Introduction
Establishing a business in Japan requires navigating a legal landscape fundamentally different from other countries. A core premise is that Japan operates under a Civil Law system, distinct from the Anglo-American Common Law tradition.
Contract under Civil Law
1. Civil Law Characteristics
Civil law is a legal system developed primarily in France and Germany. It is characterized by a comprehensive legal order built around codified statutes. Japan’s Civil Code, enacted in the late 19th century, was also significantly influenced by the German and French Civil Law systems. Consequently, Japanese legal practice begins by considering “which statutory provisions apply?”. While a contract is important, it is viewed as “a component of the broader legal framework ” rather than the sole authority.
2. The Concept of Contract Formation
A distinctive feature of Civil Law is the simplicity of the contract formation. Under Japanese Civil Code (Article 522), a contract is formed the moment the parties’ expressions of intent (the “offer” and the “acceptance”), align.
Critically, if both parties express their intent to “agree to these terms,” a binding contract is formed even without a written document. While a written contract is crucial evidence to clarify terms and prevent disputes, it is not a prerequisite for the contract formation.
3. Role and Interpretation of Contracts
In Japan, statutory law acts as a default mechanism, supplementing any matters not explicitly detailed in the contract. This is the most important point for understanding Japanese contract practice.
For instance, Japanese contracts often include “gentlemen’s clauses,” stating “In the event of doubt regarding the contract terms, the parties shall resolve the matter through sincere consultation.” This reflects the philosophy that not every contingency can be exhaustively covered in the contract itself; instead, unforeseen issues should be resolved based on the principle of mutual trust.
This stems from the status of contracts in Civil Law where a contract is merely a written record of the parties’ agreement. Even matters not explicitly written in the contract can be considered part of the agreement if mutually understood by the parties. Therefore, the parties must pay careful attention to pre- and post-contract communications, such as emails, as these can influence interpretation, exchanges and other communications both leading up to and following the contract’s execution.
Furthermore, unless explicitly overridden by the contract terms, the Civil Code automatically governs the scope of liability for breach of contract and the effects of termination. The core principle of the Civil Law approach to contracts is that the contract functions as an integral part of the law.
Comparison with Common Law
Common Law, by contrast, is centered on accumulated judicial precedent. It emphasizes how similar cases should be handled based on past court precedents.
In terms of contract law, the most significant difference is that the contract document is considered the definitive rule of the transaction under the following principles:
- Parol Evidence Rule: It is a Common Law principle where agreements not recorded in the contract document are generally unenforceable. Thus, contracts must be exhaustive, codifying every detail of anticipated risks and resolution methods.
- Consideration: This is a Common Law principle where the validity of a contract requires a quid pro quo relationship. Unilateral promises or gratuitous agreements are often considered invalid, unlike Civil Law where mutual consent is emphasized.
- Strict Liability: Common Law tends to apply principle of strict liability for breach of contract, regardless of intent or negligence. This necessitates explicit force majeure and liability limitation clauses. This is the reason why disclaimers are often emphasized in capital letters in common law contracts. In contrast, Civil Law generally governs breach of contract and liability, unless otherwise stated in the contract.
Practical Considerations for Startups
Startups aiming to enter the Japanese market should prioritize the following when negotiating contracts in Japan:
- Confirm the governing law: Even if a contract is drafted in English, if the governing law is Japanese law, it will be interpreted under the Civil Law framework. The legal effect is determined based on Japanese law, not the language of the document. Local legal review by local experts is advisable.
- Adjust Expectations on Contract Length: Under Japanese law, the areas supplemented by statutory provisions are broad, meaning overly detailed, lengthy contracts are not always reasonable. Therefore, when dealing with Japanese counterparties, avoid requesting excessive revisions simply because the contract is shorter. Negotiate revisions in accordance with Japanese contract practices, and consulting experts is crucial for this purpose.
- Note the Differences In Negotiation Culture: While Common Law contracts are drafted to “prepare for the worst-case scenario,” Japanese practice emphasizes relationships and trust, frequently assuming flexible implementation. Understanding this cultural background facilitates smoother contract negotiations. Overly aggressive revision may undermine the counterparty’s trust.
Summary
Contracts in Japan operate under a legal philosophy significantly different from Common Law. The system prioritizes mutual consent and views the contract document as part of the broader legal framework, whereas Common Law treats the contract document as the central authority.
For startups, correctly understanding these distinctions is a crucial foundation for mitigating risks and building long-term business relationships.
GVA Global LPC can provide strategic advice tailored to your specific entry requirements. Contact us at any time to support your expansion into the Japanese market.
