Limiting liability

Prohibition on exclusions and limitations

What liabilities cannot be excluded or limited by a supplier in a contract?

In principle, a provision that limits liabilities or provides an exemption from liability for damages is valid. However, in cases where the damages were caused by a person intentionally or by gross negligence, such limitation or exemption may not apply.

Financial caps

Are there any statutory controls on using financial caps to limit liability for breach of contract?

In principle, a provision that uses financial caps to limit liabilities for breach of contract is valid. However, in cases where the damages were caused by a person intentionally or by gross negligence, such limitation may not apply.

For instance, the validity of a contract for outsourcing software development that included a provision specifying that ‘the upper limit of the compensation for damages shall be the contract amount specified in an individual agreement’ was reviewed by a court. In this case, the court found that ‘if this provision limits the liability for damages, even in the case where a party concerned infringes rights or interests protected by law, intentionally or by gross negligence, this will degrade equity considerably and go against the ordinary intentions of the parties concerned’, and went on to rule that the provision limiting compensation for damages cannot apply to such cases.

Indemnities

Are there any statutory controls on indemnities used to cover liability risks in contracts?

Indemnities used to cover liability risks in contracts generally are valid. An indemnification provision, however, may not be considered applicable in the case where the damages were caused by a person intentionally or by gross negligence.

Liquidated damages

Are liquidated damages clauses enforceable and commonly used in your jurisdiction?

Liquidated damages clauses are enforceable and commonly used in Japan. Under the Civil Code, if liquidated damages are specified in a contract, the courts have no authority to change the amount stated in such agreement as long as the scope of the damages and the amount specified in the clause are reasonable when compared with the actual damages that could result from a breach of the contract.

However, it is possible that liquidated damages could be violative of the principles of good faith, public order and morals, and held invalid.

For example, given the court precedents, in cases where the liquidated damage is too high (as has been found with respect to a franchise agreement), there may be a risk of violating public policy and of the agreement being deemed invalid. While there have been court precedents recognising liquidated damage of 60 months’ worth of royalties and precedents recognising a liquidated damage of three times the admission fee, in general, the courts would limit liquidated damage to approximately 30 months’ worth of royalties.

Law stated date

Correct on

Give the date on which the information above is accurate.

1 May 2020.