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Is the Condominium Renewal Fee Illegal?
"Good Faith and Bona Fide Principle" in the Consumer Contract Act

Makinori Goto
Professor, Waseda Law School Professional Graduate School Waseda University

Conflicting Decisions

In determining whether or not the contract with the renewal fee clause infringed the Consumer Contract Act, Article 10, the court continued to rule that it did not infringe and that it was valid up to the decision that was made by the Otsu District Court on March 27, 2009. The contrary decision was made by the Kyoto District Court on July 23, 2009, Osaka High Court on August 27, 2009, and Kyoto District Court on September 25, 2009, ruling one after another that the renewal fee was invalid and that it infringed the Consumer Contract Act, Article 10. While this court decision was to seemingly become established, more recently the Osaka High Court again ruled on October 29, 2009, that renewal fee did not infringe the Article 10 and that it was valid.

The August ruling was related to the contract of monthly rent of 45,000 yen with a renewal fee of 100,000 yen to be paid every year. The court ruled that the renewal fee only constitutes commitment made at the time of the closure of the original lease contract or at the renewal of the contract by the lessee to pay a certain amount of money to the lessor for the following renewal event and that the contract specified neither the nature of the payment nor the object of payment, concluding that such a renewal fee could not be explained easily in the legal term and that the contract lacked sound grounding for the payment. The October ruling was related to the contract of monthly rent of 52,000 yen with a renewal fee worth two months every two years with a change of rent to 50,000 yen after the third renewal with a renewal fee worth one month every two years starting from that renewal. The court ruled that it was reasonable to interpret the renewal fee as addition or supplement to the payment for the leasehold rights and that the amount remained within the reasonable range, concluding that the lessee did not unilaterally receive any disadvantages based on the good faith and bona fide principle though this special contract gave the lessee additional burden and that the contract was valid.

The August ruling can be seen as an exception since the contract term was one year instead of two years which is usual in such a contract and also because the special renewal contract was set twice as much as the monthly rent, an amount higher than usual, thus concluding that the contract violated the Consumer Contract Act, Article 10. These rulings, however, draw our attention since they are based on different interpretations of the Consumer Contract Act, Article 10.

Interpretation of the Consumer Contract Act, Article 10

The Consumer Contract Act, Article 10, stipulates "Clauses which restrict the rights of consumers or expand the duties of consumers beyond those under the provisions unrelated to the public order applicable pursuant to the Civil Code, the Commercial Code and such other laws and regulations" (preceding requisite) "and which, impair the interests of consumers unilaterally based on the fundamental principle provided in the second paragraph of article 1 of the Civil Code," (subsequent requisite) are void. The two different rulings made by the Osaka High Court both acknowledged that the preceding requisite was applicable to the renewal fee contract, while for the subsequent requisite the August ruling concluded "the case shall be ruled by determining if the case impairs the interests of the consumer unilaterally based on the good faith and bona fide principle strictly from the viewpoint of the Consumer Contract Act" in view of the Purpose clause (Article 1) of the Consumer Contract Act. Meanwhile, the October ruling acknowledged that the subsequent requisite was "a unjust clause that indicated infringement of the interests of the consumer, who should be protected by law under normal conditions, to the degree that is contrary to the good faith and bona fide principle, creating irrational disparity of the interests between the consumer and business owner" due to the disparity of information and negotiating capabilities between the consumer and business owner.

Acknowledging that the contract was demanding to such a degree that it infringed the good faith and bona fide principle, the October ruling put emphasis on the disparity of the interests between the parties. Here, it is important to explore the reason why the good faith and bona fide principle was used as criteria for Article 10 and in that context we need to know how the good faith and bona fide principle was interpreted.

Looking back some of the cases in the past that ruled that the lease deposit deduction contract violated Article 10, the Kyoto District Court did not mention the good faith and bona fide principle (November 8, 2006, Supreme Court HP), and the Kobe District Court ruled that the lease deposit deduction contract did not have any rational or just reason to support itself and that the lessee was unilaterally forced to have the lease deposit deduction contract, concluding that such a contract was void as it unilaterally infringed the interest of the lessee based on the good faith and bona fide principle (July 14, 2005, Hanrei Jiho Vol.1901, p87). The Tokyo Summary Court ruled that the clause was designed to charge the lessee for the cost of restoring the conditions from natural deterioration and that the lessor gave the lessee double burdens since the lessor received the rent as the fee of usage already giving the lessee the burden of the cost for restoring the conditions from natural deterioration during the period of lease. Hence it concluded that the contract violated the good faith and bona fide principle as the lessor received unjust interests while it was disadvantageous to the lessee. The Court added that the agreement in the deposit and liquidation clause was made neither envisaging how the restoration shall be made or how the cost shall be estimated nor providing the lessee with appropriate information, that the decision made by the lessor to require the cost for cleaning or restoring from damage, if it were made, would inevitably oblige the lessee with the cost of restoration without choice of involvement and that the agreement was made neither providing the lessee with necessary information nor enabling the lessee to recognize that it was disadvantageous to the lessee. The Court concluded that it was unilaterally disadvantageous to the lessee, it violated the good faith and bona fide principle and it was void (November 29, 2005, Supreme Court HP).

In these rulings, violation of the good faith and bona fide principle is used as a pillow phrase to indicate that the consumer unilaterally receives disadvantages, seemingly establishing the rule that the good faith and bona fide principle is violated when the consumer unilaterally receives disadvantages (Tajima, Junzo. Consumer Contract Act, Article 10, the Research Institute of Education on Ultimate Facts in Law School, Vol. 6, p92).

In conclusion, lower courts have been consistent so far in their rulings that the decision should be made on the subsequent requisite of Article 10, by determining "if the consumer interests are unilaterally infringed or not based on the good faith and bona fide principle from the perspective of the Consumer Contract Act (August case)." Should the Supreme Court make a contrary decision, it would need to find a way to explain all rulings that have been made by lower courts in the past.

Makinori Goto
Professor, Waseda Law School Professional Graduate School Waseda University

Biography
Born in 1952, graduated from Waseda University, School of Law, and left the school after completing the term of the doctorate course at Waseda University, Graduate School of Law. Served as Professor at the Waseda University, School of Law. Presently, Professor at Waseda Law School, Professional Graduate School, Waseda University. Specialized in Civil Code and Consumer Act. PhD (Law, Waseda University).

Some of the publications
Shohisha Keiyaku no Horonri (Legal Theory for Consumer Contract), Koubundou, 2002. Keiyakuho Kogi (Lecture on Contract Law), 2nd Edition, 2007. Youken Jijituron to Minpogaku tono Taiwa (Dialogue Between Material Facts Theory and Science of Civil Law), ed. Shojihomu, 2005.