Japanese Supreme Court Issues Precedent-Setting Decision Interpreting the Japan Arbitration Act

The Supreme Court of Japan recently issued a precedential decision interpreting, for the first time, the arbitrator disclosure requirements of the Japan Arbitration Act (the “Arbitration Act”).[1] The Supreme Court held that Article 18.4 of the Arbitration Act—requiring arbitrators to disclose all “facts likely to give rise to doubts as to his/her impartiality or independence”—(1) is not satisfied by blanket disclosures or advance waivers of potential future conflicts, and (2) requires disclosure of facts both known to an arbitrator or “that can be normally ascertained by an investigation that is reasonably possible . . . .”[2]

The Supreme Court’s holding introduces a new legal standard and reverses a prior Osaka high court decision setting aside an arbitration award in favor of Sanyo Electric Co., Ltd. and certain of its subsidiaries (“Sanyo”) in a dispute with its former U.S. distributor under the Commercial Arbitration Rules of the Japan Commercial Arbitration Association (“JCAA”). This new standard presents opportunities and challenges for enforcing arbitration awards in Japan, and suggests measures that both arbitrators and parties can use to protect their awards.

Morrison & Foerster attorneys successfully represented Sanyo in the initial international arbitration, with Ito & Mitomi (in association with Morrison & Foerster) attorneys representing Sanyo in the related court proceedings and appeals.

Background

Although many specifics of the underlying dispute are confidential, the Supreme Court’s decision is public and describes certain facts important to their ruling:

• Sanyo entered into an agreement with a former U.S. distributor and its related companies (“Distributor”), for the sale of Sanyo branded air conditioning equipment. That agreement contained an arbitration clause requiring any dispute between the parties to be resolved through binding arbitration, in Osaka, Japan, before a three-person panel under JCAA rules.
• Despite this arbitration clause Distributor threatened to, and eventually did, file suit against Sanyo in the U.S. regarding their agreement. In response, Sanyo successfully moved to compel arbitration in Japan. Shortly before that arbitration began, as was widely reported at the time, Sanyo became a wholly-owned subsidiary of Panasonic Corporation.
• In accordance with the JCAA’s rules all three arbitrators submitted declarations of impartiality and independence. One of the arbitrators, a practicing attorney based in Singapore, also stated that attorneys from the arbitrator’s firm “may, in the future, advise or represent the parties to this arbitration and/or their affiliates in matters unrelated to this arbitration.”
• An award was eventually issued in Sanyo’s favor and Distributor responded by filing suit seeking to set aside the award. Distributor alleged that the Singapore based arbitrator failed to disclose that, after the arbitration had been underway for some time, an unconnected attorney with the arbitrator’s firm appeared to begin representing a separate Panasonic subsidiary in connection with an unrelated matter in the U.S.

While the district court dismissed Distributor’s initial challenge, the high court reversed on appeal and set aside the arbitral award. The high court’s decision was based on two legal holdings: First, Article 18.4 of the Arbitration Act obligates arbitrators to disclose all “facts likely to give rise to doubts” regarding an arbitrator’s impartiality, but merely stating that “a conflict of interest may arise in the future” is insufficient. Second, arbitrators are not excused from disclosing facts they do not know. Rather, arbitrators “bear the burden of conducting an investigation in order to disclose any facts that can be learned without undue exertion.”

In reversing the high court, the Supreme Court agreed with the first holding regarding the insufficiency of so-called “advance waivers” but disagreed with the second holding. The Supreme Court instead held that an arbitrator must disclose both potential conflicts of which they are aware and those “that may be normally ascertained by an investigation that is reasonably possible.” Because, however, the appellate record was unclear as to what investigation had been performed, the Supreme Court also remanded the matter to the high court for further fact finding.

Challenging Arbitration Awards in Japan

Although a signatory to the New York Convention on the Enforcement of Arbitral Awards (“New York Convention”), the process of enforcing arbitration awards in Japan is not necessarily straightforward and provides multiple opportunities for parties looking to resist enforcement. The Supreme Court’s new legal standard for arbitrator disclosures, with an emphasis on fact-based “reasonableness,” may well result in Japanese arbitral awards facing additional challenges.

Japanese courts, in general, use a “dual-court” system to enforce arbitral awards. Under this system, civil courts must first issue an “execution order” to make the award judicially enforceable. Once the execution order has been issued a separate enforcement court handles proceedings seeking to collect on the award through a process called “compulsory execution.” For awards made in Japan, an opposing party can also bring a separate action in civil court to have the award set side.

Parties seeking to resist enforcement in Japan can challenge both the execution order, if one is sought, and bring a separate action to set aside the award. This may create two cases, based on essentially the same set of facts and law, where parties end up litigating the same issues twice. Although courts will typically stay execution order proceedings while a related set-aside case is pending, there is no requirement that one court show deference to the other. In other words, it is possible that one court will decline to set aside the award only to have the execution order court reach an opposite conclusion and refuse enforcement. Parties may also appeal from a loss in either action, adding additional complexity and time.

The grounds for non-enforcement (Article 45.2) and set aside (Article 44.1) under the Arbitration Act are essentially the same as those in Article 5.1 of the New York Convention. Distributor’s challenge here was based on Article 44.1(vi) of the Arbitration Act, allowing courts to set aside awards when “the composition of the arbitral tribunal or the arbitral proceedings were not in accordance with the provisions of the laws of Japan.” While the Supreme Court’s decision to uphold an arbitral award is a positive development for arbitration in Japan, the newly articulated legal standard for arbitrator disclosures based on “reasonableness” appears to invite lower courts to perform a fact-based investigation of arbitrators’ conduct. This potential for additional inquiry, across multiple trial and appellate courts, may further complicate the arbitral enforcement process in Japan.

Key Take-Aways

The Supreme Court’s new standards for evaluating arbitrator conflict disclosures suggest some measures that both arbitrators and parties to arbitration in Japan can take to protect the enforceability of their awards:

• Avoid blanket advance waivers. The Supreme Court has spoken clearly that so-called “advance waivers” of potential conflicts are not effective under Japanese law. Instead, to the extent that potential conflicts arise during the course of arbitration they should be specifically disclosed.
• Maintain factual records regarding efforts taken to check conflicts. The key factual question posed by the Supreme Court’s ruling is whether an arbitrator’s conflicts check was “reasonable.” Maintaining records regarding a review of potential conflicts or any investigation provides a ready source of proof in case of a future challenge. Note that the Supreme Court here remanded for just such as fact finding exercise.
• Review arbitrator disclosures early. Nearly all arbitration procedures, including those of the JCAA, allow parties to review arbitrator disclosures as part of the appointment process. Arbitrators making, or parties receiving, such disclosures should review them early to ensure that they comply with the disclosure requirements and that potential grounds for challenge are not left unresolved.
• Prepare for a complicated enforcement process. As noted above, the process for enforcing arbitration awards in Japan is relatively complex and presents several opportunities to delay or challenge enforcement. In deciding where and when to enforce an award, parties should take into consideration the potential set aside risk under the Supreme Court’s new standards as well as the potential delays that even a non‑meritorious enforcement challenge could cause.

For now, the next step is to see how the Osaka high court interprets the Supreme Court’s directions on remand.

[1] A copy of the Arbitration Act, in unofficial English translation, is available at http://www.jcaa.or.jp/e/arbitration/JapaneseArbitrationAct.pdf.

[2] The Supreme Court’s decision, in Japanese only, is available at http://www.courts.go.jp/app/files/hanrei_jp/306/087306_hanrei.pdf.