The purpose of the "Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors" ("Subcontract Act") is to ensure the fairness of subcontracting transactions and to protect the interests of subcontractors by preventing large companies with capital exceeding a certain amount ("Subcontracting Companies") from coercing small- and medium-size subcontractors into unfair transactions. Four types of transactions are subject to the Subcontract Act—manufacturing contracts, repair contracts, information-based product creation contracts, and service contracts.
Subcontracting Companies are prohibited from engaging in 11 types of trade practices with respect to these four types of transactions. The Japan Fair Trade Commission issues guidelines for the Subcontract Act ("Guidelines") that provide detailed interpretations and specific examples of prohibited trade practices.
On December 14, 2016, the Guidelines were amended in order to further strengthen enforcement of the Subcontract Act. One of the major amendments was to significantly increase the specific examples of prohibited trade practices from 66 to 141 based on past enforcement and hearings.
For instance, one of the newly added examples of a prohibited trade practice is the prohibition on Subcontracting Companies requiring subcontractors to reduce prices without reasonable grounds in order to achieve the Subcontracting Companies' own purposes, such as by requiring a subcontractor to "Reduce the production cost by X percent in Y number of years" (corresponding to an "unfair demand for price cuts," one of the prohibitions under the Subcontract Act).
Besides the above-mentioned significant increase in the number of specific examples, the Guidelines also specify additional trade practices to which Subcontracting Companies should pay special attention, such as price reductions in the case of retroactive application of newly lowered unit prices. Further, the Guidelines have been amended to provide additional examples of transactions targeted by the Subcontract Act.
Through this amendment, it is expected that there will be even stronger enforcement of the Subcontract Act, and therefore companies that regularly engage in subcontracting transactions will need to verify, using the amended Guidelines, that their transactions and trade practices do not violate the Subcontract Act.