Contracts, negotiation and enforcement in Japan: overview

A Q&A guide to general contracts and their negotiation and enforcement in Japan.

The Q&A gives a high level overview of the key legal concepts, including contract formation with general discussions as to authority, formal legal requirements, formalities for execution, the requirements for deeds and notarisation, and powers of attorney. It also considers the status of contractual terms, variation and assignment of contracts, and enforcement of the contract. The enforcement section covers remedies and liability, exclusion of liability, and cross-border/jurisdictional matters.

The Q&A is part of the global guide to contracts, negotiation and enforcement.

Contents

Formation of contracts

Authority and capacity

1. What are the authority/capacity rules for entering contracts, for different commercial entities?

This Q&A focuses primarily on companies, which are the main commercial entities that enter into contractual transactions.

Companies

Stock companies (kabushiki kaisha) (also known as limited liability stock corporations). The board of directors in principle makes decisions on the execution of the operations of the company. The board can delegate these decisions to individual directors, unless they relate to important operations, which must be decided by the board of directors. Important operations include:

  • The disposal or acceptance of the transfer of material assets.

  • Borrowing in a significant amount.

Further, transactions which involve conflicts of interest on the part of a director require the board of directors' approval.

Limited liability companies (godo kaisha). The limited liability company is comprised of members. If the company's articles of incorporation do not provide for a managing member (gyoumu shikko shain), each member executes the company's business and the company's decisions are determined by a simple majority (by headcount) of the members. If managing members are provided for in the articles of incorporation, decisions regarding the company's business are determined by a majority of the managing members.

Foreign companies. There are no specific regulations for foreign companies under Japanese law, but foreign companies must take necessary procedures under the laws governing their incorporation.

Insolvent companies. The right to administer and dispose of assets held by an insolvent company will, at the time of the commencement of bankruptcy proceedings, become the exclusive right of the bankruptcy trustee. In addition, the permission of the court is required for the bankruptcy trustee to conduct certain acts. The insolvent company and parties involved in the legal acts conducted by the insolvent company regarding its assets after the commencement of bankruptcy proceedings cannot claim that these acts are valid. The bankruptcy trustee can, however, ratify an executory contract made between the insolvent company and other parties.

Trustees and authority of directors

Trustees have the power to conduct acts that are within the scope of the purpose of the trust. (For the bankruptcy trustee, see above, Companies: Insolvent companies.)

The board of directors can appoint representative director(s) from among the directors, who have the full right of representation with regard to the business of the company. No limitation on the comprehensive authority of the representative director can be asserted against a bona fide third party that enters into a contract with the company through that representative director.

Under the agency rules, the company may become liable to non-negligent, bona fide third parties who have contracted with directors or employees who do not have the full right of representation, where (Article 354, Companies Act):

  • The company gives a non-representative director a title that is regarded as having authority to represent the company.

  • An employee of the company uses a title regarded as having the right of representation with the approval of the representative director.

For more information on the agency rules, see Question 15.

Formal legal requirements

2. What are the essential requirements to create a legally enforceable contract?

A contract is formed and legally enforceable if an offer and an acceptance match (which forms an agreement). In Japan, consideration is not a requirement for the formation of a contract, and not many types of contract require specific formalities.

However, some contracts must be in writing, such as:

  • Guarantees.

  • Fixed term building leases.

  • Fixed term land leases with a duration of 50 years or more.

  • Construction work contracts.

In addition, some contracts require the delivery of the object that is the subject of the contract for the contract to be formed, such as:

  • Pledges.

  • Contracts for accord and satisfaction (that is, where a contract is formed to discharge a debt by transferring valuable consideration which is not the consideration in the original contract).

  • Contracts for earnest money (security deposits made in certain important contracts).

  • Loans for consumption contracts (that is, a contract under which the owner of a personal chattel lends it to another to be consumed, on the basis that the other party will deliver another chattel of the same kind, quality and quantity to the lender).

  • Loan for use contracts (a loan of an article for a certain time, to be used by the borrower, without paying for it).

  • Deposit contracts (a contractual agreement governing the handling of deposited assets).

  • Other in-kind contracts.

 
3. What are the main forms of contract, for example in writing and oral?

An offer to create a contract must contain certain and definite terms for it to be sufficient to form an agreement with the other party's acceptance, and therefore form a contract. Any notice of intention that does not identify the other party or the contractual terms does not constitute an offer to create a contract, but merely an invitation to negotiate, and has no effect of forming a contract even if the other party accepts it. The distinction between an offer to create a contract and an invitation to negotiate is not clear, however, and trade usage and other factors are also considered.

In terms of revocation of an offer, an offer that specifies a period for acceptance cannot be revoked. An offer made to a person at a distance without specifying a period for acceptance cannot be revoked until the lapse of a reasonable period for the offeror to receive notice of acceptance.

For commercial transactions, except for transactions such as actual sales and purchases that are completed immediately, contracts are often prepared in writing to avoid future disputes, even where this is not a requirement for the formation of the contract. Terms can be incorporated into written contracts by reference, provided that there are no uncertainties regarding the existence or details of the document being incorporated.

It is possible to form a contract by offer and acceptance via electromagnetic means. However, the relevant special law provides that unless the business entity has taken measures to confirm the consumer's intention by electromagnetic means, the consumer can revoke an electronic consumer contract for mistake.

In principle, any party wishing to use digital material as evidence in court needs to put it in writing (such as by printing).

 
4. How are preliminary agreements used in your jurisdiction?

In cases where decision-making by the parties require time and caution, such as real estate transactions or business transfers, parties commonly, at an early stage of the contract, enter into one of the following.

Written consent to purchase/written consent to sell

The main matters that this will include are:

  • Exclusive negotiation rights and their effective term.

  • Deadline for entering into a final contract.

  • Payment amount.

  • Payment due date.

Memorandum of understanding or letter of intent

If due diligence is to be performed prior to entering into a final contract, a memorandum of understanding or a letter of intent often contains terms that are related to due diligence. As binding matters can often give rise to a conflict between each party's interest, the memorandum or letter often identifies binding terms (or terms that must not have a binding effect). When disclosing documents necessary for due diligence to a prospective purchaser, a non-disclosure agreement is usually entered into for the protection of confidential information.

 
5. Can negotiations become legally binding in any circumstances? What are the principles and rules (if any) on pre-contractual liability and good faith in negotiations?

Consequences can occur if a party instils in another party during the course of contract negotiation a strong sense of confidence in the formation of a contract, which results in the other party making expenditures. In that case, the party that breaks that confidence will be liable to compensate the other party for any damage (reliance damage) actually incurred by the other party (culpa in contrahendo).

Examples of cases where a party can be held liable under this principle include:

  • Where one party breaks off contract negotiation betraying the other party's expectation for contract formation and causing the other party to incur unnecessary losses.

  • Where a contract is validly formed, but one party has acted against the principle of good faith during the course of negotiations (such as making false representations or failing to make necessary disclosure). In that case, that party may be liable if the other party is made to receive performance which is different from what it expected, resulting in incurring damage.

Formalities for execution

6. When are written contracts required and for which assets/interests?

In Japan, not many types of contracts must be prepared in writing for them to be validly formed (see Question 2). There are, however, a number of other contracts where written documents are in practice prepared.

Real estate sale and purchase contracts and mortgage contracts

In practice, these are always prepared in writing, as written contracts are required for real estate registration even though they are not required for contract formation.

Financial instruments transactions contracts

Before a customer enters into a contract, a financial instruments business operator or registered financial institutions must in principle deliver to that customer a document providing an overview of that financial instruments transaction contract. This document is not the written contract itself.

Insurance contracts

An insurer, when entering into an insurance contract, must deliver a document to the insurance policyholder stating the terms and conditions of the insurance contract, including (Insurance Act):

  • The term of insurance.

  • Amount of insurance premium.

  • Payment method.

Consumer contracts

Consumers have the right to cancel where they have misunderstood the contract due to false representation by the business entity. This consumer protection provision does not, however, mean that the business entity has a general duty to deliver a written document.

Perfecting assignment of receivables

To perfect the assignment of receivables by registration, it is necessary when applying for registration to submit an electromagnetic media (such as a CD-ROM) on which matters to be registered are recorded. An assignment of receivables contract does not itself need to be in writing. However, the assignment is perfected by way of notice from the assignor to the obligor, or by obtaining the consent of the obligor. The notice or consent must be in the form of a deed with an officially confirmed date stamp.

 
7. Are there different formalities for different types of contractual document?

A small number of contracts must be in writing (see Question 2). In addition, contracts for which there is a significant need to certify the content are often prepared in the form of a notarised deed (including fixed term land leases and fixed term building leases) (see Question 10).

 
8. What are the formalities for the execution of documents by companies, foreign companies and individuals?

Companies

Companies ordinarily affix the name of the representative and its seal for the execution of documents. Documents that are used for corporate registration or real estate registration must be affixed with the seal that has been registered with the registry office in advance.

Foreign companies

Foreign companies often use the signature of an authorised signatory, such as a representative of the company, to execute documents. Those signatures, even if affixed without a seal, are considered to have the effect of a seal (based on the Act on Signatures and Seals and Insolvency Certificate in Relation to Foreign Nationals). However, in the case of a signature affixed on a document which will be used for corporate registration or real estate registration procedures, it will be necessary to submit to the registry office a signature certificate evidencing that this signature is the signatory's genuine signature. The signature certificate must be issued by either:

  • The consul of the foreign delegation of the country of nationality of the signatory in Japan.

  • A notary public of the country of nationality of the signatory.

Individuals

Individuals generally use signatures and seals for the execution of documents. For documents which will be used for real estate registration procedures, it is necessary to affix a seal using the seal that the individual has registered with the municipal government of the location of his or her residence in advance. In practice, individuals must often affix their registered seals when engaging in bank transactions, and so on.

 
9. What is the status of electronic and faxed signatures in your jurisdiction?

Electronic signatures

Scanning a hand-written signature signed on a paper and pasting its image on a contract or other documents, and printing or photocopying that document with this image, is considered insufficient to certify that the signature is attached by the signatory, as it can be fixed by anyone without permission.

The Act on Electronic Signatures and Certification Business resolves this by providing for an "electronic signature". When transmitting and receiving electronic documents between persons at a distance, the preparer of the electronic document encrypts information using a key that allows encryption. After sending the electronic document with an attached electronic signature created by the encryption, the receiver confirms that the electronic document is received using a key that allows decoding of encrypted information. This method is considered to increase the certainty that such an electronic document has been authentically prepared.

Faxed signatures

A signature appearing on a faxed document is often treated as a valid signature unless there is a dispute among the parties as to whether this signature is a mechanically copied signature of the authorised signatory.

Deeds

10. When are deeds required in relation to contracts?

Transfers of interests in real estate

Notarised deeds are not generally required (see below, Notarised deeds). However, when applying to register the transfer of a real estate interest, for the purpose of confirming the applicant's identity as registered right holder, the applicant must provide, in relation to the interests to be transferred, either the:

  • Registration certificate.

  • Information for registration identification.

Notarised deeds

Notarised deeds must be created for the following contracts/legal acts:

  • Fixed term land lease contracts for a business purpose, with either a duration of ten years or more and less than 30 years, or a duration of 30 years or more and less than 50 years.

  • Voluntary guardianship contracts.

  • Notary deed wills.

However, notarised deeds are often used in cases where there is a need to certify the contract (see Question 7).

 
11. What are the legal formalities for a deed?

Either the registration certificates or the information for registration identification are required for a transfer of ownership of real estate or creation of a mortgage, so that the registration office can confirm that the applicant for registration is the registered right holder (see Question 10). Notarised deeds are required for certain contracts.

Registration certificate

The registration certification is created by the registry office simply by affixing its official stamp of acceptance on the photocopy of the registration application form or the photocopy of the contract to conveyance (which is attached to the registration application form). It will be returned to the successful applicant of the registration for the verification of the authenticity of his right. He does not need to apply separately for the certificate itself. A registration certificate, which certifies the transfer, preservation or creation of a right to real estate, is issued by the registry office to the registered right holder of the relevant real estate with the seal affixed by the registry office on a duplicate copy of the application for registration itself or on the attachment which certifies the transfer, preservation or creation of a right such as a sale and purchase contract.

Information for registration identification

This is a password that consists of a unique combination of alphabetic characters and numbers and other codes, and is notified by the registration officer to the registered right holder of the real estate, which is expected to be kept strictly confidential by its holder.

Notarised deeds

A notarised deed must be prepared by a notary, and is subject to a preparation fee (see Question 14). Revenue stamps are also required for certain documents (for example, contracts of cash loans for consumption, land lease contracts and land sales contracts). It must also be witnessed, depending on the form of instrument (for example, a notarised deed will requires two or more witnesses for execution). Moreover, there are other formalities, such as language, which must be in Japanese, and certain matters that must be stated (such as name, address, occupation, age of the person requesting the preparation of the notarised deed, and so on). Other formalities may be required in specific cases, such as the use of interpreters or observers, reading aloud, or displaying the contents of the notarised deed to obtain the approval of the testator and the witnesses.

 
12. What are the legal requirements for the execution of deeds?

There are some legal requirements for the execution of certain documents, such as:

  • Attendance of witnesses (for example, a notarised deed will requires attendance of two or more witnesses for preparation (see Question 13)).

  • In relation to corporate acts that are related to registration, when attaching a seal on an application for registration or any other document, it is necessary to use the seal registered with the relevant registry office in advance. The company securely handles these seals.

Notarisation

13. Is notarisation required for contracts in your jurisdiction?

Notarised deeds are required for fixed term land lease contracts for a business purpose (with certain contract periods), voluntary guardianship contracts, and notary deed wills (see Question 10).

 
14. What are the legalisation requirements in your jurisdiction and how is it carried out?

Notaries are appointed by the Ministry of Justice. A notary can be a judge, public prosecutor, or attorney-at-law that has fulfilled certain requirements. A notarised deed of contract or will prepared by a notary has legal effect, as it is presumed to be authentically created. A notarised deed for a claim for a monetary obligation is enforceable without going through a court procedure, if it includes a statement that the obligor is immediately subject to enforcement (enforcement deed), and if its served to the obligor.

The preparation fee for notarised deeds is based on the monetary value of the purpose of the subject contract or legally operative act (such as a will). For example, if the monetary value is:

  • JPY1 million or less, the preparation fee would be JPY5,000.

  • Between JPY1 million and JPY2 million, the preparation fee would be JPY7,000.

In addition to a preparation fee, revenue stamps may also be required.

Japan is a member state of the HCCH Convention Abolishing the Requirement of Legalisation for Foreign Public Documents 1961 (Apostille Convention). When submitting a document to another member state, no legalisation by the state to which the document is to be submitted is required if an apostille of the Ministry of Foreign Affairs of Japan is obtained. However, there are cases where both of the following are required:

  • A certification of genuineness of the seal certified by the Ministry of Foreign Affairs of Japan.

  • A consular authentication by the foreign delegation in Japan of the state to which the document is to be submitted.

Further, in a case where a foreign citizen submits a document to a registry office in Japan, unless that foreign citizen has a registered seal, the document must be signed and a signature certificate of that signature must be submitted (see Question 8).

Powers of attorney

15. What are the main types of powers of attorney in your jurisdiction?

It is not required to prepare a power of attorney for an agent to execute a contract for the principal; however, a power of attorney is usually prepared and delivered to the agent as evidence of the authority.

A power of attorney may also have sections identifying the agent or authorised matters left blank for the convenience of the transaction and/or because of confidence in the agent. In that case, the legal effect of an act conducted by the agent can become an issue when a person makes improper use of the blank power of attorney by completing the blank sections and pretending that it has been granted with the authority of agency within the scope set forth in that document. The principal may be liable if the person fills only the section of the agent or the section of the counterparty to those acts, as it could be said that the counterparty would have good reason to think that he or she had the authority of agency. If, however, the person fills the section of the authorised matters of the blank power of attorney, it is more difficult to argue that the principal had shown to the counterparty that he or she granted that authority. In either case, if the counterparty knew or was negligent in not knowing that the person was not granted the authority of agency, the principal is not liable.

The power of attorney terminates on the expiry of the term of that power, if that term is specified in the power. The power will be terminated even if the term is not specified, in cases where, for example, the:

  • Authorised matters are completed.

  • Performance of the authorised matters becomes impossible.

  • Authorisation is cancelled.

  • Principal or agent dies.

For this reason, an enduring power of attorney is not permitted.

 
16. What are the main transactions when powers of attorney are used?

Some common uses of a power of attorney include powers of attorney issued to:

  • An attorney to conduct litigation proceedings.

  • A judicial scrivener (shihō shoshi) for a registration application.

  • A proxy in relation to exercise of voting rights at a shareholders meeting.

 
17. What are the key provisions in a power of attorney?

The scope of the authorised matters agreed between the principal and agent, and the term of the matters, are key provisions in a power of attorney.

 
18. What are the formalities for the execution of a power of attorney?

A power of attorney must have the seal of the principal attached. If the principal is a company, that seal must in most cases be the seal registered with the registry office in advance. If the principal is an individual, the seal is not usually a registered seal, except in cases of real estate registration (see Question 8).

Other

19. Is virtual closing used in your jurisdiction?

Virtual closing is used for transactions in which a number of parties are involved, and for cross-border transactions.

 
20. How are legal opinions obtained and used in your jurisdiction?

Legal opinions are sometimes obtained from legal advisers as a method for directors to determine whether a new transaction that a company proposes to enter into is legal.

 
21. What are the key issues in the conduct of completion meetings?

At completion meetings, the following are key issues:

  • That each contracting party provides a certificate of the seal impression of the registered seal for that party's identification.

  • That each representative of a company provides a certificate of incumbency to certify the power of representation.

  • Confirmation of the fulfilment of the conditions precedent.

Other key issues include earn-out clauses for M&A transactions and post-closing clauses regarding defects, if any, for real estate transactions.

 

Content of contracts

22. What is legal status of contractual terms in your jurisdiction?

Agreed contractual terms are legally protected in Japan. There is no specific legal distinction between terms and representations in a contract. It is not uncommon for parties to a contract to include a clause stating the effect on remedies, including liquidated damages. Conditions are common features of a contract, but closing conditions are rare, except in certain complex contracts such as M&A and finance.

Contracts are generally interpreted taking into account the reasonable intent of the parties. Contractual terms exist mainly of express terms. Implied terms are possible, but are rarely recognised, as the requirements are relatively stringent. Contractual parties can, however, also be liable for concealed defects.

 
23. Are warranties recognised in your jurisdiction?

Under the laws of Japan, there is no concept exactly corresponding to contractual warranties. A warranty in Japan will generally refer to the closest available concept, the product warranties that are generally provided by product manufacturers. Such warranties often state that repairs will be conducted free of cost for a certain period of time. To that extent, the manufacturer is interpreted as undertaking a unilateral obligation to provide repairs, and so on.

The Product Liability Act, which provides tort laws, sets out the rules for damages in the case of defects in products delivered by the manufacturer. This could be interpreted as legally equivalent to warranties.

 

Variation and assignment

24. What are the main ways to transfer contractual rights?

Contractual rights are commonly transferred by way of an assignment of receivables. It is possible to provide in a contract for a special agreement prohibiting assignment. Where an assignment is entered into in breach of this agreement, this assignment will not take effect, although this may not be effective as against a bona fide transferee that is not grossly negligent.

It is also possible to agree on the transfer of the entire contractual position so that a third party can step into the place of a contractual party. There are also cases where contractual rights are transferred by comprehensive succession, such as inheritance.

 
25. What are the rules relating to waiver of contractual rights?

A waiver is not valid when any right of a third party or the counterparty would be infringed by the waiver of contractual rights. In addition, the following cannot be waived:

  • The right to invoke a statute of limitation before the limitation has lapsed.

  • The right to revoke a will.

 

Enforcement

Liability and remedies

26. What are the rules relating to invalidity, misrepresentation and mistake relating to contracts?

A contract is void where:

  • The contractual terms are against public order and morals.

  • A party has made a mistake regarding any element of a contract, except in the case of gross negligence on the part of that party.

A contract that has been formed by fraud or intimidation is voidable.

In addition, a number of laws provide specific grounds of invalidation/revocation, including the:

  • Consumer Contracts Act.

  • Act on Land and Building Leases.

  • Interest Rate Restriction Act.

  • Labour Standards Act.

  • Insurance Act.

 
27. What are the main performance and discharge rules relating to contracts?

If either party to a contract fails to perform its obligations, the non-defaulting party can lawfully refuse to perform its own obligations. Further, the non-defaulting party can cancel the contract if the defaulting party fails to perform the obligation despite a demand from the non-defaulting party.

If a party fails to perform any scheduled act that is the purpose of a contract by the due date, the non-defaulting party can cancel the contract without any notice or demand. If a contract is cancelled, it is extinguished with retrospective effect, so that both parties:

  • Are released from legal obligations that remain unperformed.

  • Bear the obligation, in the case of contractual terms already performed, of restoring to the original state.

The defaulting party remains liable for any damages incurred to the non-defaulting party.

It is also possible to cancel a contract on agreement among the parties. However, if any third party rights may be infringed due to that cancellation, the cancellation may be treated as not effective to protect that third party's rights.

The Civil Code provides as a default rule that, if a contract for the delivery of a specific object becomes subsequently unenforceable due to any cause not attributable to the obligor, the obligor still holds the right to receive counter-performance under that contract, laying the risk of loss on the obligee.

 
28. What are the key rules on privity of contract and third party rights?

As a general rule, only the parties to a contract can exercise rights under the contract. However, third parties can exercise rights under a contract to which they are not a party when:

  • A creditor exercises the rights an insolvent debtor has against a third party, on behalf of the debtor, for the creditor to preserve its receivables (creditor's subrogation right).

  • A creditor demands the court to revoke unfair disposal of property by an insolvent debtor to preserve its receivables (creditor's right to revoke).

  • A contract is made for a third party, under which one party covenants to the other party that it will directly assume an obligation to a third party. This third party acquires the right to directly make a claim against the covenanting party when it indicates to that party its intention to enjoy the contractual benefits.

 
29. What are the main rules relating to contractual liability?

Multiple contractual parties can assume the following liabilities:

  • Joint and several liability: a number of parties jointly and severally assume the same liability in full. This means that all parties are liable for the performance in full.

  • Indivisible liability: a number of parties assume the liability requiring the same indivisible performance.

  • Several liability: this means that each party is severally liable to perform the liability in an equal amount, that is, only liable to the extent of the party's portion.

Further, an agreement to enter into a joint and several guarantee is close to joint and several liability in nature and is widely used as a contractual term in the case of multiple parties. It means that the guarantors are liable for the performance of the liability under the primary contract in full.

A party responsible for a breach of contract is liable to compensate the non-breaching party for damage. In the case of a breach of contract, the non-breaching party can demand performance and if the breaching party still fails to remedy the breach within a certain period of time, can cancel the contract.

The right to immediately demand an injunction based on a breach of contract is not necessarily recognised (see Question 31). Exceptionally, a demand for an injunction can be recognised in accordance with certain laws and regulations or past precedents that allow this in specific cases. Such cases include a demand for an injunction by a shareholder based on an illegal act of a director or an act of unfair competition.

 
30. What are the main rules relating to excluding contractual liability?

There are no specific restrictions on agreements for the exclusion of liabilities between business parties. However, it is generally considered that liability for an act of wilful misconduct cannot be excluded, based on the principle of faith and trust. As to the exclusion of liability based on gross negligence, court precedents have rendered different rulings but it is likely to be invalid if there is no rationale to exclude liability.

Where a consumer is a party, clauses are prohibited that (Consumer Contract Act):

  • Totally exempt the business operator from liability in the case of a minor negligence on the part of the business operator.

  • Partially exempt the business operator from liability in the case of wilful misconduct or gross negligence on the part of the business operator.

 
31. What are the main contractual remedies?

Damages can be obtained to compensate for non-performance of contractual obligations. Damages comprise not only actual (expectation) damages but also lost profits if they were foreseeable at the time of contract. When determining the amount of damages, if there has been negligence on the part of the party claiming damages, set-off for contributory negligence is allowed. Punitive damages are not recognised.

Compulsory performance is also a potential remedy in cases of non-performance of monetary obligation, obligation of delivery of movables/real estate, and so on. Whether the court orders specific performance or damages depends on the arguments made by the parties. The law does not prioritise one remedy over the other.

Injunctions may not always be obtained, but it is possible to obtain injunctions in certain circumstances:

  • Against specific acts set out under the Commercial Code or Companies Act (concerning the use of trade marks, acts of directors or issuance of shares for subscription).

  • Against specific acts set out under the Intellectual Property Basic Act or Unfair Competition Prevention Act (concerning acts of infringing patent rights or copyright or acts of unfair competition).

  • Demands for injunctions relating to preservative disposition proceedings to secure the subject of the ruling.

  • Other situations in legal claims in line with precedent (see Question 29).

The court may interpret the contract in line with the reasonable intentions of the parties, and revise the contractual terms based on the assertions of the parties to a lawsuit.

 
32. What are the main differences between indemnity and damages? Are penalty clauses subject to any limitation?

Under the laws of Japan, there is no specific distinction between "indemnity" and "damages". It could be argued that there is a distinction between the concept of "indemnity" and "damages" in the Financial Instruments and Exchange Act, as this prohibits securities companies from providing compensation for losses, but not from being liable in damages.

Any penalty in a contractual claim is presumed to constitute liquidated damages (Article 420(3), Civil Code). It is also possible, however, to agree that a party can claim damages exceeding the penalty amount. Where a contract provides for a payment of a penalty in the event of breach separately from damages, an applicable special law may set a cap, for example:

  • Where the dispute concerns a contract over a sale of a property and a real estate broker is the seller, the sum of liquidated damages and penalty must not exceed 20% of the purchase price.

  • Where the dispute concerns a consumer lease agreement, a portion of interest that exceeds the interest rate provided under the Interest Rate Restriction Act is invalid.

 

Enforcement and cross-border issues

Choice of law

33. Is a foreign choice of law in a contract upheld by the local courts?

Under conflict of law rules, the law of the country of forum applies. However, the contractual parties can legally agree under the Act on General Rules for Applications of Laws of Japan to apply a foreign law as the governing law. The courts of Japan will in the event of a dispute make a judgment based on that foreign law, to the extent that this is not against:

  • Public order.

  • The mandatory laws of that foreign law.

 
34. Are any mandatory terms implied by statute?

Under the Act on General Rules for Application of Laws, where the parties do not designate a governing law, it will be based on:

  • For consumer contracts, the law of the habitual residence of the consumer.

  • For all other contracts, the law which governs the place most closely connected to the act of entering into the contract (that is, an offer and an acceptance) at the time of that act.

However, any contractual formalities that comply with the law of the place where the act of entering the contract is made will be valid, even where they do not comply with the law which the parties designated as the governing law, or the law which governs the place most closely connected with the act of entering the contract.

Where the parties have contracted at a distance, any contractual formality that complies with the law of place where a notice for application or approval is issued is also valid. However, in the case of a consumer contract, where no governing law is designated, the applicable law will be the place of the habitual residence of the consumer, and not the place of the act, the law of the place where the contract is applied, or where the contract is entered into.

In relation to the formation and effect of employment contracts, an employee can inform the employer that the employer must apply the rules of a mandatory statute of the law governing the place most closely connected to the employment contract.

Jurisdiction

35. Is a choice of jurisdiction in a contract upheld by the local courts?

The court must generally respect a choice of jurisdiction agreed between the parties. However, any agreement that grants exclusive jurisdiction to a foreign court that cannot exercise jurisdiction is invalid. In that case, whether or not courts in Japan have jurisdiction will be determined in accordance with principles of the Code of Civil Procedure.

In the case of agreements between business operators and consumers or agreements on jurisdiction between employer and employee, a jurisdiction clause that is likely to cause disadvantages to consumers or employees will not be recognised. Even where the court of competent jurisdiction is located in Japan, the court may dismiss a case if it determines that exercising jurisdiction would:

  • Disturb the equity between the parties.

  • Prevent appropriate and swift realisation of the trial considering, among other factors, the:

    • nature of the case;

    • degree of burden of responding to an action by the defendant;

    • location of evidence.

Enforcement of foreign judgments

36. When are foreign judgments recognised in your jurisdiction?

The following requirements under the Code of Civil Procedure must be met for a foreign judgement to be recognised:

  • It is a final and binding judgment of the relevant foreign court.

  • The relevant foreign court has jurisdiction.

  • The defeated defendant has received summons/service necessary to commence a lawsuit or responded to the action.

  • It is not against the public order and morals of Japan.

  • There is a mutual guarantee with that foreign country for the reciprocal recognition and enforcement of judgments.

To enforce a foreign judgment, an execution judgment of a Japanese court is necessary. The party seeking to enforce must bring a case before the court. However, the court will only examine whether or not applying the foreign judgment will comply with the formalities. The court will not examine whether a foreign judgment correctly interprets or applies laws or whether the judgment of the court is appropriate.

 

Online resources

Ministry of Internal Affairs and Communications (MIAC) database

W http://law.e-gov.go.jp/htmldata/M29/M29HO089.html

http://law.e-gov.go.jp/htmldata/H17/H17HO086.html

http://law.e-gov.go.jp/htmldata/H18/H18HO078.html

Description.This is an online database (in Japanese) where the MIAC Administrative Management Bureau posts laws and regulations whose enforcement date has been announced in the Official Gazette.

Japanese Law Transaction Database System

W www.japaneselawtranslation.go.jp/law/detail/?id=2057&vm=&re=

www.japaneselawtranslation.go.jp/law/detail/?id=2035&vm=&re=

www.japaneselawtranslation.go.jp/law/detail/?id=1970&

Description.The Japanese Law Transaction Database System is a database where the Ministry of Justice includes laws and regulations that have been translated by relevant ministries and agencies. These translations are not official, the translation database is not complete, and it is not always up-to-date with the latest amendments.

Civil Affairs Bureau of the Ministry of Justice registry office information

W www.moj.go.jp/MINJI/saikenjouto-02.html

Description.This website is managed by the Civil Affairs Bureau of the Ministry of Justice, and provides (in Japanese) up-to-date official information concerning application procedures and costs under the relevant laws and regulations in relation to registry offices, for the benefit of those wishing to make applications, for example, to register the transfer of receivables. Official or trusted unofficial translations of this site are not, to the authors' knowledge, available.

Japan National Notaries Association website

W www.koshonin.gr.jp/hi.html

www.koshonin.gr.jp/pdf/en20151112.pdf (English language summary)

Description.This website is managed by the Japan National Notaries Association (the national organisation of the 50 Notaries Associations in Japan), and contains up-to-date information (in Japanese) from the relevant laws and regulations on the procedures and rules relating to the preparation of notarial deeds by notaries.

The English language summary may potentially contain information that is out-of-date.



Contributor profiles

Junko Ogushi, Senior Partner

Atsumi & Sakai

T +81 3 5501 2111
F +81 3 5501 2211
E junko.ogushi@aplaw.jp
W www.aplaw.jp/en/lawyers/junko-ogushi/

Professional qualifications. Japan

Areas of practice. M&A; corporate; banking and finance; real estate; capital markets; business restructuring; insurance; SE Asia practice.

Non-professional qualifications. LLM, University of Michigan Law School

Recent transactions

  • Advising an operator of an infrastructure REIT in IPO to Tokyo Stock Exchange.

  • Advising a shipping company in stock purchase of an Indonesian LNG company.

  • Advising a Japanese government sponsored company and a construction company in development of emergency hospital in Cambodia.

  • Advising lenders, real estate companies and funds on numerous office development projects individually valued at up to US$3 billion.

  • Advising lenders, real estate companies and funds on the redevelopment of a landmark cultural institution in Tokyo.

Languages. Japanese, English and Italian

Professional associations/memberships. Tokyo Bar Association.

Publications. "InsTech" in Japan: Direction and Key Points on the Insurance Business Act," GINKO JITSUMU Vol.46 No.5, Banking Education Co., Ltd. (May 2016); Global Legal Insights - Corporate Real Estate, First Edition, Japan Chapter, Global Legal Group, 2014; Vietnamese court's revocation of a VIAC arbitral award: a Japanese investor vs its Vietnamese JV partner, JCA Journal, the Japan Commercial Arbitration Association, January 2014.

Takafumi Ochiai, Partner

Atsumi & Sakai

T +81 3 5501 2361
F +81 3 5501 2211
E takafumi.ochiai@aplaw.jp
W www.aplaw.jp/en/lawyers/takafumi-ochiai/

Professional qualifications. Japan

Areas of practice. Litigation, arbitration, ADR; Chinese and International law practices; corporate; restructuring; intellectual property rights; M&A; IT; FinTech, Healthcare, regulations.

Non-professional qualifications. BS, Keio University, 2004

Recent transactions

  • Acting as arbitrator in a JCAA product defect case between a Taiwanese Company and a Japanese company.

  • Acting as legal counsel to a Japanese company in a JCAA arbitration application JCAA against a Bahamian company.

  • Advising a Japanese company on a CIETAC arbitration related to the restriction of remittance and transfer credits in mainland China.

  • Acting as legal counsel to a Hong Kong company in Japan court procedures relating to the enforcement of an arbitral award rendered in HKIAC.

Languages. Japanese, English, Chinese

Professional associations/memberships. Dai-ni Tokyo Bar Association; Deputy Director-General and Vice Chairman of Affairs Finance Committee of the Japan Association of Arbitrators; Member of Central Board on Intellectual Property Rights of the Japan Federation of Bar Associations; Vice-Chairperson of International Committee, Daini Tokyo Bar Association Vice-Chairperson of the steering committee of the Arbitration Center of the Dai-ni Tokyo Bar Association; Member of the steering committee of the Young Japan Association of Arbitrators (YJAA); Member of the Research Committee on Business Recovery in China, a research committee of the Japanese Association for Business Recovery.

  • Publications. Training Material for International Arbitration Practice, Shinzansha Publisher Co Ltd, 2015.

  • Using CIETAC to resolve disputes: what you need to know when doing business in China, SHUNKAN KEIRIJOUHOU No. 1335, 2013.

  • Japanese translation of the IBA Guidelines for Drafting International Arbitration Clauses, listed on the IBA website, December 2011.

Keita Hitomi, Associate

Atsumi & Sakai

T +81 3 5501 2172
F +81 3 5501 2211
E keita.hitomi@aplaw.jp
W www.aplaw.jp/en/lawyers/keita-hitomi/

Professional qualifications. Japan

Areas of practice. Competition and anti-trust; corporate and M&A; finance and financial services regulatory; energy and natural resources; labour and employment; dispute resolution and litigation.

Recent transactions

  • Contributed to various types of international and domestic transactions (corporate, M&A, finance) and litigations, including large-scale securities suits.

  • Assisted the anti-trust team partners and facilitated collaborative work with foreign lawyers in cartel investigations in various jurisdictions worldwide.

Languages. Japanese, English

Professional associations/memberships. Member of the Dai-ni Tokyo Bar Association and the Japan Competition Law Forum.

Publications. "Doing Business 2016: Measuring Regulatory Quality and Efficiency", A World Bank Group (Regional Contributor)


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