International Investment and Commercial Arbitration in Australia and Japan: Shared Challenges, Different Solutions?

Australia and Japan face a remarkably similar challenge. Few international arbitrations have their seat in either country, despite various initiatives undertaken over the last decade or two. Both Australia and Japan probably need to adapt quite radical measures to overcome remaining barriers to attracting international arbitration activity to their respective shores. This shared problem is serious not just because their arbitrators, lawyers, institutions or local economies miss out on business – after all, at least the arbitrators and lawyers can still earn fees by deploying their skills in arbitrations further abroad. The problem is serious also because low levels of international arbitration activity in both countries limit the potential to develop domestic arbitration, ADR more generally, and indeed effective civil procedure.
Despite the shared challenge, however, quite radical solutions for each country may differ somewhat. Expedited arbitration procedures may be a particular selling point for Australia, but not Japan. Caucusing in Arb-Med may work in Japan, but not Australia. And Japan may have more scope than Australia to develop international arbitration through a ‘whole-of-government’ approach that promotes investment arbitration provisions, for example, even in treaties with other developed countries.

Few international arbitrations in either country persist despite, firstly, striking differences in background ‘general culture’ (predominantly British/Irish in Australia, plus diverse immigrant groups particularly since the 1970s); and, arguably more importantly, in ‘legal culture’ (the strict English variant of the common law in Australia; a considerable Franco-German civil law legacy in Japan). This makes it harder to advance a straightforward ‘culturalist’ (or ‘Asian Values’) explanation for low levels of arbitration activity. That becomes even more questionable in light of empirical evidence that Japanese corporations quite frequently appear before arbitral institutions (and even national courts) outside Japan, and regularly include arbitration clauses in their cross-border contracts. More anecdotal evidence suggests the same for Australian corporations. They often use arbitration too, but the seat still tends to be located abroad – albeit perhaps increasingly in other parts of the Asia-Pacific, not just held in the traditional European or US ‘core’ of the arbitration world.
There are also problems with a second explanation sometimes given for low levels of arbitration and litigation activity within Japan, and potentially elsewhere – including therefore Australia. An ‘economic rationalist’ paradigm focuses instead on predictability of substantive law (and, by extension, procedural law). If the outcomes (and processes) are reasonably certain, parties will not persist with the formal proceeding. Instead, they will negotiate out or mediate the dispute, thus jointly saving the costs involved. This theory may help explain why the US, in particular, has quite a lot of domestic arbitration activity – parties wish to avoid the uncertainties of jury trials and so on even in civil trials. But it doesn’t explain why Japan has low levels of domestic arbitration, despite more much more predictable court processes. The theory becomes even more intractable when extended to international arbitrations, in an attempt to explain few cases with their seat in Japan or Australia.
This leaves a third explanation, also derived originally from literature comparing civil litigation rates. ‘Institutional barriers’ dissuade parties from choosing Japan or Australia as the seat for their arbitrations. For example, court costs and legal fees in Japan are quite reasonable; unlike judges, arbitrators are not subsidised by the state. Initially it was uncertain whether even ‘foreign law solicitors’ resident in Japan could represent clients in international arbitrations. There were also concerns about the skills of bengoshi lawyers and of Japanese arbitrators in international arbitration. And Japan’s arbitration legislation dated back to 1898.
Yet the legislature clarified the foreign lawyers issue in 1996, and in 2003 enacted an Arbitration Act based on the UNCITRAL Model Law (admittedly, in the context of broader reforms that simultaneously made civil litigation more attractive as well). Australia resolved both issues in 1989, although its International Arbitration Act is currently under review and court decisions have been less pro-arbitration than those of Japanese courts (especially when enforcing foreign arbitral awards). Both Australia and now Japan also have an emerging ‘new generation’ of arbitration law experts – lawyers, arbitrators and professors.
Do these recent parallels therefore suggest that international arbitrations will increase significantly in both countries? This paper suggests that this is unlikely, unless some fairly radical measures are taken. One reason is that a major barrier remains fairly insurmountable: geography. Why come all the way down to Australia or across to Japan, especially given their limited caseloads so far? Especially now that more convenient venues like Hong Kong and Singapore have attracted much larger caseloads and experience since the 1990s, also boasting quite similar attractions (Model Law based legislation, experts, independent and professional courts supportive of arbitration). All the more so, now that countries like Korea are also devoting significant resources in an attempt to share in some of their success.
A second reason is that the governments in neither Japan nor Australia appear prepared to devote so much time or resources to compete for business in the Asia-Pacific. If they were, we would have expected a much earlier and ambitious set of reforms to international (and domestic) arbitration in Australia. We would also have expected a more flexible approach to have emerged regarding investment treaty arbitration, which has significant synergies with commercial arbitration despite the greater public interests involved. At present, in negotiating BITs and FTAs, it seems that Australia maintains a simplistic position: ‘no investment arbitration provisions with developed countries’.
Japan adopts a more nuanced position in this last respect (for example, including such provisions in its FTA with Switzerland recently), although perhaps because it is often a net capital exporter even vis-à-vis other developed countries. Promoting investment treaty arbitration provisions and reforms may therefore be one way that Japan can develop a somewhat higher profile in international arbitration more generally.
But another and more direct way is to take develop a feature of JCAA (and presumably TOMAC) arbitration: a tradition of arbitrators encouraging settlement during the proceedings, especially – according to a recent study by ANJeL Research Visitor Professor Tatsuya Nakamura – if they come from a civil law or Japanese background. However, it seems that almost all such attempts include ‘caucusing’ (arbitrators meeting separately with parties). This is unusual even for civil law arbitrators, at least from the Germanic tradition, and is not recommended in recent international initiatives from the likes of CEDR. So Japan can either revise its practice, or try to turn this ‘caucusing’ feature into a distinctive marketing advantage. The CIArb in Australia is currently developing Arb-Med rules that do allow for caucusing, but ACICA’s Rules Subcommittee prefers the CEDR approach. Even the latter version of ‘Arb-Med’ will represent quite a radical measure to try to increase Australia’s attractiveness vis-à-vis countries like Singapore and Hong Kong (which do not actively engage in Arb-Med, in fact, despite provisions in their Acts).
A final and quite radical way forward for Australia is to promote Expedited Arbitration. By insisting that an oral hearing is used only exceptionally (Rule 13.2), and even then potentially using internet-based videoconferencing, it can overcome the tyranny of distance. By keeping costs down more generally, Australia can distinguish itself from other venues around the Asia-Pacific. On the other hand, Japan may have a comparative advantage in regular proceedings, especially larger-scale and more complex arbitrations. After all, to venture a cross-cultural over-generalisation: the Japanese pride themselves on being meticulous, whereas the Australian ethos is to get the job done quickly – even if this means cutting some corners or not getting it quite right.

Author: Luke Nottage

Prof Luke Nottage (BCA, LLB, PhD VUW, LLM LLD Kyoto) is founding co-director of the Australian Network for Japanese Law (ANJeL), Associate Director (Japan) of the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS), and Professor of Comparative and Transnational Business Law at Sydney Law School. He specialises in international dispute resolution, foreign investment law, contract and consumer (product safety) law.