Article: Revision of the Civil Code of Japan

Article written by Michio Matsuzaki.

Part 1) Statutory Interests

The Civil Code of Japan was first established in 1896 as the basic rule governing civil matters between/among individuals and business entities, which is comprised of five parts, i.e. “General Provisions”, “Real Rights”, “Claims”, “Relatives” and “Inheritance”. As time goes by with the advance of Japan’s society some parts of the law seem no longer sufficiently cover and govern those relevant matters in modern society and the economy of Japan. In the aim of adapting such inappropriate parts of the law The Ministry of Justice of Japan is currently in the process to introduce a bill of the revised Civil Code to the Diet. Since this article is provided in the aim of helping those foreign individuals and companies to launch and operate businesses in Japan I describe those parts relevant to such business activities, i.e. The articles of “The Part 2 - Claims” in particular, as follows.
The following are the major points to be revised and added.

Shifting statutory interests to variable interest rates from fixed rates:

The current Civil Code, Article 404 regarding statutory interests stipulates the rate of statutory interests upon non-business transactions as 5% per annum. However, such a fixed rate can be discrepant from actual rates in the market under the Japan’s economic trend of the times. Accordingly, the bill proposes to tentatively change the statutory interest down to 3% per annum in the first 3 years in accordance with the current rates in the market, which shall the be reviewed and changed every 3 years as a 3-year term based upon the rate in the last year.
On the other hand, as for business transactions’ the commercial statutory interest rate of 6% under The current Commercial Code, Article 514 shall be abolished to be unified to the above variable interest rate of The Civil Code. 

Part 2) Default and Cancellation of Contracts

Cancellation of contracts caused by default upon business transactions

A party involved in a business transaction may cancel a contract in case of default by the counter party. For example, if a seller failed to surrender the product to the buyer due to damages inevitably occurred upon the product the buyer may cancel the sales contract due the seller’s default. The bill of revised Civil Code shall further clarify the basic rules upon such a case of cancellation of the contract and/or damage claim upon the default as follows.

1) Cancellation of Contract:
Claims: 
For example, a seller needs to give a claim against the seller to surrender the product within the reasonable period of time prior to eventually cancel the contract. However, the revised law shall restrict such a cancellation by the buyer in case the default is not so serious under common sense in society. On the other hand, in case performance of the obligation was already impossible such as the product concerned were totally damaged or lost or no longer useless the buyer can immediately cancel the contract without a claim in advance.

Unavoidable responsibility of obligor:
The current law has released obligors from liabilities in case causes of default were unavoidable such as natural disasters etc. However, the revised law shall not release obligors from liabilities no matter what the causes are.

Partial cancellation:
The revised law shall enable partial cancellations of contract in case the objects of contract can be divided such as a sales contract for housing materials and the relevant installation services etc.

Extinguishment of cancellation rights:
In case a buyer damaged the product concerned after receiving from the seller the sales contract can no longer be canceled.

Part 3) Damage Claims upon Default

Conditions to justify damage claims

The revised Civil Code shall further specify those conditions that justify damages claims upon default of contracts. In principle, a damage claim can be risen only in case the default is caused by negligence of obligor. For example, in case of a sales contract the party can rise a damage claim against default by the counter party.

- Impossibility of performance: the product was damaged or lost by negligence of the seller before surrendering

- Refusal of performance: the seller refused to surrender the product or the buyer refused to pay money without justifiable reasons

- Cancelation & rights to cancel contract upon agreement: Damage claims based on cancelation & cancelation right according to the contract as such

On the other hand, in case a seller cannot surrender the product to the buyer due unavoidable reasons such as damages by natural disasters etc. the buyer cannot rise damage claim against such an unavoidable default. Meanwhile, the seller needs to verify that there was no negligence the one’s side upon damage of the product.

Amount of damage claims

Amounts of damage claims can be freely stipulated in a contract by agreement by the parties concerned. However, it may also cause such agreements with unreasonable amounts of damage claims, which cannot be changed even by a court in case of disputes.

Accordingly, the revised Civil Code shall authorize courts to change such unreasonable amounts of damage claims even ones agreed in a contract to some reasonable amount in case of disputes.