Litigation in Japan Seems Costly and Time-Consuming: What Alternative Dispute Resolution (ADR) Options Are Available for Businesses?

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read

For businesses operating internationally, the prospect of litigation in a foreign jurisdiction often raises concerns about potentially high costs, lengthy proceedings, and procedures that may be unfamiliar. While Japan's court system is well-regarded, companies are increasingly seeking more flexible, efficient, and tailored ways to resolve commercial disputes. Alternative Dispute Resolution (ADR) offers a spectrum of such options. This article explores the primary ADR mechanisms available in Japan, their characteristics, and the legal framework supporting their use, providing insights for businesses, including U.S. companies, considering dispute resolution strategies in Japan.

The Dispute Resolution Landscape in Japan: Beyond the Courtroom

Traditionally, disputes might escalate from direct party-to-party negotiation to formal court litigation. However, there's a rich field of options involving third-party neutrals designed to facilitate resolution without a full-blown trial. These methods, collectively known as ADR, vary in formality, the role of the neutral, and the binding nature of their outcomes. Japanese law and practice have embraced several forms of ADR, recognizing their potential to offer advantages over litigation in specific contexts. Often, a dispute might even be resolved through a combination of these methods.

Key ADR Mechanisms in Japan

Understanding the main types of ADR available can help businesses choose the most appropriate path.

A. Mediation (Chōtei): Facilitating Mutually Acceptable Agreements

Mediation is a process where a neutral third party (or a panel) assists the disputing parties in reaching a mutually acceptable settlement. The mediator does not impose a decision but rather facilitates communication, helps identify underlying interests, and may propose potential solutions.

  1. Court-Annexed Civil Mediation (Minji Chōtei):
    This is a well-established and frequently used form of ADR in Japan, conducted under the auspices of the courts.
    • Procedure: A mediation committee, typically comprising one judge and two or more lay mediators with relevant experience and knowledge, handles the case. The process is informal and private.
    • Advantages: It is relatively inexpensive, proceedings are flexible and not strictly bound by legal formalities, and the focus is on achieving a practical solution that both parties can accept. If an agreement is reached, it is recorded by the court in a mediation record (chōtei chōsho), which has the same legal effect as a final and binding court judgment and can be enforced accordingly (Civil Mediation Act, Art. 16).
    • Scope: Applicable to a wide range of civil disputes, including commercial disagreements, contract issues, and real estate disputes.
  2. Private and Certified ADR Mediation:
    Mediation is also offered by various private organizations and ADR institutions, some of which may be certified by the Minister of Justice under the ADR Act (discussed later).
    • Specialization: Many private ADR bodies specialize in particular sectors, such as construction, finance, intellectual property, or international commerce, offering mediators with specific industry expertise.
    • Confidentiality: A key advantage of private ADR is the high degree of confidentiality, which can be crucial for businesses wishing to protect sensitive information or maintain ongoing relationships.
    • Enforceability: A settlement reached through private mediation is typically a contractual agreement. For it to have the direct enforceability of a court judgment, parties might need to take additional steps, such as creating a notarized deed or, if litigation is pending, incorporating the settlement into a judicial settlement record.

While mediation offers flexibility and can preserve relationships, its success depends on the willingness of both parties to negotiate in good faith, as the mediator's proposals are generally non-binding unless an agreement is reached and formalized.

B. Arbitration (Chūsai): Binding Adjudication by Chosen Neutrals

Arbitration is a more formal ADR process where parties agree to submit their dispute to one or more private individuals (arbitrators) who render a binding decision, known as an arbitral award.

  1. The Arbitration Agreement (Chūsai Gōi):
    The foundation of arbitration is the arbitration agreement, by which parties contractually agree to resolve specified disputes through arbitration rather than court litigation.
    • Effect on Court Jurisdiction: A valid arbitration agreement generally ousts the jurisdiction of national courts over the covered dispute. If a party to an arbitration agreement initiates court proceedings, the other party can invoke the arbitration agreement as a defense, and the court will typically dismiss the action (Arbitration Act, Art. 14).
    • Form and Scope: Arbitration agreements must usually be in writing (including electronic forms) and clearly define the scope of disputes to be arbitrated.
  2. The Japanese Arbitration Act (Act No. 138 of 2003):
    Japan enacted a modern Arbitration Act in 2003, largely based on the UNCITRAL Model Law on International Commercial Arbitration. This Act governs both domestic and international arbitrations seated in Japan and provides a comprehensive legal framework covering the arbitration agreement, the appointment and powers of arbitrators, the conduct of arbitral proceedings, and the recognition and enforcement of arbitral awards. Arbitrators can make awards based on the agreed legal standards or, if the parties explicitly request, on principles of "equity and fairness" (zen to kōhei) (Arbitration Act, Art. 36).
  3. Leading Arbitral Institutions:
    Japan has several arbitral institutions, with the Japan Commercial Arbitration Association (JCAA) being one of the most prominent for handling domestic and international commercial disputes. These institutions provide rules, administrative support, and rosters of potential arbitrators.
  4. Advantages of Arbitration:
    • Party Autonomy: Parties have considerable freedom to choose arbitrators, the applicable law, the language of the arbitration, and the procedural rules.
    • Neutrality and Expertise: Especially in international disputes, parties can select arbitrators from neutral countries and with specific expertise relevant to the dispute.
    • Confidentiality: Arbitral proceedings and awards are generally confidential, which is highly valued in business disputes.
    • Enforceability: Arbitral awards are widely enforceable internationally under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which Japan is a signatory.
    • Finality: The grounds for challenging or setting aside arbitral awards are typically very limited, leading to greater finality compared to court judgments which may be subject to multiple levels of appeal.

Arbitration is often preferred for complex, high-value commercial disputes, particularly those with an international dimension.

C. Conciliation/Good Offices (Assen)

Conciliation or assen is generally a less structured process where a neutral third party endeavors to bring the disputing parties together, facilitate their communication, and assist them in reaching a voluntary settlement. Unlike a mediator who might actively propose settlement terms, a conciliator's role is often more focused on improving dialogue and helping parties explore options. This method is sometimes employed by administrative agencies for particular types of complaints or by industry associations.

Specialized ADR-like Procedures

Beyond general mediation and arbitration, Japan has developed specialized, often hybrid, procedures for certain types of disputes, most notably in the labor sector.

Labor Tribunals (Rōdō Shinpan):
Established by the Labor Tribunal Act (Act No. 45 of 2004), this system is designed to provide speedy and effective resolution for individual employment disputes between an employee and an employer.

  • Hybrid Nature: It combines elements of mediation and adjudication. A Labor Tribunal panel consists of one professional judge and two expert lay members (one representing labor interests and one representing employer interests).
  • Speedy Process: The system aims to resolve disputes within a maximum of three sessions.
  • Outcomes: The primary goal is to achieve a resolution through mediation. If mediation fails, the Tribunal can issue a shinpan – a determination that outlines a solution to the dispute. If neither party objects to the shinpan within a specified period, it becomes legally binding and has the same effect as a judicial settlement. If an objection is duly filed, the case proceeds to ordinary civil litigation.
    The Labor Tribunal system has been widely utilized and is generally considered a successful ADR-like mechanism in Japan.

Other sectors, such as construction and intellectual property, also have specialized ADR bodies and procedures designed to leverage industry-specific expertise.

To further encourage the use of ADR, particularly private ADR services which were perceived as underutilized, Japan enacted the Act for Promotion of Use of Alternative Dispute Resolution Procedures (commonly known as the ADR Act; Act No. 151 of 2004).

Key features of the ADR Act include:

  1. Certification System for Private ADR Providers:
    The Act establishes a system whereby private ADR providers can obtain certification from the Minister of Justice if they meet certain standards regarding fairness, expertise, and procedural transparency.
  2. Legal Benefits for Using Certified ADR Procedures:
    The Act grants certain procedural advantages when parties use ADR services provided by these certified institutions:
    • Tolling of Prescription (Statute of Limitations) (ADR Act, Art. 25): If a claim is pursued through a certified ADR procedure but does not result in a settlement, and the statute of limitations for that claim would have expired during or shortly after the ADR process, the Act provides for a tolling period. Specifically, if a lawsuit is filed within one month from the date the ADR procedure is terminated without resolution, the prescription is deemed to have been interrupted (under the pre-2017 Civil Code terminology, now understood as "tolled" or "suspended" to allow completion of the ADR and subsequent filing) as of the time the claim was submitted to the ADR procedure. This provides parties with assurance that attempting ADR will not jeopardize their ability to subsequently litigate if ADR fails.
    • Stay of Court Proceedings (ADR Act, Art. 26): If a dispute is pending in both court litigation and a certified ADR mediation procedure simultaneously, the court may, upon a joint motion by both parties, stay the court proceedings for a period not exceeding four months. This allows parties to concentrate their efforts on the ADR mediation without the pressure and cost of parallel litigation. The court can also extend this stay if deemed necessary.

Advantages and Considerations for Businesses Choosing ADR in Japan

ADR methods offer several potential benefits for businesses compared to traditional court litigation:

  • Speed and Cost-Effectiveness: ADR processes are often faster and less expensive than full-scale litigation, which can involve multiple court hearings, extensive written submissions, and lengthy appeal processes.
  • Confidentiality: Most ADR procedures are private and confidential, which is a significant advantage for businesses wanting to avoid public disclosure of sensitive commercial information, trade secrets, or the dispute itself.
  • Flexibility and Party Control: ADR allows parties more control over the process (e.g., choosing the neutral, deciding on procedural rules in arbitration) and the outcome. Solutions can be tailored to the specific needs and interests of the parties, rather than being strictly limited by legal remedies available in court.
  • Expertise of Neutrals: Parties can select mediators or arbitrators who possess specialized knowledge of the relevant industry or subject matter, which can lead to more informed and practical resolutions.
  • Preservation of Business Relationships: The less adversarial nature of mediation, in particular, can help preserve ongoing business relationships that might be irreparably damaged by contentious litigation.

However, businesses should also consider potential downsides or limitations:

  • Non-Binding Nature of Some ADR: Mediation and conciliation are generally non-binding unless a settlement agreement is reached and formalized. If one party is unwilling to compromise, the process may not yield a resolution.
  • Limited Powers of Compulsion: ADR neutrals typically lack the coercive powers of a court to compel evidence production from reluctant third parties or to enforce interim measures in the same way a court can.
  • Enforceability: While arbitral awards are widely enforceable, mediated settlements reached outside a court-annexed process might require an additional step (e.g., a separate contract or court action) to become directly enforceable if a party fails to comply voluntarily.
  • Importance of ADR Clauses: For arbitration to be the mandated route, a clear and well-drafted arbitration agreement is essential. Without it, a party cannot be compelled to arbitrate.

Accessing ADR Information

For parties seeking information about suitable ADR options or institutions in Japan, the Japan Legal Support Center (commonly known as Hōterasu - 法テラス) can be a valuable resource, providing guidance and referrals.

Conclusion

Alternative Dispute Resolution mechanisms offer a diverse and increasingly robust set of tools for resolving commercial disputes in Japan. From the widely used court-annexed civil mediation to sophisticated international commercial arbitration, and specialized procedures like labor tribunals, businesses have a range of options that can provide more timely, cost-effective, confidential, and tailored solutions compared to traditional litigation. The ADR Act has further enhanced the attractiveness of certified private ADR by providing key procedural benefits like the tolling of prescription and the potential for staying court proceedings.

For U.S. companies and other international businesses, understanding and strategically considering these ADR options as part of their overall dispute resolution planning in Japan is essential for efficient risk management and the effective resolution of commercial disagreements. The choice of the most appropriate ADR method will depend on the specific nature of the dispute, the relationship between the parties, the desired level of confidentiality, and the need for a binding and enforceable outcome.