Outline of Contract Law in Japan

Hiroto Dogauchi (Professor of Law, University of Tokyo)

Part 1. Formation and Interpretation of Contracts
Chapter 1. Status of contract law within Japanese Law
Chapter 2. Contracting parties
Section 1. Capacity to hold rights
Section 2. Mental capacity/ capacity to act
Chapter 3. Formation of contracts
Section 1. Principle of consensualism
Section 2. Manifestation of intention that is truly unsatisfactory
Section 3. Agency
Chapter 4. Interpretation, revision and supplementation of contracts
Section 1. Mandatory provisions and public policy
Section 2. Interpretation and supplementation of contracts
Section 3. Expanded contractual liability
Part 2. Specific Contracts
Chapter 5. Contracts for transfer of property
Section 1. Sale
Section 2. Gifts
Chapter 6. Contracts for use of property
Section 1. Loan
Section 2. Lease
Chapter 7. Contracts for provision of services

Chapter 8. Other contracts

Section 1. Contracts for formation of organizations
Section 2. Third party beneficiary contracts and others
Part 3. Performance and non-performance of contracts
Chapter 9. Contract performance
Section 1. Fulfillment of obligations
Section 2. Lapse due to period of time
Chapter 10. Breach of contract and compulsory performance
Section 1. Impposibility to perform
Section 2. Failure of possible performance
Chapter 11. Realization of monetary claims
Section 1. The preservation of obligor's property
Section 2. Other ways for the realization of monetary claims
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Part 1. Formation and Interpretation of Contracts

Chapter 1. Status of contract law within Japanese law
1. Japan is a civil law country that uses statutes for the fundamental areas of
law. However, the basic rules concerning contracts are prescribed in the Civil
Code together with the law of torts, law of property, law of succession, and
family law. There is no separate contracts code.
Moreover, the rules concerning contracts that are contained in the Civil Code
are limited to basic rules. Special rules relating to contracts between
merchants are prescribed in the Commercial Code. There are also many
special laws for purposes such as consumer protection. Beyond this, there are
also many statutes to regulate the conduct of business operators. This

includes statutes that play a very important role in relation to, for example, the
process of contract formation.
2. For practical purposes contract law is the aggregate of these statutes and
rules. Simply looking at the contract provisions and their application in the
Civil Code would not be sufficient for understanding contract law in Japan.
However, at the same time, the provisions in the Civil Code form the basis,
and so we focus on these in the following discussion.
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Chapter 2. Contracting parties

Section 1. Capacity to hold rights

1. The meaning of capacity to hold rights

Article 3 (1) of the Civil Code states, The enjoyment of private rights shall
commence at birth. This means that all natural persons qualify as entities
capable of rights and obligations. Possessing such qualification is referred to
as having capacity to hold rights (Rechtsfhigkeit).
This concept of capacity to hold rights no longer has any great meaning for
natural persons excepting societies that deny slaves the capacity to hold
rights. However, this is more important for a juridical person. Article 43 of the
Civil Code states, A juridical person shall have rights and assume duties to
the extent of the purpose provided in the applicable articles of incorporation or
act of endowment subject to the applicable provisions of the laws and
regulations. Applying this literally means, for example, even if a stock
company enters into contract types outside the purposes provided for in its
articles of incorporation such stock company would not qualify as an entity to
enter into such contract so such contract may become invalid.
2. Juridical person's capacity to hold rights

These provisions are said to have been influenced by the ultra vires doctrine
under English law. However, as with the abandonment of the ultra vires
doctrine in England, this article has very limited application in Japan.
That is to say, a claim by a juridical person that entered a contract for profit
and now asserts the contract to be invalid because it is outside the purposes
provided in its articles of incorporation would not be upheld by courts. Even
when it would appear at first glance to be outside the purposes in the articles
of incorporation of such juridical person, these purposes in the articles of
incorporation are interpreted very widely. Most actions are interpreted as
corresponding to the articles of incorporation and being within the purposes
specified.
However, for those juridical persons not entering into a contract for profit there
have been court rulings that state a contract is invalid because the contract is
outside the specified purpose1.
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Section 2. Mental capacity/ capacity to act

1. The origin of a contract's binding effect

What determines the binding effect of a contract is a matter of worldwide
debate. This largely divides into whether it is grounded in the parties' intent or
grounded in the parties' trust.
The same debate exists in Japan, and it should be said that current statutes
are designed to strike a balance between both grounds.
When the parties' intent is agreed as the binding force of the contract, the
content of the contract must be truly satisfactory to the parties. This is
because being bound by desire first make sense as a reason for parties
entering into contracts when there is true satisfaction with the contents of the
contract. Consequently, statutes are used to prepare systems to ensure this
true satisfaction. In short, if true satisfaction is not present regardless of the
external form of the contract, its binding power must be denied.

However, we consider the example of agreement based on an error of speech

from one side. We certainly cannot have true satisfaction at such time and
this becomes a matter of the other person's trust. A soba (noodle) shop
makes and delivers a tendon (tempura on rice dish). As long as the other
person's trust is protected as the grounds for the binding effect of the
contract, the validity of the contract cannot be denied without reason.
How to balance the two grounds and reach an appropriate resolution
becomes an important issue.
2. Mental capacity
First, in order to state there was true satisfaction it is at a minimum necessary
for each party to understand the content of the contract and the types of rights
and obligations each has undertaken themselves. There are no explicit
articles on this. While it is assumed to be taken for granted, it is common in
cases decisions and scholarly treatises to explain this using the term capacite
mentale (mental capacity). In abstract terms, mental capacity can be referred
to as the psychological capacity that enables one to determine the nature of
one's own actions. Legally, manifestation of intention without this is deemed to
have no effect (be invalid). Whether or not there is mental capacity is
determined in light of the nature of the act. This means that even when there
is the same psychological capacity there are cases where mental capacity is
inferred for simple acts and no mental capacity for complex acts. However,
no mental capacity is inferred for children under the age of 10, mentally
disabled persons, and intoxicated persons with psychological capacities below
such level.
However, it is very difficult to ensure true satisfaction through the concept of
mental capacity by itself. First, for a person with a particular manifestation of
intention to claim there was no mental capacity at the time so that
manifestation of intention is invalid, that person must prove there was a loss
of mental capacity at that time, and this is more often than not difficult. In
addition, an ordinary 12 year old child certainly might have mental capacity,

but that would not be the case in relation to making a real estate transaction
based on correct judgment. For persons without the capacity to understand
complex transactions, in other words for persons without the capacity to
determine whether or not entering into a contract is either necessary or
beneficial to them, there must be protection even if there is mental capacity.
3. Capacity to act
For this reason the concept of capacity to act was included in the Civil Code.
The capacity to act is not a concept that takes issue with each individual's
psychological capacity on a case by case basis. It is capacity from the
perspective of formal standards. In abstract terms the validity of a juristic act is
created through one's own actions conclusively belonging to oneself. The Civil
Code specifies a number of types of persons without the capacity to
understand the transaction details and without the capacity to determine
whether or not entering into a contract is either necessary or beneficial to
them. Capacity to act is restricted for such persons in an effort to ensure
protection. Specifically there are four types: minors, adult wards, persons
under curatorship, and persons under assistance.
(1) Minors
First, a minor is a person who has not reached the age of 20 (Civil Code
Art.4).
A minor is not deemed to have the reasoning capacity (or competence) to
participate in transactional society alone. A contract may be rescinded (Civil
Code Art. 5(2)) if it is entered into without the consent of the minor's statutory
agent (parent, or guardian; See Civil Code Art. 824 and Art. 181).
(2) Adult wards
Unlike the case of minors, there is no uniform measure such as age for
determining who is an adult ward. The Family Court may order the
commencement of guardianship at the request of the person in question, or a
family member who is within a specified degree of kinship if a person

constantly lacks the capacity to discern right from wrong (Civil Code Art. 7). In
practice, regardless of the extent to which a person lacks the capacity to
understand, a person does not become an adult ward until these procedures
are undertaken.
An adult ward has a guardian appointed (Civil Code Art. 8 and Art. 843 (1))
and guardianship then commences (Civil Code Art. 838 (2)). A guardian
administers the property of a ward and represents a ward in juristic acts
concerning his/her property (Art. 859 (1)). The ward is thus protected from
transactional society. Then, as for a minor, a juristic act performed by an adult
ward may be rescinded (Art. 9). However, in relation to any act relating to daily
life, such as the purchase of daily household items, the adult ward is able to
continue acting alone.
(3) Persons under curatorship
A person under curatorship is a person who has become, at the request of
specified persons, subject to an order of the Family Court for commencement
of curatorship. While not stating that the person lacks the capacity to discern
right from wrong (a lack of capacity would mean an adult ward) this applies
for persons whose capacity is deemed to be extremely insufficient (Civil Code
Art.11).
A person under curatorship has a curator appointed (Civil Code Art. 876 and
Art. 876-2 (1)). A major juristic act, as prescribed in article 13 (1), such as
borrowing and real estate transactions undertaken by a person under
curatorship without the consent of the curator is subject to the protection of it
being able to be rescinded (Civil Code Art. 13 (4)). In addition the curator may
rescind these actions (Civil Code Art. 120 (1)). However, unlike the
aforementioned guardian, the curator is, naturally, not deemed to have power
of representation. Nevertheless, on the application of the person under
curatorship or specified persons (this requires the consent of the person under
curatorship him or herself) the power of representation can be given
concerning specified juristic acts (Civil Code Art. 876-4).

(4) Persons under assistance

Even if there is insufficient capacity for understanding, but not to the extent
that would meet the criteria for an adult ward or person under curatorship this
by itself would not mean there is a lack of capacity to for example, conclude
contracts. However, there are still concerns about whether the contracts can
be concluded properly. Nevertheless, on the application of the person or
specified persons (this requires the consent of the person) the Family Court
may order that the consent of an assistant be required for some of the acts
prescribed in article 13 (1) of the Civil Code (the acts for which a person under
curatorship must obtain the consent of his/her curator). An act which requires
such consent may be rescinded if it was performed without such consent. This
is referred to as an order of commencement of assistance with the person
referred to as a person under assistance and the person with the power to
give consent referred to as the assistant. This is a reduced version of
curatorship.
In addition, as with curatorship on the application of the person or specified
persons (this requires the consent of the person under assistance him or
herself) power of representation is granted to the assistant concerning
specified juristic acts for the person under assistance (Civil Code Art. 876-9).
4. In this way the Civil Code aims to protect minors, adult wards, persons
under curatorship, and persons under assistance (collectively referred to as
persons with limited capacity) who are deemed to lack sufficient capacity for
understanding.
This is very beneficial for those subject to protection. However, in certain
circumstances it is necessary to protect counterparties and third parties.
Nevertheless, there is no denying the need to protect those without sufficient
capacity to understand in relation to transactional society. The two requests
need to be balanced.
Consequently, first when an order is given for commencement of guardian
ship, commencement of curatorship, or commencement of assistance it shall
be recorded in the guardian registration file located at the Legal Affairs

Bureau. Therefore, if a person who plans to transact with another person

requests the provision of that person's certificate of registration (or
documentary evidence of not being registered) it is possible to know the
specific details of limitations on the capacity to act. This is the same for
minors. The date of birth can be clarified by requesting production of family
registration or a certificate of residence.
Therefore, for important transactions documentation about the counterparty
proving his or her age and proving that there is no registration of restrictions
on the capacity to act is requested. For example, if a minor cleverly rewrites
his or her birth date on his or her student card to make the counterparty think
the minor is 20 years of age or more, the need to protect such person is
denied. Consequently, article 21 of the Civil Code states that a contract may
not be rescinded if a person with limited capacity employs any fraudulent
means to induce a counterparty to believe that he/she is a person with
capacity. The wording of this article by itself suggests a contract cannot be
rescinded if a person employs any fraudulent means, but that is not the case.
At least it requires the person to have defrauded the counterparty and for that
counterparty to have believed the person was not a person with limited
capacity to act. In addition, simply having been negligent in belief can also be
deemed unacceptable. For example, in a section for recording one's age in an
application for a mail order simply inserting 22 years of age is not interpreted
as fraudulent. A person's protection is required against employment of
fraudulent means, as well as for reasons of insufficient capacity for
understanding. This means it is obviously appropriate for a counterparty to
take a certain degree of care.
Next, while aiming for limitations on period of right to rescind (5-years from
when a person with the right to rescind act knows about the execution of the
contract; Civil Code Art. 126), a counterparty can press the statutory agent,
the curator, or assistant for rescission or ratification. If such person with the
right to rescind act does not respond within a specified time period it is
deemed that such act has been ratified (Civil Code Art. 20).

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Chapter 3. Formation of contracts

Section 1. Principle of consensualism

1. Fundamental non-necessity of documentation

As is the case for many countries, contracts under Japanese law are formed
by the manifestation of intention by way of offer and acceptance (In fact, there
is no wording clearly prescribing this point. However, this is presumed in the
provisions under Civil Code Art. 521.)
In various actual fact patterns it is often unclear as to what manifestation of
intention there is in the offer and what wording should be taken to mean in
the acceptance. It is said that An offer is a conclusive manifestation of
intention for the formation of contract. An acceptance is for the formation of
contract with the manifestation of intention in relation to a specific offer.
Ultimately the success or failure of a contract is determined by whether or not
there is agreement on the important parts of a contract.
For Japan the formation of contracts does not require documentation in
principle. Even when litigating a claim for formation of contract the evidence is
not restricted to documentation. On the other hand, as in the case of a real
estate transaction by a housing construction business operator there are
cases when there are legal obligations for a written contract to be delivered to
the client (Real Estate Business Law Art. 37). In practice it is frequently quite
difficult to prove formation of contracts without documentation. However, for
example even when there is a written contract for the interpretation of
additional provisions and written provisions in the contract, oral agreement
can be asserted with the decision being reached from various types of
evidence.
In addition, there are also cases where both parties think there is no formation
of contract until a written contract has been created. In such a case the

absence of formation of contract until a written contract has been created is

not counter to consensualism.
2. Offer and acceptance
The issue of late arrival of offer and acceptance is dealt with in article 521 and
following of the Civil Code. However, many of the provisions therein assume
an era when a notice might not arrive or be considerably later than scheduled
even though it was dispatched. In other words, it assumes an era of offers and
acceptances being dispatched by post and there being postal delivery
problems.
In particular, article 526 of the Civil Code states that contracts between
persons far away from each other (persons at a distance) shall be formed
upon dispatch of the notice of acceptance (postal rule). Under this system a
contract shall be formed even if the acceptance does not reach, or is
considerably delayed in reaching, the offeror. The risk of non receipt or
delayed receipt is borne by the offeror. However, offerors who do not want to
bear such risk can set a period for acceptance of the offer. Under such an
arrangement when a notice of acceptance does not arrive within the period
the offer ceases to be effective. Therefore, the contract is not formed (Art.
521). Since the offeror has a way to avert this type of risk it means in principle
that it is fair to deem the contract to be formed when the acceptance is
dispatched.
Nevertheless, where postal conditions are good and in a society with very low
possibility of non receipt or late receipt there is not much need to adjust the
principle that the manifestation of intention first becomes effective on delivery
to the counterparty (effective delivery principle). In particular, for contracts
using electronic methods such as email, regardless of the distance separating
the parties a notice sent is instantly received by the counterparty. Therefore,
the Act on Special Provisions to the Civil Code Concerning Electronic
Consumer Contracts and Electronic Acceptance Notice was enacted in 2001.
Under this Act, in cases where acceptance is made via email, online entry

(such as purchases on the Internet), facsimile, telex and telephone, contracts

are formed when a notice of acceptance arrives at the counterparty. It was
determined that article 526 (1) of the Civil Code would not apply.
3. Battle of the forms
In relation to the so-called battle of the forms the Civil Code does not set any
precise provisions. Unless the terms of the acceptance and the offer are the
same there will be no validity as an acceptance. This type of acceptance shall
be deemed to constitute a new offer (Art. 528). The principle is the mirrorimage rule. Nevertheless, in theory - with reference to article 19 of the UN
Convention on Contracts for the International Sale of Goods - even if the
acceptance is modified when the modifications are not major the contract
shall be formed with the modified terms of acceptance, unless the offeror
objects.
Even if such a rule is not clearly adopted, in a situation in which both parties
think a contract has been formed and act according to that assumption,
notwithstanding that the offer and acceptance are not in agreement, the court
can be expected to recognize the formation of contract by construing the
intent of the parties to find terms consistent with fairness between the parties.
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Section 2. Manifestation of intention that is truly unsatisfactory

1. Five systems
When executing a specific contract there are cases of truly unsatisfactory
manifestation of intention. Even so, the issue is the balance of two requests
that are derived from two grounds concerning the contract's binding effect.
From the position of party intent a truly unsatisfactory manifestation of
intention should be denied validity, but from the position of the need to protect
trust some limitations are needed. Consequently, the Civil Code takes an
approach that considers the two aspects just as in the case of persons with

limited capacity; i.e., the responsibility of the person in question and the
need to protect counterparties and third parties. We classify manifestation of
intention that is truly unsatisfactory into five categories based on these two
aspects. They appear in the Civil Code in the following order: concealment of
true intention, fictitious manifestation of intention, mistake, fraud, and duress.
These five systemic categories can be considered from various perspectives.
Here, we explain them by separating into two broad groups. One deals with
situations in which the person making the manifestation knowingly makes a
manifestation of intention that does not correspond to his or her true intent;
the second deals with situations in which the person making the manifestation
is not aware that the manifestation of intention made does not correspond to
his or her true intent. The former includes manifestations of intention based
on concealment of true intention, fictitious manifestation of intention and
duress, whereas the latter includes manifestation of intention based on
mistake and manifestation of intent based on fraud.
2. The person making the manifestation knowingly makes a manifestation of
intention that does not correspond to his or her true intent.
Situations in which the person making the manifestation knowingly makes a
manifestation of intention that does not correspond to his true intent can be
further classified into three categories from the perspective of responsibility of
the person in question and the need to protect counterparties. First, this can
be divided into situations in which the person voluntarily makes such
manifestation of intention and situations in which the person was compelled
to make such manifestation of intention. Then, voluntary situations can be
further separated into situations in which manifestation was made in concert
with the counterparty and situations where this was not the case.
A manifestation of intention not made in collusion with the counterparty, made
voluntarily and not corresponding to his or her true intent is referred to as
concealment of true intention; a manifestation of intention made in collusion
with the other party, made voluntarily and not corresponding to his or her true

intent is referred to as fictitious manifestation of intention; and a

manifestation of intention made as the result of fear due to the threat of harm
from another person and not corresponding to his or her true intent is
referred to as a manifestation of intent made under duress.
(1) Concealment of true intention
Manifestation of intention through concealment of true intention is the
manifestation of intention of a person who makes the manifestation knowing
that it does not reflect his/her true intention. Responsibility of the person in
question is a clearly a big issue at such a time. In principle, such
manifestation of intention is considered valid and the counterparty is
protected. However, in a situation that the counterparty knows the
manifestation not to be true intent or should obviously know based on the
circumstances, he or she is protected because the manifestation of intention
is void (Civil Code Art. 93).
(2) Fictitious manifestation of intention
Fictitious manifestation of intention is a manifestation of intention that is not
true intent, made in collusion with another party. It is the same as concealment
of true intention in the sense that the person who makes the manifestation
knows that the manifestation is not his or her true intent. The difference is the
manifestation of intention is made with the consent of the other party. This is
the general definition, but in contrast, there is also the view that this creates
the appearance that the manifestation of intention has been in collusion with
the other party, and there is no manifestation of intention called fictitious
manifestation of intention. The latter view is probably easier to understand.
Take for example the case where debtor A is faced with having his home
seized by creditors if the present situation continues, so he acts in collusion
with acquaintance B to pretend that the house was sold to B and transfers the
title of ownership to B.
In this case too, the responsibility of the person in question is great. However,
there is no need for protection of the other party. The other party knows that

this is a manifestation of intention without a corresponding true intent.

Consequently, article 94 (1) of the Civil Code simply provides Any fictitious
manifestation of intention made in collusion with another party (ies) shall be
void.
However, there is the need to protect third parties who are not direct
counterparties. In the above example, since the sales contract between A and
B is void, there is no transfer of ownership from A to B. However, suppose that
B falsely states that he is the owner of the house and sells it to a third party C.
C needs to be protected from situations such as C having researched the
registry to verify that B was the owner, and verified that B was listed as the
owner on the registry. In addition, as already stated above, A has great
responsibility.
Consequently, article 94 (2) of the Civil Code prescribes that The nullity of the
manifestation of intention pursuant to the provision of the preceding
paragraph may not be asserted against a third party without knowledge. The
term without knowledge means not knowing the circumstances and may not
be asserted against can be thought of as cannot claim. The fictitious
manifestation of intention between A and B is void, but the fact that it is void
means there cannot be a claim against C (a third party without knowledge)
who did not know the manifestation of intention between A and B was
fictitious. In other words, C acted as if the house had been validly transferred
from A to B and acquired ownership of the house by concluding a sales
agreement with B. Basically, C acted on the basis that the transfer of this
house from A to B was valid, and entering into a sales contract with B means
C can acquire ownership of this house.
(3) Manifestations of intention through duress
This is the case in which the manifestation of intent is made by a person who
is subject to illegal duress by another, feels fearful, and forms intent based on
such fear. In this case, the responsibility of the person in question is minimal.
In addition, in the case that the person exerting duress is the other party to the
contract, there is no need for protection of the other party. Consequently,

article 96 (1) of the Civil Code provides that the person making the
manifestation of intent may have it rescinded if it was induced by duress.
Even where the action can be rescinded, it is completely valid until it is
rescinded. However, when it is rescinded, that act is deemed void ab initio
(retroactively) (Civil Code Art. 121). Therefore, after it is rescinded the
situation will be the same as if it were void.
Suppose that A has not alternative but to sell a house he owns to B, due to
duress from B, and transfers the title to B, whereupon B sells the house to
third party C. On this occasion, C checks the registry and verifies that the
owner is B, and does not know that this was the result of the sales agreement
entered into under duress. C is likely to need protection. Or suppose D (a
person other than B) put A under duress to cause A to sell A's house to B, but
B also did not know about the duress. This case will probably require
protection for B.
However, the Civil Code does not contain provisions to protect C and B in the
above two examples. The code gives decisive importance to the fact that
there is no responsibility of the person in question.
3. Situations in which the person making a manifestation of intention is
unaware that it does not correspond to his or her true intent.
These situations can be further classified into two cases from the standpoint
of the responsibility of the person in question and the need for protection of
the counterparty and third parties. The issue is whether or not the
misunderstanding that caused the person making a manifestation of
intention, which unconsciously does not correspond to their true intent, was
intentionally brought about through the act of another person. Where this is
not the case, the manifestation of intention is due to mistake; where this is the
case, it is called the manifestation of intention through fraud.
(1) Manifestations of intention due to mistake
Mistake refers to cases in which there is a discrepancy between the
manifestation and the true intent due to a mistake of perception or judgment

by the person making a manifestation.

In cases of manifestation of intention due to mistake, the misunderstanding
that was the cause was not intentionally brought about through the act of
another person. Accordingly, the responsibility of the person in question is
great. Since there was certainly no true satisfaction, such manifestation of
intention cannot be simply deemed valid. At the very least, we cannot deem
any manifestation of intention caused by any mistake to be void.
Consequently, article 95 of the Civil Code takes a dual approach to delimiting
these cases: where manifestations of intention due to mistake are void are
limited to when there is a mistake in any element of the juristic act in
question; while the person who made the manifestation of intention may not
claim such nullity when the person who made the manifestation of intention
was grossly negligent.
In terms of contract the phrase when there is a mistake in any element of the
juristic act in question means when there is a mistake in an important part of
the contents of the contract. Whether or not something is an important part
is determined not based on the thinking of the person making the
manifestation of intention (subjective intent) but based on whether or not an
ordinary person would be considered unlikely to make such a manifestation of
intention if there were no mistake as to that part.
Generally, the motive for a manifestation of intention is not constituative of the
contents of the contract. Therefore, when there is a mistake in the motive it
generally does not fall under when there is a mistake in any element of the
juristic act in question. However, case law has recognized a mistake in any
element of the juristic act in question, even where there is a mistake as to
motive when that motive has been declared to the other party. For example,
when a customer notifies a bank that he needs cash to pay a third party and
terminates a term deposit contract, then even if the contract with the third
party is void and there turns out to be no need for payment of the funds, this
would not be a mistake in an element of the juristic act2. However, in the
situation of the distribution of property due to divorce, if it has been made
clear to the other party that the person distributing the property determined the

amount of property for distribution based on the perception that the

distribution would not be taxed, the case would be regarded as one of a
mistake in an element of a juristic act even though the mistake was one of
motive3.
Manifestations of intention due to mistake are deemed to have no effect
under the wording of article 95 of the Civil Code. That said, the precedents
hold that this invalidity can only be claimed by the person making the
manifestation of intention and there is no significant difference between this
and cancellation (rescission).
(2) Manifestation of intention through fraud
As we have seen above, in cases of manifestation of intention due to mistake,
because the other party could suffer improper loss if the person making the
manifestation were simply permitted to claim invalidity, the scope of such
claims is limited. However, in a case of misunderstanding by the person
making a manifestation of intention due to deception by the other party, there
is no need for protection of the other party. Further, even in a case in which
the other party does not directly deceive the person making the manifestation
of intention, if another person deceives the person making a representation
with the knowledge of the counterparty, there will be no need for protection.
Consequently, article 96 (1) of the Civil Code does not impose the limit of
mistake in an element of a juristic act but simply provides that Manifestation
of intention which is induced by any fraud [ ] may be rescinded, and further
provides in paragraph 2 even in the case that any third party commits any
fraud inducing any person to make a manifestation of intention to the other
party, such manifestation of intention may be rescinded if the other party knew
such fact.
In a situation in which for example, as a result of a manifestation of intention
made as a result of the fraud, the transfer of ownership of land from A to B is
registered, there will be a need to protect C, a third party who purchases the
land from B. Consequently, article 96 (3) of the Civil Code prescribes The
rescission of the manifestation of intention induced by the fraud pursuant to

the provision of the preceding two paragraphs may not be asserted against a
third party without knowledge. It is important to note here that the third party
referred to here must have appeared prior to the rescission. In the above
example, C's purchase of the land in question must have occurred before A
rescinded his or her manifestation of intention. The result of rescission will be
that the manifestation of intention is deemed void from the beginning (Civil
Code Art. 121). Accordingly, from a logical standpoint, the sales agreement
between A and B does not exist, so even if transfer of ownership to B is
registered, such registration is void. However, because C appeared while the
contract between A and B was valid, C must be protected. In contrast, we
consider the purchase of land by C from B after A rescinds the manifestation
of intention concerned and the contract between A and B has been deemed
void from the beginning. In this case, the situation becomes one whereby C
purchases from B, a person who is not the owner although he or she appears
to be. This has nothing to do with the retroactive effect of a rescission. This
relates to the general issue of whether or not a person who relies on
appearance should be protected, and is not a problem unique to cases of
fraud.
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Section 3. Agency

1. Effectiveness of agency
Agency is a system whereby a person (agent) with a stipulated relationship to
the principal can, by making manifestation of intention on the principal's
behalf, directly bind the principal.
Authority of agency is generally conferred by a mandate agreement between
the principal and the agent. However, it is also held that authority of agency
can arise from employment contracts and outsourcing contracts. Further,
there are also situations in which authority of agency arises in accordance
with the provisions of acts such as the guardian of an adult ward.

For an agent's act to be valid it requires that (1) the agent make a
manifestation of intention after making it clear that the effect will be binding on
the principal, and (2) such agent's manifestation of intention is within the
scope of the validly granted authority of agency (Civil Code Art. 99). However,
exceptions to (1) are prescribed in the Commercial Code. Specifically, for
agents in commercial transactions, it is a general rule that the principal is
bound even where an agent acts without manifesting that he acts on behalf of
the principal. This is a doctrine similar to that of undisclosed principal under
Anglo-American Law, but there are some minor differences. Under Japanese
law, when it is known that the agent acts on behalf of the principal, demand for
performance can only be made against the principal, and the only one who
can demand performance of the counterparty is the principal.
2. Unauthorized agency
An issue arises in situations in which one acts as an agent although there is
no valid authority of agency. In this situation, if the principal is satisfied, it is
permissible to have the act of the agent bind the principal. This will prevent
the counterparty's expectations from being harmed. Consequently, article 113
of the Civil Code provides for the ratification by the principal even where there
was an act of unauthorized agency. Ratification has retroactive effect.
Problems arise when the ratification by the principal cannot be obtained.
In such cases, the counterparty can demand performance from the
unauthorized agent in place of the principal or demand damages (Civil Code
Art. 117). However, in a situation such as where the contract concluded was
one for, say, the sale of land owned by the principal, it is actually impossible
for the unauthorized agent to perform the contract. Further, even if payment of
damages is requested, nothing can be done if the unauthorized agent does
not have the capacity to pay.
However, as we have already seen, even though the general rule is that the
binding effect of manifestation of intention will be denied unless there is true
satisfaction due to the intent of the parties being demanded for the binding

effect of a contract, the protection of the counterparty's trust must also be

considered. Consequently, here too the Civil Code strikes a balance between
both the responsibility of the principal (i.e., whether the principal has an
unavoidable responsibility even if bound by a manifestation of intention that is
not true intent) and the need for protection of the other party (i.e., whether
the counterparty acted with care sufficient so as to deserve protection).
First is the issue of whether or not the principal is responsible. In order to
think about this, it is necessary to consider why A would confer authority of
agency on B in the first place. This would be because A thought that in light of
A's own available time and capacity as well as trust in B it would be better to
have B act, rather than acting him or herself. In other words, A confers
authority of agency on B because employing B as an agent would be
beneficial to A, and A trusts B. However, B acted beyond the scope of that
authority of agency. This would be a case of A's slip in judgment. A should
have taken care in choosing the agent. In this case, the responsibility of A, in
other words the principal, can be recognized.
However, suppose B took the liberty of counterfeiting a power of attorney
without A granting B any authority of agency and acted, calling himself A's
agent. In this case, because A did not entrust B, A is not responsible.
However, if A created the cause of B's acting as if he were an agent although
B was not granted any authority of agency at all, then A can be found
responsible.
3. Apparent authority
Based on the above reasoning, the Civil Code prescribes the following three
cases in which the counterparty should be protected. Such cases are called
apparent authority, because, notwithstanding the actions were those of an
unauthorized agent, the counterparty who believed the appearance of proper
authority of agency is protected and the principal is bound by the unauthorized
agent's actions.

(1) Apparent authority due to exceeding authority of agency

Even in a situation in which a person with authority of agency acts beyond the
scope of such authority, when a third party has reasonable grounds for
believing that the agent has the authority the principal shall bear responsibility
(Civil Code Art. 110).
What situations constitute reasonable grounds? Generally, this can be
expressed as without knowledge or free of negligence (believing it to be true,
and it was not negligent to so believe). However, determination of whether or
not there was negligence differs according to the type of transaction and the
type of agent4. For example, with respect to the purchase and sale of real
estate, the counterparty cannot be called free of negligence without exerting
substantial care. When a family member is the agent, it is very easy to use a
personal seal to alter a power of attorney, so unless the counterparty
exercises substantial care he or she will not be deemed free of negligence.
(2) Apparent authority after termination of authority of agency
This is the situation in which a person who had authority of agency for a
period of time acts as an agent although the authority has terminated. When a
counterparty is without knowledge or free of negligence in relation to the
termination of the authority of agency the principal cannot say to the
counterparty, Don't blame me ? it was an act done after termination of the
authority of agency (Civil Code Art. 112). A had trusted B at one time, and if
the authority of agency was terminated, A should have made efforts to remove
the appearance that there was authority of agency.
Article 112 of the Civil Code foresees the situation in which the agent acts
within the scope of the terminated authority of agency. For example, the
situation in which B ? to whom A had granted authority of agency for leasing
real estate ? concludes a lease agreement with C as the agent of A after the
authority of agency has been terminated. So, what about the case in which B
concludes a sales agreement with C as the agent of A, after termination of the
authority of agency? Because this case is one of exceeding authority of
agency after termination of authority of agency, it is solved by applying both

article 112 of the Civil Code and the previously explained article 109 of the
Civil Code5. In other words, the counterparty shall be protected when the party
is without knowledge and free of negligence with respect to the termination of
the authority of agency and if the counterparty is without knowledge and free
of negligence with respect to exceeding the authority of agency. It is sufficient
if the requirements of these two articles are met in sequence.
(3) Apparent authority due to manifestation of grant of authority of agency
This is a situation in which a third party is protected if A has in fact not granted
authority of agency on B but nevertheless makes a manifestation to a third
party as if A had granted authority of agency on B and the third party enters
into a transactional relationship believing this manifestation. Article 109 of the
Civil Codes prescribes A person who manifested to a third party that he/she
granted certain authority of agency to other person(s) shall be liable for any
act performed by such other person(s) with third parties within the scope of
such authority. This situation also requires C to be without knowledge and
free of negligence.
In fact, there are many situations in which B is given a blank power of attorney
and B completes the authorization fields as agreed between A and B, but B
writes in actions outside the scope of the authority and acts as agent
accordingly. This is because the delivery of a power attorney with blank
authorization fields is taken as a manifestation of granting authority to the
agent to fill in the blank portions of the document as the agent determines6.
Further, the Commercial Code and the Companies Act contain several special
rules pertaining to article 109 of the Civil Code.
First, article 14 of the Commercial Code and article 9 of the Companies Act
prescribe that in a situation in which Company A permits B to conduct
transactions using the name Company A, A shall be joint and severally liable
for the performance of obligations from transactions conducted by B with a
counterparty who mistakenly believed that the transactions were those of A.
In addition, in relation to persons referred to under article 24 of the
Commercial Code as employees given the title which holds him/her out as

the approved chief of the business of the business office; under article 13 of
the Companies Act persons deemed to have authority as Any employee with
a title which holds him/her out as the chief of the business of the head office
or any branch office of a Company (for example, the branch manager), and
under article 354 of the Companies Act persons with the title of president,
vice president or other title regarded as having authority to represent the
Stock Company, a third party is deemed as being without knowledge to fulfill
the requirements of protection for a counterparty to an act of unauthorized
agency. Article 109 of the Civil Code interprets this as a requirement of
without knowing, free of negligence, but because speed is important in
commercial transactions and the fact that permitting a person to use a title is
highly likely to induce trust in a counterparty, the requirements for protection
are relaxed (in the case of commercial transactions).
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Chapter 4. Interpretation, revision and supplementation of contracts

Section 1. Mandatory provisions and public policy

1. Mandatory provisions
The Civil Code and other Acts contain provisions stating that parties are not
permitted to make prescriptions inconsistent therewith. These are referred to
as mandatory provisions, and agreements that conflict with mandatory
provisions are either invalid or are modified in accordance with the mandatory
provisions.
For example, with respect to a lease of land for the purpose of owning a
building, article 3 of the Land Lease and House Lease Act provides that the
duration of a land lease shall be 30 years; provided that when a longer term is
prescribed by contract, the term shall be [the longer one]. This means that
even if an agreement prescribes a shorter term, the term shall be 30 years.
This is further confirmed by article 9 of the Land Lease and House Lease Act

that states special agreements that violate the provisions of this section and
are disadvantageous to the lessee of land shall be void.
Therefore, with respect to a lease of land for the purpose of owning a building,
the parties are not free to prescribe the term of the contract. The setting of a
term of less than 30 years is not permitted, and shall be void even if the
parties agree to such a term.
There are quite a few instances whereby the contents of the contract are
regulated by mandatory provisions for purposes such as protecting the
weaker party including consumers. More detailed explanation is provided
below when various contracts are considered.
2. Void due to public policy
Thus, is it the case that any provision is valid so long as it does not violate a
mandatory provision? For example, article 41-2 (1) of the Stimulants Control
Law provides that Any person who unlawfully possesses, transfers or
receives stimulants shall be liable to penal servitude not exceeding 10
years. However, there is no direct provision as in the above example of the
Land Lease and House Lease Act that voids the contract. Nevertheless,
this does not mean one can assert that a contract for the purchase and sale of
stimulants is valid.
The contract is void based on the application of article 90 of the Civil Code.
That article provides that A juristic act with any purpose which is against
public policy is void, and the above contract is void because it breaches this
provision. However, it is very difficult to determine specifically what types of
contracts violate public policy.
There are also examples in which a violation of legal provision does not cause
a violation of public policy. Article 52 of the Food Sanitation Act provides that
any business person engaged in the sale of meat shall obtain a license from
the governor of the prefecture concerned. Therefore, what will happen if a
person who has not obtained a license purchases meat for the purpose of
selling it? The Supreme Court of Japan held that the Food Sanitation Act can

reasonably be construed as nothing more than a simple regulatory provision,

so even if Y had not obtained the license to sell meat, there is no basis for
denying the validity of the transaction in question based on the above law7.
On the other hand, article 72 of the Practicing Attorney Law provides that any
person who is not a practicing attorney shall not, for a fee and as an
occupation, engage in the practice of law. In addition the Supreme Court
found that contracts violating this, specifically contracts where X is mandated
by A to collect claims, and appointed as an attorney to institute A's
proceedings for the purposes of collecting such claims, and all other matters
relating to procedures for filing petitions and settling disputes, and if the above
collection of claims is successful will receive remuneration being one half of
the remaining balance after litigation costs are deducted from the collected
funds were against public policy and consequently void8.
There are various other examples, but in general, the determination of validity
and invalidity takes the following factors into consideration. Specifically,
whether or not there is a need to suppress such acts to the extent of voiding a
contract based on consideration of the interests to be harmed were the
contract invalidated, and taking account of the safety of the transaction and
the good faith between the parties. For example, in the above case, if the
contract is invalidated due to violation of the practicing attorney law, the
person who carried out legal work will simply end up working without
remuneration, and a sense of unfairness between the parties shall remain.
However, in order to avoid giving rise to a situation in which persons suffering
with legal problems are victimized by the unqualified, the courts must always
invalidate such contracts per se and create a regime whereby enter into such
a contract will only result in a loss. Therefore, such contracts will be treated as
invalid.
3. Violations of public policy that are not violations of laws and regulations
In the sections above we have addressed the invalidation of contracts that
violate laws and regulations in terms of violation of public policy. However,

where there being no violation of public policy without some form of violation
of laws and regulation this is not the case.
A married man entered into a contract for future marriage with a woman who
knew that he was married, under which he would pay her living expenses until
they could actually be married. The contract itself did not violate any laws.
However, this type of contract is based on the assumption of divorce. If a court
were to recognize the woman's claim for the payment of living expenses, the
court would end up promoting divorce (the only way the man could perform
the contract without payment would be to divorce). Consequently, the decision
is that this sort of contract disrupts the order of marriage and deemed to be
void because if violates public policy9.
However, even here the decision is difficult.
In addition, lately there have been many court decisions that have found
contracts for the purpose of consumer protection invalid due to them violating
public policy.
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Section 2. Interpretation and supplementation of contracts

1. Interpretation of the wording of the contract

When a contract is concluded it has binding effect and the effect as if it were a
statute between the parties. At that time if the contents of the contract are
clear with all problematic issues provided for there is no problem. However,
just as the articles of statutes require interpretation when applying contractual
terms to actual cases proper interpretation is required.
Suppose A and B have an existing commercial relationship whereby they use
the word yellow to refer to corn. In addition, at this time, A and B agree to a
yellow transaction.
Then, the objective meaning of the phrase yellow transaction is certainly not
corn transaction. However, if both parties give the phrase yellow transaction
the same meaning, the contract will be interpreted in accordance with that

meaning. This is the first stage of contract interpretation.

The problem arises when the meanings the parties give that expression differ.
On this point, the term will be interpreted to have the meaning the other party
would ordinarily think under the circumstances (this includes the manner of
dealing up to the present). In this sense, this could be thought of as
ascertaining the objective meaning of the expression; however, it must be
borne in mind that this does not constitute the meaning found in a standard
dictionary but the objective meaning under the circumstances. Accordingly,
factors such as the customs of the business world in which A and B operate
become important10.
2. Supplementation of the parties' intent
Up to this point we have been discussing the interpretation of details
manifested by the use of certain words by parties. However, in actuality, when
parties contract, they do not always precisely agree on every little detail. In
such situations, merely interpreting their manifestations will not enable
prescription of the legal relationship between the parties. There will be a need
to supplement aspects not decided by the parties.
Here too, it is deemed that the parties' intent should be respected. In other
words, the purpose of the contract is considered by understanding the overall
manifested intent, and the intent is supplemented consistent with the direction
of such agreed purpose. Further, the transactional customs, contractual
negotiations and the conduct of both parties after contract formation are all
significant in inferring the intent of the parties.
However, if this is taken too far, it is possible that the judges' opinion that
there is no mistaking that the parties thought this shall be imposed on the
parties. Certain standards are required to prevent supplementation from
becoming whatever the judges wish. Consequently, the Civil Code contains
many articles for the purpose of supplementing the intent of the parties, for
each type of contract.
3. Significance of typical contract types

Civil Code Part III Claims, Chapter 2 Contracts provides 13 classical contract
types, and prescribes the rights and obligations of the parties. However,
almost all of the articles found here are articles to supplement situations in
which the intent of the parties is not clear. In contrast to mandatory provisions,
these are called voluntary provisions.
So in order for the intent of the parties to be supplemented by such voluntary
provisions, it must first be made clear what type of contract is at issue as a
whole. For example, suppose that under a certain contract, A delivered
possessions to B. This could also arise in the situation in which B borrowed
the item from A, but it could also arise in the situation in which, say, A deposits
luggage with B, a for-fee luggage storage operator. Supposing that there was
no agreement with respect to the payment of a fee, such that supplementation
is necessary. In the former case supplementation would be required to provide
for B paying a fee to A. Conversely in the latter, supplementation would be
required to provide for A paying a fee to B. Consequently, unless the nature of
the agreement is clarified first, the details to be supplemented cannot be
determined.
Consequently, the Civil Code provides 13 contract types and clearly
prescribes the nature of the contract (ruling on nature) as the first step.
Therefore, contracts provided as contract types under the Civil Code are
referred to as classical contract types. The next step is to supplement the
contract with voluntary provisions provided for the type of contract concerned.
There is one problem if we considering the framework of ruling on nature (of
contracts) application of contract type Supplementation with voluntary
provisions as in the above. The issue is whether all of the various contracts
actually in use in society can be adequately classified into 13 types.
However, the intent of the parties, including custom, is pursued even if a
contract comes under the purview of a given contract type. In addition, when
the actual contract does not exactly match a contract type, there will be more
times when it is found that the intent of the parties differs from each article.
Whatever the case, fitting a contract to one of the 13 contract types provided

for in the Civil Code and supplementing with voluntary provisions will be the
last step.
4. Principle of good faith and abuse of rights
In addition, when determining the rights and obligations of the parties to a
contract, the principle of good faith in article 1 (2) of the Civil Code (The
exercise of rights and performance of duties must be done in good faith.) can
be used as the last step when a reasonable resolution cannot be reached
using agreed supplementation through agreed interpretation and voluntary
provisions. In addition,
Further, even where a right is recognized, there can be a certain restriction on
the exercise thereof. Article 1 (3) of the Civil Code provides that No abuse of
rights is permitted.
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Section 3. Expanded contractual liability

1. The classical concept of contract

The classical explanation with respect to the grounds for a contract's binding
effect, i.e., the explanation that the reason parties are bound by the contract
is that the parties agreed based on their free intent. In other words, the
binding effect arises from the intent of the parties' means there should be no
liability without agreement. This idea is more specifically composed of the
following two ideas. The first is that the parties do not have any obligations
whatsoever prior to the formation of the contract, and that furthermore the
parties do not have any obligation whatsoever after the contract ends. Another
is that the obligations imposed by the contract exactly comply within the scope
agreed to by the parties.
The former is referred to as temporal scope and the latter as quantitative
scope. However, at present, different situations arise with respect to these

two. That is to say, there has been a temporal expansion as well as a

quantitative expansion of contractual liability.
2. Pre-contractual effect: Type 1
The temporal expansion of contractual liabilities can be further divided into
two categories. Specifically, these are the affirmation of pre-contractual effect
and the affirmation of post contractual effect.
First the affirmation of a liability referred to as negligence in formation of the
contract can be cited as an example of an affirmation of pre-contractual effect.
The traditional thinking is that a contract is completely void if the performance
of the required obligations of a party is already considered impossible when
the contract is formed. For example, when a contract is formed for purchase
and sale of a house and that house had already been destroyed by fire it
would be impossible for the seller to perform his or her delivery obligation. So,
the purchase and sale contract itself is deemed to be completely void.
However, the buyer concluded the contract thinking it to be valid, an in some
cases may have borrowed funds from the bank, and may have arranged to
sell the house he or she is currently living in. This means they have already
incurred expenses. Even so, if the contract is deemed void due to impossibility
from inception it would be hard to allow that party to suffer without a remedy.
This would be particularly the case where, the seller should have known, by
conducting proper inspection, at the time the contract was concluded that the
house had already been destroyed by fire.
Liability for negligence in contract formation seeks to address this problem.
In other words, the parties to a contractual negotiation have imposed upon
them, at the stage of contract negotiation, the duty of care so as not to cause
a loss to the other party. In the above example, then, in a situation in which
the seller would have known that the house had been destroyed by fire if he
had used proper care, the seller would be in breach of his duty of care and
would have to compensate the buyer for harm suffered thereby.

Thinking in this way about the negligence liability in concluding a contract as

being the liability arising from a breach of obligation where negotiating parties
to a contract are subject to duty of care not to cause the other party to incur a
loss when negotiating a contract, the scope of application is not limited to
cases in which concluded contracts are void. An example is the situation in
which contract negotiations begin and a comfortable stage is reached where a
party thinks we still have to discuss some detailed terms, but the deal itself is
not going to be broken, but suddenly the other party says, I am not going to
contract. Of course, each party is free to decide whether or not to conclude a
contract. However, the interpretation is as follows: Because persons who have
commenced a transaction and entered the stage of contract negotiation are in
a close relationship subject to the principle of good faith, unlike the
relationship between citizens in general, regardless of whether or not the
contract is subsequently concluded, they should be subject to mutual
obligations under the principle of good faith not to harm the character or
property of the other party; if a party breaches this obligation and harms the
other party, it is reasonable to recognize liability for damages as contractual
liability even where the contract is not concluded.
There are many case decisions recognizing liability with respect to this sort of
improper termination of contractual negotiations11.
3. Pre-contractual effect: Type 2
The example of negligence in concluding a contract was an example of how
even where a contract is not void, liability can be imposed for breach of
obligation in the negotiation process. In the same way, a breach of obligation
in the negotiation process can become a problem subsequently even where
the contract is formed.
An obligation for a specialist to give full explanation to a consumer is
sometimes recognized in relation to the negotiation process. For example, in
addition to the obligation for securities companies that sell high risk financial
products to consumers to provide sufficient explanation, in the first place, it is

desirable for such companies to take care in promoting investments that best
conform to the client's investment experience, financial capacity and will. For
persons without sufficient knowledge or financial means the act of soliciting
such persons for speculative transactions itself is sometimes illegal.
4. Post contract effect
Important examples of the imposition of specified performance obligations
after the contract ends are confidentiality obligations, and the obligation to
refrain from competition. These are often explicitly prescribed in contracts. For
example, a franchise contract may prescribe that, the franchisee shall not, for
a period of two years after the end or termination of this agreement, engage
directly or indirectly in a business similar to the business of the X chain or a
competing business in the same prefecture or a neighboring prefecture.
These sorts of confidentiality obligations and duties to refrain from competition
are sometimes recognized even where there is no explicit agreement.
Further, there is a viewpoint that seeks to impose a certain duty of care on a
seller of certain products after the sale. For example, there is a notion that if,
after a securities company sells a certain financial product to a client, a
situation arises due to economic changes whereby it is advisable to sell that
financial product as soon as possible, the securities company must give
appropriate advice to that client.
Further, the problem of whether or not a buyer can claim damages is also
presented in a situation in which the seller of a resort condominium who made
a selling point of the beautiful view from the window soon after the sale starts
to erect a building next door that blocks that view.
5. Quantitative expansion
Contractual obligations also tend to expand quantitatively.
In particular, in a contract to receive services from another party, there are
obligations when receiving such services to take the necessary care to protect
the other party from danger to his or her life, and health, etc. (obligation to

exercise safety). There are several Supreme Court cases on this.

Such obligations of security do not mean the parties have made such an
agreement in advance. Obligations of safety are not prescribed in the articles
in the Civil Code concerning labor supply contracts. However, precedents are
expanding the obligations imposed on the parties based on the principle of
good faith (Civil Code Art 1 (2)).
The trend with respect to specified legal relationships toward imposing
obligations on the parties that are broader than agreed to can also be seen as
part of the realm referred to as specialists' liability.
At present, the tendency has been to consider, in a situation in which one
party to a contract trusts the ability of the other party as a specialist and
entrusts certain matters thereupon, that the party, as a specialist, is obligated
to consider the interests of the other party beyond the scope of the
agreement.
This means obligations are imposed to a broad extent necessary to comply
with the trust of the other party under the scope of their respective fields of
specialty. This obviously applies to specialists with public certifications such as
doctors, attorneys, architects, and also applies to securities companies in
relation to securities transactions and banks in relation to banking
transactions.
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1

Decision of the Supreme Court, 4 July 1969, Vol. 23 No. 8: 1347

Decision of the Supreme Court, 19 May 1972, Vol. 26 No. 4: 723

Decision of the Supreme Court, 14 September 1989, Vol. 41 No. 11: 75

Decision of the Supreme Court, 25 June 1976, Vol. 30 No. 6: 665

Decision of the Supreme Court, 28 July 1970, Vol. 24 No. 7: 1203

Decision of the Supreme Court, 10 November 1967, Vol. 21 No. 9: 2417

Decision of the Supreme Court, 18 March 1960, Vol. 14 No. 4: 483

Decision of the Supreme Court, 13 June 1963, Vol. 17 No. 5: 744

Decision of the Great Court of Judicature, 23 October 1920, Vol. 26: 773

10

Decision of the Great Court of Judicature, 2 June 1921, Vol. 27: 1038

11

Decision of the Supreme Court, 27 February 2007

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Part 2. Specific Contracts

Chapter 5. Contracts for transfer of property
Section 1. Sale
Subsection 1. Overview

1. Definition
The definition of a sales contract is provided in Article 555 of the Civil Code.
This states, A sale shall become effective when one of the parties promises
to transfer a certain property right to the other party and the other party
promises to pay the purchase money for it.
From this definition, a sale is a bilateral contract that is a contract for value.
A contract for which payment is made for the value of performance is referred
to as a contract for value, while other contracts are referred to as contracts for
no value. One should note that under Japanese law, gifts are also contracts
(contract for no value). Naturally, for example, the regulations differ in the case
of a defect in performance under a gift, which is a contract for no value, and in
the case of a defect in performance under a sale, which is a contract for value.
However, under Japanese law, the existence of consideration or cause is not
a condition for determining binding effect of a contract. This is the reason why
a gift is also a contract.
Further, a contract in which both parties are obligated to pay consideration for
benefits received from the other party is referred to as a bilateral contract,
while a contract that obligates only one party is referred to as a one-sided
contract.
Bilateral contracts for value have the most significance in economic society.
Sales are a typical example of a bilateral contract for value.

2. Fundamental elements
Purchase money under a sales contract should clearly be specified in all
cases. It does not matter whether this is specified in Japanese yen or a
foreign currency (CC Art 403). In addition, it is also acceptable to set as twice
the Nikkei 225 Average for the Tokyo stock market three months hence.
Since the subject of sales is property rights even if the contract is not for a
transfer of ownership of things, it will be treated as a sales contract as
defined under the Civil Code. For example, a contract to transfer monetary
claims is a sales contract while contracts to transfer patent rights and fishing
rights are also sales contracts. In addition, even when the contract involves
things this does not only mean the case of an individual item being specified.
There are cases when an item is defined by type (see CC Art 401). In such a
case, the obligation of the seller is referred to as a fungible obligation and the
claim of the buyer is referred to as a fungible claim. In addition, there are also
sales where the seller shall provide for a claim that is to be identified by way
of choice among more than one (see CC Art 406) (Similarly, this is referred to
as alternative obligation, and alternative claim).
It is also acceptable for items for which property rights do not exist at the
present point in time. Contracts to transfer future obligations have important
significance for financial transactions. This is also true for futures transactions.
Moreover, it can also apply to other person's things that are the subject of
sale. Of course, even if seller A and buyer B enter into a contract for things
owned by C, C naturally does not lose his/her ownership. However, A shall
assume an obligation to acquire the rights and transfer the same to the buyer
(CC Art 560). In other words, A is obligated to obtain the thing from C by way
of sale and then transfer such thing to B. If C will not sell it to A, A will not have
satisfied its obligation to B under the contract.
3. Pre-contracts of sales, basic contracts/ comprehensive type commitments
Pre-contracts of sales are prescribed in the Civil Code. It states, A precontract to sell or purchase made by one party shall take the effect of a sale

when the other party has manifested his/her intention to complete such sale
(CC Art 556 (1)). However, this is in fact almost never used in practice.
Take the case, for example, where a basic contract concluded between a
manufacturer and a special distributor where there is a contract for the seller
to sell and deliver certain products to the buyer to fulfill an order from the
buyer and for the buyer to accept such delivery. This is sometimes referred to
as a comprehensive commitment; an order by itself does not constitute a
sales contract (a pre-contract of sale does) and means that there is only an
obligation to enter into a contract with the other party. In other words, a seller
who does not fulfill an order would be in breach of his/her obligation to enter
into a contract, but not in breach of obligations under an established sales
contract.
For this kind of continuing sale, the conditions differ from the usual one-off
sale and there are specific problems such as under what circumstances a
basic contract can be cancelled. Above all, the criteria for the fundamental
breach that is the condition for cancellation will be different.
Subsection 2 Seller's obligation

1. Obligation to transfer the subject matter

There is no question that the seller in a sales contract is obliged to transfer the
subject matter to the buyer. In addition, when there are perfection
requirements, for example, land registration, in relation to the transfer the
seller must take the necessary action to satisfy the perfection requirements for
the buyer.
2. Seller's warranty
So what is the situation when the promised property rights do not have the
expected characteristics or qualities? This is also a breach of the seller's
obligations. However, the Civil Code includes special provisions for separate
treatment of when the promised property rights are not the same nature as

expected when there is a breach of seller's obligations. These are referred to

as the seller's warranty. They are categorized as (1) in cases where rights
partially belong to others, (2) in cases of shortage of quantity or partial loss of
object, (3) in cases when third parties have right of use, and (4) in cases
where there is any latent defect in the subject matter.
These provisions are also merely default rules (provisions for supplementation
of intent when the parties have not specifically agreed). Therefore, special
agreements with other content are possible. However, the seller may not be
released from that responsibility with respect to any fact that the seller knew
but did not disclose, and with respect to any right that the seller himself/herself
created for or assigned to a third party (CC Art 572). In this case there is a
mandatory provision.
(1) Seller's warranty where rights partially belong to others
The sale of a thing that belongs to others is also valid, and as already
explained, the seller is obligated to acquire the thing from the other party and
transfer it to the buyer, but this is the case when performance is not possible
in part. This includes the case where part of the thing that is subject to the
sale is owned by the seller but performance is not possible on the part owned
by a third party, as well as the case when all of a thing is owned by a third
party and only part could be acquired by the seller.
The Civil Code makes provisions for this by separating the case where all or
part of the thing that is subject to the sale is owned by someone other than the
seller is known by the buyer (bad faith) from where it is not known by the
buyer (good faith).
In the case of bad faith the buyer should also anticipate the possibility that the
seller may not be able to perform to the full extent. Here, Civil Code Article
563 (1) only provides that the buyer may demand a reduction of the purchase
money in proportion to the value of the part in shortage from a bad faith
seller. Nevertheless, there are cases such as the case of a firm commitment
of transfer from the seller when this article does not apply and the contract is
interpreted as a regular failure to perform.

By contrast, in the case of good faith, the buyer does not anticipate non
performance by the seller. Here, the buyer can obviously demand a reduction
of the purchase money - A buyer in good faith may cancel the contract if the
buyer would not have bought the rights if the rights consisted only of the
remaining portion (CC Art 563 (2)). Then, a claim for damages is also
possible when damages are incurred because of the demand for the reduction
in the purchase money or cancellation of the contract (CC Art 563 (3)).
Nevertheless, these rights must be exercised within one year; in the case of a
good faith purchaser measured from the time the buyer knew the facts (i.e.,
the facts that the seller would be unable to transfer the rights) and in the case
of a bad faith purchaser from the time of the contract (i.e., where the time for
fulfilling the seller's obligation was set in the future when the contract was
executed, that time) (CC Art 564). The theory is that this will quickly stabilize
the relationship of parties. Case law provides that exercising the rights extra
judicially within one year satisfies the above requirements. In this way, once
for example there is an extra judicially demand for reduction in purchase
monies the enforcement of rights can be made within the period for extinctive
prescription of claim (10 years, CC Art 167 (1))1.
(2) Seller's Warranty in Cases of Shortage in Quantity or Partial Loss of Object
Civil Code Article 565 provides that, in cases where there is any shortage in
the object of a sale made for a designated quantity, or in cases where part of
the object was already lost at the time of the contract, if the buyer did not
know of the shortage or loss, the same provisions will apply as in the case
where part of the rights belongs to others. In other words, the buyer may
demand a reduction of the purchase money from the seller in proportion to the
value. The contract can be cancelled if the buyer would not have bought the
rights if the rights consisted only of the remaining portion. Furthermore, it is
also possible to claim for damages. This is limited to good faith purchase as in
if the buyer did not know of the shortage or loss; because if the buyer was in
bad faith it could be considered that the agreement was reached to purchase
the object on the basis of a shortage in quantity or partial loss.

Case Law2 defines a sale indicating a quantity as For a party to secure the
actual quantity of a specified object the seller shall specify the area, volume,
weight, numbers and units of measurement in the contract and the sale shall
be determined by purchase monies based on such quantity. However, for
sale of land it is usual to note the dimensions recorded in the registry
indicating the specific thing in the contract. However, even if the dimensions
noted in the registry for the subject land are indicated in the sales contract this
should not necessarily mean the seller agreed to transfer the land of recorded
dimensions since it is well known that the dimensions recorded in the registry
are not always the same as the actual dimensions3.
This is also true for the restriction of within one year from knowing the facts
(pursuant to CC Art 563 in accordance with Art 565).
There are important special provisions concerning sales specifying quantity in
Article 526(1) of the Commercial Code. The buyer does not have an obligation
to inspect under the Civil Code, but the Commercial Code provides in the
case of sales between merchants that the buyer should make an inspection
without delay on receipt of the subject things and must give immediate notice
to the seller if there is a shortage in quantity.
Nevertheless, if the seller knows there is a shortage in quantity (bad faith) the
aforementioned special provision does not apply since there is no need for
seller protection (Commercial Code Art 526 (2)).
(3) Seller's warranty in cases where third parties have right of use
If a third party has the right of use for the subject matter of the sale
(superficies, emphyteusis, servitudes, rights of retention, pledges, right of
lease) it will preclude the buyer's rights. However, if we consider the example
of land ownership being the subject of the sale, even if a third party has
superficies for such land (the right to use the land of others in order to own
buildings. CC Art 265) the buyer will become the owner and able to enjoy
rental income. This is clear when a third party has servitudes (the right to use
such land for activities such as passage and drawing water. CC Art 280) and
unless it obstructs such servitude the buyer can also use the land. The value

of the purchased land is not reduced to zero and a proportional solution is

called for. The example above refers to the case where the subject of sale is
encumbered, but the same is true in the opposite case when the servitude for
the benefit of the real estate that is the subject matter of a sale (turns out) not
to exist.
Hence, in principle the buyer is limited to only claiming damages against the
seller, but the contract can be cancelled only in the case where the purpose of
the contract could not be fulfilled because of the existence/non-existence of
such servitude.
This situation is also subject to the one year time limit (CC Art 566). When the
buyer is in bad faith it is assumed that the agreement was made on the basis
that the thing that was the subject of sale was subject to a limitation of rights
and so redress is limited to when the buyer was aware of the existence/nonexistence of servitude etc. (the same as for Cases of Shortage in Quantity or
Partial Loss of Object).
(4) Seller's warranty in cases where there is any latent defect in the subject
matter
We consider the situation where the subject matter of a sale lacks the usual
quality and features that such type of thing should have. Naturally, the buyer
will not be able to profit to the extent anticipated. However, even though this
may be the case, the value of such subject matter will not be zero. Even in
this case the Civil Code treats the subject matter in the same way as the case
in which there are third party use rights. In other words, in general only a claim
for damages can be made, and the contract can be cancelled only where the
purpose of the contract could not be fulfilled because of such defect. In
addition, there is also the same one year time limit (CC Art 570). This is
referred to as warranty against defects.
Case law states that even where special statutory limitations on the subject
matter exist, these are a type of defect4. An example would be where 80% of
a purchased land parcel was within the area for a road subject to urban
planning.

It is necessary for this to be a latent defect. Case law interprets this in

abstract terms stating this could not occur if an ordinary buyer in such a
transaction took the usual care or there is no negligence in the buyer not
knowing of its existence. However, in reality situations where the buyer knows
of the defect are exempted. When the buyer knows of the existence of a
defect it can be considered that the agreement on the sale of the subject
matter was for things with such defect.
As in the case of shortage in quantity or partial loss of object there are
special rules for sales between merchants. The meaning and details are the
same (Commercial Code Art 526).
There is debate about whether or not the rules for sellers warranty against
defects and cases of shortage in quantity or partial loss of object apply when
the subject matter of the sale is prescribed only by type (unspecified things). If
applied, where there is a shortage in quantity or a defect, the obligation to the
buyer has not been satisfied but the seller is not obligated to provide another
proper thing, which can be fulfilled. It is argued that the warranty thus appears
to be limited to the case of specified things, where the provision of another
proper thing is impossible.
This is a theoretically a very difficult issue, but in the case of a shortage in
quantity there are many cases determining that the rules of warranty applies
to unspecified things. Furthermore, for warranty of defect the case law states
that if the buyer initially accepts the performance as is then it becomes an
issue of warranty5.
Subsection 3 Buyer's obligation

1. Earnest money
The buyer's obligation for purchase monies becomes a problem depending on
whether or not the monies paid by the buyer to the seller are all purchase
monies. When a sales contract is formed there are cases when the buyer
pays the seller a certain amount of monies. Various terms are used to refer to
such payment, such as application money, down payment, and earnest

money etc.
The nature of the payment is determined by the intent of the parties. However
the following types of custom predate the enactment of the Civil Code. In
other words, if monies referred to as earnest money are exchanged on
formation of the contract the buyer can cancel the contract by forfeiting such
monies. Conversely, the seller can cancel the contract by reimbursing twice
the amount to the buyer. In this case there is no need to pay any other form of
damages.
Here, the Civil Code provides that a proportion of the purchase monies paid
by the buyer to the seller at the time the contract is formed is inferred to
evidence the parties' intention in line with this custom (CC Art 557). However,
the contract can be cancelled by either the buyer forfeiting the earnest money
or the seller reimbursing twice the amount until either party commences
performance of the contract. The case law6 states that the commencement of
performance of a contract pursuant to Article 557 (1) of the Civil Code
indicates the case when pre-conditional action that was necessary for the
performance or partial performance based on an objective external perception
was undertaken.
2. Obligation for receipt of monies for the subject matter
Can the buyer refuse delivery when the seller tries to deliver the subject
matter of the sale?
Article 524 of the Commercial Code states that when the buyer refuses to
receive the object that is the subject of sale between merchants the seller may
sell such object at auction (sale through the courts). There is no clear wording
in the Civil Code, but at present there are many scholarly views that affirm the
buyer's obligation to receive the subject matter. In general when the seller is
subject to storage costs for the subject matter that the buyer refused to
receive, the seller may claim payment against the buyer.
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Section 2. Gifts

Gifts shall become effective by the manifestation by one of the parties of

his/her intention to give his/her property to the other party gratuitously, and the
acceptance of the other party thereof. (CC Art 549). In this way, depending on
the disclosed intent agreed by the donor and the donee, gifts also form a
contract under Japanese law.
Therefore, the donor has an obligation to deliver the promised property to the
donee. In the case of encumbered gifts, the donee shall also be obligated to
perform such encumbrance.
However, unlike a contract where there is a value relationship between the
parties, in a gift contract the donee, after all, receives the property at either no
cost, or with just a slight encumbrance. Consequently, the need for protection
is reduced to that extent. Here, Article 550 of the Civil Code provides that a
gift not in writing can be cancelled. However, any portion of a gift that was not
in writing for which performance has already been completed cannot be
cancelled. This is because a contract in writing or already performed partially
is likely to raise definite expectations of the donee and so it is difficult to
cancel, but at the stage of a verbal promise such definite expectations are
unlikely. In addition, while there is no clear wording for encumbered gifts,
when the donee performs the encumbrance the interpretation is that it is then
too late for the donor to cancel the gift contract.
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Chapter 6. Contracts for use of property

Section 1. Loan

1. The distinction between loans for consumption contracts and lease

contracts/loans for use contracts
Contracts where one party causes another party to use property can be
divided into contract types where the return of borrowed goods takes the form

of things that are the same in kind, quality and quantity, and contract types
where there is return of the thing itself. The former is referred to as loans for
consumption contracts. The latter contract can be further divided depending
on whether or not there is a value paid for the borrowing (rent) into loans for
use contracts (things on which value is not paid) and leases (things on which
value is paid).
For consumer loans, the Civil Code does not distinguish between contracts for
value and no value. This creates a problem that is discussed later.
2. The nature of loans for consumption contracts
The definition of loans for consumption contracts is provided in Article 587 of
the Civil Code.
A loan for consumption shall become effective when one of the parties
receives money or other things from the other party by promising that he/she
will return by means of things that are the same in kind, quality and quantity.
This definition differs from the definition of a sales contract; loans for
consumption contracts will not be formed just by a promise by both parties. In
addition to agreement, loans for consumption contracts require the delivery of
the subject matter and the effectiveness of other provisions. Compared to a
sales contract that is a consensual agreement that is formed just through
promises, contracts such as loans for consumption contracts are referred to
as substantial contracts.
Why is this so?
In the case of loans for consumption contracts there are no regulations
concerning interest to supplement the intent of the parties in Articles 587 to
592 of the Civil Code. In other words, the basic form of a loan for consumption
is without interest. Consequently, whatever the agreement, there is no great
need to protect the trust of the borrower in relation to the agreement.
Therefore, loans for consumption contracts are not formed simply by
agreement and the contract becomes effective on the actual delivery of the
thing.

However, what is of major significance to current transacting companies is

naturally loans for consumption contracts with interest. Consequently, the
rationale that loans for consumption contracts without interest are deemed to
be loans for substantial contracts is inapplicable for most contemporary
contracts. In other words, there is no rational reason to deem these to be
substantial contracts.
Hence, under present doctrine there are many who perceive that at the very
least a loan for consumption contract with interest is formed just by
agreement. Therefore, from the principle of freedom of contract, if a party's
intent is for a contract to be formed just by agreement it would only be natural
for such agreement to be formed. However, the existence of Article 587 of the
Civil Code makes the courts reluctant to directly recognize the formation of
consensual loans for consumption contracts. As a result, there is leaning
towards dealing with cases of financial institutions breaching loan promises
not as non performance of contract, but as tortious acts7.
In reality, financial institutions often enter into promises with borrowers to grant
loans divided into a number of portions (loan installment contracts) and
promises to lend any number of times up to a specified limit (recurrent loan
contracts). A breach of these types of promises is at the very least tortious
unjust refusal.
3. Interest
Historically in Japan there has been no banning of interest itself. The Civil
Code certainly refers to the principle of loans for consumption without interest,
but Article 513 of the Commercial Code states that a lender can claim
statutory interest (6% annually, Commercial Code Art 514) when there has
been a loan of money between merchants even if there was no agreement on
interest: interest arises in principle. However, limits on interest have been in
place for a long time.
Currently, the Interest Rate Restriction Law prescribes the maximum amount

of interest. This is 15% per annum for principal amounts of 1 million yen or
more.
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Section 2. Lease

1. Definition
As already explained, lease contracts are lending contracts where the lender
receives the return of the things lent, and the borrower pays a value (rent) for
the borrowing. A typical example is a contract to live in a rented dwelling on
the payment of rent.
Lease contracts are consensual contracts and a formed only by agreement of
the parties (CC Art 601).
2. Borrower's obligation
It goes without saying that the most important obligation of a borrower
(lessee) on a lease contract is the obligation to pay rent (obligation to pay
rent). Other than that there are various regulations such as the obligation to
use the subject matter in an appropriate way (obligation to adhere to method
of use, mutatis mutandis application of Civil Code Art 616 to Art 594 (1)), the
obligation to return the things by the period specified in the contract (obligation
to return the thing, mutatis mutandis application of Civil Code Art 616 to Art
597 (1)), and the prohibition of assignment of the lessee's rights or sublease
(or lend) a leased thing without the approval of the lender (lessor) (right to
borrower)(prohibition of unapproved transfer of lease rights, and unapproved
assignment, CC Art 612).
3.Protection for land lessees and dwelling lessees
In the domain of land and dwelling rentals the aim is to protect the land
lessees and dwelling lessees through case law and special legislation.

Case law states that in land lessees and dwelling lessees, even if there is
default by the lessor, unless such default causes major damage to the trust
relationship between the lessee and the lessor, the lessor cannot terminate
the contract8. Even if the lessee does not pay rent for about 1 to 2 months this
would not allow the lessor to terminate the contract. This is referred to as the
doctrine of damage to the trust relationship.
In addition, in terms of special legislation there is the Land Lease and House
Lease Act. An outline of that Act is provided below.
(1) Term
The land lease rights applicable under the Land Lease and House Lease are
the lease rights for land for the purpose of building ownership (Land Lease
and House Lease Act Art 2-1). This type of land lease right first limits the
minimum term (30 years) (Land Lease and House Lease Act Art 3). Further, if
there is a building existing after the expiry of the contracted term the lessee of
the land can request renewal of the contract (Even if there is no special intent
indicated, the ongoing use of the land means a request has been made). The
lessee of the land cannot be refused renewal of the contract unless there are
just and reasonable grounds for dismissal (Land Lease and House Lease Act
Art 5, 6).
By contrast a minimum term for building leases is not prescribed for leases
with prescribed terms of less than one year and those considered not to have
a prescribed term (Land Lease and House Lease Act Art 29). However, leases
with definite terms will require just and reasonable grounds for dismissal if
the lessor is to either refuse the renewal of contract or the lessor wants to
submit a notice to have the lease with no prescribed term terminated (Land
Lease and House Lease Act Art 28).
However, land lease rights without renewal of the contract term (fixed land
lease rights) are also recognized under specific conditions (Land Lease and
House Lease Act Art 22 to 24). In addition, for house leases a fixed house
lease system has been introduced since 1999. In the case of a fixed term
house lease the regulations concerning contract renewal (such as the need

for just grounds for dismissal to reject renewal) are excluded as already
explained and the house lease contract terminates with the initially contracted
expiry date (Land Lease and House Lease Act Art 38 (1)). However,
depending on what was written at the time of the contract, there are conditions
imposed such as a reminder notice to be given to the lessee during the period
of 1 year to 6 months prior to the expiry date.
(2) Perfection of lease rights
When a lessor transfers the thing to be leased to a third party the principle is
that the lessee cannot assert a right to lease against the new owner. However,
even on this point, the Land Lease and House Lease Act prescribes the
following type of regulation to protect the lessee.
For a land lease, even if the lease rights themselves are not registered, a
lessee who has entered into the land lease for the purpose of acquiring the
building thereon may, if such building is registered, assert the lease rights
against a third party as well (Land Lease and House Lease Act Art 10 (1)).
Even for a residential building lease, a lease of a building is effective against
a subsequent acquirer of the property rights when the building had been
delivered, even without registration (Land Lease and House Lease Act Art 31
(1)).
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Chapter 7. Contracts for provision of services

1. Service types
It is impossible to live in modern society without receiving services based on
contract. The Civil Code defines a number of types of contracts for some form
of service to be provided by one party to another; specifically, contracts for
work, employment, mandates, and deposits. However, the criteria for
these four categories are actually not very clear.
Three types: contracts for work, employment and mandates are basically

explained as follows. First, there is a division into whether the purpose is to

provide labor itself or provide the results of labor (completion of work). The
former is taken to be an employment or a mandate and the latter a contract for
work. Then, amongst contracts for which the purpose is the provision of labor
itself there is a breakdown into employment and mandates based on whether
the provision of such labor is under the direction of the employer
(employment) or whether undertaken on the basis of a specific discretion of
the labor providers (mandate).
However, even if this is the case, it is not clear which will apply for a specific
contract. It is preferable to consider how, under the broad concept of contracts
for provision of services, those contracts are regulated by the Civil Code and
whether or not there should be such regulation.
Also, amongst contracts for provision of services there are those that are
subject to a number of laws referred to as labor laws that provide for the
contractual relationship between employers and employees (the Labor
Standards Act is at the core of these). These are referred to as labor
contracts. There are various forms of employment and a special act called the
Labor Contract Act was promulgated in 2007.
Contracts for provision of services are consensual contracts and formed only
through agreement (CC Art 623, 632, 643). Agreements for the provision of
services for custody of things also form a contract even if there is no actual
acceptance of things. However, the legal relationship pertaining to custody of
things commences with the actual acceptance of things (CC Art 657).
2. Remuneration
If there is an agreement about the existence (or not) of remuneration and the
payment period, such an agreement obviously prevails. The issue is when
there is no precise agreement.
First we consider what happens when there is no agreement about the
existence (or not) of remuneration. On this point the Civil Code states that
employment contracts and contracts for work are contracts for value and

remuneration is recognized in principle (CC Art 623, 632), but mandate

contracts and deposit contracts are in principle contracts for no value (CC Art
648 (1), 665).
3. Service provider's duty of care
For contracts for provision of services when there is demand for completion of
specific work, it is not an issue what degree of care a service provider must
exercise to perform such work. The point is that the work is completed and no
questions are asked about the process. Further, when a party takes action on
the basis of direction by another party (the person receiving the service) it is
only fair to act in accordance with such direction.
By contrast, when a service provider exercises his/her discretion, the issue is
the extent to which care was taken in exercising such discretion. Here, Article
644 of the Civil Code prescribes in relation to the mandatary there be care of
a good manager (duty of good management). In addition there is provision for
necessary obligations, if so requested by the mandatary, report the current
status of the administration of the mandated business at any time (CC Art
645). However, when things are held gratuitously a person shall exercise
care identical to that he/she exercises for his/her own property in respect of
the thing held (CC Art 659).
4. Warranties
When there is a request for completion of a specific work there is the issue of
what to do if the completed work is defective. As was explained in relation to
the seller's warranty, this also calls for a proportional solution. This is
prescribed in the Civil Code from Articles 634 to 640. To state it very simply,
when there is a defect in the subject matter of the work the party who orders
the work can demand repairs and claim for damages from the service provider
(person contracted for the work) for a period of one year from delivery . In
addition, when the purpose of the contract cannot be satisfied due to such

defect the contract can be cancelled. This is virtually the same as for the
seller's warranty.
5. End of contract
If the scheduled service has been provided and remuneration paid the end of
the contract is clear. Can then a contract end by terminating it midway?
When the completion of the specified work has not been received and where
there is no relationship of services being provided to the direction/instruction
of the party receiving the services, there is a relationship of trust between the
receiver of the service and the service provider who is providing services
based on his/her discretion. In this situation the relationship of trust between
the parties is important. Here, either one of the parties can cancel the
mandate (CC Art 651 (1)). When remuneration is involved and the party
receiving the services unilaterally cancels the mandate, the service provider
will receive damages under a separate provision (CC Art 651 (2)).
Once a specific work has been accepted, the service provider is not at liberty
to cease the work. By contrast, the party ordering the work can cancel the
contract, but the service provider can secure due remuneration (CC Art 641).
The above two prescriptions are combined when there is a relationship of
service provided based on the direction of the party receiving the service.
This is because in addition to the element of a trust relationship existing
between the parties, the fact of following direction is considered a
comprehensive acceptance of completing the work. Then, either party may
request to terminate at any time (CC 627(1)), but when a period of five years
or less is specified, unrestricted cancellation during that period is precluded
and when a longer period is specified, unrestricted cancellation is not possible
for either party until after the expiration of five years. When a term is specified,
it can be said there is agreement to act in accordance with direction during
that period. However, the thinking is that it is not appropriate to leave (a party)
in a subservient relationship for a very long term.
For care of things, the party that requested the care may demand the return of

the same at any time (CC Art 662). If the party requesting care specified a
term of care, the thing must be cared for during that period (CC Art 663).
6. Regulations under Special Acts
There is an infinite variety of specific stances for contracts for provision of
services ranging from large scale items such as the undertaking to construct a
building to the level of giving an elderly person a bath. Thus, particular
contracts for provision of services are subject not only to the provisions of the
Civil Code, but also the Commercial Code and other various Special Acts.
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Chapter 8. Other contracts

Section 1. Contracts for formation of organizations

1. Partnership contracts
There are various organizations in society. A contract to create this type of
organization is referred to as a partnership contract. Article 667 paragraph 1 of
the Civil Code states that the details of a partnership contract are provided
when each of the parties promises to engage in joint business by making a
contribution. The business referred to here can be construed as for
charitable purposes, private purposes as well as neither of such purposes.
When a partnership is formed The contributions of the partners and other
partnership property shall be jointly owned by all partners (CC Art 668). Then
the partnership property is subject to organizational restraints and each
partner is unable to dispose of his/her share (CC Art 676 (1)) nor seek division
of the partnership property before the partnership is dissolved and liquidated
(CC Art 676 (2)). By contrast, each partner owes a separate responsibility in
proportion to the value of each partner's contribution. Also, the creditors
against the partnership can levy the partnership property.

2. Anonymous association contract

However, although the name may be similar to partnership within the Civil
Code, Article 535 of the Commercial Code provides for anonymous
associations that are completely different types of entities. These are
contracts where a party invests in the business of another party with the
promise of sharing in the profits arising from said business. This is not a
formation of an organization, and in terms of loans for consumption contracts,
the lent monies are restricted to the purposes of running the business. In
addition, where the amount of repayment and timing is conducted through
distribution of profit this can be said to be a matter of specific agreement.
Investments by anonymous association members become the property of the
business owner (Commercial Code Art 536 (1)).
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Section 2. Third party beneficiary contracts and others

1. Other type contracts

In addition to type contracts defined in the Civil Code are life annuities (CC
Art 689) and settlement contracts (CC Art 695). The Civil Code naturally
anticipates their existence, but contracts not defined in Part 3 Debt, Chapter 2
Contracts include insurance contracts and contracts establishing real rights
such as mortgages.
2. Third party beneficiary contracts
Furthermore, while not a type contract one variety of contract defined in the
Civil Code is the third party beneficiary contract. This is a contract type where
a third party other than the contracting party obtains rights based on a
contract between other parties.
In principle a contract creates rights and obligations only between the parties
to the contract, but rights can be provided to a third party by special

agreement. A life insurance contract is one typical example, but for sales
contracts if a buyer and the party to whom payment is to be made, or more
precisely if there is agreement between the seller and the buyer for the
obligee for the claim on payment to be by a third party other than the seller it
becomes a sales contract that is a third party beneficiary contract.
However, no matter the extent to which rights are acquired, the intent of such
third party cannot be ignored. Hence, Article 537 (2) of the Civil Code provides
for this special contract type, stating that the rights of the third party shall
accrue when the third party has expressed his/her intention to the obligor to
enjoy the benefit of the contract (expression of beneficial intent). In the above
sales contract example, if the third party expresses intent to the buyer by
saying I will receive the purchase monies for the sale, such third party will
become the obligee with a claim on the purchase monies for the sale.
However, when the recipient of insurance payments is to be a third party, such
third party's expression of intent to benefit is invalid (Commercial Code Art
648, 675).
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1

Decision of the Great Court of Judicature, 9 November 1935, Vol. 14: 1899

Decision of the Supreme Court, 20 August 1968, Vol. 22 No. 8: 1692

Decision of the Supreme Court, 20 August 1968/ previous note 2.

Decision of the Supreme Court, 14 April 1966, Vol. 20 No. 4: 649

Decision of the Great Court of Judicature, 13 March 1925, Vol. 4: 217 et al

Decision of the Supreme Court, 24 November 1965, Vol. 19 No. 8: 2019

For example, Decision of the Tokyo High Court, 1 February 1994, Hanrei-Jiho No. 1490:

87.
8

For example, Decision of the Supreme Court, 28 July 1964, Vol. 18 No. 6: 1220
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Part 3. Performance and non-performance of contracts

Chapter 9. Contract performance

Section 1. Fulfillment of obligations

Subsection 1. Performance

1. Overview
When and where should performance occur? is prescribed by the contract
(Civil Code Articles 412 and 484 are provisions for supplementation when the
agreement is not clear), but what can becomes an issue is Which obligation
has been satisfied when a specified performance has been provided?
(allocation of performance).
This is also determined by the designation of the person tendering the
performance (CC Art 488 (1)). When the person tendering the performance
does not make the designation, the person who receives the performance
may determine the particular obligation to which the performance applies.
However, the person who tenders the performance may object (CC Art 488
(2)). When neither party makes the designation, the performance shall be
governed by Article 489 of the Civil Code. Performance is allocated beginning
with the earliest due obligations and that performance of obligations which
would have the most benefit (such as high interest) to the obligor.
Which kind of performance constitutes fulfilment of obligation? is of course
prescribed in the contract. If the obligor and the obligee agree to provision of
performance other than the original performance obligated, such other
performance becomes the performance. This is referred to as substitute
performance (CC Art 482).
2. Performance for a holder of quasi-possession of claim
Against whom should the performance be provided to effect the
extinguishment of the obligation? There are obviously cases where
performance in respect of the obligee is acceptable, while performance in
respect of an agent authorized for collection and a trustee in bankruptcy is,
naturally, effective. Then, what is the case when a person not given such

appropriate authorization for collection gives the appearance that he/she has
such authority, and the obligor performs the obligation?
On this point Article 478 of the Civil Code states, Any performance made vis-vis a holder of quasi-possession of the claim shall remain effective to the
extent the person who performed such obligation acted without knowledge,
and was free from any negligence. In other words, when performance was
made in respect of a person who gives the appearance that he/she has the
authority for collection or is seen to be the obligor from the perspective of the
performer upon the standards relating to transactions generally accepted by
society = a holder of quasi-possession of claim, where the performer was
unaware that the person did not have the authority to receive such
performance (= good faith), and when there was no negligence in not
knowing, the effect is to extinguish the obligation. This type of performance is
referred to as performance for a holder of quasi-possession of claim.
3. Repayment of bank deposits
A frequent problem arises in relation to the repayment of bank deposits. Here,
case law expands the interpretation of performance in Article 478 of the Civil
Code to include prepayment of fixed-term deposits as performance.
Furthermore, this article is applied by analogy to set-off in the loans secured
by deposits1 as well as loans from insurance companies to insurance policy
holders that are secured by the redemption value of life insurance policies2.
We will consider another problem, i.e. prepayment of fixed-term deposits.
Suppose the case where a person giving the appearance of being the
depositor goes to the bank before the maturity of the fixed-term deposit and
requests repayment, and the bank complies with such request. In this case,
we can find two actions.
(1) Consensual termination of the fixed-term deposit contract;
(2) Its performance.
Article 478 of the Civil Code is the provison relating to performance. However,
in case law3the problem is dealt with under Article 478, which treats actions

(1) and (2) as a whole. In other words, if the person who requested
prepayment of a fixed-term deposit is a person who gives the appearance
that he/she has the authority for collection or is seen to be the obligor from the
perspective of the performer upon the standards relating to transactions
generally accepted by society the consensual termination + repayment is
effected and the claim on the fixed-term deposit is extinguished.
It is normal for a bank to repay a fixed-term deposit prior to maturity (the
interest rate becomes the same as an ordinary deposit). Therefore, it is not as
though there is an independent juristic act of consensual termination, and the
decision is based on recognition of the current practice.
4. Repayment using cash card
Further, for repayment of bank deposits there is a regulation that as long as
the bank has verified and concluded with due care that the seal used on the
repayment request and other documents is the registered seal, the
documents shall be treated as not false, and the bank shall not be liable for
damage incurred from the use of such documents even if such documents
have been counterfeited, altered or subject to other wrongful use. It is not that
verification of the seal by itself is acceptable, it also requires due care be used
in all procedures (Note that signatures are not commonly used in Japan as a
method for securing intent. Seals are used).
Nowadays, repayment is often conducted using cash cards. Consequently,
cash card agreements stipulate, If cash has been dispensed after the
automated teller machine has verified the card and that the personal
identification number used for the operation of the automated teller machine
has matched the registered personal identification number, the bank or allied
banks shall not be liable for any damage that arises, even if the card or
personal identification number is counterfeited, altered, misappropriated or
subject to some other accident. The Supreme Court states in relation to the
effect of this contractual stipulation that Even if a person other than the
depositor receives repayment using an automatic teller machine provided by

the bank, if the actual cash card provided to the depositor by the bank is used
and the correct personal identification number input, and the bank repays the
deposit after the automatic teller machine has verified the cash card and the
personal identification number the bank will have discharged the purpose of
the contract without liability, unless there are special circumstances such as
unsatisfactory management of the personal identification number by the
bank.4
A point to note is the proviso unless there are special circumstances such as
unsatisfactory management of the personal identification number by the
bank. When this type of new system is implemented the person implementing
the system is responsible for considering any undermining of client trust in the
safety of the system. Therefore, there is a requirement for due care necessary
for establishment and administration of the system. No matter how the
discharge of a contract is satisfied, a person who simply provides a dangerous
system is unable to assert its validity.
Thus, in a fact pattern where applying Article 478 of the Civil Code was at
issue, the Supreme Court determined there were also situations when a bank
is found to be grossly negligent and in applying this article, found that
performance had not been discharged5. The bank's deposit in this case used
a passbook and not a card (In Japan, passbooks are issued for bank deposits,
then held by the depositor with the transaction history recorded therein) and
when the passbook was inserted into the automatic teller machine and the
personal identification number pressed, withdrawals could be made. However,
this was not stipulated in the contract, nor the depositor know about it. The
depositor left the passbook in his car and it was stolen; the personal
identification number was the same as the car's license plate number and so a
lucky thief was able to make the withdrawal.
The decision in the case was that there should be gross negligence since the
explanation to the depositor was also lacking: For a bank to be considered
not grossly negligent in relation to the repayment of deposit through the
method of automated payment to a holder of quasi-possession of claim, it
requires not only that the machine works correctly at the time of payment, but

that the bank has taken the utmost possible care in relation to the
administration of the entire automated payment system, necessary to exclude
payment to an authorized person. This includes informing the depositor of the
ability to obtain repayment of the deposit by way of the automated payment
so that depositor does not make an omission in his/her management of items
such as the personal identification number.
Subsection 2. Performance by third parties

The obligor is required to perform the obligation. However, the matter of who
can perform the obligation is not limited to the obligor. This is determined by
the intention of the parties in contract. Although Article 474 (1) of the Civil
Code says that The performance of an obligation may be effected by a third
part whereas cases where the nature of such obligation does not permit
such performance or the parties have manifested their intention to the
contrary, this only restates the principle. This is referred to as performance
by third parties.
A third party is separated into a person called upon by the obligor to perform
the obligation as a substitute for the obligor and a person who performs the
obligation even though not called upon by the obligor. A person who has not
been called upon by the obligor is free to perform the obligation, if such
person has no interest in whether or not the obligation is performed (for
example, a third party who is providing security). By contrast, it is stated that a
third party who has no interest in an obligation may not perform the obligation
against the will of the obligor (CC Art 474 (2)).
A third party who performs the obligation has the right to obtain
reimbursement. The wording that provides the grounds differs on whether the
person was called upon by the obligor to undertake the performance (CC Art
650 (1)), the person was not called upon by the obligor to undertake the
performance (CC Art 702 (1)), or the person was a provider of security
(pledgor) (CC Art 351, Art 371, Art 567(2)).
Subsection 3. Relationship of claims and obligations of multiple parties

1. Joint and several obligations

An important case when there is right to obtain reimbursement is the
relationship between joint and several obligations and guarantee obligations.
So far we have considered examples where there is one obligor and one
obligee, but when there is a relationship of claims and obligations between
multiple parties there are also cases where multiple obligors are obliged to
provide performance at the same time. This type of obligation is referred to as
joint and several obligations.
However, under Japanese law there is no presumption of joint and several
obligations, even if there are multiple obligors. By contrast, when the provision
of performance is divisible, they are in principle divisible obligations (CC Art
427).
2. Guarantee obligations
Again, in the case of the provision of the same contents by multiple obligors
there are also cases where there is a principal-supplemental relationship
between the obligations of each obligor. Guarantee obligations are such an
example. Article 446 (1) of the Civil Code states, A guarantor shall have the
responsibility to perform the obligation of the principal obligor when the latter
fails to perform such obligation. When the guarantor has received a demand
for performance from the obligee, the guarantor has the right to first demand
the obligee to demand performance of the principal obligor (CC Art 452). Even
where the obligee has demanded performance and the principal obligor does
not perform, the guarantor may refuse to perform the guarantee obligations
when the guarantor has proved that the principal obligor has the financial
resources to pay his/her obligation and that the execution would be easily
achieved (CC Art 453).
Consequently, guarantee obligations are supplementary. This is troublesome
for the obligee. So, in actuality there makes often a relationship of joint and
several obligations between the guarantee obligations of the guarantor and
the principal obligation. The obligee is free to demand performance from either

the guarantor or the principal obligor. The obligation incurred by the guarantee
in this case is referred to as a joint and several guarantee obligation.
(Simple or joint and several) guarantee obligations are formed by contract
between the obligee and the guarantor. In general, the guarantor becomes the
guarantor at the request of the principal obligor, but this relationship between
the parties has no direct relationship in formation of the guarantee obligations.
In addition, regulations to protect the guarantor were implemented with
revisions to the Civil Code in 2004 for contracts where a natural person
comprehensively guarantees a certain portion of items such as loans incurred
by the principal obligor. Such contracts must specify the maximum amount of
the guarantee, and also restrict the term. In addition, all guarantee contract,
including the above-mentioned type of guarantee contract, have become to be
required to be formed through documentation (CC Art 446(2) and (3), 465-2 to
465-5).
3. Obtaining reimbursement among joint and several obligors; the guarantor
obtaining reimbursement from the principal obligor
As mentioned above, obtaining reimbursement between obligors becomes a
problem when the obligation is incurred by multiple obligors.
The obligation to perform completely is incurred by the relationship between
joint and several obligors and the obligee, but there should be agreement
about burden ratio (equal burden when there is no agreement) in the internal
relationship between joint and several obligors. The obligor who performs the
obligation can obtain reimbursement from other joint and several obligors
based on this agreement to the extent of the portion of the obligations which is
borne by the other joint and several obligors (CC Art 442).
In the case of guarantee obligations, the relationship with the principal obligor
means the proportion of obligation borne by the guarantor is zero. The
guarantor can demand full reimbursement from the principal obligor (CC Art
459, 462).
Subsection 4. Subrogation by performance

1. Definition
If a person who has the right to obtain reimbursement from the obligor, he/she
may exercise any and all rights possessed by such obligee as the effect of,
and as a security for, such right to the extent he/she may seek
reimbursement under his/her own right (CC Art 501). A person with the right to
obtain reimbursement for performing the obligation takes the status of a
substitute in relation to the original obligee, and this is referred to as a
subrogation by performance.
Specifically, the claim performed (referred to as the original claim) is legally
transferred to the performer together with the security interest and other items
that secure such claim6. Accordingly, the performer is able to exercise the
original claim, but the point is that when the original claim is subject to security
interest such security interest can be exercised, and a demand for guarantee
obligations can be made against the guarantor, when the original claim has a
guarantor.
Obviously, since it should be acceptable if the performer is satisfied by the
right to obtain reimbursement, the original claim or exercise of the security
interest is only approved to the extent he/she may seek reimbursement. For
example, even if the original claim is something that accrues interest at 10%
per annum, the right to obtain reimbursement can only be for a late payment
charge that is within statutory interest, which would be a late payment charge
of only 5% for civil cases and only 6% for commercial cases, unless there is a
special contract provision with the obligor.
2. Requirements
However, other requirements must also be satisfied for the aforementioned
type of subrogation to be validated.
When a third person who has legitimate interest performs the obligation
he/she will naturally subrogate the obligee when acquiring the right to obtain
reimbursement (CC Art 500). There are two types of persons who have
legitimate interest: a person on whose property the attachment is levied

unless he/she performs the obligation and a person who will suffer the loss of
value of his/her own rights unless he/she performs the obligation. The former
is joint and several obligors/guarantors and third party pledgors/mortgagaros.
Specific examples of the latter are subordinated secured parties and general
obligees. This is referred to as statutory subrogation.
A third person with legitimate interest would be given the rights of
subrogation by performance without any requirement other than performance
(CC Art 500). By contrast, when a third person who does not have legitimate
interest performs the obligation it is in a sense the free choice of that person.
Therefore, there is no special need for protection. However, the obligee can
transfer his/her own rights to such third person. in that situation. Article 499 of
the Civil Code states a performed person should acquire the approval of the
obligee upon such performance for subrogation (CC Art 499 (1)), and set up
the requirements for assertion of assignment of claim (CC Art 499 (2)). This is
referred to as voluntary subrogation.
In other words, voluntary subrogation is based on full consent.
Further, when there are multiple guarantors and third party
pledgors/mortgagors (including third party acquirers of the thing encumbered
by the security) the relationship of rights amongst such persons must be
defined in relation to the subrogation.
In such case, Article 501 of the Civil Code provides the following regulations:
(1) When there are multiple guarantors the respective burdens shall be equal;
(2) When there are multiple third party pledgors/mortgagors, the proportion of
the burden shall be divided according to the proportion of value of the real
estate that is encumbered by security;
(3) When there are both guarantors and third party pledgors/mortgagors, first
the proportion of burden is divided by the number of parties. For example, in
the case of two guarantors and three third party pledgors, the proportion will
be guarantor 2 to third party pledgor/mortgagor 3. Furthermore, rule (1) is
applied with equal sharing of the burden between guarantees, and rule (2) is
applied with the burden divided in to the proportion of the value of the real
estate that is encumbered by security between third party

pledgors/mortgagors.
Further analysis is required in relation to third party acquirers of the thing that
is encumbered by the security, which leads to formulation of complex rules.
3. Special provisions for financial transactions
Subrogation through performance is a rational system. However, in actual
financial transactions, many types of special contract provisions are
concluded and the disposition often differs from the explanation given above.
First, for the aforementioned rules (1) and (3) there are provisions defining
different proportions of subrogation. In particular, when a credit guarantee
corporation (Special public corporations created to make it easier for small
and medium enterprises to raise funds from financial institutions by executing
guarantees, located in all regions in Japan) is the guarantor, it agrees with
other guarantors and third party pledgors/mortgagors that the burdon ratio of
the credit guarantee corporation is zero; the entire amount in relation to the
obligee from the other guarantors and third party pledgors can be subrogated
if the credit guarantee corporation performs the guarantee obligation. This is a
special provision relating to the proportion of subrogation. In terms of the right
of the credit guarantee corporation to obtain reimbursement from the obligor
this special provision is linked to a special provision of interest rate that is
higher than statutory one. This is a special provision relating to the scope of
right to obtain reimbursement.
In addition, banks include the following type of special provision for nonexercise of subrogation rights in contracts of guarantee executed with the
guarantor.
The rights acquired by the guarantor from the bank through subrogation
when the guarantor performs the guarantee obligations will not be exercised
without the consent of the bankas long as the transactional relationship
between the principal obligor and the bank continues. That right or ranking
shall be assigned to the bank at no charge, if there is a request from the
bank.

If any performance occurs with respect to part of a claim, there will be

subrogation by the performer, but when the bank still retains a claim the bank
has the right to exercise the mortgage held by the bank (CC Art 502 (1)).
However, the bank wants to exercise the mortgage at a time of its own
choosing, and wants to avoid exercising the mortgage at the convenience of
the subrogated performer. That is why the aforementioned special provisions
are agreed.
In addition, banks have included special provisions in the guarantee contract
with the guarantor so that the guarantor will not assert discharge even if the
bank changes or cancels another guarantee or security. This is referred to as
special provision for exemption of security interest preservation, which alters
the default rule is found in Article 504 of the Civil Code.
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Section 2. Lapse due to period of time

Other than the transfer resulting from the intent of parties, the relationship
between claim and obligation can also transform over time. A typical example
is extinctive prescription.
Article 167 (1) of the Civil Code prescribes the following in relation to the
extinctive prescription of claims. Eventually, an ongoing situation of a claim
not being exercised will reach a point of extinctive prescription, then it is
treated as extinct. An ongoing situation of a claim not being exercised is the
situation when the obligor does not actively take recognizable action in
relation to the existence of the obligation, the obligee does not institute legal
procedures based on the existence of the claim, and even a part of
performance of the obligation remains unfulfilled.
In principle, extinctive prescription is 10 years (CC Art 167 (1)). However,
Article 170 of the Civil Code defines various terms from 1 to 3 years by claim
type. In addition, Article 522 of the Commercial Code stipulates that claims
arising out of commercial transactions shall be extinguished after five years
have passed unless a shorter period is defined in the Civil Code. This article

applies regardless of whether either the obligee or the obligor is a merchant,

because of the need for speed in determining the relationship of rights in such
a case.
A particular feature of Japanese law is that extinctive prescription is only
recognized when it is asserted by the party benefiting from the extinctive
prescription (CC Art 145). The court cannot recognize extinctive prescription
without assertion by the party.
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Chapter 10. Breach of contract and compulsory performance

Section 1. Impposibility to perform
Subsection 1. Damages due to default

1. Reasons attributable to the obligor

So far we have considered the performance of obligations that arise from a
contract, but there are obviously cases when performance is also not
possible.
In this situation, we can divide the scenarios into two by considering the case
where performance has not occurred even though performance conformed
with the contract is possible; and the case where performance conformed with
the contract is not possible. For example, enforcement of performance can be
considered in the former scenario, but not in the latter.
Here, we consider the case that performance conformed with the contract is
no longer possible.
First, we must consider whether or not the obligor is responsible for the
reason that performance is not possible.
One might think that it would be easy to determine whether or not the obligor
has any responsibility. However, even where a warehouse burns down
because it catches on fire from a neighborhood fire and a thing to be sold is
destroyed, one cannot simply state this was not a reason attributable to the

obligor. For a subject matter with a high value there are also cases where the
obligor should be obliged that the thing should obviously be stored in a place
that is fire proof with security provisions. Then, if the thing is stored cheaply in
a wooden warehouse located in dense housing district and is burnt down
because of a fire that spread from a neighboring house, such a fire should be
considered a reason attributable to the obligor.
Consequently, the determination of whether or not there are reasons
attributable to the obligor ultimately depends on the content of obligation
incurred by the obligor. Thus, the content of obligation incurred is defined by
the contract. This includes the duty of care when a thing is stored and the duty
of care when a thing is transported. However, in order to estimate that there
are reasons attributable to the obligor, we should state that the performance
of the obligation conformed with the contract has become no longer possible,
which was caused by the fact that the obligation of the contract was not
performed. The point is what obligation has been incurred.
Impossibility of performance is considered as breach of contract only when
its reason can be attributable to the obligor, and the phrase, impossibility of
performance, is used when it is considered as breach of contract. By
contrast, when there are no reasons attributable to the obligor, this becomes a
question of risk allocation, as explained later.
2. Obligation for damages
The rights recognized for the obligee when there is impossibility of
performance is first the entitlement to demand damages from the obligor (CC
Art 415, second sentence). This will be by payment of money (CC Art 417).
The obligee, in principle, has no right to demand the provision of another very
similar thing.
The first problem is the scope of damage that will be compensated. Article 416
of the Civil Code states that only the damage of which causal factor was
normal or could have been foreseen by the obligor at the time of default
should be compensated. This resembles the rules of Hadley v. Baxendale

case7 in England.
However, it is not necessarily clear how to assess what causal factor was
normal or could have been foreseen by the obligor. This gives wide discretion
to the judge. Therefore, there are many examples where amounts of
compensation for damages are agreed in the contract (liquidated damages).
When there is this agreement, demand for compensation for damages can be
made with only proving non-performance of a party. The courts are basically
unable to increase or decrease the amount (CC Art 420 (1)). However, when
the amount is excessively large the amount can be decreased because it
contravenes public policy (CC Art 90).
Subsection 2. Cancellation of a contract

1. Effectiveness of cancellation
Demand for the compensation for damages discussed above can also be
made even if the contract has not been cancelled. In the case of a bilateral
contract, the obligation of the party that demanded damages to the other party
continues to exist. We consider the example of a contract for A to sell a
painting he/she owns to B, and A loses the painting or A sells the painting to a
third party because A did not take due care. Then B has the right to demand
damages from A, and B continues to have an obligation to pay the price
agreed in the contract to A.
However, this involves a monetary obligation for both parties so the amounts
are set off and only the difference paid. By contrast, in the case of a contract
between B and A to exchange paintings they respectively own, when A cannot
perform his/her obligation B has the right to demand compensation for
damages from A, but A has the right to demand transfer of the promised
painting by B.
However, this result can be unsatisfactory for B. Here, Article 543 of the Civil
Code states the contract between B and A can be cancelled by B.
The effect of cancellation is that, in a word, such contract is treated as never
having existed8. Therefore, if B cancels the contract to exchange paintings

with A, A does not have to deliver his own painting to B. In addition, if the
painting has already been delivered, A can demand the return of such painting
(CC Art 545 (1)). However, even if one says such contract did not exist, B
has certainly incurred damage. Then, Article 545 (3) of the Civil Code states
that even if the contract is cancelled B shall be able to assert a claim for
damages against A in relation to existing damages. The scope of damage that
should be compensated is determined by the rule in Article 416 of the Civil
Code. Since B also does not have to perform his/her obligations he/she profits
to such extent. That amount is deducted from the amount of claim of
compensation for damages.
2. The importance of impossibility of performance
From the wording in Article 543 of the Civil Code, the obligee may cancel the
contract at any time when there is impossibility of performance. However, in
the example of a contract to sell a piano, if a wall of the purchaser is damaged
when the piano is delivered, there is the question of whether or not the
cancellation of the contract by the buyer to buy the piano shall be permissible.
This would be based on the impossibility of performance for the reason as
follows; the seller owed the associated obligation of no damage to be caused
to the buyer's home on delivery and the seller has become unable to perform
this obligation because he/she has already caused damage to the buyer's
home. However, there is no need to go this far. It is thought that approval of
the demand for damages for the scratch on the wall is sufficient. In addition,
for an example of a sales contract executed in respect of a cedar forest, when
some cedar are felled following the execution of the contract, the buyer is not
considered able to cancel the contract. It may be acceptable to cancel the
contract if almost all the cedar has been felled, but it would also be unusual to
cancel the entire sales contract because of the felling of some of the cedar. In
some cases just to have compensation for damages would suffice.
When thinking about whether or not the obligee is considered to have the right
to cancellation, the obligations that are impossible to perform need to be

considered in relation to the level of importance of such obligations under the

contract. Only when such obligations are important will cancellation be
permissible based on Article 543 of the Civil Code (This obviously includes
when it is impossible to perform the whole obligation). Otherwise, only the
entitlement to demand damages based on the second sentence of Article 415
of the Civil Code shall apply. Actual case law also restricts the right to
cancellation in this way.
Whether something is important or not is determined by the purpose set out in
the contract. Whether or not the impossibility to perform is important is the
extent to which the purpose of the contract can be achieved or not due to
such impossibility to perform. Each contract should be considered to
determine the purpose of each contract.
Subsection 3. Allocation of risk

1. When there are no reasons attributable to the obligor

So far we have explained the situation when the obligations under the contract
cannot be performed for reasons attributable to the obligor. Next we consider
the case where there are no reasons attributable to the obligor.
When there are reasons attributable to the obligor, it is obvious that the loss or
damage from such impossibility should be placed on the obligor. However,
when there are reasons attributable to the obligee, this cannot be assessed as
a default by the obligor. The obligee himself/herself should be held
responsible. In addition, when there are reasons that cannot be attributed to
either the obligee or the obligor such as a natural phenomenon or action of a
third party, it obviously cannot be said that the responsibility should be borne
by the obligor, even though the obligation cannot be performed conformed
with the contract.
Here, the Civil Code provides separate regulations by way of allocation of risk
in relation to situations when there are no reasons attributable to the obligor.
In principle, this is prescribed by Article 536 of the Civil Code. According to
Paragraph 1, the obligor shall not have the right to receive performance in

return if there are no reasons attributable to either the obligee or the obligor. In
other words, the obligor does not need to perform his/her own obligation (this
is obvious since it is impossible), and a claim for performance of the obligation
cannot be made on the other party either.
When partial performance is impossible, as we discussed in the case of
default due to the impossibility of performance, the matter is dealt with by
considering whether or not the purpose of the contract cannot be achieved
because of the impossibility of performing a part of the contract.
By contrast, when there are reasons attributable to the obligee, the obligor will
lose his/her right to receive performance in return (CC Art 536 (2)).
2. Exceptions such as sales contracts for specified things
The above rules are considered rational. However, Article 534 prescribes
some important exceptions to these.
In cases where the purpose of a bilateral contract is the creation or transfer
of real rights regarding specified things, if the things have been lost or
damaged due to reasons not attributable to the obligor, such loss or damage
shall fall on the obligee.
Consequently, for a sales contract where the specified things are second hand
machinery, the buyer (the obligee for the transferred obligation) shall bear
any damage when such machinery is destroyed without any reason
attributable to the obligor. In other words, the buyer must pay compensation.
Similar rules can be found in the laws of other countries, and the injustice of
such rule is also noted in such countries. Even in Japan this rule is considered
unfair and in doctrinal terms the allocation of risk for a specified thing under
the control of the obligor is often interpreted as being the burden of the
obligor. In practice, it is usual to include special provisions to exclude the
application of this regulation in contracts such as sales contracts. Then, the
articles relating to allocation of risk are discretionary provisions, and the
special contract provisions are taken to be effective as is.
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Section 2. Failure of possible performance

Subsection 1. When taken to be a default

1. Necessity of attributing the reason to the obligor

The wording of Article 415 of the Civil Code suggests there is no need for
cause imputable to the obligor when performance is not fulfilled even though
it is possible. However, many scholarly writings recognize non-performance in
situations where it is possible to perform as only being a default when there
are reasons attributable to the obligor.
We can view case law as also relying on this interpretation, but case law
restricts the interpretation of no reasons attributable to the obligor to
situations such as force majeure.
More important is the situation where there was non-performance of the
obligations conformed with the contract (even though it was possible) when
the contract stated a certain action should be undertaken and such action was
not taken.
We consider the example of a delay in transfer of a specified thing from seller
A to buyer B due to traffic congestion. The point here is not whether or not the
delay because of traffic congestions can be a reason attributable to A, but
whether or not the agreement, clearly or implicitly, made by contract consents
to a delay caused by something such as traffic congestion as something that
cannot be helped. If there is such consent there has been no nonperformance of obligation. By contrast, if there is strict promise of the timing
for delivery, the seller conceivably should have prepared a risk management
strategy by transporting the thing close to the point of transfer the day prior. A
breach of obligation is said to have occurred in this example.
Therefore, the point is the interpretation of the contract. It depends on what
types of obligations have been agreed. For a specific contract whether or not
everything has been agreed will depend not only on what is clearly agreed,
but by taking account of customs for such transaction types and principle of

good faith. The outcome will be supplemented with the Code provisions
concerning each contract type.
2. Defense for simultaneous performance
Article 533 of the Civil Code is a supplementary provision to clarify the details
agreed in a bilateral contract. It states, A party to a bilateral contract may
refuse to perform his/her own obligation until the other party tenders the
performance of his/her obligation; this is referred to as defense for
simultaneous performance. This a rule that can be excluded when there is
agreement clearly to the contrary, but it plays an important role in relation to
cancellation and compensation for damages based on default.
There is no liability of default for either party even after the period of
performance when there is this type of right of defense for simultaneous
performance. If one party demands performance of the other party, a so-called
judgment to exchange benefits would be made, for example, A should make
the transfer in exchange for payment of price by B.
However, one should note that the wording in Article 533 of the Civil Code
does not state until the other party has performed his/her obligation, but
rather until the other party tenders the performance of his/her obligation.
Performance means in the case of transfer the actual transfer. By contrast,
tender the performance means the act of the obligor, which would be
completed as performance if the obligee cooperates for receiving the
performance when performance cannot be completed without the cooperation
of the obligee.
For example, in a sale of real estate where seller A bearing the necessary
documentation waits for buyer B (= obligee) at the judicial scrivener's law
office that has been agreed as the place of transfer, A will be considered to
have tendered the performance. Since this means A has done everything
he/she can do, it only remains for action by B. In such circumstance, an
assertion by B to the defense for simultaneous performance against A will not
be recognized.

3. Other effects of tendering performance

Tendering performance has important significance in areas other than in
relation to defense for simultaneous performance. For example, we take the
case of an agreement for payment of price where A is obliged to make
payment of JPY 100 million to B. Here, we consider the situation where A has
tried to pay B, but B refuses to take receipt of the payment. Under such
circumstances, there is clearly no right for B to cancel the contract or demand
damages from A based on non-performance of fulfilling the payment
obligations. This is clarified by Article 492 of the Civil Code that prescribes,
Upon tendering the performance, the relevant obligor shall be relieved from
any and all responsibilities which may arise from the nonperformance of the
obligation.
In addition, by tendering the performance the risk due to factors such as the
loss of the specified thing shall also transfer to the obligee.
Subsection 2. Methods for enforcing performance

1. Affirmation of enforced performance

Now, the obligor has the defense for simultaneous performance in the case
that performance is possible, but it is not performed; when the obligee has
refused receipt despite the tender of performance by the obligor it is
recognized as a default.
At this time, the obligee has the right to enforce performance by the obligor. In
principle, enforced performance is not recognized and there is a system for
just being able to take compensation for damage, but Japanese law provides
a system whereby the obligee can enforce performance by the obligor (CC Art
414 (1)).
Of course, there is no need for the obligee to select a system of performance
by the obligor. The method for canceling the contract can also be selected, as
detailed below.
Next, we consider the situation when selecting enforcement of performance.

At this time, under Japanese law there is limited scope for recognition as selfhelp. In principle, only the courts can provide assistance; compulsory
execution procedures.
2. Compulsory execution procedures
Compulsory execution first requires one's own rights to be proved publicly.
This is referred to as title of obligation. Typically, the obligee sues the other
party, demanding perform the obligation and a confirmed winning decision is
the public proof. In this case, such decision is a title of obligation in relation to
compulsory execution. Other than this there are a number of types of title of
obligation prescribed in Article 22 of the Civil Execution Act.
In the following, we consider the circumstances by obligation type, one at a
time.
(1) Obligation to transfer a thing
Direct enforcement is employed for an obligation to transfer a thing (CC Art
414 (1))). In the case of real estate, The enforcing officer will terminate the
obligor's possession of the specified and cause its possession to be acquired
by the obligee (Civil Execution Act Art 168 (1)). In the case of movables,
regardless of whether a specified thing or unspecified thing, the enforcing
officer will take it from the obligor and transfer it to the obligee (Civil
Execution Act Art 169 (1)).
(2) An obligation to act that can be performed by a substitute party
For obligations where the obligor is obligated to perform specific actions,
making the obligor undertake such action by enforcement would result in
forced labor that is also prohibited under Article 18 of the Constitution. First, in
relation to obligations where there is no difference to the result for the obligee
whether the obligor himself/herself or a third party performs (alternative
obligation to act), for example an obligation such as to demolish a building,
the obligation to perform can be enforced through substitute execution (CC
Art 414 (2)).

A title of obligation with the capacity for execution is submitted to the courts
applying for compulsory execution. The court receiving this submission
determines that the obligee may cause a party other than the obligor to
perform the specified act at the expense of the obligor. Based on this ruling,
the obligee undertakes such action himself/herself or requests a third party to
perform the action (See: Civil Execution Act Art 171). Here, for example the
result will be the demolishing of the building, but the point is that the obligor
can be held responsible for the cost involved.
(3) Obligation for an inaction
Article 414 (3) of the Civil Code prescribes, With respect to any obligation for
an inaction, a request may be made to the court at the expense of the obligor
seeking the removal of the outcome of the action performed by the obligor, or
an appropriate ruling against any future action. Theoretically, through the
breach of an obligation for inaction when some sort of physical situation
remains, such obligation is converted to an obligation to act (to remove the
outcome) and become a substitute execution.
(4) Indirect enforcement
For example, the obligation to provide data held by the obligor cannot be
enforced through a substitute execution. This is because a third party cannot
provide the data if the obligor possesses the data. For this type of obligation,
indirect enforcement can be used.
Indirect enforcement is a method for determining a specified amount of
money that the obligor should pay to the obligee that is equivalent to ensuring
performance of the obligation when there is a period of delay or is a
recognized equivalent when performance does not occur within a specified
time period (Civil Execution Act Art 172 (1)).
Indirect enforcement had been considered as supplement to other types of
enforcement, but the 2003 revision of the Civil Execution Act made it possible
to use indirect enforcement if there is an offer from an obligee, even for
enforcement of the transfer of things, and the enforced execution of an

obligation for inaction and obligations for actions which can be enforced
through other types of enforcement (Civil Execution Act Art 173 (1)).
(5) Obligations for manifestation of intent
An obligor incurs obligations for a specific manifestation of intent by way of
contract. For example, when agricultural land is sold to a third party the
approval of an agricultural committee (in some cases, the Prefectural
governor) is required (The Agricultural Land Act Art 3 (1)), but the joint
application of the buyer and the seller is required for this approval. The seller
is obligated to cooperate with the buyer in relation to the joint application for
approval.
However, what happens if the seller will not perform such obligation? An
alternative execution is not possible in this case because the act of seller
him/herself is required. One could rely on indirect enforcement, but there are
doubts about whether actual action (appearing before a committee) should be
strictly required.
Here, the proviso in Article 414 (2) of the Civil Code prescribes with respect
to any obligation for any juristic act, the manifestation of intention of the
obligor may be achieved by a judgment. If there is a judgment to confirm an
obligation for manifestation of intent, this would mean that there was a
manifestation of intent (here meaning the application) (Civil Execution Act Art
173). In principle, the registration of real estate also requires the joint
application by the registry title holder and the person to whom it is to be
transferred, yet it is prescribed that while the application must be submitted
jointly, registrations due to firm rulings that outline the necessary registration
procedures means a party other than the person who must submit such joint
application can submit independently (Real Estate Registration Act Art 63).
Since there is manifestation of intent of the obligor it means the obligee can
thereafter independently submit an application.
(6) Enforced performance of monetary debt
For enforced performance of monetary debt, the basic procedure is for the

courts to sell assets of the obligor and reimburse the claim of the obligee
through the price of such sale.
The obligee must indicate the subject of the seizure, and the procedures differ
slightly for execution in relation to real estate, execution in relation to
movables, and execution in relation to monetary claims and other rights.
3. Demands for compensation for damages
Even if the types of enforced execution described above are successful,
performance will obviously be delayed and damage has already been
incurred. For this type of damage, there can obviously be a claim against the
obligor. The calculation of the amount of compensation for damages is as in
accordance with Article 416 of the Civil Code that we have already explained.
Some care should be taken in relation to monetary debt.
Compensation for damage due to the delay in payment of monetary debt is
subject to Article 419 of the Civil Code, with the amount of compensation for
damages prescribed by statutory interest rates. Even if the obligee can prove
that the delay in the performance by the obligor caused damage in excess of
the statutory interest rate, he/she cannot take such compensation for
damages (Case law. However, this is different in a situation where special
rules have been approved. Articles 647, 665, 671, 701 et al. of the Civil Code).
For compensation based on the statutory interest rate, a claim can be exerted
without any proof (CC Art 419 (2)).
The statutory interest rate is the interest rate prescribed in Article 404 of the
Civil Code and Article 514 of the Commercial Code. The 5% per annum
prescribed in Article 404 of the Civil Code is the general rule, but under Article
514 of the Commercial Code the rate is 6% per annum for obligations arising
out of commercial activity.
Furthermore, when there is a contract in relation to late payment charges, the
payment shall be in accordance with such contract. In practice, late payment
charges in excess of statutory interest rates are prescribed.
Subsection 3. Cancellation of contract

1. Importance of default
Article 541 of the Civil Code prescribes the following in relation to cancellation
of a contract when the other party does not perform even though performance
is possible:
In cases where one of the parties does not perform his/her obligations, if the
other party demands performance of the obligations, specifying a reasonable
period and no performance is tendered during that period, the other party may
cancel the contract.
There are two points to note.
The first, is that as noted in relation to cancellation due to impossibility of
performance, there needs to have been an important default to the extent that
would warrant cancellation for the contract to be cancelled, although the
wording in the article simply states In cases where one of the parties does
not perform his/her obligations.
In addition, depending on the scope of non-performance there are situations
when only part of the contract can be cancelled.
Second, is that the wording in the article states, if the other party demands
performance of the obligations, specifying a reasonable period.
A reasonable period is interpreted as the period necessary for a person, who
has already made preparations to perform, to perform. When there is nonperformance of monetary debt such as obligation to pay price, about 3 days is
taken to be effective. In addition, even if the period is not specified in the
demand or if the demand is something along the lines of please pay
promptly, in reality termination is possible if a reasonable period has
passed9. Then, if the demand states, the contract will be cancelled if payment
not made by X date, the contract will automatically terminate once such date
has passed, and there is no need for manifestation of intent to cancel after the
period has passed10. It is acceptable if the obligor who has already made
preparations is provided with the chance to perform.
Nevertheless, there is no need to demand In cases where the purpose of the

contract cannot be achieved unless the performance is carried out at a

specific time and date or within a certain period of time (CC Art 542).
2. Special contract provisions in practice
The aforementioned type of wording in the Civil Code is considered
inconvenient from a practical perspective and there are various special
contract provisions.
First, many actual sales contracts include wording that provides for prompt
cancellation of the contract if there is evidence of deterioration in the obligor's
credit such as the dishonor of a negotiable bill, seizure by another obligee, or
a petition for bankruptcy. Cross default provisions are used widely.
Next, in relation to the need to issue a demand, provisions that provide for
prompt cancellation of the contract without demand are prevalent.
3. Effect of cancellation
As we have already explained briefly, the effectiveness of cancellation is that it
is as though the contract had never existed.
Nevertheless, if any monies are to be refunded, interest must accrue from
the time of the receipt of those monies (CC Art 545 (2)). In addition, it is
possible to demand compensation for damages separately for damage that
cannot be redressed by just returning the situation to its original state.
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Chapter 11. Realization of monetary claims

Section 1. The preservation of obligor's property
Subsection 1. The necessity of the preservation of obligor's property

When the obligor does not perform the obligation, the obligee can seize the
obligor's assets on the basis of title of obligation and have the courts convert it

into cash and recover his/her own claim from such. However, the distribution
of the converted cash at this time is in accordance with the principle of
equality of obligees.
What should obligee do if he/she wants to recover the most in relation to
his/her own claim based on this system? The first thing that comes to mind is
to secure the assets that can be seized. The Civil Code provides for two
systems for securing the obligor's assets: obligee's subrogation right (CC Art
423) and obligee's right to demand the rescission of fraudulent act (CC Art
424). The former is subrogation by the obligee to exercise rights that the
obligor does not try to exercise even though they are vested in him/her
resulting in the preservation of the obligor's assets. The latter is the right of the
obligee to rescind an action by the obligor when the obligor attempts to reduce
to his/her assets.
Originally, these systems were for the benefit of all obligees to protect the
obligor's assets. However, these are also used outside the original purpose of
the system to gain the advantage in recovery of claims.
Subsection 2. Obligee's subrogation right

1. Significance of obligee's subrogation right

The obligee can exercise the rights vested in the obligor by subrogation (CC
Art 423). This is referred to as the obligee's subrogation right.
We consider the following example. A has a monetary claim against B. B has
sold the land he/she owned to C, but C has not paid the price even though the
period for performance has already passed. If C has the financial resources, A
can seize the claim on the sales price that B has on C. However, if C has not
paid the sales price because he/she does not have the financial resources, it
would be pointless even if the claim on the sales price were seized. At such a
time, B's cancellation right for the sales contract (an event of default by C) is
exercised by A on the basis of the obligee's subrogation right. This cancels the
sales contract with the right of ownership returned to B. Furthermore, B's right
to erase the right to registration by C is exercised by A on the basis of the

obligee's subrogation right with the registered name returned to B. Then such
property is seized.
By this type of obligee's subrogation right, the obligee performs the rights
vested in the obligor by substitution. This is significant as preparation for
enforced execution procedures. Further, rights which are exclusive and
personal to the obligor cannot be exercised by way of subrogation (proviso in
CC Art 423 (1)).
2. Requirements for obligee's subrogation right
Exercising the obligor's rights by way of obligee's subrogation right is an
intervention in the obligor's right to manage his/her assets. Therefore it
requires a state that can be in no way amended to protect the obligee's own
claim. Then, Case law11 in principle recognizes the exercise of the obligee's
subrogation right by taking out the claims that are subject to subrogation only
when the obligor does not have assets to pay the full obligation.
However, we consider the situation where there is sequential assignment of
land from A to B then B to C, but the registration is still in the name of A. C has
requested a transfer of registration from B to himself/herself, but since B has
not yet acquired the transfer of registration from A, B cannot institute the
transfer of registration to C. At such a time, for C to realize his/her claim on B
(right to demand transfer of registration) in its original form there would be no
significance no matter what other assets B has. It is vital that B accurately
exercises his/her right to demand transfer of registration from A.
Under this fact pattern, the general lack of financial resources is not required
for C to exercise the obligee's subrogation right12. The obligee's subrogation
right was originally for securing an obligor's general assets to enforce
execution to realize monetary claims. However, in the transfer of registration
example, the obligee's subrogation rights are not exercised to secure the
obligor's general assets. Here, it can be referred to as an example of a
conversion of obligee's subrogation right.
3. Prioritized recovery of claim by way of obligee's subrogation right

Obligee A with monetary claims can also exercise monetary claims against
third party C based on obligee's subrogation right of monetary claims that
obligor B has against C. Then, it is possible for A himself/herself to demand
payment from C.
Of course, since it was A that received payment from C instead of B, the
amount of money received must be transferred to B. However, A's own claim
on B can be set-off by B's claim on A. Therefore, when a monetary claim that
is vested in the obligor is exercised by way of subrogation due to the obligee's
subrogation right, it effectively leaves other obligees making it possible to
have one's own claim given priority for recovery. Since this is contrary to the
original purpose of the system of obligee's subrogation right there are strong
doctrinal views that this result is not appropriate, but case law has approved
the effective priority performance13.
Subsection 3. Obligee's right to demand the rescission of fraudulent act

1. Definition and requirements for obligee's right to demand the rescission of

fraudulent act
The obligee's right to demand the rescission of fraudulent act is a system that
resembles right of avoidance under bankruptcy law.
Paragraph 1 Article 424 of the Civil Code prescribes, An obligee may
demand the court to rescind any juristic act which an obligor commits knowing
that it will prejudice the obligee.
One needs to take care in relation to the following points.
First, unlike an obligee's subrogation right, the demand for rescission must be
made to the court. An obligee's subrogation right is only the performance of an
action by a person instead of another who does not act even though he/she is
able. The obligee's right to rescind means the rescission of another person's
act so this represents a high level of intervention, and calls for careful
adherence to procedures.
Second, intervention is not approved for juristic acts of which the object is not
property right (CC Art 424 (2)). Even if the obligor renounces his/her

inheritance, such rescission is not approved. This is because it is a matter that

should be left to the obligor's own decision of the obligor, and the
renouncement of inheritance only means that property will not increase and
not that it will decrease. By contrast, distribution of property resulting from
divorce will be subject to rescission when the amount is inappropriately large
in relation to the purpose of division of assets on divorce.
Third, only acts that could unjustly reduce the obligee's portion through such
action are subject to rescission, and intervention is approved only when the
obligor is aware of such fact.
However, considering specific examples there are subtleties as to whether or
not the above requirements are met. In Case law, the subjective elements of
the obligor and the counterparty and the purpose of acts are considered
synthetically.
2. Priority recovery of claims by way of obligee's right to demand the
rescission of fraudulent acts
Rescission by way of obligee's right to demand the rescission of fraudulent
acts is effective for all obligees against such obligor. The effect of the
rescission for this purpose goes relatively well when the obligor has disposed
of real estate; this real estate would come back to the obligor's assets and
become subject to the seizure of all obliges.
However, if the benefits to a beneficiary due to the rescission of a juristic act
are monetary (simply to consider the case of payment to just a specific
obligee) the obligee who instituted the procedures for rescission can demand
the transfer of such monies to himself/herself. Since there is no method of
compulsion against the obligor for such receipt, the rescinding obligee must
be able demand the transfer to himself/herself. Of course, the rescinding
obligee who receives the monies has the obligation to transfer the received
monies to the obligor. Nevertheless, at this time, the rescinding obligee can
set-off his/her own claim against the obligor with the obligor's claim against
the obligee (the claim for the monies that have been received to be

transferred to the obligor). This effectively means there can be a priority

recovery of claims.
As is the case for obligee's subrogation rights, this also goes against the
original purpose of the obligee's right to demand the rescission of fraudulent
acts so there are strong doctrinal views that the above result is not
appropriate. However, according to case law14 there is effectively approval for
priority payment to the rescinding obligee.
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Section 2. Other ways for the realization of monetary claims

1. Set-off and assignment of claim

As observed above, the obligee's subrogation right/ obligee's right to demand
the rescission of fraudulent acts functioned as a system for priority recovery of
a claim for a specific obligee. In the following, set-off and assignment of claim
will be explained as other ways that serves to provide priority recovery of
claims.
Assignment of claim is obviously not an inherent method for recovery of
claims, but in effect it is often used as a method for recovery of claims.
2. Features of set-off under Japanese law
Article 505 (1) of the Civil Code prescribes In cases where two persons
mutually owe to the other any obligation with the same kind of purpose, if both
obligations are due, each obligor may be relieved from his/her own obligation
by setting off each value thereof against the corresponding amount of the
obligation of the other obligor; provided, however, that, this shall not apply to
the cases where the nature of the obligation does not permit such set-off. The
following two points need to be noted in relation to this definition.
First, even if the requirements for set-off have been met, deduction is not
assumed and the set-off only happens due to a party's manifestation of intent.
Second, set-off is approved in cases where two persons mutually owe to the

other any obligation with the same kind of purpose and there is no
requirement for there to be some sort of relationship between both obligations.
3. Special contract provisions in relation to bank transactions
Set-off is often used for priority recovery of one's own claim. In particular,
banks expect to recover claims through the set-off of loans and deposits.
Nevertheless, this is only possible if both obligations are due (CC Art 505
(1)). In such situations, the following special contract provisions are often
made to meet these requirements.
Specifically, we consider Article 5 (1) of the Banking Transaction Agreement
that is used for transactions between a bank and its customer. Almost all
banks have similar clauses in their contracts. Here, we take A to be the
bank's customer and B to be the bank.
If at least one of the following events occurs in relation to A, A will naturally
lose all profit due for the term in relation to the debt even if there is no notice
from B, and immediate repayment of the debt is required.(text deleted)
3 When notice is issued in relation to provisional seizure, protective seizure or
attachment on deposits of A or its guarantor with respect to claims against B.
(abbreviated)
The effectiveness of this clause has been contested on a number of
occasions in the Supreme Court.
First, we consider an example.
A has a fixed term deposit of JPY 10 million with bank B at the same time as
borrowing JPY 15 million from bank B. A has failed to make payment on an
obligation to another obligee C, so C has effected a seizure over the deposits
of A held with B. Consequently, bank B has asserted a set-off of the deposits A
held with B for the same amount of the loan from bank B to A.
Bank B's position is as follows. Based on Article 5 (1)-3 of the Banking
Transaction Agreement the seizure of A's deposits caused the lost of the term
profits of A in relation to the borrowing obligations, thereby the period for
repayment of the loan obligation falls due. Then, the term profits on the

deposits of A with bank B were waived by bank B intentionally. Although, in the

case of a fixed term deposit, the term profits are not only for the purpose of
the obligor's (= bank's) profit, there is an interpretation that term profits could
have been waived if the interest until the maturity of the contract had been
accrued. Consequently, set-off is possible because the payment period for
both obligations has fallen due.
To state the conclusion first, current Supreme Court rulings15 approve the
aforementioned bank's point of view.
If set-off is seen as just a simple method for settlement, a result that provides
a priority recovery of claim for just one party (in this case, the bank) should be
avoided to the extent possible. In fact, previous Supreme Court
rulings16 restricted the effect of the Banking Transaction Agreement. However,
in subsequent Supreme Court rulings the collateral type functions of set-off
have been squarely approved. Thus, bank B's arguments have been
approved based on this ruling.
This type of ruling is established, but there is still much scholarly debate.
Further, in relation to netting, the Law concerning Close-out Netting of
Specified Financial Transactions Entered into by Financial Institutions, etc.
was established in 1998, and the effectiveness under the bankruptcy law has
been squarely approved.
4. Function of assigning claims
Realization of a claim was originally the receipt of perfect repayment.
However, if there are people who will purchase such claims, their economic
value can be realized. Of course, no-one will try to pay JPY 10 million to
purchase a JPY 10 million claim. On the other hand, if there is a person who
wants the money quickly and will satisfy with a smaller amount than the claim
and another person is willing to wait a little time to acquire the benefits of
investment. Consequently, this results in a sales contract with price of JPY 9
million for a claim of JPY 10 million.
Here, Article 466 (1) of the Civil Code prescribes A claim may be assigned.

This is an assignment of claims.

However, together with the proviso that this shall not apply to the cases
where its nature does not permit the assignment (the proviso in CC Art 466
(1)) an assignment of claims is not possible when the parties have manifested
their intention to the contrary (CC Art 466 (2)).
A typical example of a contract for a claim that cannot be assigned is a bank
deposit contract. In addition, for claims where the state or a local public body
is the obligor, in almost all cases there are special contract provisions
prohibiting assignment of claims. However, special provisions prohibiting
assignment of claims are at any rate promises made between parties and a
third party would not know whether or not there are special provisions
prohibiting assignment of a specific claim. So there is a need to protect the
recipient of an assignment of claim who had no knowledge of the existence of
the special provision. Hence, the proviso in Article 466 (2) of the Civil Code
states assertion against a third party without knowledge, i.e., a third party
without knowledge of the existence of such special provision, is not permitted
In addition, even for claims that have special provisions prohibiting
assignment of claims, the third party can seize the claims, obtain an
assignment order and become the obligee. This is also the same when the
third party has knowledge about the existence of the special provisions. In
other words, even if there are special provisions, the compulsory assignment
of claims is unhindered by the assignment order. This is because if it were not
the case, assets that cannot be subject to enforced execution by way of an
assignment order could be freely created by special provisions between the
parties and it would not be appropriate.
5. Requirement for assertion of assignment of claim
The system of requirement for assertion is important for the assignment of
claim.
On this point, Japanese law uses the obligor as an information center.
Specifically, even if there is assignment of claim, an assertion of an

assignment of claim cannot be made against the obligor or another third party
unless notice is given to the obligor or acknowledgement obtained in relation
to that matter from the obligor.
This type of notice or acknowledgement may not be asserted against a third
party other than the obligor unless the notice or acknowledgement is made
using an instrument bearing a fixed date (CC Art 467 (2)). An instrument
bearing a fixed date is a document bearing a date certified by a public
institution. It is often the case that a notary will either stamp a date on the
document or the notice or acknowledgement will be sent by content-certified
mail (A service for date stamped postal items to certify the contents provided
by Japan Post).
However, when multiple claims are assigned it is troublesome to have notice
with an instrument bearing a fixed date or obtain the acknowledgement of the
obligor for each one. Currently, the Law Concerning Exceptions, Etc. to the
Civil Code, Applicable to Perfection of Assignment of Claims was promulgated
in 1998 to simplify the assertion requirements in relation to assignments of
monetary claims by juridical persons (The law has now been revised as the
Law Concerning Special Exceptions, etc to the Civil Code with Respect to the
Perfection of the Assignment of Chattel and Claims).
Article 467 of the Civil Code, concentrates the information on the obligor to
clearly indicate ownership of the claims. This is because there is no registry
that indicates ownership of the claim. If that is the case, a registry should be
created. Therefore, the Special Acts above state that when the assignor is a
juridical person, the assignment shall be registered in the file for registry
assignment of claims prepared by the Legal Affairs Bureau, and this is taken
to fulfill the requirement for assertion against a third party.
Nevertheless, since it is not appropriate for the obligor to be required to take
care about whether or not an assignment has been registered when
undertaking performance, even if the assignment of claim is registered in the
registry of assignment of claims, the assignee can assert receipt of an
assignment of claim only against a third party other than the obligor.
Therefore, it will be acceptable if the obligor, thinking that the original obligee

(=assignor) is still the obligee, performs in relation to that person. When the
assignee also wants to assert against the obligor he/she must ultimately issue
a notice to the obligor.
6. Assignment of future claims
There is also the issue that to what extent the assignment of future claims are
admitted. Initially there was an accumulation of lower court rulings concerning
this problem that restricted the effectiveness of the assignment of future
claims to within one year from assignment, and it was a major impediment to
securitizing or collateralizing claims.
However, in 1999 the Supreme Court recognized the effectiveness of
comprehensive assignment of claims over a long period of time extending into
the future as long as the claims are specified. Assignment of claim contracts
must obviously specify the claims for the purpose of assignment by aspects
such as the reason for such assignment and the amount subject to
assignment. In the case where the purpose is to assign a number of claims
that emerge within a specific time period or for which the term for performance
should be up, the claim for the purpose of assignment should be specified by
clearly stating the start and end period for the aforementioned term through
some arbitrary method17.
However, there is the restriction that for an assignment of contract claims for
which claims should emerge within a specified time period, the contract details
such as the length of such time period should be restricted from notably
departing from what would be considered within the scope of conventional
wisdom for the assignor's business activities. This should take overall
consideration of the state of the assignor's assets at the time the contract is
executed, the anticipated transition of matters such as the assignor's
operations at such time, the contract details, and the background to execution
of the contract. If special conditions were to be approved that were
unreasonably detrimental to other obligees, such a contract would be against
public policy and the effectiveness of part or all would be negated.