Overview

The Japan Commercial Arbitration Association (JCAA) has issued an announcement that it is (i) amending its two current sets of arbitration rules and (ii) introducing a revolutionary set of rules designed to provide efficient and cheap civil-law style arbitration.

In its introduction to an initial call for public comments on the drafts, the JCAA made the frank admission that it: “has yet to play a significant role in the resolution of international disputes.”  The clear motivation for these new rules is to change this by offering a unique arbitration model that is attractive to a wide range of businesses.  Accordingly, the new sets of rules (the key features of which are explored below) seem to create a three tiered-system:

The new sets of rules will come into force on 1 January 2019.

1. Administrative Rules

The Administrative Rules allow the JCAA to administer arbitrations under the UNCITRAL Arbitration Rules.  Since the UNCITRAL Rules are designed for ad hoc arbitration, the Administrative Rules are designed to provide: “the minimum essentials to make the UNCITRAL Arbitration Rules operate effectively as institutional arbitration rules” (emphasis added).

The most significant additions relate to the remuneration of arbitrators.  Specifically:

  1. Arbitrators’ fees will be fixed at an hourly rate between USD 500 to 1,500 per hour by the JCAA; considering the arbitrator’s experience and the complexity of the case (Rule 20).
  2. No reduction in the arbitrators’ rates after a certain number of hours (in the case of the Commercial Rules, 150 hours) (Rule 21).
  3. If proceedings are expected to be prolonged, the JCAA may pay an arbitrator their remuneration before the termination of proceedings with the parties’ consent (Rule 22.2).

This puts the JCAA at a similar level to other international institutions in the region (e.g., SIAC and HKIAC) as regards the remuneration of arbitrators, where previously the JCAA had a reputation for keeping such fees low.  As the JCAA confirms in its explanatory overview, the change at (a) above will make it easier to appoint: “prominent international experts to serve as arbitrators” while the additions at (b) and (c) render the Administrative Rules more suitable for long and complex cases.

Although these changes are welcome, parties tend to choose institutions for their own rules.  It is therefore unclear whether these changes will lead to more international parties choosing the JCAA to administer their UNCITRAL arbitrations and in what circumstances they might choose to do so.

2. Commercial Rules

The JCAA’s approach to the new Commercial Rules is markedly different.  The new rules make some inventive changes designed to remove inefficiencies and protect against challenges / appeals.  At the same time, the changes place heavier restrictions on arbitrators’ fees which might dissuade top-tier arbitrators from acting under the Commercial Rules.

The most important alterations are as follows:

  1. Explicit ongoing duties for arbitrators to investigate potential conflicts of interest (Article 24) – in particular, potential arbitrators are now required to conduct a “reasonable investigation” into the existence of any potential conflicts of interest both prior to accepting an appointment and on an ongoing basis during their appointment. This wording reflects a 2017 ruling of the Supreme Court of Japan (please see our blog post at the link here).
  2. Detailed rules regarding the role of the Tribunal Secretary (Article 33) – key additions require that a tribunal secretary: (i) is appointed only after a detailed proposal is formally approved by both parties; (ii) cannot perform tasks that could “substantially influence” the tribunal’s decision; and (iii) will be paid out of the fee cap of the appointing arbitrator.
  3. Explicit right for the Tribunal to reject evidence submitted in an untimely manner (Article 41) – whilst tribunals generally have such a right, this provision emphasises the JCAA’s desire to empower tribunals to take a less permissive attitude and enforce procedural propriety more rigorously.
  4. Increased target time for rendering an award from 6 months to 9 months (Article 43) – though this is a welcome change, it seems likely that even the extended target of nine months will be too short for anything more that the most straight forward of disputes. As such, it is unclear how much emphasis will be placed on meeting such targets.
  5. No dissenting opinion may be disclosed “in any manner” (Article 63) – in its explanatory overview, the JCAA confirms that this addition is designed to avoid: (i) potential challenges to awards; and (ii) any temptation for party-appointed arbitrators to give dissenting opinions to show loyalty to their appointers. This is innovative and goes beyond most other institutional rules, which are either silent on dissenting opinions (LCIA Rules) or only permit notification to the parties outside of the award (ICC Rules).  It will be interesting to see how this restriction works in practice and if it is eventually adopted by other institutions.
  6. Increase in scope of automatic expedited procedures to cover disputes up to JPY 50 million (around USD 400,000) (Article 84) – this represents an increase from JPY 20 million but is still far below other institutions like the ICC (USD 2 million), HKIAC (around USD 3.2 million) or SIAC (around USD 4.4 million). This could mean that smaller disputes that would otherwise be suited to the expedited process will rely on the agreement of the parties to apply such rules; something less likely to occur once a dispute has started.
  7. Arbitrators’ Remuneration – the new Commercial Rules introduce detailed changes to arbitrators’ remuneration. The most fundamental of these are as follows:
    • All arbitrators paid a fixed hourly rate of JPY 50,000 regardless of experience or the complexity of the case (Article 93.2). This is lower than the lowest hourly rate possible under the Administrative Rules (USD 500) and much lower than other institutions’ hourly-rate caps, e.g., the HKIAC’s cap is around JPY 94,500.
    • After 150 hours working on the case (up from 60 hours under the current rules), the arbitrator’s rates are reduced by 10%, and again for every 50 hours thereafter to a maximum of 50% (Article 95).
    • The upper limit of a sole arbitrator’s fees for one matter is JPY 30 million (and this is reduced depending on the value of the dispute) – in three person tribunals the co-arbitrators’ cap is 80% of this figure and the chairperson’s cap is 120% (Article 94).
    • The parties may agree in writing before the constitution of the arbitral tribunal to amend the hourly rate, fee cap or planned reduction but the amendment cannot be less favourable to the arbitrators than the position under the Commercial Rules and no changes are possible (even with both parties’ agreement) once the tribunal has been constituted (Articles 97 and 98)

The overriding impact of the changes is to tightly limit arbitrators’ fees.  While this should generally be welcomed, the low hourly rates may put off many senior international arbitrators from taking appointments under JCAA commercial Rules arbitrations and, if accepted, there will likely be immediate requests to dis-apply (something we have seen happen under these rules regularly in practice).  Given its approach to the Administrative Rules, where the focus is on making it easier to appoint prominent international experts as arbitrators, it is unclear at what level the JCAA is pitching these revised Commercial Rules and particularly how far they are intended to provide for top-tier international disputes.

3. Interactive Rules

The new Interactive Rules are based on the new Commercial rules.  The vast majority of the provisions are identical but there are some significant changes designed to respond to three key issues identified by the JCAA: (i) awards are unnecessarily long; (ii) lawyers often do unnecessary work with the benefit of hindsight; and (iii) costs are increasing year-on-year.

The JCAA’s solutions fall into two categories:

a) Inquisitorial / interventionist approach from the tribunal:

  • Article 48 of the Interactive Rules requires the tribunal to share with the parties, as early as possible, a document summarising the parties’ positions and the factual and legal issues that arise. The parties then comment on this document and the summary of their positions may be used as the basis for the arbitral award.
  • Under Article 56, before making a decision on whether a hearing is necessary, the tribunal must also set out the factual and legal issues it considers important, its preliminary views on the same, and any other matters the tribunal deems important. These views are not binding on the subsequent final award and so will not be grounds for a challenge against any arbitrator.

The new Interactive Rules appear to take many qualities from the new Prague Rules on Efficient Conduct of International Arbitration that are due for release on 18 December 2018, which will focus on a civil law approach to international arbitration. The tribunal’s more active role is designed to improve predictability and narrow the issues in dispute early.  We would also expect this to encourage settlement discussions.  This may be an attractive proposition to some parties and represents a genuinely innovative approach to arbitration.  However, as acknowledged by the JCAA, the requirement for the tribunal to announce preliminary views will likely concern practitioners and parties from a common law background who may view this as infringing the parties’ right to a fair hearing.  Time will tell whether this model will prove popular in practice.

b) Fixed fees – arbitrators’ fees are fixed depending on the value of the claim (up to JPY 5 million for a sole arbitrator working on highest value claims under Articles 94 and 95). Interestingly, the fixed fee is still paid in full if the parties’ withdraw the claims prior to the award (but after the constitution of the tribunal) (Article 97.1), and any tribunal secretary is to be reimbursed directly by the appointing arbitrator (Article 33.4).

The JCAA heralds this fixed fee structure as ensuring that arbitrators are motivated by integrity rather than economic reward and so work more efficiently on cases.  However,  based on the Commercial Rules’ hourly rate of JPY 50,000, a sole arbitrator would only be able to work a maximum 120 hours on the most complex and high value case before exceeding the fixed fee under the Interactive Rules.  Given the additional work required by the Tribunal in some areas under the inquisitorial style of arbitration, it remains to be seen whether arbitrators will be comfortable committing to this fixed fee structure.

Conclusion

These new rules, coming only four years after the most recent update to the Commercial Rules (please see our blog post on this update at the link here), clearly demonstrate the JCAA’s ambitions to improve its reputation as a viable institution for international arbitration.

Some of the innovations implemented – particularly the Interactive Rules – are ground-breaking and may help to justify the JCAA’s claim that it will provide a uniquely diverse set of rules.  However, in establishing a three-tiered approach, there may be concerns that the Commercial Rules in particular – understood to be the most popular for complex international arbitration at the moment – include overly stringent restrictions on fees that will make it difficult to attract arbitrators of the requisite quality and reputation.  Likewise, it is unclear whether many international parties will pick the JCAA to administer their UNCITRAL arbitrations above other institutions.

The JCAA has been inventive and brave; the challenge will be encouraging parties to embrace this bold new approach.

For more information, please contact David Gilmore, Partner, Ben Jolley, Senior Associate, Sam Beer, Associate, or your usual Herbert Smith Freehills contact.

David Gilmore
David Gilmore
Managing Partner, Tokyo
+81 35 412 5415
Ben Jolley
Ben Jolley
Senior Associate
+81 35 412 5399
Sam Beer
Sam Beer
Associate
+81 35 4125 449