6.6 Commercial transactions

Commercial transactions in Japan blend traditional practices with modern legal frameworks. The system emphasizes good faith, fair dealing, and consensualism while providing flexibility through various business structures like Kabushiki Kaisha and Godo Kaisha.

Contract formation follows structured processes, focusing on mutual agreement and clear communication. Performance and breach are governed by principles that prioritize specific performance over monetary damages, reflecting a preference for maintaining business relationships.

Overview of commercial law

• Commercial law in Japan governs business transactions and relationships between entities, reflecting the country's unique legal system that blends civil law traditions with modern commercial practices
• Japanese commercial law aims to facilitate economic growth while maintaining fairness and stability in business dealings, balancing the interests of various stakeholders

Key principles of transactions

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• Good faith and fair dealing (shingi seijitsu no gensoku) underpin all commercial transactions in Japan, requiring parties to act honestly and reasonably
• Freedom of contract (keiyaku jiyū no gensoku) allows parties to determine their own terms, subject to certain legal restrictions and public policy considerations
• Consensualism emphasizes the importance of mutual agreement in forming valid contracts, with less emphasis on formalities compared to some Western legal systems
• Duty of care (chūi gimu) requires parties to exercise reasonable care in fulfilling their contractual obligations

Types of commercial entities

• Kabushiki Kaisha (KK) serves as the standard corporation type, offering limited liability and being suitable for large-scale businesses
• Godo Kaisha (GK) provides a more flexible structure similar to a limited liability company, popular among small to medium-sized enterprises
• Gomei Kaisha operates as a general partnership with unlimited liability for all partners, less common but still used in some traditional businesses
• Goshi Kaisha functions as a limited partnership, combining elements of both limited and unlimited liability for different partners

Contract formation

• Contract formation in Japanese commercial law follows a structured process, emphasizing mutual agreement and clear communication between parties
• The Japanese Civil Code and Commercial Code provide the legal framework for contract formation, supplemented by industry-specific regulations and customs

Offer and acceptance

• Offer (mōshikomi) must be sufficiently definite and indicate the offeror's intention to be bound upon acceptance
• Acceptance (shōdaku) must be unconditional and match the terms of the offer exactly to form a valid contract
• Mailbox rule (tōtatsu shugi) generally applies in Japan, making acceptance effective upon dispatch rather than receipt
• Revocation of offers follows specific rules, with irrevocable offers (kakutei mōshikomi) binding the offeror for a reasonable period

Consideration and capacity

• Consideration (taika) is not strictly required in Japanese contract law, differing from common law systems
• Cause (gen'in) serves as a similar concept, requiring a valid reason or purpose for the contract to be enforceable
• Legal capacity (nōryoku) determines an individual's or entity's ability to enter into binding contracts
• Minors (miseinen) and adults under guardianship (seinen kōken) have limited capacity, with special rules governing their contractual activities

Performance and breach

• Performance and breach of contracts in Japanese commercial law focus on fulfilling obligations and addressing failures to meet contractual terms
• Japanese courts generally prefer specific performance over monetary damages when possible, reflecting a preference for maintaining business relationships

Contractual obligations

• Primary obligations (shutaru gimu) constitute the core duties explicitly stated in the contract
• Ancillary obligations (fuzui gimu) include implied duties such as providing necessary information or cooperating in good faith
• Force majeure (fuka kōryoku jijō) may excuse performance under certain unforeseeable and unavoidable circumstances
• Duty to mitigate (songai keigen gimu) requires the non-breaching party to take reasonable steps to minimize losses resulting from a breach

Remedies for breach

• Specific performance (genjō hōfuku) compels the breaching party to fulfill their contractual obligations as originally agreed
• Damages (songai baishō) compensate the non-breaching party for losses resulting from the breach
  • Expectation damages (kitai rieki no baishō) aim to put the party in the position they would have been in had the contract been performed
  • Reliance damages (shinrai rieki no baishō) compensate for losses incurred in reliance on the contract
• Termination (kaijo) allows the non-breaching party to end the contractual relationship in cases of material breach
• Liquidated damages clauses (yaku'atsu baishōkin jōkō) specify predetermined amounts payable upon breach, subject to court review for reasonableness

Sale of goods

• Sale of goods in Japanese commercial law is primarily governed by the Civil Code and the Commercial Code, with additional regulations for specific industries
• The United Nations Convention on Contracts for the International Sale of Goods (CISG) applies to international sales involving Japanese parties, unless expressly excluded

Transfer of ownership

• Ownership transfer (shoyūken no iten) generally occurs upon delivery of the goods, unless otherwise agreed by the parties
• Risk of loss (kiken futan) typically passes to the buyer upon delivery, but can be modified by contract or trade terms (Incoterms)
• Retention of title clauses (shoyūken ryūho jōkō) allow sellers to retain ownership until full payment is received, providing security in credit sales
• Delivery (hikiwatashi) can be actual or constructive, with various methods recognized under Japanese law (direct delivery, delivery to a carrier, etc.)

Warranties and conditions

• Express warranties (meiji no hosho) are explicitly stated guarantees about the quality or characteristics of the goods
• Implied warranties (mokuteki no hosho) arise by operation of law, such as the warranty of merchantability (shōhin sei no hosho)
• Conditions (jōken) are essential terms of the contract, breach of which may allow the innocent party to terminate the contract
• Warranty against defects (kashi tanpo) requires the seller to deliver goods free from material defects, with specific remedies available to the buyer

Secured transactions

• Secured transactions in Japanese commercial law provide mechanisms for creditors to obtain security interests in debtors' assets
• The system aims to balance the interests of creditors, debtors, and third parties while promoting access to credit and economic growth

Types of security interests

• Mortgage (teitō ken) applies to real property and certain types of movable property, requiring registration for perfection
• Pledge (shichi ken) involves the transfer of possession of the collateral to the creditor, commonly used for tangible movables and securities
• Assignment of receivables (saiken jōto) allows the use of accounts receivable as collateral, with specific rules for perfection and priority
• Retention of title (shoyūken ryūho) provides security for sellers in credit sales, allowing them to reclaim goods if the buyer defaults

Priority and perfection

• Perfection (taiko yōken) establishes the security interest's effectiveness against third parties, typically through registration or possession
• Priority rules determine the ranking of competing security interests in the same collateral
  • First-to-file-or-perfect rule generally applies, with some exceptions for purchase money security interests
  • Statutory liens (hōtei tanpo ken) may have priority over consensual security interests in certain cases
• Public notice system (kōshi seido) provides information about existing security interests through various registries
• Conflict of laws rules determine applicable law for security interests in cross-border transactions, considering the location of the collateral and the parties involved

Negotiable instruments

• Negotiable instruments in Japanese commercial law facilitate the transfer of monetary rights and obligations in commercial transactions
• The Bills of Exchange and Promissory Notes Act (Tegata hō) and the Checks Act (Kogitte hō) provide the primary legal framework for these instruments

Promissory notes vs bills of exchange

• Promissory notes (yakusoku tegata) contain an unconditional promise by the maker to pay a specified sum to the payee or bearer
  • Commonly used in Japan for short-term financing and as security for loans
  • Must include specific elements such as the term "promissory note," unconditional promise to pay, and signature of the maker
• Bills of exchange (kawase tegata) involve an order by the drawer to a third party (drawee) to pay a specified sum to the payee or bearer
  • Less common in modern Japanese commercial practice but still recognized in law
  • Require acceptance by the drawee to create an obligation to pay

Rights and liabilities of parties

• Holder in due course (zengi no sojisha) enjoys special protections, taking the instrument free from most defenses
  • Must take the instrument for value, in good faith, and without notice of defects or defenses
• Liability of parties follows a chain of responsibility based on their roles (maker, drawer, endorser, etc.)
  • Joint and several liability (rentai sekinin) applies to all parties liable on the instrument
• Presentment (teiji) and notice of dishonor (fuwatari tsūchi) rules govern the procedures for demanding payment and notifying parties of non-payment
• Statute of limitations (jikō) for actions on negotiable instruments is generally shorter than for ordinary contracts, encouraging prompt resolution of claims

Agency and partnerships

• Agency and partnership structures in Japanese commercial law facilitate business relationships and representation in commercial activities
• These arrangements are governed by provisions in the Civil Code, Commercial Code, and specific partnership laws

Principal-agent relationships

• Agency (dairi) allows an agent to act on behalf of a principal, creating legal rights and obligations for the principal
• Actual authority (jitsuryoku) arises from express or implied agreement between principal and agent
• Apparent authority (hyōmenshugi) protects third parties who reasonably rely on an agent's appearance of authority
• Ratification (ninshō) allows a principal to retroactively approve an agent's unauthorized acts
• Duties of agents include:
  • Duty of care (chūi gimu) to act with reasonable skill and diligence
  • Duty of loyalty (chūjitsu gimu) to act in the best interests of the principal
  • Duty to account (keisan gimu) for transactions conducted on behalf of the principal

Partnership formation and dissolution

• General partnerships (nin'i kumiai) are formed by agreement between partners to engage in joint business activities
  • Partners have unlimited liability for partnership debts
  • Profits and losses are shared according to the partnership agreement or equally if not specified
• Limited partnerships (yūgen sekinin jigyō kumiai) allow for limited liability partners alongside general partners
  • Limited partners' liability is restricted to their capital contribution
  • Limited partners generally cannot participate in management without losing liability protection
• Dissolution occurs upon:
  • Expiration of the partnership term
  • Completion of the partnership's purpose
  • Unanimous agreement of partners
  • Death, bankruptcy, or withdrawal of a partner (unless otherwise agreed)
• Winding up process involves settling partnership debts and distributing remaining assets among partners

Corporate transactions

• Corporate transactions in Japanese commercial law encompass various activities that significantly impact company structure, ownership, and governance
• These transactions are subject to regulations under the Companies Act, Financial Instruments and Exchange Act, and industry-specific laws

Mergers and acquisitions

• Mergers (gappei) involve the combination of two or more companies into a single entity
  • Absorption-type merger (kyūshū gappei) where one company survives and absorbs the other(s)
  • Consolidation-type merger (shinsetsu gappei) where a new company is formed from the merging entities
• Acquisitions can take various forms:
  • Share acquisitions (kabushiki shutoku) involve purchasing a controlling stake in the target company
  • Asset acquisitions (shisan shutoku) involve purchasing specific assets or business divisions
  • Tender offers (kōkai kaitsuke) are required for large-scale acquisitions of public companies
• Due diligence (deyū dirijiensu) process involves thorough investigation of the target company's financial, legal, and operational status
• Regulatory approvals may be required, such as antitrust clearance from the Japan Fair Trade Commission

Corporate governance issues

• Board of directors (torishimariyaku kai) structure and composition are crucial in Japanese corporate governance
  • Trend towards increasing outside directors (shagai torishimariyaku) to enhance oversight and independence
• Shareholder rights and protections are emphasized in Japanese corporate law
  • Derivative actions (daihyō soshō) allow shareholders to sue on behalf of the company for directors' breaches of duty
  • Appraisal rights (kabushiki買取請求権) provide dissenting shareholders with a way to exit in certain corporate transactions
• Disclosure requirements ensure transparency in corporate activities and financial reporting
  • Timely disclosure (tekiji kaiji) rules for listed companies
  • Internal control systems (naibu tōsei) to ensure accurate financial reporting and compliance
• Corporate social responsibility (CSR) and environmental, social, and governance (ESG) factors are increasingly important in Japanese corporate governance

International commercial transactions

• International commercial transactions in Japanese law involve cross-border business activities and are subject to both domestic and international legal frameworks
• Japan's participation in international trade agreements and conventions shapes its approach to governing these transactions

Choice of law

• Party autonomy principle allows contracting parties to choose the governing law for their international contracts
  • Choice must be express or clearly demonstrated by the terms of the contract or circumstances
• In absence of choice, Japanese courts apply the law of the country with the closest connection to the contract
  • Factors considered include place of performance, parties' places of business, and nature of the transaction
• Mandatory rules of the forum (kyōkō hōki) may override chosen law in matters of public policy or consumer protection
• Renvoi (tensō) is generally not accepted in commercial matters, focusing on substantive law rather than conflict of laws rules

Dispute resolution mechanisms

• Litigation in Japanese courts remains an option for resolving international commercial disputes
  • Jurisdiction determined by factors such as defendant's domicile, place of performance, or parties' agreement
  • Recognition and enforcement of foreign judgments subject to specific requirements under Japanese law
• International commercial arbitration is increasingly popular for cross-border disputes
  • Japan Arbitration Act based on UNCITRAL Model Law provides a modern framework for arbitration
  • Tokyo and Japan Commercial Arbitration Association (JCAA) offer institutional arbitration services
• Mediation and conciliation provide alternative methods for amicable dispute resolution
  • Japan Commercial Arbitration Association (JCAA) offers mediation services
  • Court-annexed mediation (chōtei) available in some commercial cases
• Investment treaty arbitration available for disputes between foreign investors and the Japanese government under bilateral investment treaties (BITs) and free trade agreements (FTAs)

Consumer protection laws

• Consumer protection laws in Japan aim to safeguard consumers' interests in commercial transactions, addressing power imbalances between businesses and individuals
• The Consumer Contract Act and Product Liability Act form the core of Japan's consumer protection framework, supplemented by industry-specific regulations

Unfair contract terms

• Consumer Contract Act prohibits unfair terms in consumer contracts that unreasonably disadvantage consumers
• Unconscionable clauses (futekisei jōkō) that significantly impair consumer interests can be nullified by courts
• Examples of potentially unfair terms include:
  • Excessive liquidated damages clauses
  • Unilateral modification rights for businesses
  • Unreasonable limitations on consumer rights or remedies
• Transparency requirements mandate clear and understandable contract terms for consumers

Product liability

• Product Liability Act imposes strict liability on manufacturers for defective products causing damage to life, body, or property
• Defect (kekkan) defined broadly to include design defects, manufacturing defects, and warning defects
• Burden of proof on the consumer to demonstrate:
  • Existence of a defect in the product
  • Damage suffered
  • Causal relationship between the defect and the damage
• Statute of limitations for product liability claims:
  • 3 years from knowledge of damage and liable party
  • 10 years from product delivery (extended for latent health effects)
• Defenses available to manufacturers include:
  • State of scientific or technical knowledge defense
  • Compliance with mandatory standards set by public authorities

E-commerce and digital transactions

• E-commerce and digital transactions in Japan are governed by a combination of general commercial laws and specific regulations addressing online business activities
• The Act on Special Provisions to the Civil Code Concerning Electronic Consumer Contracts and Electronic Acceptance Notice provides a legal framework for online transactions

Online contract formation

• Electronic contracts are generally recognized as valid and enforceable in Japan
• Click-wrap and browse-wrap agreements commonly used in online transactions
  • Courts consider factors such as visibility and opportunity to review terms when assessing enforceability
• Cooling-off period allows consumers to cancel certain online contracts within a specified timeframe (usually 8 days)
• Electronic signatures recognized under the Act on Electronic Signatures and Certification Business
  • Qualified electronic signatures given same legal effect as handwritten signatures

Data protection and privacy

• Act on the Protection of Personal Information (APPI) governs the collection, use, and transfer of personal data
• Key principles include:
  • Purpose limitation: data must be collected and used for specified, explicit purposes
  • Data minimization: only necessary data should be collected and retained
  • Transparency: individuals must be informed about data collection and processing
• Cross-border data transfers subject to specific requirements under APPI
  • Adequate protection or consent required for transfers to third countries
• Cybersecurity measures mandated to protect personal data from unauthorized access or breaches
• Rights of individuals include:
  • Right to access their personal data
  • Right to request correction of inaccurate data
  • Right to request cessation of use in certain circumstances

Commercial dispute resolution

• Commercial dispute resolution in Japan offers various mechanisms for resolving conflicts between businesses, balancing efficiency with fairness and cultural preferences
• The Japanese legal system encourages amicable settlement of disputes, often integrating mediation or conciliation into formal legal processes

Litigation vs alternative methods

• Litigation in Japanese courts follows a civil law system with some unique features
  • Emphasis on documentary evidence over oral testimony
  • Judge-led fact-finding process with limited discovery
  • Multiple hearing sessions rather than a single continuous trial
• Arbitration gaining popularity for complex commercial disputes
  • Japan Arbitration Act provides a modern framework based on UNCITRAL Model Law
  • Advantages include confidentiality, flexibility, and enforceability of awards
• Mediation and conciliation widely used in commercial contexts
  • Court-annexed mediation (chōtei) available for many types of civil disputes
  • Private mediation services offered by institutions like the Japan Commercial Arbitration Association (JCAA)
• Expert determination used for technical disputes, with experts' decisions often binding on parties

Enforcement of judgments

• Domestic judgments enforced through court-supervised execution procedures
  • Compulsory execution (kyōsei shikkō) involves seizure and sale of debtor's assets
  • Provisional attachment (kari sashiosae) available to secure assets pending final judgment
• Foreign judgment recognition and enforcement subject to specific requirements:
  • Reciprocity between Japan and the country of origin
  • Proper service of process on the defendant
  • Judgment not contrary to Japanese public policy
  • Finality and conclusiveness of the foreign judgment
• Arbitral awards, both domestic and foreign, enforceable under the Arbitration Act
  • New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards applies to foreign awards
• Enforcement challenges include:
  • Locating and identifying debtor's assets
  • Dealing with complex corporate structures or overseas assets
  • Cultural reluctance to use aggressive enforcement measures in some business contexts