Contractual Stipulation for Judicial Review and Discovery in United States-japan Arbitration Contracts
| Publication year | 2003 |
I. INTRODUCTION
There is a growing tendency in transnational contracting to include an agreement that the parties will arbitrate any disputes that may arise. This trend has "increased significantly over the past several decades" to the point where it is seemingly universal in transnational contracts.(fn1) The parties usually assume that, in the unlikely event a dispute arises, arbitration will be a faster and cheaper process resolution than civil litigation. While arbitrations in the United States and Japan(fn2) are without doubt faster than litigation, parties are generally not aware of numerous serious problems that they should be aware of before they agree to arbitrate any disputes.
The single most critical problem in both Japan and the United States is the lack of judicial review of arbitrators' reasoning, their conduct of the arbitration, or the legal or factual basis for the award. Under United States' law there are a few strictly construed statutory and case law exceptions that will allow only a very limited amount of judicial review.(fn3) Under Japanese statutory law there is no right to judicial review whatsoever. This can result in the legal anomaly, if not absurdity, of courts enforcing an award yet coming very close to declaring on the record that the award is not just or equitable.(fn4) This problem may be somewhat, although never completely, ameliorated by including in the arbitration agreement a provision that the award will be subject to judicial review for errors of fact and law.
The second problem in arbitration is that discovery is extremely limited. By design, the statutory arbitration provisions in the United States and Japan allow for little discovery in order to expedite the process and reduce expenses. Paradoxically, however, all manner of evidence that would not be admissible in civil litigation can be, and frequently is, admitted into evidence by the arbitrator in the United States.(fn5) Discovery under Japanese law is also very limited (common law type discovery is not normally allowed in Japan in litigation or arbitration), and what little may be done is subject to approval and control by the arbitrators and courts.(fn6) This paper suggests that the difficulty in obtaining and presenting relevant evidence in both Japanese and United States arbitrations may be mitigated by the inclusion of a clause detailing a discovery scheme in the arbitration agreement.
These problems in American arbitrations should be of great concern for Japanese legal professionals for several reasons. First, Japanese parties will usually negotiate contracts without participation of legal counsel who are knowledgeable in American contract law. Japanese parties will be even less knowledgeable regarding the peculiarities of American arbitration law and procedure. Second, Japanese parties may view arbitration as less confrontational than litigation and believe that they will be culturally comfortable in arbitration. Thus, after a dispute has developed, Japanese parties may find themselves bound to submit the controversy to arbitration when, in retrospect, arbitration may not have been the wisest choice for resolving that particular dispute.
In the event the arbitration is conducted in Japan under Japanese law, the American party is at a similar disadvantage. It goes without saying that there are relatively few American attorneys who are knowledgeable in Japanese contract or arbitration law. For American counsel to agree to an arbitration in Japan or to stipulate that the contract will be governed by Japanese law may well be flirting with malpractice.(fn7) For American parties and counsel who are familiar with arbitration in the United States, Japanese arbitration procedure itself is not entirely dissimilar in general outline. However, there are significant differences that American counsel should be aware of. Whether the arbitration is in the United States under American law, or in Japan under Japanese law, there are two important aspects of arbitration that are very similar as noted above: the lack of judicial review and the very limited discovery.
As most transnational arbitration hearings in the United States are in New York and California, this paper focuses on the law of arbitration in those states, with comparative comments on Japanese law.(fn8) Special attention is given to the conflict between California and New York arbitration law and the Federal Arbitration Act, the latter of which applies to transnational contracts as a matter of law.(fn9) Although generally critical of American and Japanese arbitration law, it is not the position of the author that the basic premise of either American or Japanese arbitration law is fundamentally flawed and should be abandoned. There are circumstances where arbitration is entirely appropriate and in the best interests of all parties. However, there are situations where litigation is clearly preferable because of the facts of the dispute, or the inherent problems of the arbitration system in either the United States or Japan. This article will describe some of the above-cited problems in American and Japanese arbitration procedure that can lead to a flawed and unjust award. The contracting parties should be aware of these issues prior to entering into a contract containing an arbitration clause and determine if, on balance, the potential areas and subject matters of potential disputes that may arise under that particular contract indicate whether arbitration or litigation is the best dispute resolution mechanism.
Upon the determination that arbitration is the preferred method of dispute resolution (despite the pitfalls of arbitration in both the United States and Japan), parties should carefully consider the advisability of including clauses that would detail additional discovery in the event of a dispute, when such clauses are permitted in the jurisdiction where the arbitration will be conducted.(fn10) Likewise, parties should seriously consider the advisability of including a provision for a wider scope of judicial review than is provided for under Japanese and American law. It is highly unlikely that the inclusion of such provisions would be a "deal breaker" any more than a bare arbitration clause would. Moreover, such clauses give both parties the ability to create a specific dispute resolution system that will best suit the particular nature of the contract and the business relationship of the parties.(fn11) Thus, the parties can, at their pleasure, provide for the amount of discovery they deem proper, and for judicial review if they deem it in their best interest.
The fundamental reason arbitration, as an alternative to litigation, has grown in popularity is that it holds the promise of a fast, economical and (in theory) reasonably predictable means of dispute resolution. It is certainly the case that arbitration is faster and, on the surface, less expensive than litigation, but these factors should not be the sole determining considerations. The "less expensive" arbitration may, in the final analysis, be far more expensive for a party who lost the case but should have won under the law and facts, or a party who won but was not able to present its entire case. The reason is simple: arbitrators in both the United States and Japan are given virtually unchecked powers in conducting the arbitration proceeding. First, in order to make the arbitration process faster and cheaper, discovery is curtailed severely and controlled by the arbitrators, which may prevent a party from discovering critical evidence. Second, arbitrators are not required to apply the correct substantive law or even the provisions of the contract itself, and may even enact their own personal concept of the law as they see fit. Finally, the arbitrator may refuse to admit relevant evidence, ignore relevant evidence if it is admitted, or admit irrelevant evidence, all at their discretion. All of these abuses are virtually immune from judicial review; much less will such acts be grounds to vacate arbitrators' awards. Consequently, the uniformity and predictability of arbitration hearings, even with similar factual and legal claims, cannot be assured.
Part II of this article discusses in detail how the arbitration process in both the United States and Japan can very often result in injustice to both parties. This Part describes how limitations on discovery can cause vital information necessary to either prosecute or defend a claim to never appear before the arbitrator. The article then discusses the possibility of including provisions that might ameliorate this problem. Next, this Part examines specific examples of situations where the arbitrators can ignore the civil rules of evidence and admit evidence that would be inadmissible in a court of law. Finally, this Part concludes with a discussion of the very limited scope of judicial review of arbitral awards that is allowed by statue in the United States and Japan. Part III introduces the concept of including a provision in arbitration contracts for judicial review of arbitrators' errors of law or fact, and, most important, identifies the jurisdictions where such a provision will be recognized. Part IV offers some...
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