At a glance: construction contracts and insurance in Japan

Contracts and insurance

What standard contract forms are used for construction and design? Must the language of the contract be the local language? Are there restrictions on choice of law and the venue for dispute resolution?

A standard contract form is widely used for domestic construction works in both the private and public sectors. For private construction works, the General Conditions of Construction Contract is provided by a private committee. For public construction works – the employers of which are public bodies – the Public Work Standard Contract is provided by the Central Council for Construction Business. For design works, the General Conditions for Design and Supervision Works Contract provided by a private association is widely used.

No local laws impose any restrictions on:

• the language of the contract;
• the choice of law; or
• the venue for dispute resolution.

In practice, all of the standard forms commonly used in Japan are written in Japanese and Japanese law is implied as the governing law where no choice of law clause is provided. In regard to the venue for dispute resolution, the General Conditions of Construction Contract for private works or the Public Work Standard Contract for public works specify, as a forum of dispute resolution, the Committee for Adjustment of Construction Work Dispute, whose jurisdiction is specified in the Construction Business Act (100/1949).

How are contractors, subcontractors, vendors and workers typically paid and is there a standard frequency for payments?

An employer usually makes a payment by promissory notes or bank transfer. The frequency of payments varies with the size and complexity of the project as stipulated in the contract. For large projects, the employer typically applies an advance payment for completion of a milestone. The standard forms of contracts for both public and private works stipulate conditions for an advance payment.

What is the typical contractual matrix for a major project in your jurisdiction in terms of the contractual relationships among the various construction project participants?

In major projects, several main contractors commonly constitute a consortium under the name of a joint venture and all main contractors become a party to the construction contract with the employer. A consortium or each of its members typically deploys subcontractors, which often deploy sub-subcontractors. The Construction Business Act (100/1949) prohibits contractors from subcontracting all construction works to a subcontractor, except where prior written consent is given by the employer in relation to a private construction project.

Is there a formal statutory and regulatory framework for PPP and PFI contracts?

The Act on Promotion of Private Finance Initiative (117/1999) provides the basic policy and procedure for PFI. However, there is no formal statutory or regulatory framework for other types of PPP. PFI can be classified into two categories: the conventional type and the concession type, which were both introduced recently. Under the conventional type, government entities pay consideration for services rendered by private entities, while under the concession type, government entities do not pay such consideration, as private entities run these projects on a self-financing, profit-oriented basis.

Specifically in relation to the conventional type, the PFI/PPP Promotion Office of the Cabinet Office has issued a standard PFI contract form and two guidelines explaining the aims, matters for special attention, and definitions that should be contained in PFI contracts, as well as setting out the main articles. These guidelines are generally adhered to and PFI contracts have become standardised in practice.

The concession type – under which public entities concede their operation rights of public facilities to private operators – was introduced in 2011. The relevant guideline issued by the PFI/PPP Promotion Office provides for the main concept to be considered in the drafting of concession contracts.

Are all members of consortia jointly liable for the entire project or may they allocate liability and responsibility among them?

For a major project, several main contractors commonly constitute a consortium under the name of a joint venture. In such cases, a consortium for a construction project is typically classified as a partnership under the Civil Code (89/1896). All members of a consortium will be held jointly and severally liable for the obligations borne by each of them in the operation of the consortium (ie, the entire project). Members may allocate liability and responsibility among themselves in accordance with the agreements made between them.

In some cases, main contractors may prefer to utilise a company under the Companies Act (86/2005) for their consortium. If a consortium is established as a company under the act, the members of the consortium will be responsible as shareholders of the company, to the extent limited by the value of their respective capital contributions.

Do local laws permit a contracting party to be indemnified against all acts, errors and omissions arising from the work of the other party, even when the first party is negligent?

No local laws prohibit indemnities in general. Therefore, parties are not prohibited from stipulating an indemnification against all acts, errors and omissions arising from the work of the other party if they are caused by the negligence of the party claiming indemnification.

However, Japanese courts interpret these contractual provisions in such a way as to find the reasonable meaning, taking into consideration:

• the intent of both parties;
• the background of the negotiations;
• trade customs; and
• commercial common sense.

In addition, the fairness and equality of construction contracts are referenced under the Construction Business Act (100/1949). The general legal principles of good faith and public policy are also applicable. Therefore, such indemnity provisions may be invalidated separately from the rest of the contract.

Where a contractor constructs a building that will be sold or leased to a third party, does the contractor bear any potential responsibility to the third party? May the third party pursue a claim against the contractor despite the lack of contractual privity?

Pursuant to the Civil Code (89/1896), a contractor can be the subject of a tort claim brought by a third party that purchased a building constructed by the contractor, even if there is no contractual relationship between the two parties. Case law has held that contractors and designers have a duty of care towards residents, neighbours and passers-by to ensure the fundamental safety of a building. Any breach of this duty resulting in defects in a building that undermine its fundamental safety, thereby infringing the life, body or property of residents, may constitute claims for damages in tort.

To what extent do available insurance products afford a contractor coverage for: damage to the property of third parties; injury to workers or third parties; delay damages; and damages due to environmental hazards? Does the local law limit contractors’ liability for damages?

The extent of insurance coverage offered for a contractor is a commercial and business matter determined by private insurers. In general, a contractor may purchase an insurance policy covering:

• damage to the property of third parties;
• injury to workers or third parties; and
• delay damages for an employer.

Eligibility for insurance with regard to damages caused by environmental hazards (eg, typhoons, flooding, earthquakes and toxic substances) varies according to the insurer.