Report of Corporate Legal System Study Group (kigyo hosei kenkyukai)

for Research on Economic Activity and the Judicial System

May 9th,2000

The judicial system is considered a social infrastructure indispensable for national life, in terms of its role to support the free and fair activities of people by making rules and providing resolution of disputes.

At the start of the 21st century, Japanese economic circumstances are drastically and rapidly changing. Enterprises involved in economic activities are required to dynamically and rapidly cope with such change such areas as instance, (i) implementation of corporate alliances, etc. for the purpose of revitalization of competitiveness in the international market, (ii) intensifying the corporate governance system, and (iii) modification of business models in response to globalization, which is rapidly developing.

However, the current judicial system is incapable of adequately supporting the activities of enterprises, which need to cope with the changes in the economy. As a consequence, in order to enable the Japanese economy to grow on a stable basis in the 21st century, it is necessary to (i) study the possibility of drastic reform in the judicial system and (ii) implement the results of such a study as soon as possible. In July 1999, the Judicial System Reform Council (shiho seido kaikaku shingikai) was established within the Cabinet and the Council will submit its report to the Cabinet after its two-year-term study.

Although, reform in the judicial system needs to be discussed from various points of view, our study group has studied the reform in the judicial system mainly from the viewpoint of its role to support the economic activities, taking into consideration the aforementioned matters, and hereby publishes this report in order to provide the Judicial System Reform Council with discussions made from such a viewpoint. Accordingly, this report does not mention any issues related to the whole court system rather than economic activities, such as introduction of the jury system and the system of appointment of judges from among experienced attorneys. Furthermore, needless to say, all the members of our study group do not necessarily agree on all the issues mentioned in this report on an unanimous basis.

We believe that user-friendliness is important with respect to reform in the judicial system, from the economic viewpoint. We hope that the Judicial System Reform Council will take into consideration such a viewpoint and thereupon, will produce a good result in terms of user-friendliness, by referring to this report.

While the circumstances surrounding the Japanese economy are completely changing, the court system and the attorney system have not yet adequately responded to needs arising out of the recent changes in the economic community. Drastic reform of the judicial system is urgently required.

1.Change in Circumstances Surrounding the Court System

(1) Expansion of Degree of Freedom and Number of Options in Terms of Economic Activity

Today, due to (i) the development of deregulation and (ii) the great changes in the industrial structure arising from drastic technical innovation, the degree of freedom and number of options for players in the economic field is greatly expanding. In such circumstances, players in the economic field develop their economic activities freely, based on their original ideas. Actually, business development is actively based on innovative business models and corporate alliances.

(2) Necessity of Prompt and Appropriate Dispute Resolution System

On the other hand, relationships among players in the economic field have become more complicated and dynamic and therefore, the number of disputes among them is expected to increase. Thus, the lack of a prompt and appropriate dispute resolution system, which can ensure predictability of results of dispute resolution, jeopardizes the effectiveness and fairness of economic activities in Japan and the development of the Japanese economy. In addition, high-level expertise in international trade and specialized fields is necessary for dispute resolution, as the globalization of the economy and specialization of disputes regarding intellectual properties increase.

(3) Necessity of Reform of Court System

However, Japanese dispute resolution systems such as the court system do not necessarily cope with the foregoing circumstances. Therefore, reform of the court system is significant in order to create of a prompt and appropriate dispute resolution system, which will enable Japan to become an attractive economic area in the 21st century.

2.Change in Circumstances Surrounding Attorney System

(1) Increased Needs for Legal Services Supporting Corporate Activities

Due to the globalization of the economy and intensive international competition, Japanese enterprises are now actively involved in international mergers, acquisitions and alliances. Additionally, the necessity of restructuring corporate management and organization, such as the adoption of group company systems and the separation of corporate divisions, is even greater, and intellectual property issues have become important in the context of corporate management. Furthermore, due to deregulation, the number of enterprises involved in new business areas is increasing and venture businesses have become active. In such circumstances, the need for various specialized high-quality legal services which are competitive in the international market, has increased in the areas of contract negotiation, capital transactions, organizational structuring, listing and regulation.

(2) Importance of Legal Service for the Purpose of Avoidance of Disputes

With the economic community becoming more complicated and international and also with the changes in the social system, the number of disputes is expected to increase. Under such circumstances, efforts to avoid disputes in advance would benefit the parties to the potential disputes and the whole society. From such a viewpoint, adequate legal service to support efforts to avoid disputes in advance, such as the preparation of compliance programs, is very important.

(3) Necessity of Reform of Attorney System

Without adequate legal service in response to the foregoing needs, the economic activities of Japanese enterprises might face difficulties in the future. However, the number of attorneys is extremely few and the Japanese attorney system does not necessarily meet needs in terms of (i) specialty, (ii) expertise regarding international business and (iii) convenience for users. Therefore, the attorney system needs to be reformed with respect to both quality and quantity.

In order to enable users to easily utilize civil litigation, it is essential to establish an adequate disclosure system, which ensures reasonable access to information concerning court decisions and information concerning cost and time required in court proceedings. In addition, for the purpose of making court proceedings expeditious and appropriate, it is important to provide the court with enough staff and to make available various types of court proceedings for dispute resolution, for various types of dispute. Furthermore, in order to meet the various needs of users, an appropriate alternative dispute resolution system is also important.

1. Reform of Civil Litigation

It is widely acknowledged that Japanese courts have achieved an internationally acceptable level of civil litigation in terms of fairness and reliability. However, as information disclosure regarding civil litigation is insufficient, there is less predictability for users with respect to the result and cost of the litigation. Therefore, adequate disclosure is still required. In addition, today, due to the changes in society and the economy, disputes have become more complicated and specialized, and particular types of lawsuit are required to be expeditiously resolved. Also, the court is required to enhance its specialty. Specifically, our discussion regarding the enhancement of users’ convenience and satisfaction is summarized below.

(1) Disclosure of Information Concerning Court

It is important to promote the predictability of the trial results. This contributes to the active use of proceedings, and the avoidance of a situation in which the court is obliged to deal with a case which it is not equipped to deal with. Although the court has already disclosed a limited number of carefully selected judgements to the public, we should now disclose all judgements by using the Internet, establishing a database and opening it to the public.

We also need to obtain the information necessary for using court proceedings, such as information regarding fees payable to the court, legal fees, the standard period for proceedings, the flow of proceedings and the documents to be prepared. We should study the renewal of the court’s HP, through which we are able to obtain such information.

With respect to disclosure, we should consider how to utilize services provided by private industry besides the court’s own efforts.

Furthermore, it should be noted that sufficient disclosure of judicial information is indispensable to the design of the judicial system because actual data will be made available by such disclosure.

(2) Computerization of Court Proceedings

For the convenience of users, the active introduction of information technology into court proceedings, such as the filing of complaints, responses, and briefs by using the Internet, should be considered.

(3) Increase in Number of Judges

In the last twenty years, the number of new cases of the first instance of civil litigation has doubled.(The number of new cases of the first instance of the district courts increased from 74,907 cases in 1975 to 152,678 cases in 1998.) In contrast, the number of judges has shown no remarkable fluctuation. In order to resolve cases promptly and appropriately, the number of which tends to increase, we should consider how to increase the staff, not only the judge but also the staff who support the judge, such as court investigators, court secretaries and court clerks.(In 1997, the number of judges of Japan was 2,899. In France it is 4,900, the smallest number of lawyers in terms of ratio to the entire population among the developed countries except Japan.)

We should also consider the expansion of the court facilities in order to cope with the increased number of cases.

There are some problems in the human resource administration of the court, such as the rotation of judges. Such matters should also be studied.

(4) Diversification of Court Proceedings

With respect to the increase in and the variety of recent cases, we need to use the various court proceedings in accordance with the variety of cases, so that the court can promptly and appropriately resolve the case in response to the needs of the person concerned. The introduction of the following should be considered: (i) expansion of the application of small debt lawsuits (shogaku sosho), (ii) establishment of the short-form proceeding applicable to a certain amount of debts, or to specified types of disputes, that is to say the “fast track”, and (iii) development of practice that, depending on the case, the court determines, at its discretion, to distribute the case to mediation or arbitration at an early stage.

(5) Practice of Proceeding Plan

A proceeding plan which prescribes the details of court proceedings, such as the time schedule, would give the parties predictability concerning the process and so make the legal proceedings prompter and more efficient.

In order to develop the practice of such a plan, the Civil Procedure Code needs to be amended. For example, if the parties to the lawsuit agree on a proceeding plan and the court approves such a plan, the court as well as the parties should be subject to such a plan.

(6) Use of Expertise at Court Proceedings Involving Intellectual Property, etc.

As the Japanese economy and society become more complicated and specialized, the effective use of expertise is indispensable in order to promptly and appropriately resolve the dispute. We should consider the improvement of the hearing system of expert opinions, an increase in the number of court investigators and court advisors (shihou iin), which work as the advisory bodies of judges, and the introduction of the participation of experts in the court panel.

2. Ensuring of Result of Enforcement in Civil Cases

The ultimate purpose of a lawsuit is to support the exercise of a right through the proper enforcement of the law. First of all, we should strengthen the measure which helps the debtor to repay his or her debt voluntarily. We should also adopt measures which prevent the evasion of enforcement by concealment of property or disturbance of the enforcement. This leads ultimately to dispute resolution and greater credibility of the court system for users.

(1) Strengthening of Support of Payment

(a) Diversification of Enforcement

Even if the debtor possesses some property, enforcement is unavailable because of the lack of effective measures. For the purpose of effective enforcement, we should consider the diversification of enforcement, as follow: (i) establishment of a system which decides how to repay the debt(in which, if the debtor has little property, the court can allow the debtor to repay his or her debt by installment or to postpone the due date)and (ii) expansion of application of indirect compulsory enforcement (kansetsu kyosei).

(b) Extension of Application of the Servicer Law

We should expand the application of the Servicer Law(the special law which regulates the business to collect claims)in order that the Servicer can deal with such type of claims as loan claims of the Non-banks, claims of general corporations, loan claims of lenders vis-Evis consumer, etc., with which the Servicer is currently not allowed to deal. The target range of the claim to which the Servicer law is applied should be broadened as much as possible, and we should make a negative list of the claims with which the Servicer is not allowed to deal, as against the current regulation.

(2) Strengthening of Countermeasures for Evasion or Disturbance of Enforcement

(a) Introduction of System to Prevent Concealment of Property

We should consider the establishment of the following system as procedures which enable the creditor to find the hidden property of the debtor. One is the procedure to compel the debtor to state his or her existing property. (If the debtor does not voluntarily repay his or her debt, the court can order the debtor to state his or her own existing property according to the allegation of the winner.) The other is the procedure to refer to a third person for the existent property of the debtor.(Upon the petition of the plaintiff’s obtaining a judgement in favor, the court can order a third person to report the existing property of the debtor.)

(b) Establishment of Procedure of Tentative Injunction Without Specification of the Other Party

It is difficult to identify the person who actually occupies real estate because the occupant of the real estate changes frequently. Therefore, we hereby propose the introduction of a new type of procedure of the tentative injunction, under which the court can issue a tentative injunction order to the occupant who actually occupies the real estate even if the real occupant has not been specified yet. Upon receipt of such an order, the occupant is prohibited from transferring his or her occupation.

3. Arrangement and Expansion of Alternative Dispute Resolution(ADR)

Alternative dispute resolution(ADR)facilitates the dispute resolution in the early stage by utilizing a flexible procedure. ADR also provides various options to resolve the dispute in response to the characteristics of the case. Therefore, we can satisfy the need for expeditious and effective dispute resolution and mitigate the burden of the court.

However, today ADR is inactive. After clarifying why ADR is not so active by studying the existent ADR, we should strengthen the function of ADR and should study the pre-conditions to facilitate the use of ADR. Set out below is our discussion concerning these matters.

(1) The Strengthening of the Connection Between Litigation and ADR

In order to facilitate the use of ADR, we should strengthen the connection between litigation and ADR. Namely, we should facilitate the appropriate distribution of cases to the mediation, at the court’s discretion, depending on the characteristics of the case. Furthermore, we should consider the establishment of court-annexed arbitration and also a system in which ADR can play a particular role in the court proceedings.

(2) Use of Information Technology in ADR

We should first strengthen the function of the existing ADR, and we should also consider the establishment of an ADR Center, whose functions include intensive administration of the data for each ADR.

As the Civil Procedure Code does not cover the proceedings of ADR, we can enjoy a flexible procedure at ADR. We should study the construction of a network system among courts and the establishment of a new type of mediation and arbitration by using that nationwide telecommunications at system.

Today communication networks have spread worldwide, and an international conference about the construction of a new dispute resolution scheme has been held. Therefore, we should start a discussion about these new schemes including on-line dispute resolution.

(3) Necessity of Amendment to Law

In order to facilitate the use of private ADR, amendments to the fundamental law regarding mediation and arbitration are indispensable. Especially, taking into consideration the existence of the UNCITRAL model law, we should immediately study amendments to the law on arbitration

.

In order to ensure that the players in the market are able to freely engage in economic activities based on their original ideas, it is indispensable to create an adequate legal service system, under which lawyers support the legal aspects of those activities. With the policies of deregulation and facilitation of competition, in order to realize the provision of an adequate legal service, we should reform the attorney system, in the following ways.

1. Sufficient Disclosure of Information Regarding Legal Services

(1) Disclosure of Information Concerning Lawyers

Nowadays, for the general user of the legal service, it is difficult to obtain information about lawyers. Therefore, to promote easy and prompt access to information about practicing lawyers, we need to get individual lawyers and law firms to disclose their careers, specialized fields and so on. Moreover, we should consider the feasibility of the use of helpful media, such as the Internet, to gain access to lawyers, and the construction of a database which enables users to seek information about lawyers by using office location or specialized field, and making such a database available.

(2) Revision of Legal Fee System

For the convenience of the user, it is important to be aware of the competition among lawyers in legal fees, which each lawyer should determine at his or her discretion. Therefore, we need to strengthen the thorough disclosure of legal fees.

2. Enhancement of Quantity of Legal Service

(1) Increase in Number of Lawyers

Today, even in France, which has the smallest number of lawyers among the developed countries except Japan, the number of lawyers is 3.7 times as many as that in Japan in terms of the ratio to the entire population. In the light of such a situation, we should increase the number of lawyers immediately. (The present number of Japanese lawyers is 17,000.)

(2) Expansion of Permissible Field of Quasi-Legal Professionals

We should consider, from the viewpoint of the user, deregulation regarding the monopoly of the legal business by attorneys, so that quasi-legal professionals such as benrishi, zeirishi, shiho shoshi and so on, are allowed to provide a wider range of legal services in their specialized fields. We think various players should be allowed to participate in the legal service market.

3. Improvement of Quality of Legal Service

(1) General Law and Economic Firms

We should consider the pre-conditions for establishment of a general law and economic firm (sogoteki horitsu keizai jimusho), for example, by admission of law firms that are corporations rather than partnerships, and the setting up of branch offices of law firms in order that the legal professionals are able to offer users various legal services concerning corporate management, on a one-stop shopping basis.

(2) Deregulation of Restrictions concerning the Admission of Foreign Lawyers

We should consider deregulation of the restrictions concerning the admission of foreign attorneys(gaikokuho-jimu-bengoshi or gaiben)and foreign law firms, such as the restrictions on full partnership between gaiben and bengoshi and the employment of bengoshi by gaiben, for the purpose of the provision of high-quality legal services regarding foreign laws. This would enable us to facilitate competition among lawyers, and to improve the quality of the legal service still more.

(3) Deregulation of Restriction on Expansion of Lawyer’s Employment, etc.

It is important that lawyers should actively take part in corporate management, not only as outside legal advisers but also as, for example, in-house planners who plan the capital transactions of the company, or who make its business plan. In the near future, this must be the new relationship between lawyers and economic activities. Therefore, we should consider the abolishment of the restriction on lawyers’ employment, etc., so that lawyers are able to take part in economic activities with ease.

(4) Accessibility of Legal Services

For our economic development, it is desirable that legal services can be used by various players in the market. Therefore, we should consider support for the use of lawyers by players who do not have a sufficient amount of money.