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A case before the Japanese Supreme Court
The case deals with a claim for delivery of a stolen foreign car imported into
the Japanese market. According to the court’s fact-finding, the facts of the case are
as follows.
A Mercedes-Benz 500SL registered in Germany was owned by a German leasing
company and leased to German resident A. But when A went to Italy, his car was stolen.
Subsequently, this car was exported by Dubai-based car dealership “Ideal” to
the Japanese Company “Inter Auto.” However, the process from the moment of the
theft of the car to its exportation by the car dealer in Dubai to “Inter Auto” in Japan was
not clarified by the court’s fact-finding.
Later on, through the successive sales (Inter Auto to “N Motors” to “Kosei
Manufacturing”, which are all Japanese companies seemingly engaged in the car trade),
a Japanese individual B purchased the car and registered it for the first time in Japan.
Finally, B sold the car to car dealers “Yanase”, who in turn sold it to “Autopia Nakajima”,
from whom Y purchased the car, and obtained possession of the car with the ownership-
registration filed.
The characteristic point of this case is that the original ownership registration
in Germany still existed, on the basis of which further transactions or further financing
could have taken place. In fact, on the basis of this German registration, the German
leasing Company had concluded a car insurance contract, and the car insurance company
X, after paying the policy to it and A, filed a claim for the car’s delivery before a Japanese
court in the place of the leasing Company.
Theoretical implications of the case
This claim for delivery refers to the issue of opposition between the claim based
on ownership and the defensive plea based on purchase made in good faith, with transfer
of possession.
On the one hand, there still remains the German registration of ownership of
the stolen car. A further successive transaction and also finance in good faith could have
taken place on the basis of registration in the market under the German legal order.
However, on the other hand, due to the theft, the car has been removed from its original
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context of good-faith transactions based on the German registration, and transferred to
another context in which another succession of transactions can take place based on
the existence of the car. In fact, the stolen car was imported into Japan and this other
succession of transactions based not on registration but on the mere existence of car
began to develop in Japan. In addition, the registration of ownership of the same car
was filed in Japan, and thereafter other transactions took place on the basis of registration
in the Japanese market.
The issues theoretically implied in the case concern not simply the validity and
effect of the foreign legal title, which, in this particular case, has been acquired in
the German market, but more broadly the problem of how to construct an international
legal framework for combining and coordinating different markets ruled respectively
under different legal orders.
Polarity between the High Court and Supreme Court
The case presented here has great importance as an example tackling these
points, as it includes both of the two different dimensions, regarding choice-of-law and
the interpretation of a domestic substantive law chosen as applicable law.
For both of these two dimensions, the Supreme Court’s judgment on the case
provides us with several points to be critically assessed. This is so particularly because,
for the former issue, the Supreme Court stipulated a very particular formulation whose
possible implication of parochial unilateralism will be exposed in this article.
Moreover, as for the legal reasoning held by the Supreme Court, it will be
possible to gain insight into its particular view. Although Tokyo High Court (the appeals
court) has shown serious concern regarding the laundering of legal titles by way of
import of stolen cars, the Supreme Court sometimes shows very clear opposition to it.
Behind this opposition, we can find polarity in terms of “secure and stable
transaction,” especially in international commerce.5 This polarity, first of all, reflects
5 The English translation of the Supreme Court’s judgment (see note supra 4) adopted the wording “stability
of trade,” while the original Japanese text, literally speaking, made use of the term “security of transaction”(or trade).
In this article, the wording “secure and stable transaction” will be generally used, but should be regarded here as
interchangeable with these other wordings.
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the different choice-of-law rules, one extreme of which leads to the adoption of
the principle of lex loci rei sitae. The polarity also concerns more broadly the divergent
social backgrounds against which different domestic legal institutions for commerce
are constructed, indicating some nuance in the understanding of the term “good faith.”
The following observation on the case shows some analysis regarding how
different markets based on different legal orders are combined, at least from the view-
point of the Japanese courts. It hopefully also demonstrates some key points, and
questions if not solutions, in order for us to think in general about how to coordinate
different markets in international commerce.
II. Discussion on the Choice-of-law issue
1. Choice-of-law issue before Japanese courts
Choice of law as a prerequisite question
As indicated above, there is theoretically a prerequisite choice-of-law question
regarding the acquisition of ownership of a stolen thing, before proceeding to the
interpretation and application of the substantive law chosen as applicable.
In fact, one of the crucial points disputed in the case was the choice-of-law issue
for defining the applicable law on ownership of the car. The reason why this issue led
to heated discussion is the fact that German Civil Law and Japanese Civil Law, both of
which were considered as possible options to be the applicable law, have different
provisions regarding the acquisition of ownership of a stolen movable thing.
On the one hand, art.935 of the German Civil Code stipulates that any acquisition
of ownership of a stolen thing based on a good faith purchase shall not be recognized.6
6 See the German Civil Code (BGB):
Art. 934 (Good faith acquisition on assignment of claim for possession):
Where a thing alienated under section 931 does not belong to the alienor, the acquirer becomes owner,
if the alienor is the indirect possessor of the thing, on the assignment of the claim, or otherwise when the acquirer
obtains the possession of the thing from the third party, unless at the time of the assignment or the acquisition of
possession he is not in good faith.
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วารสารกฎหมาย ศาลอทุ ธรณค์ ดชี �ำ นัญพเิ ศษ
According to Japanese Law, however, although art.193 of the Civil Code permits
the owner of the stolen thing to recover the thing within two years, art.192 of the same
code stipulates that a person who acquires possession of movables peacefully and openly
by a transactional act acquires rights to exercise with respect to such movables
immediately if he/she acts in good faith and is faultless.7
In this context, according to Japanese Law regarding a car registered in Japan,
ownership should be transferred with the filing to the registration for completing
the perfection in relation with a third party.8 However, before any new file is registered
for a car, whether new or used and whether imported or not, the general provisions of
the Civil Code mentioned above are to be applied.
The acquisition of ownership of stolen movables, including a stolen car without
registration, is treated differently by German Law and Japanese Law, possibly leading
to an opposite outcome of judgment, so that the choice-of-law problem was taken as
a critical issue in the disputed case.
Choice-of-law issue of Japanese P.I.L.
In order to understand the significance of the Supreme Court’s position on this
choice-of-law issue, it is necessary to look at the background discussion based on
the provisions of Horei (which is the former second Japanese Code of Private
International Law).
Art. 935 (No good faith acquisition of lost property):
(1) The acquisition of ownership under sections 932 to 934 does not occur if the thing was stolen from
the owner, is missing or has been lost in any other way. The same applies, where the owner was only the indirect
possessor, if the possessor had lost the thing.
(2) These provisions do not apply to money or bearer instruments or to things that are alienated by way
of public auction or in an auction pursuant to section 979 (1a).
7 See, for the Japanese Civil Code, Article 192 (Immediate Acquisition):
A person who commences the possession of movables peacefully and openly by a transactional act
acquires rights to exercise with respect to such movables immediately if he/she is in good faith and faultless.
Article 193 (Recovery of Stolen or Lost Goods):
In the cases provided for in the preceding article, if the possessed Thing is lost or stolen goods,
the victim or person who lost the Thing may demand the recovery of that Thing from the possessor within two years
from the time of the loss or theft.
8 Japanese Road Transportation Vehicle Act (art.5)
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In the second Japanese Private International Law, which was enacted in 1898
(and revised in 2006 with the Code’s name changed, although the second code before
revision should apply to this case), there are provisions regarding the choice-of-law on
property as follows:9
Horei (1898):
Article 10 (Real Right and Other Rights Requiring Registration)
(1) A real right to movables or immovables and any other rights requiring
registration shall be governed by the law of the place where the subject property
of the right is situated.
(2) Notwithstanding the preceding paragraph, acquisition or loss of a right
prescribed in said paragraph shall be governed by the law of the place where
the subject property of the right is situated at the time when the facts constituting
the cause of the acquisition or loss were completed. [underlined by the author]
These provisions are deemed to have adopted the principle of lex loci rei sitae,
viz. the law of the place where the thing is located. If these provisions had been applied
in a simple manner, the property issue should have been ruled by Japanese law since
the moment of the car’s arrival in Japan, as long as it remains within the territory.
The immediate acquisition of property of a stolen car was then deemed to be possible
in some cases, due to art.192 of the Japanese Civil Code, leading to the denial of
the plaintiff’s claim in the case.
However, the disputed interpretative point was whether it is reasonable for
a movable such as a car to be governed by the law of the place where it is located at
any given time. If so, the applicable law on movable property could change whenever
9 As for the first codification of Private International Law in Japan, see HARATA, L’exterritorialité,
la juridiction consulaire et le droit international privé : une réflexion sur le droit international privé à la fin de XIXème
siècle, in Luigi Nuzzo and Miloš Vec (eds), Constructing International Law. The Birth of a Discipline (Klostermann,
Frankfurt am Main, 2012) pp.331-362.
For the most recent Japanese Act of Private International Law enacted in 2006, see HARATA, Quelques
réflexions historiques sur la situation du droit international privé japonais-le rôle des juristes dans le processus
législatif au Japon-in: ICCP Publications, No. 13 (2015) pp.263-86.
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the movable accidentally moves to another country. For example, if the car were located
in Germany, the property would be ruled by German law, and if the car were to be stolen
and moved to Japan, Japanese law would be regarded as the applicable law from that
moment.
2. Supreme Court’s formulation: problems and background concern
Supreme Court Judgment
In conclusion, the Japanese Supreme Court chose Japanese rather than German
law as the applicable law for the acquisition of the car’s ownership since the arrival of
the car in Japan, and applying the Japanese law, the court approved the acquisition of
ownership by B due to art.192, and also the current ownership of Y through the transaction
from B to Yanase and Autopia Nakajima to Y. The court therefore dismissed the claim
for delivery based on alleged ownership.
The remarkable point, however, is that the Japanese Supreme Court chose
Japanese law as the applicable law not on the basis of the simple application of
the principle of lex loci rei sitae, but of another particular principle which was newly
formulated by the Court with the following reasoning:
“Article 10, paragraph 2 of the Law on the Application of the Laws provides
that the acquisition and loss of real rights regarding movables and immovables
are subject to the law of the place where the facts which serve as the cause of
the acquisition or loss took place. This is because the acquisition and loss of
rights such as real rights which are purported to control a thing in an exclusive
manner have a close connection with the interests of the country where the thing
was located at the time the cause of acquisition or loss was completed”.
[underlined by the author]
“Therefore, if the object is a corporeal thing, the law of the location as provided
by this provision should be construed as the law of its physical existence, except
in cases where there are problems in allowing the place of its physical presence
to be a nexus for the choice of law”. [underlined by the author]
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As for automobiles, the Supreme Court settled on a new formulation with
the following dual categorization based on different statuses of cars:
“cars can be divided into cars which are placed in use and by their nature, can
move around for a considerable scope, and cars which are not in such a state”.
[underlined by the author]
“The article 10, para.2 means that the applicable law to the acquisition of title
to a car is the law of the place of its primary use in cases where the car is in
a state ready for use, and in cases where it is not ready for use, unless there are
special circumstances such as where it is in the process of transportation to
another country, the law of the place where it physically exists”. [underlined by
the author]
From this reasoning, the formulation adopted by the Supreme Court in terms of
the choice-of-law rule regarding the property of a car was deduced and restated at
the conclusive statement of the Court’s judgment as the following “summary:”
“The applicable law on the acquisition of title to a car is the law of the place
of its primary use in cases where the car is in a state ready for use, and in cases
where it is not ready for use, unless there are special circumstances such as
where it is in the process of transportation to another country, the law of
the place where it physically exists applies”. [underlined by the author]
Problems with the Supreme Court’s formulation
As for this formulation, from the technical and practical viewpoint, there are
many unclear points.10 One crucial problem is the key concept of “the place of its
[the car’s] primary use.” What this means and how it can be identified were not clearly
explained by the Supreme Court. Some think it is the place where the registration has
already been filed.11 What of a case in which there are simultaneously different
10 As for the detailed analysis of the judgment, see HARATA (supra note*).
11 For instance, DOGAUCHI, Case Note, 271 Hogaku Kyoshitsu (2003) 129; HAYAKAWA, Case Note,
Heisei 14 Nendo Juyo Hanrei Kaisetsu (2003) 276-77. See HARATA (supra note*) p.391.
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registrations in different countries? The case disputed here was a very similar case.
In fact, the Supreme Court held that the simple existence of registration abroad shall
not be enough for identifying the place of primary use there.12 However, the Supreme
Court has not established any clear criterion for identification.13
Another crucial problem with this formulation regards another key concept of
“a state ready for use.”14 A clear explanation of how to recognize such a state is also
omitted from the judgment. The court referred to such legislation of a country that
recognizes a state ready for use on the basis of registration.15 However, which law shall
be considered in the international context?16
The remarkable point is that such concepts as “the place of its primary use” and
“state ready for use” have not been adopted nor discussed in legislation, case law, or
academia in any country as yet, except in this Japanese case.17 Certainly, similar
12 The Supreme Court held that, “although the registration in Germany was formally existing, it was evident
that the Car was not in a state to be placed in use.”
13 The Appeal Tokyo High Court considered the place of registration as the place of primary use. As we see
later, the Supreme Court refused such an absolute identification simply based on the registration. See infra note 23.
14 In the Supreme Court’s judgment, there is confusion in the use of terminology. In the summary of
judgment, it adopted the wording “state ready for use,” while it used in other places different expressions such as
being “placed in use”, being “placed in use for a considerable scope”, and “may move around for a considerable scope
over border.” It is very doubtful how carefully the Supreme Court considered the nuances of different expressions.
Moreover, Japanese scholars are not careful about some possible different nuances in terminology.
For instance, DOGAUCHI (supra note 11) 129. See HARATA (supra note*) 384-85.
15 However, according to Japanese Law, a certain kind of car can be put in the state ‘ready for use’ without
registration in Japan. See the Japanese Road Transportation Vehicle Act (art.4). HARATA (supra note*) 388-89.
16 The Supreme Court discussed the concept of the place of primary use, considering mainly the case
in which a car is physically located and also registered within Japan.
However, the question arises of the case in which such a car registered in Japan is moved into another
country in terms of the identification of the place of primary use. If the place of primary use is deemed to be still in
Japan, it leads to the extraterritorial application of Japanese Law regarding the ownership of a car physically being
abroad. See infra III-1.
At any rate, the Supreme Court, without referring to such a case, established a general formulation for
the choice of law.
17 As for discussion in other countries, see, for instance, VENTURINI, Property, in IECL, vol.III,
chap.21 (1976) pp.1-37; STOLL, Rechtskollisionen beim Gebietswechsel beweglicher Sachen, 38 RabelsZ.(1974)
452, 457ss.; KREUZER, Gutachtliche Stellungsnahme zum Referentenentwurf eines Gesetzes zur Ergänzung des
Internationalen Privatrechts, in HENRICH, Vorschläge und Gutachten zur Reform des deutschen internationalen
Sachen- und Immaterialgüterrechts (1991) pp. 57, 72-73, 84, 94; HANISCH, I diritti reali, con particolare riguardo
alle cose mobile ed alle garanzie mobiliari senza possesso, in Il nuovo diritto internazionale privato in Svizzera
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choice-of-law issues have been discussed, with attempts at resolution over a long period
in an international context.18 However, the Japanese Supreme Court adopted a very
particular formulation without any reference to or consideration taken of this long
international discussion.
It is very probable that the Japanese Supreme Court adopted the concept of
“state ready for use” from Japan’s domestic Road Transportation Vehicle Act. This act
originally had only the character of administrative regulation on the basis of the car
registration system, but to the original and former act, the new act added some provisions
regarding the acquisition and transfer of property of a car to be registered.19 This act
stipulates that a car should be registered for putting it in a “state ready for use”. Such
a concept as a state ready for use that had originally been incorporated in the domestic
administrative regulation was now adopted and applied as a key concept regarding
the choice-of-law rule on international private law matters.
The Supreme Court limited its argument to cars as one kind of movable.20
This limitation enabled the court to apply the concept derived from the Road Transport
Vehicle Act. What of other kinds of movable? Why did the court adopt such a formulation
that can only be applied to car property? This shows a serious defect in the theoretical
perspective of the current Japanese Supreme Court.
Background concern in terms of the formulation
Why has the Japanese Supreme Court set such a formulation? We can guess
the reason against the background of theoretical and practical antagonism regarding
(1990) pp.155-56; SOVILLA, Eigentumsübergang an beweglichen Körperlichen Gegenständen bei internationalen
Käufen (1954) pp.72-73.
18 For instance, see KREUZER, La propriété mobilière en droit international privé, RdC 1996, p.9-318.
19 The former Road Transport Vehicle Act was originally enacted as Law No. 191, 1943. Then the new
Act, including a provision regarding the acquisition of property rights on registered cars (art.5) was enacted as Law
No.185, 1951.
20 As for the Supreme Court’s deliberate limitation of argument in its judgment, see HARATA (supra
note*) 386-87. Although the Supreme Court discussed the interpretation of art.10 of Horei comprehensively
regarding the choice-of-law on ownership and other property rights, it limited its focus on the issue of transfer of
ownership for movables by way of transaction. In addition, it discusses only the ownership of cars as a particular
kind of movable thing.
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the principle of lex loci rei sitae, which had clearly appeared between the District Court’s
judgment and the Appeal High Court’s judgment in this case.
The District Court21 chose Japanese law as applicable regarding the acquisition
of ownership, applying art.10 of Horei in the simple material sense. Then, in accordance
with art.192 of the Japanese Civil Code, the court held that B acquired the car’s ownership
by way of a good-faith transaction followed by transfer of possession (this method of
ownership acquisition is called an “immediate acquisition”), and dismissed X’s claim
for delivery.
Contrary to this, the Tokyo Appeal High Court chose German law as
the applicable law.22 It also applied art.10 of Horei with the principle of locus rei sitae.
However, the High Court interpreted, in a fictitious manner, not Japan, but Germany
as the locus rei sitae, using the following reasoning:
“Cars, by their nature, are movables which are expected to move around
considerably, and therefore, it is not appropriate to understand that the law of
each place where it moves to shall be applicable. Rather, it is appropriate to
regard the law of a fixed central place where the car was originally expected to
be primarily used, i.e. the law of the place where it is to return (the place of
registration) as the law of the location as provided by article 10, paragraph 2
of the Law on the Application of Laws, unless there are special circumstances
such as non-use or absence at the place of registration for a long time, or
the de facto loss of the possibility of returning it to the place of registration
as a result of new registration by a person who is entitled to do so”. [underlined
by the author]
The High Court held that “Germany is the place which was regarded as
the place to which it should be returned”.
21 Urawa District Court (Koshigaya division) judgment on February 22, 1999.
22 Judgment on February 3, 2000 (1709 Hanrei Jiho 43).
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The actual criterion for choice-of-law adopted by the High Court was “the place
of registration,” even though such expressions as “a fixed central place where the car
was originally expected to be primarily used” or “the place where it is to return” seem
to lead to the Supreme Court’s concept of “the place of its primary use.”23 At any rate,
the decisive factor is the place of registration, except in certain special circumstances.
The reason why the High Court applied a substantially different criterion from
the District Court, leading to an opposite outcome of approving the plaintiff’s claim,
was the serious concern regarding the issue of laundering of legal titles on a stolen
object to be realized by way of legal institutional arbitrage between different countries.
The High Court took into consideration the registration held in Germany, the ownership
registered there, and any subsequent transactions based on this registration, superior to
the accidental location of an object possibly moving from one place to another.
This possible change of physical location makes it possible for a clandestine trader
deliberately to move the object to a place where local laws might provide him/her or
his/her transaction counterpart with a cleaned legal title, opposed to the former legal
title. This is, at least for the High Court, a serious concern regarding the principle of
lex loci rei sitae.
Regarding the position taken by the Supreme Court, on the one hand, as suggested
by the refusal of simple application of the principle of lex loci rei sitae in the material
sense (which was adopted by the District Court), the Supreme Court has not completely
ignored or excluded the problem caused by that principle. However, on the other hand,
it refused to adopt the view held by the High Court. Here can be found a nuanced
position of the Supreme Court with adoption of the general formulation based on
the dual categorization of cars, as intermediate position between the view of the District
Court and that of the High Court.
23 It is remarkable that the Supreme Court, on the contrary, refused to identify the place of primary use in
Germany, based only on the actual existence of registration there. See supra note 12.
As for the High Court’s position to fix the applicable law in Germany, regarded as the place of return and
registration, it is also possible to find another concern regarding the necessity of protecting the possession, possibly
deprived of by force etc. and leading to the change of applicable law according to the principle of lex loci rei sitate,
in the international context. As for the issue of the international legal framework for protecting the possession,
particularly in regard to the international child abduction, see HARATA (supra note*) p.345 note129.
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The Supreme Court explained the reason for refusal of the simple application
of the principle of lex loci rei sitae in the following manner:
“When a car is placed in use for a considerable scope and its physical location
is changing all the time, if the applicable law is determined by the physical
location of the car, the applicable law has to change together with the movements
of the car, and also because there may be difficulties in ascertaining the physical
location of the car at a specific moment, there is a problem that the determination
of the applicable law becomes unpredictable. In such cases where the connection
between the acquisition or loss of the rights over the car and the interests which
the countries of its location has become diluted, it is better to make use of
the law of the place of its primary use rather than the law of the country in which
the car physically happened to be. In cases where cars which are ready to be
placed in use are traded, the buyer may easily obtain information for finding
out the place of primary use by inspecting documents such as the car registration
or the state of the car maintenance. By acknowledging the law of the place of
its primary use rather than the law of the country in which the car physically
happened to be as the applicable law, there is greater legal transparency for
the seller [sic: N.B., in the original Japanese text of the judgment, it must be
the purchaser] and this will contribute to the safety of trading”. [underlined by
the author]
On the other hand, the Supreme Court did not fully support the view of
the Tokyo High Court, according to which the place of registration, allegedly identified
as the place in which the car was to be primarily used and to which it was to return,
should be regarded as the criterion for choice-of-law. The view justifying this refusal
was that any registration existing de facto in some other country is not in itself sufficient
for identifying the basis of a market where a transaction has legally taken place.
In fact, the Supreme Court held that, for cars such as those “which are traded
as unregistered cars with the assumption that they will be newly registered and placed
in use in the importing country, but which in fact, had been registered in another country
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such as the Car in the present case,” if the law of the place of registration in a country
other than the importing country, where the car physically exists, is chosen as
the applicable law, “it would not be easy for those who participate in the transaction to
understand which law is the applicable law at the time of the transaction.” Due to
the consideration, the Supreme Court refused to choose German Law as applicable,
even though an ownership registration was still in existence there, albeit formally from
the Supreme Court’s viewpoint.
A registration existing in a country can provide the legal basis of market for
a transaction. However, it is implicitly suggested by the Supreme Court that a more
crucial point is the choice of and reliance of parties on a registration in a market where
they can then carry out their transaction.
As the Supreme Court adopted the criterion of the place of primary use for one
of the two categories of cars, it considered the difficulties in terms of the “legal
transparency for” the purchaser and “the safety of trading,” caused by the choice-of-law
based on the place “where the car physically happened to be.” This consideration could
mean that there is one kind of transaction which is dealt with, regardless of the physical
place at the time of the transaction, but which is based on a legal market order.
This virtual connection with a market for a transaction might be attempted, albeit in
an unclear manner, to indicate with the term of the place of the primary use in
the Supreme Court’s judgment.
In the following section of the reasoning of the judgment, similar consideration
was also shown for sustaining the principle of lex loci rei sitae in the second of the two
categories of automobiles.
“On the other hand, when cars are traded across the border, new cars are often
distributed before registration, and second-hand cars are distributed in the state
where the previous registration has been deleted, and thus in both cases, they
are distributed in the state in which the cars are not ready for use”.
“… regarding cars which are traded in a state not ready to be placed in use,
there is no place of primary use, and the acquisition or loss of the rights have
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a close connection with the law of the country of location at the time the facts
which serve as the cause of acquisition or loss were completed, and there is no
difficulty in ascertaining the physical location at that time. Furthermore, among
such cars, there are cars which are traded as unregistered cars with
the assumption that they will be newly registered and placed in use
in the importing country, but which in fact, had been registered in another
country such as the Car in the present case. If laws other than the law of
its physical existence, such as the law of the country of registration, is made
the applicable law, it would not be easy for those who participate in
the transaction to understand which law is the applicable law at the time of
the transaction. Such a situation is against the requirement that those who are
involved in international trade should be allowed to clearly predict the choice
of applicable laws which have a major potential to affect his transaction and
to take measures in advance. It also significantly harms the stability of trade
from the viewpoint of international private law. Therefore, those cars which,
at the time the cause for the acquisition and loss of the rights was completed
were in such a state that they were not ready to be placed in use, the law of
the place of its physical presence should be the applicable law in the same
manner as ordinary movables, unless the car is being transported to the consignee
country and there is a problem in making the law of its physical presence
the applicable law”. [underlined by the author]
The Supreme Court referred to the fact that it is not difficult in cases of
the category for parties to acknowledge the actual place of physical existence of a car,
in order to sustain the principle of the lex loci rei sitae. However, in terms of places that
parties can easily identify at the time of transaction, there are other options, such as
the place of transaction or the place which the parties to the transaction choose in terms
of choice-of-law as party autonomy. Nevertheless, instead of these options, the Supreme
Court held the principle of lex loci rei sitae as for a car not being ready for use, except
in particular cases.
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The substantial concern decisive for this court’s attitude again seems to be about
the “security of transaction.” As implicitly suggested in the reasoning of the judgment,
the Supreme Court considered, for this category of cars, the characteristics of
the transaction to be made in the importing country where the traded car also physically
exists. Here, it might be possible to find the court’s assumption that the transaction takes
place on the legal basis of the market valid at the place where the car physically exists.
However, it is necessary to carefully distinguish the place of physical existence, that is
merely the material aspect, from the place of the market relied on by the parties, which
is a market-oriented aspect.
It is possible that, while the ownership of a movable was registered in a country,
and some transaction and finance is dealt with on the basis of this registration,
the movable is moved into another country, and other transactions are made regardless of
the registration, or on the basis of the other registration newly completed in the latter
country. Taking such a case into consideration, the preference of the Tokyo High Court
to always choose the law of registration as applicable creates some difficulty.
On the other hand, the simple application of the principle of lex loci rei sitae
by the District Court presents another difficulty for the “stability of trade,” as there is
a possible transaction type with which to proceed, regardless of the place of current
physical existence.
Faced with both of these extremes, the Supreme Court has apparently tried to
find an intermediate way, adopting the dual criteria of the place of primary use and of
the place of physical existence for the two categories of cars, based on the state ready
for use.24
24 In the Supreme Court’s judgment, even though it refers to the “stability of trade” for both categories
of cars, there is, even though not taken seriously into consideration, a different implication of the concept for each
case in terms of the characteristics of transaction. See HARATA (supra note*) 371 note 51.
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III. Japanese parochialism and unilateralism
on international commerce
1. Possible implication of the formulation
The Supreme Court could be regarded as not completely opposed to the High
Court’s position, at least in terms of the background consideration for the general
formulation. Therefore it initially appears possible to find a certain coherent line between
the Supreme Court’s judgment and the High Court’s judgment.
However, it is remarkable that, in the Supreme Court’s judgment, it is difficult
to find any serious consideration taken of the characteristics of different kinds of
transactions. The criterion of the state ‘ready for use’ adopted by the Supreme Court
bears no direct relation whatsoever with the point as to which market the transaction
legally relies on. The latter point was taken into consideration in a very obscure and
unconscious manner by the Supreme Court.
In addition, the formulation adopted by the Supreme Court, although apparently
bilateral and neutral in terms of the equal treatment of the court’s domestic law and
foreign law, in fact hints at a unilateral and parochial attitude towards international
commerce. The crucial point is to what extent the court’s domestic law is chosen as
applicable. Verification of this point inevitably relates to the ambiguous concepts of
the state ‘ready for use’ and the place of primary use. Although uncertainty always
remains, the general formulation held by the Supreme Court possibly has a crucial
implication.
Remarkably, in most cases, the formulation might lead to the application of
Japanese law, once a car has arrived inland and/or a car is also registered in Japan,
regardless of the possible existence of foreign registration, and regardless of
the succession of good faith transactions having already been carried out abroad.
First of all, the formulation has the implication of excluding the application of
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any foreign law for a car once arrived and thereafter remaining in Japan, and before
being registered there. Whatever the Supreme Court considered as the “stability of trade”
in terms of choice-of-law, any foreign law, which at first acknowledged the ownership
to a person, cannot always work for the stability of ownership of the same movable,
once arrived in Japan. Instead, on the basis of the principle of lex loci rei sitae, a certain
kind of “secure and stable transaction” protected by Japanese Law is given priority over
other stability or concerns shown by foreign laws.
Once registered in Japan, the reasoning of the Supreme Court seems also to lead
to the possibility that the law of Japan, as the place of primary use, should apply,
even though the car is stolen, exported and possessed abroad. This means an extension
or extraterritorial application of Japanese property law on a car located abroad.
This last point still depends on how to identify the place of primary use. It also relates
to another side of the issue, in which case a foreign law is chosen as applicable.
According to the Supreme Court’s judgment, it would be possible to claim that
the law of the place of physical existence is chosen as applicable for a car which is
physically located in a foreign country without any registration which would allow it
to be put in the state ‘ready for use’ there. However, in other situations, the same
formulation might lead to the choice and application of Japanese laws in a case in which
a car was registered in Japan and moved thereafter to another country, as the place of
primary use might still be regarded to be in Japan, and a car might be regarded to be
still in the state ‘ready for use’ there. The verification of this point was left uncertain in
the judgment due to the general formulation composed of very ambiguous concepts.
It also means that it is not sufficiently clear in which case a foreign law can be chosen
as the applicable law.
There still remains the possibility that the formulation would work unilaterally
and parochially, leading to the extraterritorial application of Japanese Law, although
it appears to be a bilateral and neutral rule for international commerce.
2. Parochial reaction from Japanese scholars
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A more remarkable point than the formulation itself is the reaction among
Japanese scholars. In addition to their lack of a philological sense necessary to criticize
the Supreme Court’s very confused reasoning, almost no Japanese scholars, on the one
hand, are concerned about what impact that choice-of-law formulation can have in terms
of the legal-title laundering issue.25 There has not been any serious consideration or
discussion as to the possible function of the formulation, viz. the extraterritorial
application of Japanese laws which can mean to pursue a stolen and exported car now
abroad. Due to this possible function of the formulation, a stolen car from Japan and
existing abroad should be pursued and possibly recovered in accordance with
the Japanese territorial laws rather than the lex loci rei sitae in a material sense. Whether
or not the legal-title laundering was deliberately ignored, the possibility of extraterritorial
application of Japanese laws pursuing a stolen car abroad has never seriously been
pointed out by Japanese scholars.26
To paraphrase and add some explanation to the former point regarding legal-title
laundering, Japanese scholars generally criticized the view held by the Tokyo High
Court, yet largely approved the Supreme Court’s formulation and the choice of Japanese
Law as applicable in this case, saying that application of Japanese Law ensures
the security and stability of the transaction in this case.27
As mentioned above, while the District Court held that the issue of “laundering”
concerns only money, and does not directly relate to the disputed case, the High Court
concerned itself seriously about the issue of laundering in a broader sense. The main
concern of the High Court regards the laundering of legal titles, which is enabled due to
the diachronic change of applicable law on the basis of the principle of lex loci rei sitae
and caused by the intentional change of the place of physical existence. The ownership
25 For instance, DOGAUCHI (supra note 11) 128. For detailed analysis, see HARATA (supra note*) 373-77.
26 Some scholars, considering that such a case will very rarely occur, do not enter into any further discussion.
For instance, HAYAKAWA (supra note 11)277 and DOGAUCHI (supra note11) 129. See infra note 30.
The issue of such an extraterritorial application of Japanese law, even if a very rare case, should not be
excluded from our discussion.
27 For instance, DOGAUCHI (supra note 11) 129 and HAYAKAWA (supra note 11) 277. See HARATA
(supra note*) 374.
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of a movable, having been provided and established by a former lex loci rei sitae, once
the locus rei sitae is subsequently changed and moved abroad, is deemed to be
exclusively ruled by the subsequent lex rei sitae, excluding any causal relationship
possibly recognized by the former applicable law. In terms of this legal framework for
dealing with choice-of-law, there is a strong incentive to deliberately bring a movable
into a country whose local laws enable opposition to claims by the person who was
previously recognized as title holder by the former applicable law loci rei sitae.28
In spite of this potential for legal-title laundering enabled by the lex loci rei sitae,
the position held by the High Court in this regard has been severely criticized by Japanese
Scholars,29 whether or not such a reaction is peculiar to Japan or an international general
tendency. To the contrary, there has never been found any opposition to the outcome of
the Supreme Court’s judgment to apply Japanese laws in disputed cases nor to
the general formulation, possibly almost always leading to application of the same laws
28 In view of the treatment based on the principle, a legal title holder may find it appropriate to physically
hold the movable object in an exclusive manner in order for the object not to be transported into another country.
For instance, a lease of movable property, as occurred in the case, might be regarded as a very risky business.
29 For instance, see YOKOMIZO, Case Note, 502 Hanrei Hyoron (2000) 234. Criticizing the High Court
judgment, he argued that such an issue of substantive law as the concern over laundering a stolen car shall not be
included in the dimension of choice-of-law. He went on to hold that the place of “existence” (art. 10 of Horei)
should be deemed to be in Japan in this case, in which the object actually existed in Japan and a considerable time
already passed after it had arrived there and that, in accordance with the Japanese substantive law, the acquisition
of ownership by B should have been acknowledged.
See also MORITA, Case Note, 1193 Jurisuto (2001) 127-28, criticizing the High Court judgment as
having confused the choice-of-law dimension with the concern of preventing laundering of stolen cars, regarded as
consideration of substantive law.
Certainly, in view of the classical theory of private international law, the strict distinction and articulation
of these two dimensions is crucial in order to conceptualize the transnational sphere composed of coexisting private-
law legal orders, autonomous to some extent from the inter-sovereign state relations. In this sense, any inclusion
of the substantive legal concern in the choice-of-law dimension should be treated with much attention. However,
concern over prevention of laundering should not be simply left to the substantive laws of each country or to
the hands of domestic legislators. The choice-of-law dimension itself, together with the substantive laws of different
countries, can and shall take a role to tackle the general problem of how to develop a legal structure of international
commerce, which clearly includes the legal-title laundering issue as well.
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for cars existing within Japan.30, 31
Here, Japanese scholars show their particular way of thinking in favor of
the secure and stable transaction in accordance with the law of the place of physical
and material existence, according to which the exclusive ruling of the subsequent and
current lex loci rei sitae shall be given priority in order to enable the secure and stable
transaction at the place of physical existence, instead of the causal relations of
transactions developed in the international context.32
30 See OJIMA, Supreme Court Judgment Report, 57-4 Hosho Jiho (2005) 305. Ojima, a Supreme Court
legal research clerk, in his report on the Supreme Court judgment, remarked on the difference between Japan and
European countries to which cars registered abroad usually travel. According to his report, if cars enter into Japan from
abroad, it is mainly for the import car trade. In the case of a new car, it is imported as unregistered, and in the case
of a used car, the foreign registration shall be omitted abroad before the car enters Japan. See also DOGAUCHI
(supra note 11) 129 and HAYAKAWA (supra note 11) 277.
In view of such an understanding, it would very rarely (if ever) happen that the law of a foreign country
is chosen as the applicable law, due to the place of primary use in that country for a car currently existing in Japan.
As for the ownership of a car existing abroad, Hayakawa held that the choice of the law of Japan, deemed
to be the place of primary use, would occur very rarely. HAYAKAWA (supra note 11) 277. However, according
to Dogauchi, “we need to abide by the choice of the law of a foreign country to which a car stolen in Japan was
transported”. DOGAUCHI (supra note 11) 129.
In comparison with these views, see art.6 of Italian Law no.436, dated March 15, 1927, which stipulated
the application of domestic law for the transfer of ownership of cars registered in Italy. Cf. MORELLI, Elementi
di diritto internazionale private italiano, 12a ed. (1986), p.159; POCAR et al., Commentario del nuovo diritto
internazionale privato (1996), p.263 [LUZZATO]; BALLARINO, Diritto internazionale privato, 3a ed. (1999),
p.568-569.
31 See DOGAUCHI (supra note 11) 129. Dogauchi approved the Supreme Court’s judgment, claiming
that, in view of the Supreme Court’s formulation, there almost never occurs the choice of any foreign law regarding
the ownership of cars, and therefore the security of the transaction within Japan is maintained.
See also HAYAKAWA (supra note11) 277. Hayakawa said that, due to the formulation, Japanese Law
is chosen as applicable for ownership in almost all cases in which a car physically exists in Japan, and leads to
maintaining the security of the transaction within Japan in terms of the choice-of-law dimension.
32 See DOGAUCHI (supra note 11) 129. Dogauchi criticized the High Court’s judgment as setting
an excessively high value on the “static” security of the transaction. Very interestingly, according to the conventional
wording among Japanese scholars, consideration for the connected and accumulated causal relationship of
transactions has been identified as “static” and to the contrary, the consideration for the exclusion of such causal
relations for establishing the exclusiveness and independence of the position of ultimate title holder is expressed as
“dynamic” security of transaction. See also TAKASUGI, Case Note, Shiho Hanrei Rimakusu 2001-Jo (2001) 147
and NARASAKI, Case Note, Heisei 12 Nendo Juyo Hanrei Kaisetsu (2001) 293. They considered the security of
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Although, as mentioned above, the Supreme Court itself has not completely
omitted some concern shown by High Court in terms of the laundering issue, Japanese
scholars do not concern themselves with it, at least in terms of dealing with choice-of-law.33
In addition, the concept of secure transaction as seen by these Japanese scholars
is very similar and coherent with the “materialistic” (or “réel”) concept of secure and
stable transaction in terms of the substantive laws. Once brought into the country, any
interference from abroad is expected to be excluded. The principle of lex loci rei sitae
in the real material sense, which they suppose in line with the concept of secure
transaction, can in fact have the function of working in favor of legal-title laundering,
by way of combination with the substantive law, which also excludes the causality of
transaction, possibly affecting the ownership.
IV. Antagonism over the “secure and stable” transaction
1. Interpretative issues regarding art. 192 of the Japanese Civil Code
After judging on the choice-of-law issue, the Supreme Court faced
an interpretative issue regarding Japanese Law chosen as the applicable law, not only
for transactions after registration, but also for transactions before registration.
the transaction to be maintained on the legal basis of the market of the place of physical existence of the movable
object. The critical point is whether to identify in an absolute manner the parties’ reliance on the legal basis of
the market in the international commerce to be always located at the place of physical existence. For this point, see
HARATA (supra note*) 376.
33 Very remarkably, it might be possible for us to find a nuanced difference in attitude between the Supreme
Court’s judgment and the Supreme Court legal research clerk’s report. See OJIMA (supra note 30) 312. Ojima said
in his report on the judgment that there is no problem caused by the instability of choice of law due to the traveling
of cars in the case in which cars are not in the state ‘ready for use’ and the immediate acquisition of their ownership
is a matter of dispute, and went on to say that, with the principle of lex loci rei sitae adopted, we would face such
a trivial [sic] issue of whether to regard as unjust a case in which a transferee deliberately brings a car (transaction object)
to a place where the laws are more favorable for his/her immediate acquisition of ownership and that such
a phenomenon is natural [sic] because of the divergences in domestic laws between countries.
In this discourse on the report, it is very difficult to find any concern over legal-title laundering, while
the Supreme Court itself has never explicitly refused such a consideration.
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Regarding this point, the existing German registration could have had some
relevance in terms of verification of the good faith of the transactions made by Japanese
importer Inter Auto and subsequent purchasers. There was again, therefore, an issue
regarding the international link between different markets respectively based on domestic
registration.
According to art.192 of the Japanese Civil Code, good faith is required for
acquisition of movable property from a transferor (not being the owner).34 According to
Japanese case law, the meaning of good faith is that “the person who commenced
possession of a movable was mistaken in believing that the opposite party was not
a person without any rights over the movable and was not negligent in believing so”.35
A Supreme Court judgment held that, as with a stolen thing, any further additional
condition shall not be imposed.36 The issue in this case was what elements are necessary
for a purchaser of an imported car to be proved as having been in good faith.37
Supreme Court’s refusal of High Court’s view
As for this point, the Japanese Supreme Court acknowledged the good-faith-
based acquisition of an allegedly individual consumer B, taking into consideration
the current practice of used-car import in Japan with the following view opposed to
the High Court’s view. The Supreme Court began to state its own position, with
the restatement of the High Court’s view as follows:
“The original instance court ruled that in trading unregistered foreign cars,
regardless of whether the assignee is a car dealer or a consumer such as B,
34 Supra note 7.
35 See the Supreme Court’s judgment on December 4, 1970 (24-13 Minshu 1987), according to which
art.192 of the Civil Code shall be applied also to car ownership in the case in which a car is not registered in line
with the Road Transportation Vehicle Act or in which the car registration is omitted.
36 The Supreme Court’s judgment on November 27, 1949 (5-13 Minshu 775).
37 Strictly speaking, the burden of proof regarding whether or not the transferee acted in good faith is
charged on the plaintiff in this case. According to the Supreme Court’s judgment on June 9, 1966 (20-5 Minshu
1011), the transferee with the possession is not charged with the proof of his/her own non-negligence, due to
the contrary assumption.
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unless the assignee checks the assignment certificate accompanied by
the presentation or the handing over of a copy of a document which verifies
the rights of the foreign manufacturer or the former genuine owner such as
a car certificate, or a reliable certificate etc. of the domestic dealer to the effect
that the dealer had verified these documents, the assignee is negligent”.
[underlined by the author]
The Supreme Court then went on to express its own view as follows:
“However, it has not been proven on record that in the imported car trade,
the handing over or verification of such documents always takes place in practice.
This can be surmised from the fact that although, when newly registering
imported cars under the Road Transport Vehicle Law, the fact that the applicant
is the genuine owner is a matter which has to be investigated by the registration
authority ex officio (Article 8, subpara.1), submission of such documents is not
required”. [underlined by the author]
“Under such circumstances, the ruling that B was negligent because he had
failed to verify the existence of the documents which prove ownership in
the country of the previous registration (moreover which country or region is
the last place of registration is not clear from the documents or the Car itself)
when B, who is an individual consumer, purchased the Car from Kosei
Manufacturing which is a dealer without any record suggesting that it is a dealer
which handles stolen goods, despite the fact that the documents required for
new registration were all there, brings unnecessary risk to the second hand car
trading business and excessively harms the stability of trade”. [underlined
by the author]
As quoted above, the Supreme Court did not support the view of the Appeal
High Court. The High Court paid more explicit attention to the issue of legal-title
laundering by way of import trade of a stolen car.
The High Court considered the fact that, in import trade practice in Japan,
the only documents necessary for customs procedures are declaration of import, invoice,
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and Bill of landing, and also the fact that, for a new registration of an imported used
car in Japan, the necessary documents are the assignment certificate documented by
the import dealer (not by the foreign exporting dealer), automobile inspection certificate,
and CRF (Clean Report Finding). Considering these facts, the High Court thought that
an imported car dealer can deceive a purchaser or at least neglect confirmation of
the former foreign owner of the car and confirmation of the fact that the car was not stolen.
In fact, according to the fact-finding by the High Court, the Inter Auto Company
dealt with the trade of the car with the exporting dealer in Dubai only through facsimile,
and the former did not receive nor was shown by the latter the assignment certificate
or any other document confirming ownership, or any documentation of car certification
or car inspection certificate.
Moreover, the High Court mentioned that, even though in line with the practice
in Japan, an importing dealer would have kept the documents certifying ownership,
if shown by the foreign counterpart exporting dealer, but that in the disputed case, such
a document was not presented before the court.
As other elements arose which raised the suspicion of laundering, the High
Court mentioned that there was no sufficient proof for maintaining that the car had
really existed in the U.A.E. at the moment of trade. In addition to that, it pointed out
the fact that the consecutive car transactions after Inter Auto’s import took place over
a very short period through Inter Auto, N Motors, and Kosei Manufacturing to B.38
The High Court doubted a superficial and apparent change of owners, disguised through
these transactions.
In conclusion, the High Court held that the doubt regarding laundering has not
been completely cleared.
Supreme Court’s position
When comparing the High Court’s with the Supreme Court’s position, some
characteristics of the Supreme Court’s position come to light. The Supreme Court refers
to the Japanese car import practice. It found that in practice, no handing over or
38 According to the fact-finding, the name of the party who actually made the import declaration was not
Inter Auto.
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verification of documents confirming former genuine ownership takes place in Japan.
However, the point mentioned particularly concerns domestic practice among Japanese
dealers and consumers. Can such a practice be reasonable and justified in terms of
the international context? Moreover, the Supreme Court referred to the administrative
practice of registration. However, can such an administrative practice based on
the Japanese domestic regulatory Act, even though it includes some provisions regarding
private-law issues, justify the Supreme Court’s position against the High Court’s
concern?
Here we find a clear contrast in position between the Supreme Court and
the High Court. What is the most fundamental turning point? We can find it in a small
but crucial detail of difference in reasoning between the two courts. It concerns how to
view the way of proving good faith or the sense of good faith. It leads us to find different
concepts of stable transaction as indicated in the following section of the judgment:
“the ruling that B was negligent because he [himself!] had failed to verify
the existence of the documents which prove ownership in the country of the previous
registration …… when B, who is an individual consumer, purchased the Car
from …..a dealer……brings unnecessary risk to the second hand car trading
business and excessively harms the stability of trade”. [underlined by the author]
We see here that the Supreme Court formulated the issue of good faith,
investigating yet ultimately rejecting the idea according to which, for a consumer
purchaser, it is necessary for him/herself to verify the existence or non-existence of
a registration confirming another genuine owner. Supposedly, a successive purchaser
would be requested again to verify the same point by him/herself. Rejecting such
a view, the perspective of the Supreme Court comes to be focused only on a direct
counterpart seller whose genuine ownership should have been derived from the former
transactions abroad. However, it is not verified in practice in any measure in Japan.39
39 The District Court in the same case displayed a way of thinking similar to the Supreme Court, discussing
the necessity for each transferee, especially B in this case, respectively and individually to verify ownership of
the ultimate transferor (exporter) in the country of export.
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Once the transaction, made with such an importing dealer, is accomplished and
the car’s possession obtained in apparent good faith, the ownership of the domestic
purchaser is now regarded to be superior to any claim based on foreign transaction,
foreign registration, and another kind of good faith based on a foreign market.
Here we can find a particular kind of concept of the stable and secure transaction
with exclusion and enclosure at first realized on the basis of the real-material location
inland and on the basis of parochial practice.40
Contrast with the High Court’s idea
Contrary to the idea regarding proof of good faith, which was rejected by
the Supreme Court, the High Court suggests a different option, according to which
verification by an individual purchaser of the genuine ownership of the exporter abroad
is not strictly necessary by him/herself, but a reliable certificate of a domestic dealer
(importer) on this point also would be sufficient. This idea was reintroduced in
the following section of the Supreme Court’s judgment.
“The original instance court ruled that in trading unregistered foreign cars,
regardless of whether the assignee is a car dealer or a consumer such as B,
unless the assignee checks the assignment certificate accompanied by
the presentation or the handing over of a copy of a document which verifies
the rights of the foreign manufacturer or the former genuine owner such as
a car certificate, or a reliable certificate etc. of the domestic dealer to the effect
that the dealer had verified these documents, the assignee is negligent”.
[underlined by the author]
40 It is certainly impossible to confirm in a general manner that the Japanese Supreme Court held
a particular view on secure transaction, with the reference to this case only. However, in the judgment on another
case on March 8, 1994 (48-3 Minshu 835), the Supreme Court also held that to invalidate the transaction of
the immovable as part of succession, which is contrary to the applicable law for succession (Taiwanese Law), would
seriously harm the “security of transaction” in Japan because there is no way of public notification of the restriction
on heir’s disposition imposed by the foreign applicable law of succession, while the laws of Japan as the place of
the transferred immovable do not stipulate such restriction, as does Taiwanese Law.
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What is the meaning of this difference? The view formulated and held by
the High Court is based on the concept of international commercial transactions in
which good faith transactions are consecutively accumulated and connected with former
transactions. The importing dealer should somehow verify the genuine ownership of
the exporter for connecting different domestic markets, and the successive purchasers
can rely on the good faith relationship of this import transaction as a connection between
different markets.
The transaction is not considered here to be separated and atomically
individualized, but to be connected to the former, building up the accumulated
good-faith relationships. Here we can find another kind of concept of secure and stable
transaction in the international context, namely based on openness and reliance rather
than exclusion and enclosure.
2. Choice-of-law dimension for a secure and stable transaction
Implication of lex loci rei sitae
As discussed above, the principle of lex loci rei sitae has strong implications
for diachronic change in the applicable law. In accordance with this principle,
the applicable law shall diachronically change, due simply to transporting a movable
to another country. The law of the place, in which a movable currently exists, regulates
ownership in an exclusive manner, possibly opposed to the former applicable law. Such
an exclusive ruling of the current lex loci rei sitae enables the break-off of legal titles
recognized by the former lex loci rei sitae.41 This kind of non-causality of the current
41 In this sense, the principle of lex loci rei sitae itself implies a possible obstacle to international commerce
developing through different countries. Regarding conflict-of-laws treatment, another element necessary for rendering
cross-border commerce more secure and stable is the commensurability of legal titles to be recognized by different
domestic laws (e.g. between “property”, “Eigenthum”, “propriété”, and “Sho-yû-ken[所有権]”) and the universal
recognition and respect of such a legal title regarded as a universally commensurable unit of legal right. The
critical point is how to conceptualize such a universally commensurable legal unit, more precisely whether or not
the ownership is an appropriate and unique unit for universal recognition. This issue concerns a more general and
difficult problem of how to construct the comprehensive structure (that is to say the “System”) composed of legal
institutions.
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lex loci rei sitae in the international context also enables laundering of legal titles by
way of particular rules of the applicable law fixed simply on the basis of the physical
existence of the movable at that moment. Therefore, it is not difficult to suppose a strong
incentive to willingly bring a movable into a country whose laws authorize opposition
against a claim based on a legal title recognized by the former lex loci rei sitae.
Causal good faith and non-causal good faith
Even though the Supreme Court and Japanese scholars acknowledged a certain
kind of “security of transaction” to be realized in some cases by way of the principle
of the lex loci rei sitae, excluding connections deriving from former applicable laws in
a non-causal manner in the international context, such a concept of transaction security
and stability appears very closed and parochial, with the focus on the transaction based
on the physical existence within the country at the current moment. There might be
doubts about whether we cannot suppose another kind of secure and stable transaction
in the international context.
As for the diachronic change in applicable law, priority is given to the new law,
enabling it to exclude claims based on the former applicable law. In addition to this
diachronic perspective (or, in a confused manner, not to clearly differentiate between
the perspectives), and regarding the synchronic perspective of choice-of-law, the physical
existence is given priority, according to the principle of lex loci rei sitae. If the law of
the place of current existence of a movable, in terms of the substantive law, regulates
the protection of ownership acknowledged by itself by way of non-causality, particularly
for import and domestic transactions based on the physical existence within the country,
the principle of lex loci rei sitae, regarding choice-of-law treatment in terms of diachronic
and synchronic perspectives, is very coherent with such a rule of substantive law of
the country.
However, it is at least still possible for us to imagine another kind of international
transaction different from that based on the material-oriented concept of secure and
For a more detailed theoretical analysis, see HARATA (supra note*), particularly p. 378 note 53; 360 note
96; 346 note 128 and 129. For the concept of “System”, see HARATA, An interim report on Savigny’s methodology and
his founding of a modern historical jurisprudence, The University of Tokyo Law Review, vol. 8 (2013) pp.125-143.
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stable transaction, which leads to support for non-causality in the substantive law, and
also for the principle of lex loci rei sitae in the conflict-of-laws. In such another kind
of transaction, the confirmation of the legal title of the seller and the good faith between
the parties to the transaction due to verification of legal title would be more crucial than
the material object itself or its physical existence. Certain consecutive transactions
would be connected on the basis of connected and accumulated good faith, and
the causal relation between the transfer of ownership and the obligation relation of
the transactions would be recognized, due to and with respect for the good faith relation.
To this kind of transaction based on causal good faith, the adoption of the exclusive
rule of the current lex loci rei sitae is destructive, cutting off individually the connected
and accumulated causal good faith relations.
In the Supreme Court’s judgment, the adoption of the criterion of the place of
primary use, separated from the place of actual existence, could have led to attention
being paid to such a causal relationship of international commerce. Nevertheless, it is
difficult to confirm that the Supreme Court dealt with any serious and detailed analysis
focused on the different characteristics of the transaction. Evidence of concern regarding
the issue of how to deal with this different kind of transaction based on causal good
faith is not easy to find in the Supreme Court’s judgment.
Solutions other than lex loci rei sitae in P.I.L. history
Historically speaking, the application of the principle of lex loci rei sitae to
movable property in general was not a common or universal phenomenon, but a relatively
new trend.42
Earlier, particularly in England, France, Italy, etc., another idea had been broadly
adopted, according to which the lex loci rei sitae principle generally applied in
an absolute manner only to immovable. As for movables, however, the transfer of property
should in principle be regulated by the law of the domicile of the transferor owner.43
42 See HARATA (supra note*) 344-365, 399.
43 Such an idea was prominent until the first half of the 19th century, at least in academia. For instance, see
J. STORY, Commentaries on the Conflict of Laws, 2nd ed. (1841) 552-553; FOELIX, Traité du droit international
privé, 2nd ed. (1847); ROCCO, Dell’uso e autorità delle leggi del regno delle due Sicilie (1837) p.125-26, 137, 139.
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The reason for this different treatment of movable and immovable property was that,
for movables, the acquisition and transfer of property by way of international commerce
should be sure and stable, and independent from the accidental location of objects.44
One can easily imagine here the idea of a virtual sphere of international commerce
developing away from the real, material sphere. The principle of the transferor’s domicile
was expected to work for stabilizing international commerce by linking the consecutive
good faith transactions based on the market of the owner.45
On the other hand, and for the first time, the principle of lex loci rei sitae has
become predominant, particularly in Germany, since the first half of the 19th century,46
giving prior consideration to the real holding, occupation, or possession of movables
and to a certain kind of commerce in favor of such a real-material-oriented social
relationship. It is remarkable that the real-material-oriented principle of lex loci rei sitae
had a particular background of a social structure in Germany different from other,
commercially more developed European countries.47
For example, the non-causal relationship of ownership transfer disconnected
from contract obligation, and the non-causal relationship between the bill of exchange
and the substantial obligation, reflect similar aspects of the whole legal structure
characterizing German society as well as this principle of lex loci rei sitae.
44 As for the adoption of the idea in 13th to 14th century Italy, see the interim report of study in HARATA
(supra note*) 356-58.
45 However, there remain conflict-of-laws issues regarding the physical control or the possession of
the movable. As for this point, the law of the transferor’s domicile has been generally deemed to pave the way for
the lex loci rei sitae.
A more difficult conflict-of-laws issue is the conflict between several concurrent laws on the acquisition
of legal titles, for instance the conflict between the law of the transferor’s domicile, the lex loci contractus, and the lex
loci rei sitae which acknowledges the immediate acquisition of ownership due to the possession based on a transaction.
While, for these issues, the doctrine supporting the law of the transferor’s domicile has not successfully
produced a convincing solution, it is still remarkable that it took into serious consideration the stability of international
commerce based on the consecutive secure transactions of legal titles, independently of the place of physical existence.
46 As influential doctrines, see SAVIGNY, System des heutigen Römischen Rechts, vol.8 (1849) 171-72,
176-77. WÄCHTER, Über die Collision der Privatrechtsgesetze verschiedener Staaten, XXV AcP (1842) 384ss.
47 This connection between the choice-of-law rule of lex loci rei sitae and the considered socio-economic
structure was most apparent in Savigny’s whole theory of private law. See HARATA (supra note*) 358-65.
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There functioned a particular sense of transaction or a particular sense of security and
stability of transaction. This means that, once one has obtained a real-material object
in one’s own hand by way of the transaction, the acquired ownership becomes stable
and secure, being duly unresponsive to some possible defect of the transaction having
led to this transfer of title.48 The defect of the transaction may call for the recovery of
the situation before the materially accomplished transaction, on the basis of a causal
relationship. However, the German concept of non-causality excludes such a claim of
returning to the former situation of ownership. The decisive element here is to obtain
the real material, and maintain occupation and possession.
If this kind of sense of security and stability of transaction is combined with
the choice-of-law issue in the form of lex loci rei sitae, it leads us to the very idea of
legal-title laundering by way of legal institutional arbitrage.
The principle of the transferor’s domicile was still maintained in opposition to
the lex loci rei sitae principle for a while after the middle of the 19th century, in countries
other than Germany.49 Moreover, at the end of the 19th century, the principle of nationality
was also alleged, mainly by Italian and Belgian scholars, to apply to the choice-of-law
regarding the transfer of movable property.50
As argued here, it is necessary to pay attention to a socio-structural background
against which the difference of choice-of-law rules on movable property transfer
appeared. Since the beginning of the 20th century, the lex loci rei sitae principle has
been more and more predominant in European countries other than Germany.
This historical process took place during the same period in which territorial sovereign
nation states began to appear as socio-economic real entities in international society,
which began to mutually recognize the independent and exclusive rule within their own
48 But see art. 935 of German Civil Code (supra note 6) in comparison with art. 192 and 193 of Japanese
Civil Code.
49 See supra note 43.
50 For instance P. FIORE, Diritto internazionale privato, vol.2, 4th ed. (1904) pp.294ss; Laurent’s project
on the Belgian Civil Code promulgated in 1882 (art.13). See also the draft of the Japanese Civil Code (art.8), which
was influenced by Laurent’s view.
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territories, as eminent domains, in a similar manner as owners treat their private property.51
Although it is not possible here for us to go on to scrutinize this historical process,
this periodical coincidence might suggest some historical change in the characteristics
of international commerce as well as our general understanding of international
economy.52
The choice-of-law rule bears, as indicated above, some close relation with
the concept of good faith and the concept of “secure and stable transaction.” Moreover,
all these points relate to the historical background of socio-economic structure. Further
study shall be necessary on the choice-of-law issues set within this historical context.53
V. Conclusion: the dominant view of secure
and stable transaction in Japan
Choice-of-law issue
If understood in a favorable sense, the Supreme Court tried to find a way to
coordinate the law of the place of registration and the law of the place of the object.
However, it must be said that this attempt at formulation failed.
51 What was historically significant since the last decades of the 19th century was the impact of the concept
of eminent domain, relating to the nationalization (expropriation and confiscation) and the declaration of permanent
sovereignty over natural resources. For the concept of eminent domain, see LEHNHOFF, Development of the concept
of eminent domain 42 Colum. L. Rev. 596 (1942).
52 Moreover, the establishment of the legal framework of international society, composed only of “Public
International Law” and domestic laws, shall be examined in the same historical context, including the diffusion of
absolute immunity of foreign states before a domestic court and the mutual refusal of application of foreign public laws.
53 The changes of discourse shown by Cheshire are very interesting in terms of the relationship between
the choice-of-law issues and the characteristics of international trade. Since the first edition of Private International
Law (1935) and for a while (very probably until the 3rd edition in 1948), Cheshire showed his interest in and attempt to
establish choice-of-law rules for legally submitting both aspects of obligation and ownership of the same transaction
in a comprehensive manner to the market on which the parties to the transaction relied. This kind of comprehensive
treatment enables the causal relationship between transfer of ownership and contractual obligation incorporated in
the same transaction to be maintained. However, his idea has gradually drawn on the gravity of physical existence,
adopting the principle of lex loci rei sitae to a broader extent. See HARATA (supra note*) 354 note 115.
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More serious concern should be given to the closed and parochial sense of trade
appearing among Japanese scholars in the form of ignorance of the issues regarding
the laundering of legal titles by way of importing stolen movables. This intellectual
attitude of ignorance has a very profound and close relationship with the concept of
secure and stable trade for Japanese society.
Japanese legal concept of stable transaction
The Japanese Supreme Court held one particular version of the concept of stable
trade which is based on domestic practice, being mainly institutionalized for domestic
transactions. However, the Court also applied this concept to international trade.
The exclusiveness and closeness of this concept of stable trade leads to discounting any
causal relationship developed abroad and based on good faith. Once a movable object
entered within the country’s boundaries, the international good faith relations previously
connected and accumulated might easily be reset, and the legal title of a stolen movable
easily laundered in accordance with Japanese domestic law which the Court interpreted
in a manner favorable to legal-title laundering by way of import.
Unresolved general problem for international commerce
Japan devised a modern Civil Code at the end of the 19th century, modeled after
the “Western Principles,”54 without, however, taking seriously into consideration certain
socio-structural differences between Western countries which could lead to a different
concept of secure and stable trade and also to different choice-of-law rules.
Even now, as shown in this article, the way of thinking of Japanese courts and
scholars shows the parochial and closed characteristics in terms of international
commerce. The Japanese courts and scholars in particular are not very much aware of
the possible impact of such a formulation and reasoning, such as those held by
the Supreme Court, based on a particular view in terms of both domestic substantive
law and choice-of-law.
54 For the Japanese codification of P.I.L. as part of the outcome of “legal modernization” or “Westernization”,
see HARATA, L’exterritorialité (supra note 9).
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วารสารกฎหมาย ศาลอทุ ธรณค์ ดชี ำ�นัญพเิ ศษ
On the other hand, such issues that came to light deal not only with the Japanese
market, but also other markets and the international coordination among them. As for
the choice-of-law issues, the principle of lex loci rei sitae, even though more and more
generally adopted in many countries since the last century, shall be reassessed in relation
with the socio-economic structure of international society as a whole. The possible
divergence on the concept of secure and stable trade and on the legal institutions related
to this concept shall be carefully examined in order to construct an appropriate legal
framework of international commerce. This shall apply not only to Japan, but more
broadly to all those dealing with the issue of legal-title laundering.
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Technology and Artificial Intelligence in
International Dispute Resolution and Arbitration -
Disruption, Destruction or Deliverance?
Steve Ngo*
I. START: LOOMIS AND ENTER THE USE OF COMPUTER
SCIENCE IN THE SCIENCE OF JUDGING.
Starting the machinery of this discourse, the widely discussed topic of Artificial
Intelligence (AI) in judicial decision making would be appropriate to be first mentioned,
in the United States Wisconsin Supreme Court case of State v. Loomis.1 Key facts in
Loomis; the defendant, Eric Loomis was charged in connection with a drive-by shooting
and it was reported that before the sentencing hearing, the court ordered the defendant
to undergo an assessment of the risk of re-offending using software called ‘Correctional
Offender Management Profiling for Alternative Sanctions’ or COMPAS. Yet the trial
judge considered the software’s report and adjudged that the defendant was identified
by the software through its assessment ‘as an individual who is a high risk to the
community’ and he would commit more crimes.2 Nevertheless, Loomis appealed against
the lower court’s decision, asserting that his right to due process was violated by the
judge’s consideration of a report produced by the software product which he was unable
* International arbitrator, academic and arbitration specialist based in Singapore, also founding President
of Beihai Asia International Arbitration Centre. He can be contacted at [email protected]. This article is in
part based on a lecture delivered at the Maxwell Lecture, Maxwell Chambers, Singapore, 13 December 2018.
1 881 N.W.2d 749 Wis (2016).
2 Adam Liptak, ‘Sent to Prison by a Software Program’s Secret Algorithms,’N.Y. Times (New York, 1 May
2017)/ <https://www.nytimes.com/2017/05/01/us/politics/sent-to-prison-by-a-software-programs-secret-algorithms.
html>/ accessed 31 March 2021
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วารสารกฎหมาย ศาลอทุ ธรณ์คดชี �ำ นญั พิเศษ
to inspect or challenge; he had no way of knowing how the software had reached its
conclusion. Elucidating the lower court’s decision, the Wisconsin Supreme Court, among
others, held that the software was merely a tool available to the court and that
‘consideration’ of the software is permissible but reliance on it for the sentence imposed
is not permissible.3 Though this may not yet directly related to international arbitration,
in time to come it is likely to when technology and AI play a more prominent role in
legal decision-making.
Incidentally, we are living in times where algorithms influence or control how
decisions are made about individuals, in a rather wide variety of instances4 that are
already affecting us. Outside of the judicial setting, we are all subject to some form of
judging by algorithms, therefore, in one way or another. Most commonly is credit
scoring which is widely used today, affecting lending decisions; or the assignment of
seats on an aeroplane for passengers who decline to pay more for preferred seat selection
or even electronic marketing emails. Of course, some of these actions performed by
algorithms may not even constitute important decision making unlike if it involves
an issue of significant importance affecting someone’s life. In the realm of science
fiction, they are often well represented in films, one such notable one is Minority Report
based on a science fiction book written by Philip K. Dick which tells about the use of
psychics called ‘precogs’ within a special police department to arrest criminals based
on prescience. Criminals will be arrested in the nick of time before the crimes were
committed, already with the elements of guilty mind and act present, this way, there
will be no loss of lives. However, there was a serious flaw in the system which resulted
in the department being disbanded and those previously convicted, pardoned and
released.
Coming back to Loomis, investigative journalism organisation, ProPublica
claimed that the COMPAS algorithm is biased against blacks that the algorithm ‘[w]as
3 Supreme Court of Wisconsin decision, at ¶ 129, <https://www.leagle.com/decision/inwico20160713i48>
accessed: 31 March 2021
4 See, Government Office for Science, Artificial Intelligence: Opportunities and Implications for the Future
of Decision Making Government Office for Science <https://assets.publishing.service.gov.uk/government/uploads/
system/uploads/attachment_data/file/566075/gs-16-19-artificial-intelligence-ai-report.pdf>accessed 1 April 2021
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particularly likely to falsely flag black defendants as future criminals, wrongly labelling
them this way at almost twice the rate as white defendants’ and ‘White defendants were
mislabelled as low risk more often than black defendants.’5 Some scholars have argued
that it is not against the use of predictive justice but concerned about its level of
transparency.6 This is understandably so because transparency is central when it involves
algorithms that make important decisions, especially when ‘scoring’ is involved because
this tends to be subjective thus can lead to the call for greater scrutiny. There is also the
risk of human developing blind reliance and accepting computer-generated outcomes
wholly without questioning. This may arise from our belief that computers are accurate
as they are machines. How often do we question the calculations rendered by electronic
calculators or spreadsheets? We might think, ‘who in the right mind would quarrel or
argue with a machine?’. Incidentally, the words of Lord Denning come to mind in
Thornton v Shoe Lane Parking Ltd 7 pertaining to an automated parking ticket dispenser,
where ‘one may protest to the machine, even swear at it but it will remain unmoved.’
Would it be a surprise that AI will make its presence in arbitration and dispute
resolution when a myriad of commercial software and technological solutions are already
being marketed and widely available? In arbitration today, the parties and tribunals are
confronted with complex subject technical issues requiring the expertise of expert
witnesses; they are also confronted with conflicting expert views or opinions as well as
the question of bias-ness. Computers are thought to be unbiased since they are ‘robots’
and since they are also emotionless, they are consistent and cannot be influenced.
In terms of the ability to undertake complex tasks quicker than a human can, AI can
also be developed to perform multi-tasking functions involving a vast amount of data,
for instance when judges or arbitrators are confronted with ascertaining loss of future
profits that would require them to take into account financial calculation models,
5 Jeff J Angwin, ‘Machine Bias,’ ProPublica (New York, 23 May 2016) <https://www.propublica.org/
article/machine-bias-risk-assessments-in-criminal-sentencing> accessed March 23, 2021
6 Cynthia Rudin, Caroline Wang and Beau Coker, ‘The Age of Secrecy and Unfairness in Recidivism
Prediction’ (2020) 2(1) Harvard Data Science Review <https://hdsr.mitpress.mit.edu/pub/7z10o269/release/4>
accessed 30 March 2021
7 EWCA Civ 2 (1970)
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historical data, market trend and trade forecasts.
The growth of international dispute resolution and arbitration have also resulted
in spurring the growth of other ancillary industries including information technology
development. In aiding the courts, arbitrators and counsels are myriads of technological
tools for ‘e-Discovery’, data mining and forensic investigations. Arbitration third party
funders may have also used financial modelling software to generate their underwriting
reports. Going back to technology in aiding decision making, whatever the extent of
the use of AI in arbitration, it should provide the fundamental assurance to its users that
it will not interfere in the decision making and violate the integrity of the dispute
resolution process while automating it. Otherwise, all the written laws by men seeking
to prevent unlawful interference in arbitration or adjudicatory process will come to
nought if technology can mischievously alter the course of justice through surreptitious
means, breaching the trust men have put in it.
II. OVERVIEW OF TECHNOLOGY, AUTOMATION
AND SCIENCE IN DISPUTE RESOLUTION
We are constantly in search of tools for the betterment of our work quality and
life. There is nothing evil about modernisation or innovation. For instance, we could
still be carrying 8-kilogramme typewriters with us on business trips instead of computer
laptops should there be no technological advancement. We need and rely on electronic
tools that have changed the way we work today, for example, the evolution from snail
to electronic mails, and carbon paper to word processor programs as well as printers.
There are now many legal support software and applications out there in the market
ranging from information retrieval, data extraction applications to cloud storage and
those capable of performing intelligent data sorting tasks. With the usage of the internet
becoming common today, information can be shared live, transcending boundaries for
collaborative data sharing between counsels and clients located in different geographical
locations. In the context of international dispute resolution and arbitration, technology
can play an important role in aiding its processes. In complex disputes, the parties do
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turn to applications to help extract data in preparation for proceedings, which can include
but not limited to emails, documents, photographs, databases, audio files, video files,
social media posts, website contents, etc. Electronic discovery (‘e-discovery’) is also
becoming popular, though it is predominant in investigations or court litigations where
information requested are stored in electronic form, also known as ‘Electronically Stored
Information’ or ‘ESI’ and placed in a legal hold.
Data extraction to build the parties’ claims and defences are very crucial in
litigation or arbitration, where the facts of the cases can play a crucial role. With the
convenience of electronic mail communication, many of us are somewhat guilty of
proliferating email exchanges, consequently, they become difficult to keep track of or
locate. The habit of clicking ‘reply all’ or the urge to reply for the sake of doing so can
swiftly create a mountain of data. Employees leave and memories fade but data stays.
Nevertheless, the enormity of data and information cannot be underestimated. Using
the parlance of natural disaster, parties may find themselves caught in a data tsunami
that could overwhelm their case, or experiencing ‘analysis paralysis’ due to the inability
to retrieve only the key information needed which are in their favour. Tools for data
mining are essential to search, compile and extract the required as well as correct
communications or documents. Data analysis software in disputes can assist counsels
with organising pertinent facts quickly and rather accurately. Such software plays
a significant role since many a time in arbitrations, successful outcomes rely upon facts
and not on legal arguments alone. Whilst these are tools and not necessarily performing
AI functions, they play an integral role in simplifying other tedious tasks of sieving
through information accumulated over the years or worst still, decades. Whereas in
disputes involving technical realms such as engineering and construction, there will be
technical drawings or calculation outputs in various proprietary electronic files that
need to be retrieved and relied upon.
It is important to mention would be applications for online dispute resolution
and electronic hearings. In cross-border transactions, the parties are likely to be located
in different geographical locations. Particularly in instances of small claims, it might
not make economic sense for parties to travel to another country outside of their domicile
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วารสารกฎหมาย ศาลอทุ ธรณ์คดีช�ำ นัญพเิ ศษ
for the conduct of the proceedings. Following the Covid-19 pandemic in 2020, virtual
or hybrid hearings are required and accepted. In time to come, there should also be
a demand for online mediation application, allowing the parties, particularly those from
overseas to mediate online perhaps with software functions enabling the submission of
settlement offers, perhaps digitising the process of BATNA8 in mediation and negotiation.
Not only that this offers a relatively economical option for mediation, parties need
not meet in person which is somewhat suitable for Asian parties who may prefer
a non-confrontational approach to resolving disputes.9
Turning to artificial intelligence or commonly known by its acronym ‘AI’,
in the beginning, when men created algorithms, they might have thought, ‘let us make
artificial intelligence in our own image’ intending for it to replicate them. Arguably,
any discourse on AI cannot commence without first talking about algorithms, but no
doubt the concept of the algorithm has changed quite substantially since its discovery
in the field of mathematics and during the era of the medieval Islamic polymath,
Muhammad Ibn Musa Al-Khwarizmi who lent his Latinized name to ‘algorithm.’
However contemporary AI thinkers such as the late Marvin Minsky was said to have
thought about a different aspect of algorithm, empowering computing systems with the
gift of intelligence.10 Nevertheless, algorithms as instructions or sequence that calculate
or performed automated reasoning, originate from manmade origin. This is so because
computers are only machines and they cannot think of their own volition, in other words,
computers do what we tell them to. In the meantime, the concept of algorithms is perhaps
best understood as what the old saying goes, ‘we reap what we sow,’whereas in computer
science language, the term ‘GIGO’ or ‘garbage in, garbage out’ applies, denoting that
‘bad input will result in bad output’ also we get what we feed into the system. However,
AI can also perform massive ‘quantitative’ tasks, not necessarily ‘qualitative’,
8 Best Alternative To a Negotiated Agreement
9 ‘[I]n certain societies, a non-confrontational approach is prized’ see Tjong Very Sumito and others v
Antig Investments Pte Ltd [2009] SGCA 41 [61]
10 Osonde Osoba and William Welser IV, ‘An Intelligence in Our Image: The Risks of Bias and Errors
in Artificial Intelligence’ (RAND Corporation, 2017) <https://www.rand.org/pubs/research_reports/RR1744.html>
accessed 3 May 2019
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that would otherwise take many human beings to undertake with a much longer time.
For instance, machine translation of documents where the algorithms allow the computer
to work rapidly in identifying words and sentences, matching them against its dictionary-
database, counterchecking against a set of data containing ‘grammatical rules’ which
have been trained by human to teach the AI to translate it more accurately. This way,
the machine can distinguish ‘dying to see you’ being relating to eager anticipation to
meet someone rather than to do with death.
However, could AI wholly substitute human arbitrators? Rather, we should ask
ourselves first whether in an arbitration or litigation we are willing to be subjected to
the procedures of feeding our pleadings and arguments into a machine for it to churn
out an outcome basing on algorithms. The use of AI in decision making has been cited
to include advanced case-law search engines, assistance in drafting needs, analysis and
categorisation of contracts according to criteria and detection of divergence or
incompatibility.11 These are not tasks out of science fiction books or films but in fact,
they are helpful tools where without which, it will take laborious efforts manually.
At its most basic level, automation and machine assistance could perform beneficial
‘smart’ tasks such as data analytics in dispute resolution, for instance, to compare data,
locate specific keywords from within documents or emails and perform data analysis.
The use of AI in judicial decision-making is also largely thought not to be making the
decision or providing legal reasoning but as tools to identify the ‘correlations between
different parameters of a decision.’12 This can also be helpful in international arbitration
which commonly involved arbitrators having to deal with governing laws of the
contractual dispute which are foreign to them.
Another aspect is ‘predictive justice’ where AI due to its ability to process a vast
amount of judicial decisions rapidly to generate the outcome in a particular case.
In a report by the Secretary-General of the Council of Europe, predictive justice is said
11 Council of Europe, ‘European Commission for the Efficiency of Justice (CEPEJ) European Ethical
Charter on the Use of Artificial Intelligence in Judicial Systems and Their Environment’ <https://rm.coe.int/ethical-
charter-en-for-publication-4-december-2018/16808f699c> para 15
12 ibid 29.
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to be able to increase the foreseeability of judicial process by ‘assessing the chances of
success of a particular trial, by ensuring transparency of the work of judges and
by harmonising the development of case law.’13 The use of AI in legal proceedings can
also be collaborative than be seen as taking over mankind; the English High Court
in Pyrrho Investments Ltd & ors v MWB Property Ltd & ors14 handed down a decision
allowing the use of ‘predictive coding’ for e-discovery. Briefly, the case involved
a massive disclosure of documents which are more than 17.6 million15 therefore the use
of predictive coding can help to perform searches and assess the relevance of
the electronically stored information rapidly than if they were to be reviewed manually.
In the decision, the Chancery Master referred to a US Federal Court case and cited
the general comments made, inter alia, ‘The Court recognises that computer-assisted
review is not a magic, Staples-easy-Button, solution appropriate for all cases.
The technology exists and should be used where appropriate, but it is not a case of
machine replacing humans: it is the process used and the interaction of man and machine
that the court needs to examine.’16
III. DISRUPTIVE OR DESTRUCTIVE?
In a 2009 American film Up in the Air, the main protagonist Ryan is a veteran
consultant hired by companies to assists with the highly emotive task of employee
retrenchment. One day, his firm hired a clever but inexperienced executive who
developed a video conferencing platform that can conduct retrenchment exercise
via videoconferencing thus increasing productivity and reducing travel costs. Ryan
protested because he opined such a process to be hazardously impersonal and that there
is a methodology to what he does as well as a reason why it is working. Ryan then took
13 Council of Europe, ‘State of democracy, human rights and the rule of law – role of institutions, threats to
institutions, Report by the Secretary General of the Council of Europe’ (2018) <https://rm.coe.int/state-of-democracy-
human-rights-and-the-rule-of-law-role-of-institutio/168086c0c5> 25.
14 [2016] EWHC 256 (Ch)
15 ibid [5]
16 ibid [28]
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the young executive on one of his work tour where the latter tried her ‘experimental’
online system on one of their client’s employee. Tragedy struck when the employee
who was retrenched using the online program took her life and the young executive left
the job out of guilt. The firm’s plan of switching to the online method thus came to an
end. This story is apt when it comes to discussing the potential ‘disruptive’or ‘destructive’
and where technology fits into our present human endeavours.
In recent times, proponents of AI in arbitration have suggested that ‘robot
arbitrators,’ in place of human beings, are unbiased and neutral since they do not have
emotions as well as cannot favour anyone. They will not succumb to emotions or
influence and they strictly follow algorithms. However, algorithms are based on what
we feed into the system. It is said that ‘a prime hallmark of intelligence is the ability to
adapt or learn inductively from ‘experience’ (i.e., data)’.17 Arguably, AI does not possess
cognitive abilities and rely on what we tell it to do first. There is a highly amusing story
in teaching how to understand philosophy through fictional anecdotes.18 Below is
an adapted version of one of the stories which quite succinctly shows that mere
regurgitating of information cannot be equated to cognitive ability:
The new chief of a Native American tribe who was raised in the ways of the
modern world… In the autumn, he was asked by his people about the weather
and so to err on the side of caution, he instructed them to collect wood for a cold
winter. Upon reflection, he thought he should ask the National Weather Service…
and the answer was the winter will be quite cold. Immediately, he told his tribe
to collect even more wood. A few weeks later, he called the local National
Weather Service and this time he was told that the winter looks like it is going
to be very cold… he immediately summoned his tribe to collect every single
scrap of wood available. Finally, a few weeks later the chief called the weather
17 Osonde Osoba, ‘An Intelligence in Our Image: The Risks of Bias and Errors in Artificial Intelligence’
(n 10) 5.
18 Thomas Cathcart and Daniel Klein, Plato and a Platypus walk into a Bar…, (Penguin Books, 2007)
42- 43.
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office again and this time he was told that winter is going to be the coldest on
record. The chief being part concerned and curious then asked, ‘How can you
be so sure?’ to which the meteorologist replied, ‘The local Native Americans
are collecting wood like crazy’.
[Emphasis added]
On 23 March 2016, Microsoft released Tay, an AI chatterbot that was supposed
to mimic a 19-year old American girl learning and interacting with human users of
Twitter. However, within 16 hours of its release, Tay had to be taken down as it started
posting offensive and inflammatory tweets instead of fulfilling its intended purposes as
a scientific attempt to create the AI of an innocent and conversational bot eager to learn
from human. According to a statement by Microsoft, Tay’s horrendous behaviour was
blamed on a ‘coordinated attack by a subset of people exploited a vulnerability in Tay’
and it would appear that this was the result of an exploitation of the chatbot’s ‘repeat
after me’ function,19 in other words, Tay’s misbehaviour was consequent to it been taught
all the wrong things by humans. An algorithm is a reflection of what we want it to be,
as well as the data we feed it with. According to some AI thinkers and researchers,
many of the key algorithms that affect public life are also considered proprietary or
trade secrets. Consequently, ‘such opaque, uninformed understanding of algorithms
impedes intelligent public discourse on their shortcomings.’20 Must algorithms be open
to public scrutiny, validation or verification? If so, how will it be regulated, by who and
according to what standard?
It is also worthwhile considering the case of Catalina v Norma21 involving
a Portuguese owned vessel, Catalina. The sole arbitrator was heard by the parties saying
that ‘Italians are liars and so as the Portuguese’whereas the other party being Norwegians
19 Abby Ohlheiser, “Trolls Turned Tay, Microsoft’s Fun Millennial AI Bot, into a Genocidal Maniac’
Washington Post (Washington, 25 March 2016) <https://www.washingtonpost.com/news/the-intersect/wp/2016/03/24/
the-internet-turned-tay-microsofts-fun-millennial-ai-bot-into-a-genocidal-maniac/> accessed 23 March 2021
20 Osonde Osoba, ‘An Intelligence in Our Image: The Risks of Bias and Errors in Artificial Intelligence’
(n 10) 6.
21 61 Lloyd’s Law Reports 360 et seq (1938)
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are ‘truthful people’ according to his experience thus he would accept the evidence of
the Norwegian master of one of the vessel. The arbitrator formed the opinion based on
his perverted views and this had influenced his mindset. However human can learn from
mistakes and be corrected so that in future, a different decision would be taken because
of our cognitive abilities. It is like how our brain and sensory taught us that touching
a hot kettle will burn our fingers thus we instinctively stay away from not only a kettle
but a naked flame or hot surface. Algorithms are a set of command that once executed,
the process will take its course; they go by the ‘book’ so to speak. Similar to making
a computerised trade execution, once the command is given it is no longer possible to
halt or influence the command. Therefore the integrity of the algorithm we rely on is
important, for a defect can lead to undesirable consequences and worst still, corrupted
outcomes.
The human mind continuously thinks and learn as such, judges and arbitrators
may make present decisions that are different from the past or in the future because our
cognitive abilities allow us to consider new developments or changes to our environment.
The Greek philosopher Socrates was said to have described the four attributes of a good
judge being, ‘To hear courteously; to answer wisely; to consider soberly, and to decide
impartially,’ not attributes that can be attached to AI. To what extent can ‘robot
arbitrators’ think and reason, to produce sound, well-reasoned arbitration awards?
According to American anthropologist, Dawn Prince-Hughes, personhood is defined
as ‘self-awareness; comprehension of past, present, and future; the ability to understand
complex rules and their consequences on emotional levels; the ability to choose to risk
those consequences, a capacity for empathy, and the ability to think abstractly.’22
In arbitration, the principle of ‘costs follows the event’ will be applicable meaning costs
will typically be awarded to the successful party but this is at the discretion of the arbitral
tribunal, taking into consideration the conduct of the successful party in the proceedings.
Discretion is not easy to interpret or define, can it be successfully reduced to
an algorithm?
22 Dawn Prince-Hughes, Songs of the Gorilla Nation my journey through autism (Harmony Books,
2004) 206
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Arguments for a higher form of AI can sometimes appear going overboard.
One such argument suggests that because the UNCITRAL Model Law on International
Commercial Arbitration (‘UNCITRAL Model Law’) did not mention that an arbitrator
needs to be a person23 therefore nothing prohibits a machine from becoming an arbitrator.
Yet we also know that according to the UNCITRAL Model Law, the award (decision)
shall state the reasons upon which it is based, unless the parties have agreed that
no reasons are to be given,24 therefore with no evidence that AI-based decision making
can provide reasons, why would the parties turn to a wholly AI arbitration? This is
bearing in mind also the ramifications of trying to enforce an arbitral award made
by AI arbitrators under the New York Convention25 which could be subjected to challenge
for its recognition and enforcement because the composition of the tribunal or arbitral
procedure was not in accordance with the agreement of the parties26 or contrary to the
public policy of the country where recognition or enforcement is sought.27 Fundamentally,
AI arbitrator rendered arbitral award will also present a doctrinal issue as to whether it
validly constitute ‘award’ under the meaning of the New York Convention.28
To think that algorithms and AI cannot be biased would need a serious rethinking.
Two researchers, Friedman and Nissenbaum29 have examined the Semi-Automated
Business Reservations Environment (‘SABRE’) flight booking system, sponsored by
American Airlines, which was used widely by travel agents to identify and reserve
airline flights for their customers. These reservation systems seem straightforward.
When a travel agent types in a customer’s travel requirements, the reservation system
searches a database of flights and retrieves all reasonable flight options that meet
or come close to the customer’s requirements. These options then are ranked according
23 Art. 2(b) UNCITRAL Model Law on International Commercial Arbitration 1985 (ML 1985)
24 ML 1985, art 31(2)
25 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Award (NYC
1958), made in New York on 10 June 1958
26 NYC 1958, art V(1)(d)
27 NYC 1958, art V(2)(b)
28 NYC 1958, art 2
29 Batya Friedman and Helen Nissenbaum, ‘Bias in Computer Systems’ (1996) ACM Transactions on
Information Systems, Vol. 14, No. 3, 330–347
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to various criteria, giving priority to nonstop flights, more direct routes, and minimal
total travel time. But the sorting always presented agents with flights from the sponsoring
American Airlines on the first page even when other airlines had cheaper or more direct
flights for the same query. This led to allegations of anticompetitive practices and thus,
American Airlines had to make the SABRE system more transparent. Algorithms can
indeed misbehave, resulting in incorrect, inequitable, or perhaps even hazardous
consequences. It was also reported that whilst AI is getting closer to acquiring human-
like abilities, they are also absorbing deeply ingrained biases.30According to a computer
scientist quoted in the report, ‘A lot of people are saying this is showing that AI is
prejudiced. No. This is showing we’re prejudiced and that AI is learning it.’31
IV. DELIVERANCE - TECHNOLOGY IN TIMES OF PANDEMIC
It would be necessary to highlight some salient points on the adoption of
technology due to recent events besetting us. The world came under siege by
the COVID-19 pandemic which led to a mad scramble for temporary solutions or
alternative to the way we have been conducting our business affairs and lives before
the pandemic. In particular, the way we conduct international dispute resolution is also
not spared by the pandemic. Technology has stepped in to provide a solution to
the current impediments of, inter alia, inability to meet face to face for meetings or
proceedings.32 There has been a mixed bag of feedback about the conduct of dispute
resolution virtually or online, with sceptics pro tempore accepting it as a transitory
solution whereas proponents are celebrating. With respect, there was unlikely to be
a moment of epiphany when parties turned to ODR (Online Dispute Resolution) during
30 Hannah Devlin, ‘AI Programs Exhibit Racial and Gender Biases, Research Reveals’ The Guardian
(London, 13 April 2017) <https://www.theguardian.com/technology/2017/apr/13/ai-programs-exhibit-racist-and-
sexist-biases-research-reveals> accessed 1 April 2021
31 ibid
32 See e.g., ‘Covid-19 forces courts to hold proceedings online’ The Economist (London, 14 June 2020) <
https://www.economist.com/international/2020/06/14/covid-19-forces-courts-to-hold-proceedings-online> accessed
31 March 2021
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the pandemic to conduct their dispute resolution processes as arguably it is a composite
of digital or technological tools and applications, many are already in existence as well
as adopted for a while now.33 For instance, it is already common for arbitrators located
in another geographical location other than the parties to conduct preliminary meetings
via videoconferencing.
The use of technology in dispute resolution today, in a way regurgitates existing
tools that we are already familiar with and many have been using those tools. They exist
as different ‘blocks’ of components that can function on their own or even assembled
to produce what might be said to be a hybrid virtual hearing or full virtual hearing that
we have found refuge in during the pandemic. A non-comprehensive list of these
components are as follows:
(a) Real-time communication – this is likely to constitute the most important
and crucial aspect of virtual hearings. Videotelephony provides for
the reception and transmission of video-audio between the users or parties
located in different locations, in this case for the evidentiary hearing of
the arbitration with the parties, arbitral tribunal, counsels and experts not
being able to be physically present in one venue.
(b) Document storage and sharing in the ‘cloud’ – this is fast gaining popularity
not only for counsels and experts working on the same team but in different
geographical locations but also for counsels for the parties to have a set of
agreed bundles to be used for the arbitral proceedings. In non-virtual hearings,
parties travelling to the arbitration hearing venue need not carry with them
voluminous hearing bundles but have everything stored electronically.
Similarly, this is also beneficial in virtual hearings.
33 Referring to Professor Richard Susskind, a world leading author on future of legal services, in his book
The Future of Law, ‘he predicted that in the future, lawyers and clients would communicate via email. This revelation
was shocking at the time, especially to those working in the legal system; however, transmitting communication
via email is now commonplace for lawyers and their clients.’ Bernard Marr, ‘The Future of Lawyers: Legal
Tech, AI, Big Data And Online Courts’ Forbes (New Jersey, 17 January 2020) <https://www.forbes.com/sites/
bernardmarr/2020/01/17/the-future-of-lawyers-legal-tech-ai-big-data-and-online-courts/#56423169f8c4> accessed
1 April 2021
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(c) Live transcription – for evidentiary hearings, live transcription is particularly
helpful because it allows all the parties to look at the questions asked and
answers given especially when there is the use of interpretation.
Technology still has technical constraints, even if not, there are practical issues
in international arbitration proceedings conducted virtually, for instance, internet
connection problem or parties and their witnesses located in different time zones.
Consequently, the parties could also object to virtual hearings as being procedurally
unfair to them which can include arguments that the body language of the witnesses
is not apparent or that the witness could be secretly ‘coached’ behind the camera. Be that
as it may, providers of ODR platforms and other digital tools should be encouraged by
the present circumstances and might have started engineering new innovative solutions
as the current pandemic has further validated the notion that there is a future for
technology in dispute resolution. Technology and innovation have been part of our
human evolution including the transformation in the legal and dispute resolution sectors.
To quote a statement said to be misattributed to Thomas J. Watson chief executive of
International Business Machines (IBM) in the 1940s: ‘I think there is a world market
for maybe five computers.’ How many of us would have imagined our mobile phones
have turned into mobile computers today? Or even the communication in international
arbitration proceedings via emails and online applications which can be managed using
our smartphones? Whilst the pandemic is not deserving of any compliment, it accelerated
the process of technology adoption, which previously might have been met with some
resistance for various reasons.
V. WHAT DO WE WANT FROM TECHNOLOGY
AND ARTIFICIAL INTELLIGENCE?
In the 1986 FIFAWorld Cup quarter-final match between Argentina and England,
Argentinian soccer star Diego Maradona scored the first goal using his hand (infamously
known as the ‘Hand of God goal’). This was not detected and not only was Maradona
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not punished, but the goal was also allowed, leading to England crashing out of the
competition. Though this was catastrophic, life goes on and this unforgettable incident
is still retold today with fascination. However, if Maradona were to play in the last 2018
tournament in Russia, he is likely to be shown a red card and sent off because of Video
Assistant Referee (VAR).34 The VAR is not an AI per se but an extra pair of eyes which
is an example of technological innovation in sports and as a consequence, we may now
achieve ‘near-perfect’competition. Supporters of VAR are likely to celebrate such efficiency
and fairness whereas opponents may argue that competitions without controversies
are dull and lifeless. Richard Susskind in The end of lawyers35 posited that the legal
profession will be taken by two forces. First, by a market pull towards ‘commoditization’
and pervasive development and second, an uptake of information technology.36
Nevertheless, we accept that technology has its advantages and usefulness in aiding
the dispute resolution process. Lawyers handling cross-border disputes no longer work
in isolation. They are either expected to communicate with their clients or clients’
personnel located overseas or work with lawyers or experts in other jurisdictions. It is
not difficult therefore to imagine the volume of communication and document exchanges
expected and how technology will be of tremendous help.
In international arbitration, lawyers are often expected to work within tight
deadlines. Thus, efficiency is important and it can be achieved with the help of
technology. ‘Cloud-based’ collaborative applications now allow multiple users located
in different geographical locations and time zones to systematically work together.
As mentioned earlier, some applications allow data analysis and this can help lawyers see
and uncover information that they could have missed if the tasks were to be carried out
manually. Meanwhile, international arbitrators are likely to be swarmed with the massive
volume of documents and information. If engineering and construction are involved,
these documents are likely to include drawings and technical specifications which are
certainly not a pleasure for arbitrators to carry with them for hearings overseas.
34 Written into the laws of the game by the International Football Association Board (IFAB) in 2018, see
<http://www.theifab.com/news/historic-step-for-greater-fairness-in-football> accessed 1 April 2021
35 Richard Susskind, The End of lawyers? Rethinking the nature of legal services (OUP, 2008) 27-28
36 ibid 28.
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