Tokyo District Court refuses to find that an arbitral award is contrary to the morality or public policy of Japan

On 26 February 2010, the Tokyo High Court upheld the Tokyo District Court's Decision No. 3 of 28 July 2009, refusing to overturn an arbitral award pursuant to Japan's Arbitration Law of 2003 (the "Arbitration Law"). Article 44 of the Arbitration Law sets out six grounds for setting aside an arbitral award, including: (a) that the party making the application was unable to present its case; and (b) that the award is contrary to public policy or morality in Japan.

The arbitral award under consideration had been rendered by a Tribunal sitting in Tokyo, applying the laws of Taiwan and administered under the International Arbitration Rules of the International Centre for Dispute Resolution ("ICDR Rules") of the American Arbitration Association.

Background

The Applicant, a Japanese company which manufactures and installs equipment for the manufacture of semi-conductors, had been ordered by the Tribunal to pay damages to the Respondent, a re-insurance company subrogated to the rights of a semi-conductor manufacturer. The manufacturer's plant, which had been using the Applicant's equipment, had been destroyed in a fire. The Tribunal found that the Applicant had breached its duty to warn the manufacturer of the possible dangers associated with its equipment and that this failure had caused the fire. The Applicant was ordered to pay damages of approximately NTD2.7 billion (more than USD80 million), default interest and legal fees of USD1.6 million.

The Applicant applied to the District Court to set aside the arbitral award under Article 44 of the Arbitration Law on two principal grounds:

1. that it "was unable to present its case in the arbitral proceedings" because the Respondent had not raised: (i) the failure to warn, or (ii) the causal connection between that failure and the fire, in the arbitral proceedings (Article 44(1)(iv) of the Arbitration Law); and
2. that the award was "in conflict with the public policy or good morals of Japan" on the basis that the Tribunal had awarded an extremely high level of damages, based on erroneous findings (Article 44(1)(viii) of the Arbitration Law).

Decision of the Court

In relation to Article 44(1)(iv) of the Arbitration Law, the District Court found that the Respondent had made submissions in the arbitration as to both the breach of the duty to warn and as to causation, and that the Applicant had been aware of these submissions. The District Court held that notwithstanding the fact that, as the Applicant contended, the Tribunal had not applied the adversarial principles of the Japanese Code of Civil Procedure, it had been possible for the Applicant to refute the Respondent's claims, and indeed it should have done so. Further, the District Court noted that as "arbitral proceedings are non-court dispute resolution proceedings with the agreement of the parties as the foundation and from which it is not anticipated that there will be an appeal" the court has a duty to "respect the arbitral award to the extent it is able to do so". Article 44(1)(iv) of the Arbitration Law should therefore be construed as "intending only to permit the court to set aside an arbitral award in the limited circumstances of a serious breach of procedural guarantees such that a party is not given the opportunity to defend itself, for instance where a party is not present for certain procedures, or where an award is rendered based on documentation of which a party is not aware."

With respect to the allegation that the award was contrary to Japanese public policy or morality, the District Court held that the Applicant's submission was "merely an assertion that the findings of fact and judicial judgment are illogical, which does not constitute a reason to accept that the content of the arbitral award is contrary to the public policy or good morals of Japan". Similarly, the fact that the Tribunal had "simply awarded a large amount of damages" could not be considered contrary to public policy or morality.

The District Court also rejected the Applicant's later argument that its inability to present its case violated the ICDR Rules and that therefore the composition of the Tribunal was not in accordance with the laws of Japan, on the basis that the argument was made out of time.

The Applicant subsequently appealed the decision to the High Court, but was unsuccessful.

Comment

This judgment is a welcome addition to a sparse body of Japanese arbitration case law, and shows Japan's willingness to follow the principles commonly applied in arbitration-friendly jurisdictions.

The decision is good news for parties and arbitration practitioners involved in, or considering, Japanese arbitration, and confirms that Japan should be taken seriously as an arbitration venue for the future.