Credit checks

Given that dealing with unpaid invoices is time-consuming and expensive, it is advisable to take the time to run a credit check before engaging in a new business relationship with customers, suppliers and partners.

1. Companies register

Basic information such as the date of incorporation and the paid-in capital tell us many things. You should check not only the current information but also the history of changes in registered matters. For instance, if the principal office address has frequently been changed, you might want to know why.

It is also advisable to compare the information on the companies register and their corporate website. If there are inconsistencies between them, you might want to investigate the company further.

2. Company credit report

You may obtain a company credit report for the potential customer, supplier or partner from a credit rating agency such as Teikoku Databank.

3. Site visits

If you intend to cultivate a long-term relationship with a customer, supplier or partner, it is worth investing time and money for a site visit and a physical meeting with them, in addition to collecting information on paper.

Debt collection clauses

Generally, Japanese courts do not allow successful parties to claim their legal costs against unsuccessful parties. Exceptionally, there is a court case in which the judge allows the successful party to recover a portion of its legal costs, following an agreement between the parties. Below is an example clause to cover collection costs.

[Customer] agrees to pay attorney’s fees and any expenses incurred by us to recover any money due under this Agreement whether or not legal action is filed.

This clause will improve your negotiating position and, if a case goes to court, the likelihood of recovering your costs. However, the arguments surrounding this topic are complex, and we cannot guarantee the court will award you costs.

Dispute resolution clauses

The dispute resolution clause is often seen as far less important than the commercial terms of a contract and given ‘standard’ arbitration or jurisdiction clause without any thought. However, once a dispute arises, this short clause can determine how and where the parties resolve the dispute. In practice, the dispute resolution clause can eventually affect the recoverability of the debts or damages under the contract.

It is sometimes seen that an arbitration or exclusive jurisdiction clause, which must have been prepared for their benefit, hinders enforcing their contractual rights against their Japanese counterpart. This is due to a lack of cost-benefit analysis.

Suppose a disputed amount is large enough to justify the cost of international arbitration or the cost of enforcement of the foreign judgment in Japan in addition to litigation in a foreign jurisdiction. In that case, such a prepared clause could work. However, if this is not the case, we advise you to draft the clause that allows you to opt to sue them at a local court in Japan from a cost-benefit perspective.

Enforceable, but…

It is often said that arbitration awards are easier to enforce than court judgments. It may be true if the judgment is given in a foreign court. However, a local judgment is of course the easiest to be enforced in the same jurisdiction.

An arbitration award is enforceable in Japan under the New York Convention. However, in practice, it could take time and costs to complete it if the other party raises objections during the enforcement procedures. If there are more steps to be followed, there are more opportunities to raise objections.

Litigation is cheaper

Costs of litigation in Japan can be significantly cheaper than that of international arbitration.

In the first place, attorney’s fees are more affordable than those in major international arbitration hubs such as London, Hong Kong and Singapore. Plus, a pure contingency fee arrangement (‘no win, no fee’) is permissible. There is no barrister’s fee. Expert evidence is rarely used. Unsuccessful parties are not generally required to pay successful parties’ attorney’s fees, which enables a party to commence proceedings with little financial risk.

International arbitration, even where it is held in Japan, is generally more costly than court litigation. This is because parties must pay arbitrators’ remuneration and administrative costs, the fee schedule of which follows the international standards. Cost allocation is applicable in arbitration, though.

Downsides in litigation

Only the Japanese language can be used in Japanese courts. As the case may be, interpretation of witness testimonies and translations of documentary evidence will be required. If the case involves a vast amount of documentary evidence written in a foreign language, flexible arrangements in arbitration will be preferable.

Also, litigation can be slower than arbitration as an appeal can be made against a court judgment. However, this is not always the case as most disputes are resolved through a settlement even before being decided at first instance, whether litigation or arbitration.

Fast-track arbitration at JCAA

It is worth considering referring a dispute to the Japan Commercial Arbitration Association (‘JCAA’) for arbitration if the disputed amount is less than ¥50 million. The expedited procedures under the Commercial Arbitration Rules allow you to obtain an arbitral award within 3 months from the appointment of the arbitrator after document-only-basis proceedings.

Hybrid clause

If you are in a superior bargaining position, a clause could be drafted especially benefit you. Such a clause could permit you to bring proceedings in any competent jurisdiction but restricts the opponent to sue you in only one jurisdiction (probably, your country). However, such clauses may be deemed invalid on the basis that they are against public policy in Japan.