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29 October 2013
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1 October 2013
A mood change in Japan is resulting in an upswing in disputes. Indeed, throughout Japan, but particularly in the commercial centres of Tokyo and Osaka, local and international lawyers have noted an upsurge in contentious work during the past few years. Such disputes have included not only pure domestic spats between feuding Japanese companies, but also court cases and arbitral references brought by, and increasingly against, international business partners, both inside and outside Japan.
This trend first came to a head in 2004 when the Bank of Tokyo-Mitsubishi launched proceedings in its famous contested takeover bid for UFJ Bank. The case was significant, not so much because it was a very public dispute over ownership of a Japanese bank, but more because it was a very public dispute between two Japanese banks. Leading commentators considered that what most clearly demonstrated how attitudes to litigation had changed was the fact that one Japanese company would take another to court, rather than find a compromise solution in the traditional way.
Further evidence of the changing mood in Japan was marked in 2005's bitterly contested takeover bid for Fuji TV. Livedoor emerged as the successful bidder, but for the second time in as many years Japanese companies were seen to be slugging it out between themselves in court.
The Livedoor bid saw another sea change: the coming of age of Japan's Securities Exchange Surveillance Commission (SESC). The SESC has taken its duties seriously and is keen to be seen as a regulator with teeth. Its investigation into the Fuji TV saga saw the imprisonment of Livedoor's president and chief executive officer Takafumi Horie. The SESC's findings have now sparked a third round of major litigation, with Livedoor now facing a claim for $293m (£160.95m) from Fuji TV for a misrepresentation action over the value of its shares.
It is apparent from this series of scandals and lawsuits that an increasingly muscular regulator is ready, willing and able to flex its powers in the interests of eradicating corporate infamy. While this is no doubt a theme common to Livedoor, Murakami and even leading Western financial institutions staring an SESC investigation in the face, it is telling that many of the more aggressive investigators were trained in the US.
Indeed, it is the increasing numbers of US-trained regulators, and for that matter US-trained lawyers, that is perhaps fuelling the burgeoning contentious climate in Japan. Many of the larger companies have an established programme of sending the brightest and best from their legal departments to study for the New York bar exams. Typically, this involves not only time spent studying at the top US law schools, but also practising at the finest New York law firms. There, a more aggressive approach to commercial problems is learnt and honed before being imported back to Japan, with the new breed of young attorneys eager to practice their skills.
In one recent example, the in-house lawyer's instruction to adopt an aggressive defence in a minority shareholder dispute was rewarded by a £1bn settlement payment to his company and a prize for leading the most successful business team that year; his lawyers were rewarded with three more major cases, the most recent of which is currently pending in International Criminal Court (ICC) arbitration.
The claims now being seen from such companies straddle a wide variety of industries and professional disciplines. As might be expected, there are a large number of oil and gas claims. The reorganisation of Japanese government-held oil and gas assets, including the IPO of Inpex in 2004, kept a number of foreign and domestic law firms busy in Tokyo. While corporate and listing counsel prepared the documentation, the disputes lawyers were busy arguing over the meaning and effect of contractual pre-emption rights in relation to holdings across a wide variety of assets in Russia, Azerbaijan and Kazakhstan - indeed, the IPO was delayed pending the resolution of one such dispute.
While these issues have been largely resolved, other holdings, such as those in the Sakhalin 2 Project, have generated disputes over the huge cost overruns experienced by that project ($20bn (£10.99bn) at the last count and rising) with attendant disputes awaited with the Russian government over recovery of those costs.
Downstream projects, too, have seen their fair share of disputes. A number of successful Japanese projects for building power plants and petrochemical plants have generated foreign litigation and arbitration. One such case, involving a household Japanese name building an independent water and power production facility in the Middle East, saw the full gamut of dispute resolution - starting with a request for ICC arbitration, the claim was litigated in the Commercial Court in London before finally being settled following a two-day mediation. Elsewhere, the heavy industries division of one major Japanese player has been embroiled in two parallel ICC arbitrations involving separate continued #+ continued power stations in Europe, the first claim having been brought by the Japanese and the second claim by the European party. And in South East Asia, at least one arbitration is ongoing with a division of the Thai government in relation to a nuclear power plant in which a large Japanese company was a subcontractor.
Indeed, in their international contracts, Japanese companies show an increasing preference in relation to arbitration over litigation in national courts. While many are familiar with, and have experience of, ICC arbitration, the diversity of arbitration clauses written into international contracts signed by Japanese companies - and the resulting arbitrations - is becoming truly extraordinary.
Dissatisfied with their experiences in other forums, increasing numbers of contracts, particularly in upstream oil and gas deals, now include a London Court of International Arbitration arbitration clause. Other companies have adopted a more flexible approach, with a marked preference for United Nations Commission on International Trade Law (Uncitral) arbitration and a neutral seat. For example, one telecoms company agreed to Uncitral arbitration in The Hague in relation to a major deal under a number of different contracts with European counterparties. Stockholm Chamber of Commerce arbitrations are often found in agreements with Russian and Chinese parties. Where a regional counterparty is involved, there is often a tendency for arbitration from the Singapore International Arbitration Centre and the Hong Kong International Arbitration Centre. Nevertheless, Japanese companies do not stop there and arbitrations have been conducted under Thai Arbitration Institute, China International Economic and Trade Arbitration Commission and the KualaLumpur Regional International Arbitration Centre rules.
So far there have been no reported International Centre for Settlement of Investment Disputes cases involving either the Japanese government or Japanese parties. That said, Herbert Smith Tokyo was instructed in relation to a claim by a Japanese company under a Japanese BIT in relation to a minerals mining project. Once the claim is filed, it will represent a double-first: it will be the first BIT claim known to have been brought by a company incorporated in Japan and the first claim to be brought under a Japanese BIT. The case would mark a coming of age for Japanese dispute resolution, marking the transition from a strategy of avoiding disputes and settling at any cost to taking disputes to the point of suing a foreign sovereign government.
Dominic Roughton is a partner at Herbert Smith Tokyo