1. How to survive in a contractual society

We live our lives in a contractual society. For example, the beginning of a family relation is a social status contract in the eyes of the family law called marriage intended for lifelong communal living, and the trading contracts governed by the property law regarding diverse goods (property) and labor (services) serve as the basis (infrastructure) of our social activities such as consumption, labor and business activities.

To walk through this contractual society safely and securely without stumbling or falling into a pitfall, it is perhaps indispensable to have an understanding of the rudiments of contract law as one’s tool (code of conduct).

The reform aimed at making this important tool easier to use is the Amendments to the Civil Code Affairs Related to Credits, Chiefly Regarding Contracts (the Act for Partial Revision of the Civil Code, Act No. 44, 2017) that was passed on May 26, 2017 and promulgated on June 2. It will come into effect on April 1, 2020.

2. The Objectives of the great civil code reform: Modernizing and increasing transparency of the Civil Code

1. Since the enactment of the Civil Code in 1896, its credit-related provisions concerning contracts have stood the test of time well, scarcely revised for about 120 years.
2. The reason why it has done so well to this day is because the code was prepared – borrowing from the cutting-edge overseas legislations of the time – to securely set down the basic frameworks and rules concerning private statutes while intentionally leaving out the excessively meticulous provisions, with its articles expressed in an abstract and simple manner, which helped them to legally cope with the societal and financial changes flexibly by necessary interpretations and supplementations. This surely is one of the great legacies of the Meiji era.
3. Today, the social and economic environments surrounding us are changing profoundly with the ever more sophisticated, complicated and globalized financial transactions, the exponential expansion of the information society, and the super-ageing society. The purpose of the latest reform is to respond to the calls from society for the legal measures to address these changes (the demands to modernize the Civil Code), and to the calls from society for a Civil Code accessible to the general public (the demands to increase transparency of the Civil Code) in view of the fact that the countless legal precedents and interpretations over a long period of time have accumulated and become established in practice.

3. Rough framework of the Civil Code reform

Responding to the social & economic changes: the core amendments to modernize the Civil Code

• Amendment regarding extinctive prescription
  Tidying up and simplifying the system, such as abolishment of occupational short-term extinctive prescription and unification of the periods of prescription
• Amendment regarding statutory interest rates
  Reducing interest rate, introducing the gradual fluctuation system, etc.
• Amendment regarding guarantee
  Improved protection for personal guarantors, etc.
• Amendment regarding assignment of claims
  New provisions to clarify the possibility of assignment of future claims
• New provisions regarding the general conditions (standard general conditions)
  To specify the legal binding power and the requirements for legal basis of contractual transactions
• Clearly stipulating the attributability of liability for damages due to default
• Amendment regarding the requirements for annulment of a contract
• New provisions for liability for damages in the case of initial impossibility
• Establishing the system to preserve the nonexempt property of an obligor (obligee subrogation & rescission of fraudulent act)
• Amendment regarding joint and several obligations
• Amendment regarding formation of contracts
• Amendment regarding assumption of risk
• Amendment regarding requirements for establishment of loans for consumption (tangibility)
• Amendment regarding leasing
  Laying down basic principles of security deposit refund and restoration at the termination of leasing
• Amendment regarding contract for work
  Tidying up the contractor’s warranty

The Civil Code accessible to the general public: the core amendments to increase transparency of the Civil Code

• Clearly stipulating the system concerning mental capacity
  Stipulating “any legal action by those who lack mental capacity is deemed invalid,” etc.
• Amendment regarding manifestation of intention
  Amending the effect of mistakes from “nullity” to “rescission”
• Amendment regarding the agent’s capacity to act
  Handling of an agent who is of limited capacity, etc.
• Amendment regarding sellers’ warranty against defects
  Reordering warranty against defects (statutory liability) into warranty against contract incompatibility (contractual liability) for clarity, etc.
• Amendment to the blanket prohibition of effecting set-offs against any claim arising from tortious acts
• Amendment regarding performance (Performance by third parties)
• Clearly stipulating the fundamental principles regarding contracts (freedom of contract)

4. Stipulating the fundamental principles: freedom of contract

1. Freedom of contract alludes to the principle that an individual is free to conclude a contract according to one’s own intention in their daily life in order to regulate the affairs related to private law, and that the authorities (such as the state) must avoid interfering in this as much as possible.
   The capitalist economies of the world are built upon these principles of freedom of contract and private property system as their legal backbone today.
2. The grounds for the freedom of contract principle in the current Civil Code is Article 91.
If any party to a juristic act manifests any intention which is inconsistent with a provision in any laws and regulations not related to public policy, such intention shall prevail.

There are three types of juristic acts – unilateral juristic acts (wills, etc.), contracts and joint action (incorporating an association, for example). If one interprets this article from the point of contract, it reads thus:

Discretionary provisions (provisions of any laws and regulations not related to public policy) can be eliminated with the contract between the parties, therefore even if the parties to the contract concludes a contract that eliminates discretionary provisions, such contract remains valid.

and this is understood to validate the freedom of contract principle.

3. However, this is utterly incomprehensible for anyone who is not a legal expert. This is why the freedom of contract principle was newly stipulated as below.
Amended Civil Code, Article 521 (Conclusion of contract and freedom of contents)
　1. Except as otherwise provided, anyone is free to decide whether to enter into a contract.
　2. The parties to the contract is free to decide the contents of the contract, subject to the restrictions prescribed by laws and regulations.
Amended Civil Code, Article 522 (Formation of contracts and method)
　1. A contract shall be formed when the content of the contract is communicated and the intention to conclude the contract is manifested (hereinafter referred to as “offer”) to the other party, and the other party agrees to said action.
　2. The formation of contract does not require to be accompanied by the production of a document or other means, except as otherwise provided.

5. Understandability and usability

1. The new amendment is mostly concerning the tidying up of legal technicalities (simplifying, increasing shorter articles, stipulating the established legal theory and precedents, etc.) aside from the ones concerning the standard general conditions, thus making the new Civil Code plainer than the current version. It is hoped that this will be made even plainer in the future.
2. The Civil Code is a life tool for each national who is the sovereign of Japan, and the citizen who is the habitant of the Japanese society, therefore its usability should be strongly emphasized socially alongside its understandability.
3. To this end, setting up and enriching the support infrastructure to offer information, explanation and learning about how to use this becomes indispensable. Of these, legal system education occupies an important role as the primary school for legalized society (a fair society where social problems are solved in accordance with the law).

Related links:

• The Two Basic Laws of Life -Family Law and Labor Law-
• Scenes from Law School and Business School
• Happiness Equation for Workers ―From the Perspective of Compliance for Increasing Corporate Value―

Shinichiro Toyama
Professor, Chuo Law School, Member of Daiichi Tokyo BAR Association
Areas of Specialization: Corporate Compliance, Modern Contract Law, Tort and Compensation Law (traffic accidents, medical malpractice, nuclear accidents, etc.), Domestic Relations Case Procedure Act, Labor Law, Insolvency Proceeding Law, Financial Legal Affairs, Antitrust Law, Personal Information Protection Law, Alternative Dispute Resolution (ADR), Legal Economics

After graduating from the Department of Law in the Chuo University Faculty of Law in 1975, Shinichiro Toyama became a Specially Appointed Professor in the Chuo Law School in 2004. He has served as Professor in the Chuo Law School since 2014 to the present.
He lectures on modern contract law at the Business School of Chuo University.
His major public positions include a member of a special committee of the Dispute Reconciliation Committee for Nuclear Damage Compensation of the Ministry of Education, Culture, Sports, Science and Technology; a member of a special committee of the Dispute Reconciliation Committee of Construction Work of the Ministry of Land, Infrastructure, Transport and Tourism; a member of the Civil Conciliation Commissioners of the Supreme Court of Japan; a medical ADR arbitrator for the Tokyo San Bengoshikai and more.
He serves as Research Director for the Grants-in-Aid for Scientific Research (JSPS KAKENHI Grant Number 15K03220).
His main publications and articles include Antitrust Law Useful for Daily Living, The World of Traffic Accident Civil Liability: Theory and Practice, Resolution of Individual Labor Disputes, Child Welfare and Joint Custody, JA Compliance: Creating a System for Preventing Misconduct, Construction Process Theory of the Corporate Value Improvement Type Compliance Preparation Model and more.
He is a regular contributor in the Monthly JA (JA-ZENCHU) magazine where his column is entitled How to Survive in a Contractual Society. Other writings include: Introduction to Modern Contract Law (2015), Modern Contract Law in Practice: Techniques of Producing Contracts (2016), Modern Contract Law: Labor Contracts (2017), and Modern Contract Law: Summary of Civil Code (Liability-Related) Amendments (2018).