Regulation of Business Outsourcing in Japan : the Amendment to the Subcontract Act

by：Kensho Onoda、Poom Kerdsang

What is the Act on the Amended Subcontract Act?

The Act Against Delay in Payment of Fees, etc. to Small and Medium-sized Entrusted Business Operators in Manufacturing and Other Specified Fields (the “Amended Subcontract Act”) is designed to protect small and medium-sized enterprises (SMEs) and ensure transaction fairness. Previously known as the Subcontract Act, the legislation was substantially amended and renamed, with the new regulatory framework taking effect on January 1st, 2026.

The Amended Subcontract Act imposes certain restrictions on the principle of contractual freedom, mandating specific obligations and prohibitions on the Entrusting Business Operator. Therefore, startups operating in Japan should thoroughly understand this regulatory framework to mitigate compliance risks.

Transaction Types Covered by the Amended Subcontract Act

The Act does not universally apply to all commercial transactions; it specifically limits to five specific transaction types:

•  Manufacturing Commissioning;
•  Repair Commissioning;
•  Commissioning of Information Deliverables;
•  Commissioning of Services; and
•  Specific Transportation Contracting

For example, outsouring of software development, app design, UI/UX design, and system operation, which are common businesses of startups, typically falls under the “Commissioning of Information Deliverables” or “Commissioning of Services” categories, thereby, triggering the Act’s application.

Businesses Subject to the Amended Subcontract Act

Whether the Act applies is not determined by vague definitions of “large corporations” versus “SMEs,” but rather by a strict statutory matrix. Under the Act, applicability is determined by examining two specific metrics: the types of outsourced transactions and the disparity in size between the two transacting parties.

Corporate size is formally measured by either the amount of the registered capital or the number of employees. For example, a company outsourcing IT services may be classified as a regulated Entrusting Business Operator if its capital or employee count exceeds specific statutory thresholds relative to the Entrusted Business Operator.

Therefore, even a startup that has newly established a Japanese subsidiary may unexpectedly bear legal obligations if its corporate metrics trigger these thresholds.

Four Obligations Imposed on Entrusting Business Operators

The Act clearly imposes the following four strict obligations on Entrusting Business Operators :

1. Obligation to Specify Order Details

The Entrusting Business Operators must clearly specify the order details, payment amount, payment due date in writing or via electronic means at the time the order is placed. This represents a significant practical difference for foreign entities accustomed to informal business practices or verbal agreements.

2. Obligation to Create and Retain Transaction Records

The Entrusting Business Operator is required to create and retain transaction records for a specified period following the completion of the transaction. This mandate ensures an auditable trail for potential future disputes or administrative investigations.

3. Obligation to Set Payment Due Dates

The payment due date must be set within 60 days from the date of receipt of deliverables or services, and the agreed period should be as short as practically possible. Even if the parties contractually agree to a date exceeding 60 days, the 60th day after the transaction date is legally deemed the payment due date. If no due date is specified, the date of receipt will be deemed the payment due date.

4. Obligation to Pay Delayed Interest

If payment is delayed beyond the statutory due date, mandatory late interest applies. Specifically, the late interest at an annual rate of 14.6% accrues for the period from the day after the payment due date until the actual date of payment.

Prohibited Acts

The Act stipulates the 11 prohibited acts that Entrusting Business Operator must strictly avoid. The underlying legal principle prioritizes the substantive fairness of the transaction over the formal “contractual terms” agreed upon by the parties. In Japan, the exploitation of a dominant bargaining position is strictly regulated regardless of whether the consent was obtained.

1. Prohibition on Refusing Acceptance

Refusing to accept deliverables or services, provided the Entrusted Business Operators is not at fault, is prohibited. “Acceptance” is legally deemed to occur when the deliverables or services are placed under the Entrusting Business Operator’s control; delaying this process pending internal reviews or user feedback may constitute a violation.

2. Prohibition on Delaying Payment of the Purchase Price

The Entrusting Business Operator must remit payment within 60 days of receiving the deliverables or services. Utilizing payment methods that cannot be reliably converted to cash by the due date, such as the promissory notes, may also constitutes a substantive delay in payment. Internal financial constraints, such as tight cash flow, are not valid legal defenses.

3. Prohibition on Reducing the Purchase Price

Unilaterally reducing the agreed-upon payment post-order placement is strictly prohibited. Regardless of the rationale, including internal policy shifts or deteriorating profit margins, making such a reduction at any point after the order is placed constitutes a statutory violation.

4. Prohibition of Returns

Returning the accepted work products when the Entrusted Business Operator is not at fault is prohibited. In the IT and design sectors, repeatedly demanding uncompesnated reperformance is generally classified as an unlawful return or an unreasonable demand.

5. Prohibition of Undue Bargaining

Unilaterally setting a payment significantly below the prevailing market price for comparable transactions is prohibited. Regulatory assessment of undue bargaining relies heavily on the existence of good-faith negotiations between the parties and the degree of deviation from reasonable commercial consideration.

6. Prohibition of Forced Purchases or Use

Coercing the Entrusted Business Operator to purchase or use products or services designated by the Entrusting Business Operator without justifiable reason is prohibited. This phobition applies even if the designated products or services belong to a subsidiary or affiliate of the Entrusting Business Operator.

7. Prohibition of Retaliatory Measures

Subjecting the Entrusted Business Operators to disadvantageous commercial treatment, such as suspending transactions or reducing order volumes, solely because they reported the Entrusting Business Operator’s violation to administrative agencies or other authorities is strictly prohibited.

8. Prohibition on Early Payment for Paid Materials, etc

Offseting or demanding for payment for raw materials supplied by the Entrusted Business Operators prior to the payment due date for the deliverables is prohibited. These actions could potentially strain the contractor’s cash flow.

9. Prohibition of Requests for Unfair Economic Benefits

Coercing the provision of money, labor, complimentary services, sponsorship, or advertising cooperation is prohibited.. Even if formally framed as a voluntary request, it constitutes a violation if the Entrusted Business Operator practically cannot refuse under the commercial circumstances.

10. Prohibition of Unfair Changes to Payment Terms and Unfair Reperformance

Changing order specifications without assuming the associated costs or demanding uncompensated rework post-acceptance, is prohibited. Heightened compliance monitoring is required in the IT sector, where specification changes frequently occur.

11. Prohibition of Unilateral Price Determination Without Consultation

Refusing to engage in a good-faith price negotiations when requested by the Entrusted Business Operators(e.g., due to increased labor or material costs), or to dictating payment amounts without providing necessary explanations, is prohibited. While there is no absolute legal obligation to accept a price increase, there is an obligation to negotiate in good-faith, requiring at least a willingness to engage in discussions.

Summary

The Act Against Delay in Payment of Fees, etc. to Small and Medium-sized Entrusted Business Operators in Manufacturing and Other Specified Fields reflects Japan’s rigorous commercial compliance lanscape.
For startups aiming to achieve sustainable growth in the Japanese market, accurately understanding this law and implementing its principles in practice is essential. GVA Global LPC provides strategic, tailored legal counsel to ensure compliance when entering and operating within the Japanese market.

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