On December 12, 2017, the Supreme Court of Japan (Supreme Court) affirmed an Osaka High Court (High Court) ruling holding that arbitrators have an on-going duty to disclose potential conflicts of interest and that “merely telling parties in the abstract of a [future] potential conflict of interest does not constitute proper disclosure.” More importantly, the Court also affirmed that disclosures should not be limited to information known by the arbitrators, but must include information that they could have known through a reasonable investigation. The Supreme Court remanded the case to the High Court to determine whether the arbitrator could have been aware of potential conflicts if an investigation had taken place.
In 2011, Sanyo Electric Co. Ltd and Sanyo Asia Ptd. Ltd. initiated an arbitration against certain U.S. respondents under the rules of the Japan Commercial Arbitration Association (JCAA). The case was seated in Osaka. The lead arbitrator in the three-panel tribunal asserted his independence to preside over the matter, and conveyed that although some attorneys at his firm may work on unrelated matters to the claimant or defendant, he would be isolated from those cases.
Several months after commencing the arbitration, an attorney who had previously worked for a subsidiary of the claimants joined the presiding arbitrator’s law firm. This attorney continued to work on a matter for the claimant’s subsidiary while the arbitration was pending.
On August 11, 2014, the tribunal found in favor of the claimants. On November 13, 2014, the respondents challenged the award in the Osaka District Court (District Court) arguing that the presiding arbitrator had failed to disclose a conflict of interest. In specific, the respondents claimed that failure to disclose the relationship between the arbitrator’s colleague and the claimant’s subsidiary violated Article 18(4) of the Japan Arbitration Act (JAA), which dictates that during the course of an arbitration an arbitrator should disclose any facts that would raise doubts of impartiality or independence. The District Court dismissed the respondent’s claim, finding that the arbitrator’s failure to disclose his colleague’s connection to the claimant’s subsidiary did not create doubts to his impartiality or independence.
The respondents appealed the decision to the High Court. The High Court set aside the award, ruling that the arbitrator “was bound to retrieve information that was readily accessible” and “given that [the arbitrator] could have identified the relevant facts through a conflicts check without any particular difficulty, this was information that [the arbitrator] should have disclosed.”
The claimants appealed the High Court’s decision to the Supreme Court. The Supreme Court agreed with the High Court, indicating that arbitrators do have a continuous duty to disclose, and that disclosure should encompass information that could have been found through a reasonable investigation as a matter of course during the arbitration. Nevertheless, the Supreme Court indicated that it was not clear whether in this specific case the arbitrator knowingly withheld facts, and it remanded the case to the High Court for further investigation.
The High Court’s and Supreme Court’s rulings manifest the strict approach that this jurisdiction is taking when examining challenges to arbitrators’ disclosures. Arguably, arbitrators conducting proceedings in Japan must now not only disclose information that is known to them prior and during the proceedings, but must also conduct continuous “reasonable inquiries” while the proceedings last to ensure that they become aware of any other potential conflicts. Unfortunately, the courts did not offer any guidance as to what constitutes a “reasonable inquiry,” thereby creating procedural doubt and other possible potential challenges to awards.
Arbitrators conducting proceedings in Japan should be aware of these recent rulings and institute processes for continuous monitoring and prompt disclosure of potential conflicts.