It is understood that only awards made in proceedings seated in Japan can be set aside by Japanese courts.23

In some cases where enforcement was at issue, the respondent filed a counterclaim for the award to be set aside, or based its defence on the ground that the award should be set aside. In the above-mentioned case relating to the enforcement of an AAA award, the respondent argued that enforcement should not be allowed as there were grounds for setting aside the award, namely the arbitration agreement was signed by a person who was not empowered to do so. The court ruled that as the place of arbitration was Honolulu, the procedure was governed by US law and US law allowed an award to be set aside if the arbitration agreement upon which it was based was not valid. However, the motion to set aside had to be brought within 90 days of the rendering of the award, which the respondent had failed to do.24

There have been some cases where a party applied to court to set aside an arbitral award on account of insufficient reasoning in the award. This was the case in a judgment delivered in 1990 concerning an award of the Japan Shipping Exchange. The court made a distinction between court decisions and arbitral awards as follows: 25[Page16:]

In arbitral awards, arbitrators do not have to base the award solely on statutes, but are empowered to make decisions from an equitable point of view, taking into consideration the specific circumstances of the given case and reaching an appropriate conclusion. The reasoning of the award will be sufficient, if the summary of the decision-making process leading to its conclusion is recognizable; legal reasoning does not have to be exclusive, but is sufficient if it is possible.

The second half of this statement was repeated in another judgment pertaining to a JCAA award. Here, the plaintiff bringing the motion to set aside argued that the substance of a crucial document submitted to the tribunal was false and that the award was made on the basis of non-existent facts. It contended that flawed fact-finding should be regarded as a failure to give reasons. According to the court, the important thing was to know how the arbitrator reached the decision. Unlike court judgments, this did not require detailed fact-finding based upon evidence or a detailed discussion of the law.26 In both of these cases, it would appear that the plaintiffs were attempting to have the awards set aside on the merits.

There have also been cases in which parties attempted to have domestic awards set aside on grounds of insufficient or inadequate reasoning, but their arguments were not accepted by the courts.27

5. 2009 decision on the setting aside of an award

It was in 2009 that a court ruled for the first time in a comprehensive manner on the setting aside of an arbitral award under the 2003 law. 28This is at the same time the most comprehensive judgment on arbitration that has been rendered by the Japanese courts and demonstrates their favourableness towards arbitration. For this reason, it deserves to be examined separately and at greater length.

The case involved an award of the International Center for Dispute Resolution of the American Arbitration Association. The place of arbitration was Tokyo. The dispute arose as a result of a fire in a semi-conductor manufacturing plant in Taiwan. The equipment used in the plant had been produced by a Japanese company. The owner of the plant was compensated by insurance companies. The dispute was between the Japanese producer of the equipment and the reinsurer. The arbitral tribunal found the respondent to be 65% liable (the owner of the plant being held liable for the remaining 35%) and ordered the respondent to pay 2.688 billion Taiwanese dollars to the claimant.

The respondent applied to the court in Japan to have the award set aside pursuant to Article 44 of the 2003 arbitration law. It argued as follows:

1) In the arbitration no reference had been made to the breach of a duty to give warning, whereas the award's finding was based on this breach. The respondent was not given an opportunity to present its position and submit evidence to refute the allegation (Article 44, para. 1, subpara. 4).

2) The award acknowledged the breach of a duty to give warning, as well as a causal link between the failure to give warning and the loss, in infringement of the applicable Taiwanese law. On the basis of such unreasonable grounds, the award granted a substantial amount (10 billion Japanese yen) to the claimant. All of this was alleged to be contrary to Japanese public policy (Article 44, para. 1, subpara. 8)

3) The respondent had not been treated properly and impartially, as required by Article 16, para. 1 of the ICDR Rules, which the parties had allegedly agreed upon, (Article 44, para. 1, subpara. 6). [Page17:]

With regard to 1), the claimant answered that in the course of the proceedings the respondent had repeatedly argued about the absence of a causal link between the failure to provide warning and the loss and had opportunities to defend the case. With regard to 2), it argued that the respondent's contention was merely that the fact-finding and the award's conclusion were unreasonable and that this did not constitute a breach of public policy. It maintained that 3) was time-barred.

The court analyzed the award at length. With regard to 1), it concluded that the respondent had discussed the breach of a duty to give warning and the causal link between the breach and the loss, and denied that the respondent was unable to defend itself in the proceedings. It stated as follows:

Since arbitration is a means of dispute settlement based upon the consent of the parties with no system of appeal available and the award being final, and also because Article 4 of the Arbitration Law provides that the court shall exercise its power only when so provided by the Arbitration Law, there is no doubt that arbitral awards should be respected as much as possible. From this point of view, Article 44, para. 1, subpara. 4 should be understood to aim at allowing the court to set aside an award only when there has been a substantial breach of guaranteed procedure, for example, the party was unable to participate in the proceeding, or the award was rendered on the basis of materials unrecognizable by the party. There is no ground for setting aside the award in circumstances where the party merely failed to recognize a certain matter to be important.

On 2), the court ruled as follows:

The court, as mentioned above, should respect arbitral awards as much as possible. Therefore, Article 44, para.1, subpara. 8 does not mean that the court is allowed to set aside the award in cases where the fact-finding or conclusions of the arbitral tribunal are merely unreasonable. It is designed to allow the court to set aside the award only when the legal outcome produced by the award is contrary to the public policy of Japan. . . . The plaintiff merely argues that the fact-finding and the legal conclusions of the arbitral tribunal are unreasonable. This cannot lead to the conclusion that the content of the award is contrary to the public policy of Japan.

The court also denied that the substantial amount of damages was contrary to public policy, since they matched the amount actually paid out by the insurers.

This judgment was upheld at appeal.

6. Final remarks

With the enactment of the 2003 arbitration law, the legal framework of arbitration in Japan has been substantially revamped. However, even before then and since at least 1961 when the New York Convention came into force in relation to Japan, Japanese courts have endeavoured to overcome obsolete law by applying the New York Convention and bilateral treaties. They have acquired a respectable track record for enforcing foreign arbitral awards and dismissing unreasonable attempts to set aside such awards. As demonstrated by the recent 2009 judgment rendered under the current law, Japan remains an arbitration-friendly jurisdiction.

1
See H. Oda, 'Arbitration Reform in Japan' (2004) 15:1 ICC ICArb. Bull. 23. For an English translation of the law, see M. Kondo et al., Arbitration Law of Japan (Tokyo, 2004).

2
This law should be distinguished from the ADR law, which was adopted in 2004.

3
H. Oda, Japanese Law, 3d ed. (Oxford, 2009) at 66-67.

4
L. Mistelis & C. Baltag, 'Recognition and Enforcement of Arbitral Awards and Settlement in International Arbitration: Corporate Attitudes and Practices' (2008) 19 The American Review of International Arbitration 319 at 328.

5
Supra, note 3 at 55-56.

6
JCAA caseload 1999-2009 (by courtesy of JCAA)

7
Judgments of the Tokyo District Court, 12 March 2010, 26 March 2008, 28 August 2007; judgment of the Intellectual Property High Court, 26 February 2006 (first instance judgment, Tokyo District Court, 21 October 2005). The case where the arbitration agreement was found to be invalid involved a contract for the purchase of a financial product, namely foreign exchange derivatives. The purchaser, a Japanese national, who was not a sophisticated investor, incurred substantial loss and sued the securities company that marketed and arranged the purchase of the product from an Australian company. The agreements contained an obvious contradiction over the choice of institution, the basic contract providing for ICC and the arbitration agreement for JCAA. The court pointed out that the purchaser was not familiar with arbitration, and since the arbitration agreement did not explicitly exclude court jurisdiction the purchaser was unable to understand the consequences and was not bound by the agreement (judgment of the Sapporo High Court, 27 February 2004). The 2003 arbitration law contains transitory provisions on consumer contracts, which allow consumers to rescind the arbitration clause.

8
Y. Taniguchi et al., eds., New Commentary on Cases: The Code of Civil Procedure (Tokyo, 1995) at 713-715 [in Japanese].

9
See <http://tcc.export.gov/ _ Trade_Agreements/All_Trade_Agreements/exp_005539.asp>.

10
See <http://www.mofa.go.jp/ _ mofaj/annai/honsho/shiryo/archives/s22-3.html> [in Japanese, no English text available].

11
See <http://www.meti.go.jp/ _ policy/trade_policy/asia/china/html/trade_treaty.html> [in Japanese, no English text available].

12
Tokyo District Court, 19 June 1995.

13
T. Kojima & A. Takakuwa, eds., Commentary and Discussions on the Arbitration Law (Tokyo, 2007) at 266-268 [in Japanese].

14
Ibid. at 204. K. Miki & K. Yamamoto, eds., The Theory and Practice of the New Arbitration Law, special issue of Jurist, 2006, at 341-343 [in Japanese].

15
Nagoya District Court, 26 February 1987.

16
Yokohama District Court, 25 August 1999.

17
Okayama District Court, 14 July 1993.

18
Tokyo District Court, 20 July 1993.

19
Tokyo District Court, 27 January 1994.

20
Tokyo District Court, 19 June 1995.

21
Tokyo District Court, 27 January 1994.

22
Tokyo District Court, 20 June 2001.

23
See Y. Taniguchi et al., supra note 8 at 711.

24
Nagoya District Court, 27 February 1987.

25
Kobe District Court, 16 November 1990.

26
Tokyo District Court, 14 November 2001.

27
Tokyo District Court, 16 February 1989; Fukuoka District Court, 13 December 1976.

28
Tokyo District Court, 28 July 2009.