Contract formation

Good faith in negotiating

Is there an obligation to use good faith when negotiating a contract?

Yes. Although a party to a contract, in principle, has full discretion whether or not to enter into the contract up until execution, even in a phase where the contract is yet to be concluded, the negotiating parties are required to act in good faith. If a party did not act in good faith and as a result the other party suffers damages, the party failing to act in good faith may be liable for such damages incurred in the following cases:

  • a contract has been concluded, but the contract is found invalid for certain reasons, such as the impossibility of performance, and the party knew or should have known of such impossibility;
  • negotiations aiming to conclude a contract had reached a final phase, but ultimately the contract was not concluded because the party did not act in good faith in failing to conclude the contract; or
  • a contract was effectively concluded, but as a result of the party’s provision of false information, the process and contents thereof were disadvantageous to the other party.

It should be noted that recovery of damages in these cases is limited to the extent of the causal relationship between the damages suffered and the reliance on the counterparty’s actions; in other words, it does not cover expectancy interest. That is to say, the harmed party will only be able to claim for direct damages suffered or incurred as a result of acting under the belief that the contract should be valid or that the contract highly likely should be concluded, and performance profits that would have been obtained if the contract were to be performed are not recoverable.

‘Battle of the forms’ disputes

How are ‘battle of the forms’ disputes resolved in your jurisdiction?

Although no definite legislation exists in Japan, and therefore Japanese law is silent on this point, if the terms of the two submitted forms are entirely different, it is likely to be considered that no contract has been formed, since it is generally understood that a contract is formed by the terms of the offer and the acceptance being the same.

Notwithstanding the foregoing, it also is generally understood that the conditions proposed by the first submitted form are evaluated as declaring an intention of that party and are rejected by the other party by its proposal of its counter form. If the party that made the initial submission does not raise any objection, it is highly likely that such counter form is considered as an acceptance and reflects the terms of the understanding.

Further, under the Commercial Code of Japan, when one party receives an offer to contract in relation to its business from another party, with which the party has regular dealings, the party must issue a notice of its acceptance or refusal of the offer to contract without delay. If the party fails to issue this notice, the party will be deemed to have accepted the offer to contract.

Language requirements

Is there a legal requirement to draft the contract in the local language?

Parties are free to draft a contract in any language they prefer.

However, since Japanese must be used in court, to enforce rights under a contract before a Japanese court, it will be necessary to have it translated into Japanese. Incidentally, if a contract is a necessary document for any registration, permission and such like, a Japanese translation will also be required.

Online contracts

Is it possible to agree a B2B contract online?

Yes, in principle, as no form of documentation is required under Japanese law for the parties to enter into a contract. Even an oral communication can constitute a contract in appropriate circumstances. Particular types of contract, however, such as contracts of guarantee, shall be made in writing or concluded by electromagnetic record.

A contractual party can avoid the obligation to pay stamp duty, which the parties are required to pay in respect of certain document types finalised in Japan. However, in order to prove the formation of a contract, it is important to maintain evidence that a contract has been validly concluded.

Traditionally, online contracts have not commonly been used in Japan and most contracts have been signed on paper, although recently the use of online contracts is being offered by more and more Japanese companies. Nevertheless, at present, the predominant method of executing contracts is still on paper.