Japan’s International Investment, Evolving Treaty Practice and Arbitration Related to Corruption and Illegality

Written by: Luke Nottage and Nobumichi Teramura#

Abstract: This article forthcoming in 55 Journal of Japanese Law (mid-2023), part of an interdisciplinary book project on Corruption, Illegality and Asian Investment Arbitration [including a conference held in Brunei on 29 May 2023 (booklet here) supported by ANJeL and CAPLUS], addresses for Japan the difficult practical and policy question facing arbitration tribunals when a foreign investor claims mistreatment by a host state but the latter alleges that the investment was tainted by corruption or other similar serious illegality. By way of background, Japan emerged from the 1980s as a leading exporter of foreign direct investment (FDI). Yet it has low inbound FDI despite some significant growth since the late 1990s (Part II). This is despite Japan having comparatively very little corruption, which is often problematic for foreign investors (Part III).

To protect and promote outbound FDI after a hesitant start, over the last two decades, Japan has accelerated ratifications of standalone bilateral investment treaties (BITs) as well as investment chapters in free trade agreements (FTAs). Almost all allow foreign investors from the home state to directly initiate investor-state dispute settlement (ISDS) arbitration against host states to get relief from violations of substantive treaty commitments, such as non-discrimination or compensation for expropriation (Part IV.1).

Japan’s investment treaty practice on corruption and illegality is comparatively interesting for two reasons (Part IV.2). First, from around 2007, its treaties have often required host states to take measures against corruption. This should help Japan’s outbound investors, but these obligations are generally weakly phrased. Secondly, Japan’s treaties have been less consistent in expressly limiting their protections to foreign investments made in accordance with host state laws (including against corruption). This may be due to treaty drafters from Japan and counterparty states being less aware of the significance of such express legality provisions, which will often lead tribunals to decline jurisdiction if corruption is established, thus leaving foreign investors without treaty protections. Such outcomes may also incentivise host states to ensure a bribe is taken, to use as a treaty defence if foreign investors ever launch treaty claims, whereas other outcomes for tribunals are possible if there is no express legality provision. Another possibility is that this drafting is deliberate, again to benefit Japanese outbound investors as claimants because the absence of a legality provision renders more difficult defences from host states, which typically have more corruption than in Japan.

Japan may adopt more and clearer legality provisions if it becomes subject to more inbound ISDS arbitration claims, and/or if claims by Japanese outbound investors are mostly against well-governed host states with little scope for corruption. Yet both types of claims remain few (Part V). The shift may therefore come more from other counterparty states pushing for such legality provisions and Japan agreeing in its future treaties to demonstrate its overall commitment to combatting corruption, and to preserve the legitimacy of the ISDS arbitration system (Part VI).

# Respectively: Professor, University of Sydney Law School; Assistant Professor, Institute of Asian Studies, Universiti Brunei Darussalam.

Author: Luke Nottage

Prof Luke Nottage (BCA, LLB, PhD VUW, LLM 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.