Defence procurement law fundamentals

Mandatory procurement clauses

Are there mandatory procurement clauses that must be included in a defence procurement contract or that will be read into the contract regardless of their actual inclusion?

When the government determines the successful bidder in a tender or the counterparty to a discretionary contract, the contract officer, among others, must prepare a written contract that includes the particulars of the purpose of the contract, contract price, performance period and contract guarantee and other necessary matters (article 29-8, paragraph 1 of the Public Accounting Act; article 100 of the Cabinet Order on Budgets, the Settlement of Accounts, and Accounting). For the Ministry of Defence, a contract must be prepared for ‘each successful bid, etc’, and a contract must be prepared for all defence and security articles, without exception.

Further, a contract will not become final and binding until signed and sealed by both the contract officer and the counterparty, and the preparation of a written contract by such signing and sealing is one of the requirements for the conclusion of contracts.

There are no particular clauses that would be read into a contract without actually being included therein.

Cost allocation

How are costs allocated between the contractor and government within a contract?

The General Terms and Conditions published by the Ministry of Defence do not refer to contract expenses. It is considered normal for each party to bear its own expenses.

Disclosures

What disclosures must the contractor make regarding its cost and pricing?

The contractor must submit a bid form or an estimate sheet to the Ministry of Defence.

The contractor has no legal obligation to disclose any information, but when the government enters into certain contracts specified by cabinet order or statute that cause expenditures to be incurred by the national government, the government must publish information concerning the contract price, among other things.

Audits

How are audits of defence and security procurements conducted in this jurisdiction?

To improve the fairness and transparency of defence and security procurements, the Ministry of Defence takes measures to ensure the appropriateness of contracts and to enhance checks and balances.

First, as part of an effort throughout the government to ‘ensure appropriateness of public procurement’, the Ministry of Defence has been expanding the use of a ‘comprehensive evaluation bid method’ and streamlining its bidding procedures. In addition, in response to a number of cases in 2012 of overcharging and manipulation of product test results by contractors, the Ministry of Defence has been steadily working on measures to prevent recurrence of these problems, such as enhanced system inspections, reviewing penalties and ensuring the effectiveness of supervision and inspections, and otherwise putting more effort into prevention of misconduct, improvement of fairness and transparency and ensuring contracts are appropriate.

Further, with the aim of strengthening checks and balances, the ATLA has established an Audit and Evaluation Division to carry out internal audits, as well as conducting multilayered checks on the ATLA from both inside and outside through audits by the Inspector General’s Office of Legal Compliance and deliberations at the Defence Procurement Council, whose members are external academics. Further, it is also making efforts towards raising compliance awareness by enhancing its education division and providing thorough education on legal compliance to its personnel.

In the case of defence and security procurement, the supplier’s records of costs are inspected in relation to the production cost of procured defence and security articles, in accordance with the contractual terms, etc (eg, a ‘special clause regarding securement of reliability of documents and implementation of system inspection’ or a ‘special clause on securement of reliability of documents related to contracts concerning import goods, etc, and implementation of import procurement inspections’) and whenever needed, cost audits are conducted to confirm that the price of each item’s cost and consumption quantity is appropriate.

IP rights

Who gets the ownership rights to intellectual property created during performance of the contract? What licences are typically given and how?

Under the special terms published by the Ministry of Defence, any copyright-protected works created during the performance of a contract are required to be transferred and a ‘certificate of transfer of copyright’ and ‘certificate of non-exercise of author’s moral right’ to be submitted together with the work product.

Economic zones

Are there economic zones or other special programmes in this jurisdiction commonly utilised by foreign defence and security contractors for financial or other procurement related benefits?

No.

Forming legal entities

Describe the process for forming legal entities, including joint ventures, in this jurisdiction.

The process for forming legal entities is described below:

  • advance preparations:
    • determine basic matters (such as organisational form, stated capital, business descriptions and succession of assets); and
    • check whether there is any other company of the same trade name at the same location of head office at the legal affairs bureau;
  • preparation of articles of incorporation:
    • determine the purposes, trade name, location of the head office, minimum amount of contributed assets, name or organisational name and address of the incorporator (matters required to be stated in the original articles of incorporation) and other matters;
  • notarisation of articles of incorporation by notary public;
  • contribution:
    • the incorporator pays the money to be contributed in full or tender all property other than monies with respect to the shares issued at incorporation without delay after subscribing for such shares issued at incorporation;
  • appointment of officers at incorporation:
    • the incorporator appoints directors at incorporation without delay after the completion of capital contribution;
    • in the case of a company with company auditors, company auditors are appointed; and
    • appointment of officers at incorporation is determined by a majority of the voting rights of the incorporators;
  • examination by directors at incorporation:
    • directors at incorporation examine whether the capital contribution has been completed and whether any incorporation procedures are in breach of any laws and regulations or the articles of incorporation;
  • appointment of directors at incorporation:
    • in the case of a company with a board of directors, a representative director at incorporation is appointed (as decided by a majority of the directors at incorporation);
  • registration of incorporation:
    • registration of incorporation must be made within two weeks from the later of the date of termination of examination by the directors at incorporation and the date designated by the incorporator; and
    • notification to the relevant government agencies (ie, tax office, prefectural tax office, municipal government (tax or national pension), labour standards office (employment insurance, workers’ accident compensation insurance) and pension office (health insurance, employee pension), etc).
Access to government records

Are there statutes or regulations enabling access to copies of government records? How does it work? Can one obtain versions of previous contracts?

In accordance with the Act on Access to Information Held by the Administration, any person may request the head of an administrative organ to disclose administrative documents, and the head of such administrative organ who receives such request for disclosure must disclose such administrative documents except in the following cases:

  • information concerning an individual (excluding information concerning the business of an individual who operates the said business), where it is possible to identify a specific individual from a name, date of birth or other description contained in the information concerned (including cases where it is possible to identify a specific individual through comparing the said information with other information), or when it is not possible to identify a specific individual, but disclosure of the said information is likely to cause harm to the rights and interests of an individual. This is provided however, that the following information shall be excluded:
    • information that is made public, or information that is scheduled to be made public, pursuant to the provisions of laws and regulations or by custom;
    • information that is found necessary to be disclosed to protect a person’s life, health, livelihood or property; and
    • if the said individual is a public officer; officer or employee of the incorporated administrative agencies; local public officer; and officer or employee of the local incorporated administrative agencies;
  • when the said information pertains to the performance of his or her duties, the portion of the said information pertaining to the job of the said public officer, etc, and the substance of the said performance of duties;
  • information concerning a juridical person or other entities (excluding the state, incorporated administrative agencies, local public entities and local incorporated administrative agencies (juridical person)), or information concerning the business of an individual who operates the said business, which corresponds to the following, provided that information that is found necessary to be disclosed to protect a person’s life, health, livelihood or property shall be excluded:
    • information that, when disclosed, is likely to cause harm to the rights, competitive position or other legitimate interests of the said juridical persons or of the said individual; and
    • information customarily not disclosed by the juridical person or the individual, which has been voluntarily provided in response to a request by an administrative organ on the condition of non-disclosure, or information for which it is found reasonable to set such a condition in light of the nature of the information or the circumstances at the time;
  • information for which there are reasonable grounds for the head of an administrative organ to find that disclosure is likely to cause harm to national security, cause damage to the relationship of mutual trust with another country or an international organisation, or cause a disadvantage in negotiations with another country or an international organisation;
  • information for which there are reasonable grounds for the head of an administrative organ to find that disclosure is likely to cause impediments to prevention, suppression or investigation of crimes, the maintenance of prosecutions, the execution of punishment and other matters concerning maintenance of public policy;
  • information concerning deliberations, examinations or consultations internally conducted by or mutually conducted between state organs, incorporated administrative agencies, local public entities and local incorporated administrative agencies, where disclosure is likely to cause unjust harm to the open exchange of opinions or the neutrality of decision-making, cause unjust confusion among citizens, or bring unjust advantages or disadvantages to specific individuals; and
  • information concerning the affairs or business conducted by a state organ, an incorporated administrative agency, a local public entity or a local incorporated administrative agency, where disclosure is likely to have the following risks or is likely to hinder the proper execution of the said affairs or business owing to the nature of the said affairs or business:
    • risk of making it difficult to accurately understand facts concerning affairs pertaining to audits, inspections, supervision, examinations, imposition or collection of tax, or facilitating wrongful acts regarding such affairs, or making it difficult to discover such acts;
    • risk of causing unjust damage to the property benefit of the state, an incorporated administrative agency, local public entities or a local incorporated administrative agency concerning affairs pertaining to contracts, negotiations or administrative objections and litigations;
    • risk of causing unjust hindrance to the fair and efficient execution of affairs pertaining to research and study;
    • risk of causing hindrance to the maintenance of impartial and smooth personnel practices in the affairs pertaining to personal management; and
    • risk of causing damage to the legitimate interests arising from corporate management with regard to the business of an enterprise managed by the state or a local public entity, an incorporated administrative agency or a local incorporated administrative agency.
Supply chain management

What are the rules regarding eligible suppliers and supply chain management and anti-counterfeit parts for defence and security procurements?

As a condition of participating in competitive bidding (other than for construction work), any person who meets the following conditions may not participate in competitive bidding:

  • any person who falls under the descriptions of articles 70 and 71 of the Cabinet Order on Budgets, the Settlement of Accounts, and Accounting (article 70 of the foregoing Cabinet Order);
  • if a sales, lease, contracting or other contract is put out to tender pursuant to article 29-3, paragraph 1 of the Public Accounting Act (hereinafter referred to as an ‘open tender’), the contract officer may not permit a person who falls under any of the following items to participate, unless there are special grounds for doing so, for example:
    • a person who is incapable of concluding the relevant contract;
    • a person who received an order of commencement of bankruptcy proceedings and has not had the person’s rights restored; or
    • a person who falls under any of the items of article 32, paragraph 1 of the Act on Prevention of Unjust Acts by Organised Crime Group Members (Act No. 77 of 1991) (article 17 of the foregoing Cabinet Order);
    • if a contract officer determines that a person who wishes to participate in an open tender falls under any of the following items, the contract officer may prevent the person from participating in open tenders for a period of not more than three years. The same applies to the proxies, managers and employers of such a person:
    • if the person has intentionally carried out construction, manufacturing or any other service in a careless manner or acted fraudulently with regard to the quality or volume of an object in the course of performing a contract;
    • if the person has obstructed the fair implementation of a tender or has hindered a fair price from being reached or colluded with others to obtain an unlawful profit;
    • if the person has obstructed the successful bidder from entering into a contract or obstructed a party to a contract from performing the contract;
    • if the person has obstructed an official from performing the official’s duties in a supervision or inspection;
    • if, without a justifiable reason, the person has not performed a contract;
    • if, under a contract, the price is to be fixed after the signing of the contract, and the person has intentionally claimed an excessive amount as such price based on false facts; and
    • if the person has employed a proxy, manager or other employee who is not eligible to participate in an open tender pursuant to this paragraph (not including this item) in the conclusion or performance of a contract; and
  • any person who currently faces a denomination under the ‘Outline of de-nomination, etc. concerning procurement of defence and security articles, etc and services’.

There are no specific rules regarding supply-chain management and anti-counterfeit parts relating to defence and security procurements.