Toward Enhancing Judicial Efficiency - Role of ADR as Engine of Judicial Reform

Japan's judicial system reform enters a crucial stage this fall. In line with the Program for Promoting Justice System Reform adopted by the Cabinet in March 2002, the establishment of law schools has so far been decided upon with the relevant legislation having been enacted during the extraordinary Diet session in the fall of 2002 and law schools slated to open in April 2004. A set of judicial system reform laws were also enacted in the ordinary Diet session in 2003: the court procedure acceleration law, which calls for completing first-instance procedures within two years and the acceleration of court procedures, and laws to reform systems concerning lawyers and judges. Meanwhile, the Office for Promotion of Justice System Reform, which has been undertaking reform work within the government, is to be dissolved at the end of November 2004. In other words, a series of bills that address the remaining key issues - the introduction of a "saiban-in" quasi-jury system, the reform of the criminal justice system, and the reinforcement and activation of Alternative Dispute Resolution (ADR) mechanisms - must essentially be drawn up in time for the next regular Diet session which convenes in January 2004. Legislative work is now proceeding and entering into the final stage with various interest groups locking horns with each other.

A major framework for the ongoing judicial system reform is already set. Yet, in this article, I would like to rethink the whole concept of the judicial system reform, tracing it back to the fundamental principles of a judicial reform as it is supposed to be. (Here, I would like to concentrate my argument solely on the civil judicial system, focusing on the relationship between the judicial system and economy.) "Judicial efficiency" is the core concept of a judicial system reform. Both the World Bank, which has an accumulation of research evidence on the relationships between economic development and judicial systems based on an international comparison including developing countries, and scholars engaged in this bank-sponsored judicial reform project emphasize this concept of "judicial efficiency" as an important analytical viewpoint. From the standpoint of those in the legal profession, "fairness" is the principle that forms the foundation of a judicial system. In many developing countries, the independence, transparency and accountability of the judiciary have yet to be established and they continue to be plagued by corruption. It goes needless to say that the concept of "fairness" surely is a principle that touches on the very foundation of a judicial system and there is no doubt that the Japanese judicial system, in this context, has been demonstrating excellent performance in terms of "fairness" even by international standards. At the same time, however, it is also true that little attention has been paid to aspects of "judicial efficiency" such as the cost and speed of judicial procedures. Thus, the improvement of "judicial efficiency" is the crucial agenda that must be addressed in Japan's judicial reform.

Based on this standpoint, I would like to set out ideas concerning judicial system reform for enhancing "judicial efficiency," introducing the analysis of international comparison in the World Bank's research project (World Bank, 2002). My argument mainly calls for the reform of an incentive mechanism for legal professionals, a task that can be accomplished through competition and selection, as well as the simplification of complicated dispute settlement procedures, rather than an increase in the financial and human resources poured into the judicial system. Within the Japanese judicial community, the prevailing view is that the acceleration of procedures and competition would lead to deterioration in the quality of legal services. In other words, it is perceived that efficiency and fairness would contradict each other. The "judicial efficiency" to be discussed in this article, however, refers to efficiency in a sense of providing "swift," "affordable" (and thus accessible), and "fair" dispute settlement services, and the idea stands on the premise that all these component factors of efficiency can be properly balanced (World Bank, 2002). Through competition, inferior services would be weeded out with higher-quality services being provided and selected instead. This is the principal feature of the improvement of "judicial efficiency." As an important step to achieve that end, I would like to emphasize that the reinforcement and activation of the ADR mechanism can have a significant impact on the Japanese judicial system and serve as an engine of judicial reform.

My reason for analyzing the judicial system from an economics viewpoint is that the economic performance of a country is closely related to its judicial system. It is believed that the judicial system and economic institutions and their performance interact with each other, and that the impact of the judicial system on the economy differs depending on the stage of development. Messick (1999) presented the following two routes by which the judicial system affects economic development. A first route is that when a good judicial system contributes to economic development by preventing the government's abuse of power and safeguarding the rule of law. This idea, which focuses on a judicial system's function of checking over the administrative authorities, can be taken as a view in which "judicial independence" is highly valued. This route is particularly important in developing countries where a judicial system has yet to be sufficiently established. The second route, on the other hand, is that where a judicial system supports economic development by facilitating and promoting various interactions and transactions in economic and social domains. This idea attaches great importance to "judicial efficiency." For Japan and other developed countries where a judicial system is very much established with "judicial independence" secured, "judicial efficiency" is more important when carrying out judicial system reform.

The idea of judicial system reform, based on the perspective of facilitating interactions and transactions, is of particular importance when new relationships or transactions begin. Historically speaking, contracts and other enforcement mechanisms used to rely very much on informal means - such as "reputation" and "trust" - in an era when the judicial system was underdeveloped. Specifically, if one breaks the rules or promise made with one's counterpart in a transaction, that counterpart would never return for another deal or transaction, thereby creating an incentive for parties concerned to honor contracts and promises so they can accumulate "reputation" to that effect. As such, there emerges a mechanism that facilitates transactions even in the absence of formal courts. This kind of mechanism was actually functioning in marine trades in North Africa and the Mediterranean in the 11th century (Greif, 1993). Not only that, similar reputation-oriented mechanisms have been observed in the Wisconsin lumber industry, the diamond trade in New York, as well as in certain parts of contemporary Asia, Africa and Latin America (Greif, 1997).

For such a mechanism to properly function, however, the number of parties engaged in such transactions must be limited and transaction relationships between them must span over a long period of time. Conversely, it can be said that traders or any other parties concerned - due to the absence of a properly functioning judicial system - have no other choice but to rely upon their existing counterparts for the smooth fulfillment of contracts. Meanwhile, in situations where the economic environment is undergoing significant changes, it is important not to miss profit-earning opportunities that can be derived from transactions with new transaction partners. To ensure the execution of a contract with a new transaction partner, that is, in a situation in which no mechanisms of "reputation" are at work, the judiciary as a formal enforcement mechanism must be implemented. Also, in situations where long-term, continuous transactions are highly valued, it is often difficult to stop dealing with long-term partners even when unprofitable. Here, the judiciary plays an important third-party mechanism of settling disputes in accordance with certain rules.

Using survey data on private-sector small and midsize manufacturers in five transition countries in the former Soviet Union and East European bloc, Johnson, McMillan and Woodruff (2002) have demonstrated that companies put greater trust in (or give greater trade credit to) their transaction counterparts when they believe that courts are functioning properly; a tendency that is particularly conspicuous when dealing with new transaction partners. They have also shown that switching costs - monetary equivalent of the inconvenience caused by replacing the existing partner with another - tend to be lower at companies having greater trust in courts. (It has been found that these companies, with a substantial probability, would switch to a new supplier if they offered a price 10% lower than that of the existing suppliers.) Meanwhile, Bigsten et al. (2002) have examined the relationships between the judiciary and corporate activities (in the manufacturing sector) in African countries. They have shown that in Zimbabwe, where the law and judicial systems are comparatively developed, companies turn to courts in dispute settlements more frequently and show a greater tendency to be engaged in high-risk (and potentially more lucrative) business activities, compared to their counterparts in other African countries. Today, Japan is facing a pressing need to create an environment where companies and individuals would - through creative destruction and other experiments - accept their share of the risk on various levels and form new relations/transactions by breaking the old bonds and extricating themselves from the tangled webs of conflicting interests. The economic and social state of such a Japan also points to the importance of "judicial efficiency."

In order to enhance "judicial efficiency," what reform measures must be implemented? Botero, La Porta, Lopez-de-Silanes, Shleifer and Volokh (2003), which served as a background paper for the paper by the World Bank (2002), presented four schools of thought on ways to improve "judicial efficiency" and examined the effectiveness of each. One school of thought believes that the problem of the judiciary system is attributable to insufficient resources (funding) being poured into the system. Based on this idea, the key to solving the problem would be to increase the number of courts, judges and lawyers as well as to provide more training and computer systems. A second group believes that excessive access (vexatious suits) makes the judicial systems inefficient. In this case, it would be necessary to raise the procedural hurdles for lawsuits and/or impose restrictions on lawyers with regard to their advertising activities and remuneration. A third school of thought views the inefficiency of the judicial system as stemming from the lack of incentives for those engaged in the legal profession. People holding this view call for provision of a greater variety of dispute settlement mechanisms and for letting them compete among themselves and with the existing legal service providers so as to change the incentive structure for legal professionals. The fourth group points to the rigidity and complexity of judicial procedures as a prime cause of inefficiency. This is a problem typically observed in developing countries in which the legal system of their colonizer had been implemented without being sufficiently adapted to their own needs. Based on this idea, simplification of procedures would provide a cure.

Having examined these four ideas for judicial reform against the results of empirical analyses on judicial reforms in various countries, Botero et al. (2003) point to the lack of adequate incentives on the part of the legal profession and the excessive complexity of judicial procedures as major factors hampering "judicial efficiency." Indeed, reducing the number of lawsuits to accelerate court procedures (in line with the second idea) is unlikely to provide a realistic solution for Japan because the country, contrary to the United States which is plagued by excessive lawsuits, is in need of a judicial system that is more open to the public. However, empirical analyses on the U.S. and Latin America also show that the large number of lawsuits is not an important cause of judicial inefficiency.

Hereinafter, in light of a series of judicial reform experiences across the world, I would like to discuss why "judicial efficiency" cannot be improved by increasing resources poured into the judicial system (first idea), and why efficiency will more likely be improved as a result of incentive-oriented reforms (third idea) or by simplifying judicial procedures and increasing their flexibility (fourth idea).

Pouring more resources into the judicial system will not necessarily improve efficiency
Insufficient budget and staff shortages have been often cited by those in the legal profession as reasons for judicial inefficiency. The existing empirical analysis results, however, provide little convincing evidence which would clearly verify the effect of increased resources. Based on U.S. state-level data as well as data on Latin American countries, it has been shown that there is no significant correlation between the level of available resources and the speed of judicial procedures (Botero et al., 2003; Buscaglia and Ulen, 1997; Dakoilas, 1999; World Bank, 2002). Dakolian (1999) compared 11 countries, including both developed and developing countries, with regard to the relationships between the number of judges and judicial performance. For instance, the backlog ratio - one of the "judicial efficiency" indicators - is the lowest in Singapore, despite the number of judges per population of 100,000 being the smallest among the 11 countries, thus, indicating that there is little linkage between these two factors. Meanwhile, findings on Latin America and Singapore show that the introduction of computer systems and other forms of mechanization are effective in accelerating court procedures. However, such improvement in "judicial efficiency" is deemed to be the result of a secondary effect of the computerization and mechanization, which primarily helps increase transparency and accountability concerning judicial procedures by making them more difficult to manipulate thus preventing corruption (Botero et al., 2003).

Of course, increasing resources may be effective in certain developing countries where financial resources are extremely limited. However, even in such cases, the infusion of additional resources must be made simultaneously with the implementation of other judicial reform initiatives. Increasing resources alone may temporarily help reduce delays in court procedures but the effect would not last long (because the increased resources would lead to an increased demand - i.e. an increase in the number of lawsuits - and the level of delays in court procedures would soon return to its original state). This is because the fundamental behavioral patterns of those in the legal profession cannot be changed simply by pouring in more resources.

What is an incentive-oriented reform?
For instance, a trial tends to get prolonged when presided over by a judge who is not institutionally required to bear the costs incurred by a delay in court procedures. The judge, in such a case, has no incentive for accelerating court procedures. Experiences in many countries show that the kind of judicial reforms that provide the "right" incentives for judges, lawyers and other concerned parties can greatly contribute to improving "judicial efficiency" by enhancing accountability and fostering competition and choice (Botero et al., 2003). Legislated time limits for cases have been implemented in some countries as a means to accelerate court procedures but these measures seem to be producing few results. In the U.S., where such limits have been set, numerous exceptions and loopholes are provided so as to fit almost all cases. Meanwhile, a study of U.S. metropolitan courts has found that civil cases tend to move faster in courts with "individual calendars," a system under which each case is handled by the same judge from beginning to end, than in those where different judges take turns in handling a single case (Church et al., 1978). This is because under the individual calendar system a significant delay in a certain case can be traceable to a specific judge (improvement of accountability) thereby providing judges with incentives to quicken up procedures.

Reforming an incentive structure for lawyers: Competition with non-lawyers
An incentive structure for lawyers is another important aspect that needs to be addressed. Underscoring the importance of reforming incentives for lawyers, Botero et al. (2003) say, "Attorneys' monopolies are good targets for judicial reform. Making lawyers compete with other professionals and facilitating self-representation by litigants can be fruitful strategies for making lawyers more accountable and increasing overall efficiency." For instance, they attribute the high levels of efficiency and litigant satisfaction in lower-level courts in Britain to the low rates of involvement by lawyers. They also point out that many of those serving as advisors at locally funded "Citizens Advice Bureaux" - which are among the biggest providers of legal advice in the U.K. - are not professional lawyers. These indicate that it is important to change the status quo of monopolization by attorneys to improve "judicial efficiency." In this regard, however, caution must be taken when implementing measures to improve the quality of the legal profession, which can be easily used as a "tool" to maintain the monopoly of legal services by professional lawyers. Introduction of measures to improve the level of qualification and aptitude of lawyers must be accompanied by policies to diversify legal service providers and increase competition - for instance, by reducing the requirements for non-lawyer legal experts to act as an agent ad litem in lawsuits - so as to prevent further monopolies by lawyers (Botero et al., 2003).

Competition among dispute settlement bodies and greater options for settling disputes
Enhancing role-sharing and competition among different "forums" for dispute settlement to increase the options for litigants is yet another aspect of incentive-oriented reform, which is just as important as promoting competition between lawyers and non-lawyers in providing legal services. For instance, role sharing and competition among regular courts, specialized courts and small-claims courts (summary courts in the case of Japan) as well as between regular courts and ADR bodies should be promoted. Under a judicial system where regular courts have no fear of losing litigants for alternative dispute settlement institutions such as an ADR body or a small-claims court, litigants are like "captives" with no freedom of choice (Botero et al., 2003). Under such situations, it would be extremely difficult to implement any incentive structure to improve the efficiency of the regular court system.

From the viewpoint of those in the legal profession, competition among courts and/or with ADR institutions may be an uncomfortable idea. However, it should be noted that such competition has served as a driving force for the development of the Anglo-American legal and judicial systems since the medieval era. At the time of the Norman invasion, the English legal system was such that local or feudal courts were handling disputes. Legal procedures, however, took a long time and were costly both economically and socially. The Norman invaders thus established the "royal court" as a new dispute settlement mechanism that is an alternative to the traditional court system. The two systems co-existed for some time and competed with each other. The "royal court" system subsequently began to attract more lawsuits, winning over people's confidence especially after providing simple and speedy legal procedures for settling conflicts over land ownerships (restoring the land to the rightful owners) in the 13th century. This exemplifies how a new state - by providing good procedures and rules, promoting competition, and settling disputes fairly - would be able to establish an efficient legal system that people chose to use (Islam, 2003). Likewise in the U.S. today, competition among courts in different states or between state and federal courts is believed to be contributing to the improvement of the overall judicial system.

Establishment and subsequent development of small-claims courts can be cited as one of the most successful examples of judicial reform. In many countries, small-claims courts, which provide simple legal procedures for minor disputes involving a small amount of money, have proven effective in reducing the time required for legal procedures and expanding public access to justice. Brazil, which introduced small-claims courts in 1995, for instance, succeeded in lowering the costs of litigations thereby making the judicial system more accessible to the general public. Also, in Britain where the small-claims court system has long been functioning well, the maximum amount of claims handled by small-claims courts has been raised to 5,000 pounds sterling (approximately ¥1 million) to make the system even more accessible. Small claims courts are quite popular in Australia, Japan and the U.S. (World Bank, 2002).

Development of ADR mechanism is the key to improving "judicial efficiency"
ADR institutions play an important role in increasing competition among the existing courts and expanding options for settling disputes. An ADR mechanism provides an alternative to the conventional means of dispute settlement by way of a lawsuit. Basically, there are two types of ADR process, namely a coordination-type, which would resolve disputes through mediation and conciliation (with a neutral third party facilitating conciliation or negotiations between conflicting parties) rather than making a judgment, and a verdict-type which would settle disputes through arbitration (with an arbitrator giving a binding judgment). India's "lok adalats" (people's courts) is one example where an ADR mechanism is functioning well. The lok adalats - normally composed of a retired judge, a lawyer, and a social worker - mediate disputes (primarily over minor incidents such as traffic accidents) through informal procedures accessible to the ordinary citizen, and if no settlement is reached, cases revert to the formal court system (Botero et al., 2003).

In developing countries where a formal court system has yet to be sufficiently developed, an ADR mechanism can provide a workable substitute. Meanwhile, with the development of a formal court system, the number of cases brought to court would increase. In this process, the presence of ADR, and thus of an alternative, provides discipline to the conventional court system by making it difficult for judges to take bribes from litigants and thus reducing opportunities for "corruption." This has been empirically proven by analyzing ADR systems in Chile and Ecuador (Buscaglia and Dakolias, 1999). Meanwhile, when a formal court system becomes efficient, court judgments become sufficiently predictable, thus leading to a relative increase in the number of cases handled in out-of-court settlements that offer simplified procedures (World Bank, 2002). As such, formal legal procedures at courts and ADR mechanisms are both alternative and complementary to each other. In other words, regardless of the degree of judicial system development, competition and increased options for settling disputes helps clarify the sharing of roles between formal courts and ADR systems, strengthens the complementary relations between them, and improves the efficiency of the respective mechanisms. In this regard, ADR mechanisms are intrinsically important for the improvement of "judicial efficiency."

Based on the above theoretical foundation, I would like to evaluate the ongoing judicial reform in Japan. First of all, let us take a look at a policy that calls for increasing the number of legal professionals primarily through the creation of law schools, a plan that has already been adopted. Due to the stringent limitation on the number of new entries, the relative number of Japanese legal professionals remains extremely small compared to those in the U.S. and Europe. Obviously, the Japanese judicial population is not large enough to fulfill the existing demand for legal services. Therefore, it is certain an increase in the number of legal professionals is urgently needed. But the ongoing judicial reform seems to be placing too much expectation on the expansion of human resources. As discussed above, "judicial efficiency" cannot be improved simply by increasing human resources and it is not a good idea to expect too much of such a policy.

Meanwhile, with regard to the simplification of dispute settlement procedures, an important means to improving "judicial efficiency," the raising of the maximum amount eligible for small-claims litigation procedures (from ¥900,000 to ¥1.4 million) and the lowering of fees for filing a suit - both approved during the 2003 regular Diet session - will likely produce favorable results to some extent. Unfortunately, however, the view of reforming incentives for legal professionals, another important pillar, seems to be absent in the existing judicial reform framework. For instance, it has been stipulated by law that legal procedures should be accelerated with an aim to completing first instance proceedings within two years. As described earlier, however, such a target may be made ineffectual by various exceptions being taken into consideration in each specific case.

In Japan, the reinforcement and activation of ADR mechanisms holds the key to enhancing "judicial efficiency" through an incentive-oriented reform by fostering competition among different dispute settlement bodies and legal professionals to provide greater options for the settling of disputes. Diversity is the major characteristic of ADR, compared to conventional litigation. Development and enhancement of ADR systems would enable potential litigants to select from or combine various options - negotiation, conciliation, claim adjustment, arbitration, etc - in accordance with the content and needs of the dispute they face. In the case of a small-claims dispute, they may turn to ADR proceedings which would provide a service suitable for the amount involved in the claim both in terms of time and cost. Diversifying dispute settlement procedures through the use of ADR is conducive to the simplification of legal procedures as well as the expansion of options in settling disputes. ADR mechanisms play a supplementary role by fulfilling the needs that cannot be satisfied by the conventional litigation system. Not only that, in countries with a substantially developed judicial system, it is expected that ADR systems - which have speediness and inexpensiveness of services as a strength - and the conventional system would compete and develop together, providing stimulation and discipline to each other. Active competition among various dispute settlement bodies including regular courts would improve the efficiency of each body. Moreover, eventually, through numerous trials and errors, an efficient mechanism of role sharing may emerge.

Furthermore, the activation and reinforcement of ADR systems is important for today's Japan as a means to set off competition between lawyers and non-lawyers in providing legal services. In the areas where ADR systems are already quite popular (marine services, construction, electronic commerce, etc), legal knowledge - though important - represents just a part of the whole knowledge required. It is often the case that legal knowledge is superseded by expertise on the specific industry and/or business concerned, or by knowhow on dispute settlement schemes. As a result of these circumstances, specific qualifications - such as being a qualified lawyer - are rarely required to provide ADR services in foreign countries. In Japan, however, Article 72 of the Lawyers Law prohibits non-lawyers from undertaking legal businesses. The article should be revised so as to enable not only quasi-legal professionals - those specialized in the fields adjoining law, namely, judicial scriveners, patent attorneys and certified public tax accountants - but also those having expertise in non-judicial fields to be engaged in ADR services. Such a revision would be a significant first step to changing the ongoing monopoly by lawyers, which may trigger full-scale competition between lawyers and non-lawyers or become a touchstone to test Japan's readiness for the major changes to follow.

I have underlined the importance of reinforcing and activating ADR mechanisms - which would provide diverse and flexible legal services thereby playing roles complementary and alternative (competitive) to the existing uniform and rigid court system - in reforming Japan's judicial system, in particular, from the standpoint of emphasizing "judicial efficiency." Under the existing framework of Japan's judicial reform, however, the creation of institutional foundation for ADR mechanisms is treated simply as a single item within the civil justice system reform. Also, in a government report on the "Establishment of Comprehensive Institutional Foundation for ADR" released in July 2003 by the Office for Promotion of Justice System Reform, focus seems to be on how to "regulate" potentially flourishing "ADR businesses," that is, from the point of view of the regulating authorities. For instance, the report calls for establishing a prior screening system, under which the qualifications of an ADR entity must be confirmed and/or approved by the administrative authorities prior to the commencement of its operations; a measure proposed as a means or condition to provide ADR entities with certain enforcement power. In addition, the way the report refers to qualification requirements for those serving as president, or head representative, of ADR entities (in the light of Article 72 of the Lawyers Law) is indicative of the hidden intention of the government that it hopes to protect the vested interest of the conventional "judicial industry" from the newly emerging "ADR industry" as well as protecting the general public from "ill-intended ADR business operators."

In order to allow for the emergence of various forms of ADRentities, there must be an environment where ADR service providerscan freely compete with each other, mobilizing their witsand ideas to offer better services. It is therefore undesirablefor the government to implement legal restrictions which putcontrol over ADR activities, even for the sake of establishinginstitutional foundation. Rather, the government should tryto provide an environment firmly based on the principle ofmarket mechanism (specifically, by promoting information disclosure,enhancing people's understanding of ADR, and facilitatingaccess to ADR), whereby market players (users) would be ableto obtain accurate information on ADR entities and properlyassess the qualifications - fairness, neutrality, independence,etc - of each ADR entity. In Europe, judging from the ongoingdiscussions on ADR mechanisms within the European Union, consensusseems to be that it is "inappropriate to regulate ADR at present"because "many ADR procedures are still at an innovative, experimentaland developing stage" and the "very advantage of ADR" - flexibilityand informality - "might be destroyed by regulation" (Hornle,2003). With the development of electronic commerce inrecent years, disputes in this particular field have beenrapidly internationalized and ADR is attracting much attentionas an effective mechanism for settling cross-border disputes,as has been the case with regard to marine services whereADR is already popular. Indeed, ADR mechanisms are alreadybeing utilized in the U.S. to deal with disputes concerningonline transactions. In relation to the cross-border natureof e-commerce, the use of the Internet-based ADR - OnlineDispute Resolution (ODR) schemes - is becoming popular. (SeeHornle,2002, for survey, and ECOM'sconsultation website for internet shopping dispute consultationfor the situation in Japan.) Against such backdrops, therehas been a growing recognition that the Internet providesa favorable framework for ADR procedures (contributing tothe lowering of costs and the acceleration of procedures).Considering the rapid development of e-commerce and the needto facilitate solutions to disputes arising from such newforms of transactions, Japan has no time to waste in reinforcingand activating its ADR mechanisms.

It is no easy task to overhaul well-established "institutions" and "mechanisms," and Japan's judicial system is no exception. Inward-looking efforts by those within the established "institution" cannot change the incentive structure for themselves. It takes "external pressure" in a broad sense and "competition" to break the ongoing stalemate. Blast a "hole" in the wall guarding the institution and let in "fresh air" from outside; only then will the true "institutional reform" begin. ADR is counted on to serve as a propelling force to crack a "hole" in the existing judicial system of Japan and become the bearer of a new judicial system. At the time when Japan's judicial system reform enters into a critical stage, I do hope that institutional foundation for ADR mechanisms will be established in a way to fully secure the advantages of ADR, which include not only the diversity and flexibility of ADR mechanisms but also the diversity of those engaged in ADR services.

October 16, 2003

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