MARKET FAQ

A: The biggest difference between the two is whether the parties themselves get to decide who decides the dispute and what procedural rules apply, and whether the outcome can also be used in another country. Litigation and arbitration differ in many procedural respects. Two of those differences stand out. 1. How much say the two parties have over the process. In arbitration, the parties can agree on who decides the dispute and what rules the procedure follows. Litigation leaves no room for that. 2. Whether the outcome can be recognized internationally. An arbitral award may be recognized and enforced in other countries. Using a court judgment in another country is a separate matter. In practice, particularly for dispute resolution in Japan–Taiwan transactions, the second difference matters more than the first. However, whether an outcome can be used across borders is subject to conditions in Japan–Taiwan cases. Factor that in before you decide which clause to use.

Why

Here are the four things to weigh when you decide between arbitration and litigation. They are not specific to Japan. They apply wherever you do business. 1. Who decides, and under which country's procedure. If you file suit in a given country's courts, a judge of that country decides the case, and the procedure follows that country's code of civil procedure. Two things here are outside your control. (1) In some countries there are concerns about the reliability of the judges and of the court procedure. (2) A judge is not necessarily familiar with your line of business, and the resulting decision is not necessarily as refined as your situation needs. 2. Whether you have any say over the decision maker, the procedure and the language. Litigation abroad can create practical difficulties in selecting counsel and in dealing with the procedural language. Your counterparty defends on home ground while you do not, so the balance between the two of you can tip against you. (1) Arbitration offers greater flexibility in these respects. The parties select the decision maker themselves and may be able to choose an arbitrator who is trustworthy and knowledgeable about the business. There is also greater flexibility in the choice of counsel and the procedural language. (2) Arbitration, however, is generally a one-instance process. In Japan, an arbitral award has the same effect as a final and binding court judgment. Even if you are dissatisfied with the award, you cannot have the merits reheard at a second instance as you can in litigation. 3. Whether the process is public. Court hearings are normally open, while arbitration is generally conducted in private. Keeping the existence of a dispute and what it is about out of a public hearing can itself be an important benefit for a startup, and more so when you have something to keep confidential. 4. Fast and cheap no longer holds across the board. Arbitration used to be described as quicker and cheaper than going to court. In recent years arbitration has also come to be noted for running long and costing more, so that description does not hold every time.

What To Do

1. Start by checking which clause your contract has now. If it names a court, the contract provides for disputes to be resolved through litigation. This is commonly called a jurisdiction clause. A jurisdiction clause sets which country's courts hear the dispute, and it sometimes names the particular court within that country as well, so check both layers. If it refers disputes to an arbitral institution, the contract provides for arbitration, and the merits of the dispute are resolved through arbitration rather than court litigation. Which country is at issue here is a different level of question from which court inside Japan hears a case, which the intellectual property entry covers. Do not confuse these two levels of jurisdiction. 2. Ask yourself three questions. (1) Do you want a say over the decision maker, the procedure and the language? (2) Do you want the existence and the content of the dispute kept from outsiders? (3) Can you live with a single outcome and no appeal on the merits? 3. Finally, look at enforcement. Whichever wording you choose, it comes back to the same question. Once you have the outcome of the dispute, can you actually collect? Japan and Taiwan have a particular problem on this point, in that a court judgment from one side may not be enforceable on the other. Whether the outcome can be used back in Taiwan, and how, is another angle you have to weigh. Before you finalize the contract, take the wording you plan to use to a lawyer in Taiwan, confirm that it also works at the Taiwan end, and then sign.

A: Litigation and arbitration are not the only routes. Mediation has been used more and more in international business disputes in recent years, and even after you have filed suit, the door to a negotiated settlement does not close. 1. Mediation means bringing in a neutral third party to help the two sides talk their way to an outcome both can accept. The third party does not hand down a decision. The parties agree between themselves. 2. Japan has acceded to the Singapore Convention and has enacted the law that implements it. Its full title is the United Nations Convention on International Settlement Agreements Resulting from Mediation, and it establishes a common framework for invoking and enforcing settlement agreements reached through mediation. On that basis, a settlement reached through mediation can be enforced in Japan, provided it meets certain requirements.

Why

1. Compared with litigation and arbitration, mediation has four advantages. (1) It is quick. You get to a resolution faster than through either litigation or arbitration. (2) You do not hand the business judgment to someone else. Letting a court or an arbitrator rule on your business is itself a risk. In mediation the parties settle it between themselves, which avoids that risk. (3) It is private. Mediation is generally conducted in private, as arbitration is, which can help keep the existence of the dispute, what it is about, and the terms of the settlement confidential. (4) What you agree on is more likely to be honored. Because both sides gave ground and agreed, both sides are more likely to follow it, and it also helps repair and keep a friendly relationship between you. 2. Starting a formal process does not close the door on settlement. Settlement is normally attempted at every stage of litigation and arbitration. Even once you have filed suit or commenced arbitration, your chance to talk is not shut off. (1) In fact it often works the other way round. Settlement talks tend to move once the proceedings have sorted out the issues and the evidence has been examined. (2) So an international business dispute does not have to end in litigation or arbitration. Look at where the parties stand, the state of the business, and how large the dispute is and what it is about, then think about the routes to a resolution from more than one angle.

What To Do

1. Sort out your goal and your strategy before you pick the tool. Litigation and arbitration both cost money. Decide first whether you want to recover money, want the other side to stop, or want to keep the partnership alive, then set out what you are using the procedure for and what you want out of it before you move. 2. If you go to mediation, the settlement agreement has to say that it can be enforced. Not every settlement can be enforced. For enforcement under the Singapore Convention or under the Japanese law implementing it, that wording in the settlement agreement is a requirement. 3. When the other side goes silent, move the process one step forward. In international business disputes the other side often stops responding. At that point you can move formally into litigation or arbitration, or instruct a lawyer and give notice that you are moving to the next procedure, and in practice that can encourage the other side to return to the negotiating table and get you to a settlement.

A: If you use the standard wording and give the Taiwanese courts jurisdiction, there is a high risk that you cannot enforce the judgment in Japan even after you win, so how you draft the dispute resolution clause must be considered together with whether you can actually enforce. For a contract between Taiwanese and Japanese parties there are five ways to draft the dispute resolution clause. 1. Litigation in Japan, 2. litigation in Taiwan, 3. arbitration seated in Japan, 4. arbitration seated in Taiwan, 5. arbitration seated in a third country. The seat of arbitration is not where the hearings are held. It is the jurisdiction in which the arbitration is legally regarded as taking place. From the perspective of enforcement in Japan, a judgment rendered by a Taiwanese court is a foreign judgment, while an award made in an arbitration seated in Taiwan or in a third country is a foreign arbitral award. To enforce one in Japan you must first meet the requirements for recognition and enforcement. Only after recognition can enforcement proceedings begin.

Why

The five options produce different results at the enforcement stage. Here they are in the order a Taiwanese startup is most likely to encounter them. 1. Litigation in Taiwan. You can win and still be unable to enforce. Taking a Taiwanese court judgment to Japan for enforcement depends on meeting the requirements for recognition first. The point that causes the trouble is whether the complaint and other court documents were properly served on the defendant, or whether the defendant responded to the claim. (1) Japan and Taiwan currently have no formal diplomatic relations, and for proceedings in a Taiwanese court, service on a defendant located in Japan that satisfies that requirement is considered difficult. (2) So unless the Japanese company responds to the claim in Taiwan, there is a high risk that the judgment cannot be enforced in Japan even after you obtain it. 2. Litigation in Japan. Enforcement in Japan is relatively straightforward, but you will need to retain Japanese counsel. Enforcement in Japan is easier than it is for a foreign judgment or a foreign arbitral award. Conversely, in some cases Japanese court judgments have been allowed to be enforced in Taiwan. Even there, the cases were basically ones in which the Taiwanese company had responded to the claim in Japan, and without that, enforcement is also considered difficult. 3. Arbitration seated in Taiwan or in a third country. Recognition and enforcement in Japan are governed by the Japanese Arbitration Act. An arbitral award made in Taiwan or in a third country is recognized in Japan under that Act, and enforcement follows under the same Act. (1) If the seat is Taiwan, the New York Convention does not apply. Its full title is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and it is the treaty under which contracting states recognize and enforce each other's arbitral awards. Japan is a contracting state, but it has made a reciprocity reservation, so it is bound to apply the Convention only to awards made in the territory of another contracting state. Taiwan is not a contracting state, so the Convention does not apply to arbitration seated in Taiwan. (2) In Japan, recognition and enforcement are instead based on the Japanese Arbitration Act. The Convention not applying does not mean you cannot enforce in Japan. It means the basis is the Japanese Arbitration Act rather than the treaty. 4. Arbitration seated in Japan. From the Japanese side, an award made in such an arbitration is not treated as a foreign arbitral award.

What To Do

1. Work out what could go wrong in this particular deal first, then choose the wording for the dispute resolution clause. If something does go wrong, compare which option is appropriate and effective in practice. Do not just copy the template. 2. Do not assume that the Japanese side is familiar with arbitration. Japanese companies do use arbitration clauses more than they used to, especially in international deals, but plenty of them are still not familiar with arbitration procedure, or still insist on resolving disputes through the Japanese courts. 3. Fold the dispute resolution clause into the contract negotiation as a whole. Governing law and dispute resolution provisions reflect the bargaining power between the parties to a large degree, so work out an overall negotiating strategy that covers the other provisions too. Before you finalize the contract, take the wording you plan to use to a lawyer in Taiwan, confirm that it is workable from the Taiwan side as well, and then sign.