Introduction

A bill to reform the Civil Code (the Civil Code Amendment Bill) was submitted to the Diet on March 31 2015. If passed, the bill is scheduled to take effect around 2018. Following the previous update on the amendments to guarantee obligations under the bill (for further details please see "Civil Code reform: amendments to guarantee obligations"), this update discusses the amendments relating to adhesive terms and conditions and their effect on banking transactions.

'Adhesive terms and conditions' are generally understood to refer to contract provisions prepared by a party to the contract in order to process effectively and smoothly a large number of typical transactions. The laws and regulations concerning the legal effects of contracts (eg, the Civil Code, the Commercial Code and the Consumer Contract Law) contain no provisions stipulating the effect or binding power of adhesive terms and conditions. However, the need to process many typical transactions uniformly and swiftly has long been recognised.

Japanese courts have found that, in principle, adhesive terms and conditions are valid – presuming the parties' mutual intent to abide by a contract containing such terms and conditions – subject to the rebuttal (admitted in many court precedents) that any terms found to be unreasonable do not form part of the contract, based on a reasonable interpretation of the parties' intent. In addition, where the adhesive terms and conditions are amended after the contract has been concluded, court precedents have generally held that the amended terms and conditions apply to the contract entered into before such amendment. However, it has been argued that the rules established by such court precedents are insufficiently clear.

In this context, the Civil Code Amendment Bill includes a legal definition of 'adhesive terms and conditions'. It also sets out:

  • the requirements to be satisfied in order for such terms and conditions to be included in an agreement governing a typical transaction;
  • the conditions under which certain provisions in the adhesive terms and conditions – which as a whole constitute an agreement governing a typical transaction – are excluded from the agreement; and
  • the requirements to be satisfied in order for subsequent amendments to such terms and conditions to be included in the agreement.

The proposed amendments therefore aim to ensure the predictability and stability of the legal effect of adhesive terms and conditions.

Proposed amendments

Definition of 'standard terms and conditions'
Under the Civil Code Amendment Bill, 'standard terms and conditions' are defined as contractual terms and conditions prepared by a specific party for the purpose of including them in standardised transactions. 'Standardised transactions' are transactions:

  • that will be repeated with a large and unspecified number of persons; and
  • for which the use of certain standardised terms and conditions would be reasonable for both parties.(1)

Based on these definitions, even if the same terms and conditions are generally used, they do not constitute standard terms and conditions unless they are used for transactions repeated with a large and unspecified number of counterparties. Also, uniform terms and conditions whose use is unreasonable from the counterparties' standpoint are not considered standard terms and conditions. These two requirements are considered to be satisfied if goods or services for many persons should be provided under the same conditions in light of their public or other nature, and without regard to the individual characteristics of counterparties.

Requirements forming basis of deemed agreement

Standard terms and conditions should not be confirmed article by article. In order to make them binding nonetheless, the Civil Code Amendment Bill sets out the following requirements which must be satisfied in order for the standard terms and conditions to be deemed to have been agreed by the parties:(2)

  • There is an agreement to enter into a standardised transaction.(3)
  • There is an agreement to apply the standard terms and conditions, or the party preparing the standard terms and conditions makes advance notification that they will apply to the standardised transaction.

Accordingly, if the counterparty agrees to enter into a transaction falling within the definition of a 'standardised transaction' and there is advance notification or agreement to apply the standard terms and conditions to the transaction, this constitutes a 'deemed' agreement, even if the contents of the terms are not confirmed individually.

Disclosure requirement

Although standard terms and conditions need not be confirmed when the contract is entered into, the counterparties must be able to confirm them if they wish. Disclosure of the standard terms and conditions must be made without delay on demand by the counterparty and the demand may be made before or within a reasonable period after entering into the contract. However, this requirement is also satisfied if the party preparing the standard terms and conditions delivers them in advance in paper or electronic form.(4) Notwithstanding this, failure to make adequate disclosure will not negate the deemed agreement if there is a temporary communication failure or for other justifiable reasons.(5)

Excluded provisions

Under the reformed Civil Code, if the agreed standard terms and conditions contain any provision which would be unreasonable if it were binding on the parties, such provision will be deemed not to have been agreed by the parties. An unreasonable provision is one that:

  • restricts the rights or increases the obligations of the counterparty to the standardised transaction; and
  • is unilaterally detrimental to the interests of the counterparty and in breach of the good-faith principle under the Civil Code, in light of the characteristics and circumstances of the standardised transaction as well as generally accepted transactional practice.(6)

Amendments to standard terms and conditions

Under the reformed Civil Code, if the standard terms and conditions are amended after a standardised transaction has been entered into, certain requirements must be satisfied for the amendment to be deemed to have been agreed by the parties without confirmation of each amended article (and therefore binding).

First, the amendment must:(7)

  • align with the interests of the counterparties in general (ie, a favourable amendment); or
  • not conflict with the purpose of the standardised transaction and be reasonable, taking into consideration:
    • the need for the amendment;
    • the appropriateness of the post-amendment provisions;
    • whether the standard terms and conditions contain a provision for amendments thereto; and
    • other factors involved in the amendment.

Even if the standard terms and conditions contain no provision for amendments, this does not mean that an amendment is impossible under the reformed Civil Code. However, if there is a provision specifically setting out the provisions subject to amendment and the procedure therefor, an amendment under such a provision would favour a finding of reasonableness.

In addition, the following steps must be taken:(8)

  • The date on which the amendment takes effect must be determined in advance; and
  • The content of the amendment and the date on which the amendment takes effect must be made known to the public, either online or by any other appropriate means.

If the amendment is not favourable, the relevant information must be made known to the public by the date on which the amendment takes effect; otherwise, the amendment will not take effect.(9)

Transitional measures

On the entry into force of the Civil Code amendments, the statutory provisions concerning standard terms and conditions will in principle apply to standardised transactions entered into before the amendments' effective date.(10) Therefore, the statutory provisions concerning standard terms and conditions that are excluded from the agreement and those concerning the amendment of terms and conditions may apply to standardised transactions undertaken before the Civil Code is amended. However, the application of the reformed Civil Code to such pre-amendment transactions may be excluded if either party indicates its intent to do so before its entry into force.(11)

Impact on banking transactions

Banks regularly use adhesive terms and conditions and process typical transactions; but due to the lack of statutory provisions governing adhesive terms and conditions, there has always been uncertainty in terms of the effectiveness of transactions which use them. Under the reformed Civil Code, the definitions of 'standardised transaction' and 'standard terms and conditions' will be enshrined in law. Deposit transactions and many consumer banking transactions will be regarded as standardised transactions, because:

  • the characteristics of each counterparty are not a relevant factor; and
  • the counterparties will benefit from the uniform and swift treatment of transactions under the terms and conditions.

Therefore, the terms used for these transactions will fall within the definition of 'standard terms and conditions'.

Thus, by following the requisite procedure (agreeing to enter into a transaction falling within the definition of 'standardised transaction' and making prior disclosure or agreement to use the standard terms and conditions) and satisfying the disclosure requirement (prior disclosure or disclosure on demand), the binding power of standard terms and conditions will be ensured without specific agreement to the clauses therein. Banks generally pre-indicate the terms and conditions applicable to typical transactions and prepare evidence to establish the counterparties' agreement to abide by the adhesive terms and conditions; but under the reformed Civil Code, the requirement for standard terms and conditions to be binding will be clearer, which will help to increase the stability of banking transactions.

At the same time, guidelines for provisions excluded from standard terms and conditions have also been included in the reformed Civil Code. As to the actual application of such guidelines, future debate and developments will need to be closely followed in order to prepare standard terms and conditions effectively (or amend the existing standard terms and conditions if any provisions in them may be excluded following the entry into force of the reformed Civil Code).

Finally, the reformed Civil Code contains new provisions governing amendments to standard terms and conditions. Although court precedents have generally held that amended terms and conditions apply to contracts for typical transactions entered into before such amendment and are binding on the parties which entered into these transactions, the law has been largely silent as to what kind of amended provisions may be binding and how such amendments should be made. The reformed Civil Code will provide considerable guidance on these points. However, this guidance is expected to become more concrete and further improved by future debate and analysis. If existing adhesive terms and conditions include inadequate or no provisions concerning amendments thereto, it is worth considering whether to include specific provisions on which terms may be amended, what procedure should be followed and how to make the amendments public, in order to increase the likelihood of amendments being upheld under the reformed Civil Code.

For further information on this topic please contact Ken Takii at City-Yuwa Partners by telephone (+81 3 6212 5500) or email (ken.takii@city-yuwa.com). The City-Yuwa Partners website can be accessed at www.city-yuwa.com.

Endnotes

(1) Article 548-2(1) of the reformed Civil Code. The 'standard form contract' under the common law seems similar to this, but the reformed Civil Code stipulates not the contract itself, but the set provisions only.

(2) Article 548-2(1) of the reformed Civil Code.

(3) This means the agreement to enter into a transaction falling within the definition of 'standardised transaction' (ie, the counterparty need not acknowledge that the transaction in question is a standardised transaction).

(4) Article 548-3(1) of the reformed Civil Code.

(5) Article 548-3(2) of the reformed Civil Code. Although not clearly set out, this provision seems to presuppose that the indication must be made as soon as reasonably possible after such justifiable reason ceases to exist.

(6) Article 548-2(2) of the reformed Civil Code.

(7) Article 548-4(1) of the reformed Civil Code.

(8) Article 548-4(2) of the reformed Civil Code.

(9) Article 548-4(3) of the reformed Civil Code.

(10) Article 33(1) of Supplementary Provisions to the Civil Code Amendment Bill.

(11) Article 33(2) of Supplementary Provisions to the Civil Code Amendment Bill.

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