Act of God or Bad Luck? Who Bears the Risk When Contract Performance Becomes Impossible in Japan?

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read

Imagine entering into a contract, only for an unforeseen event—an "act of God," a sudden accident, or a change in circumstance beyond anyone's control—to render one party's performance impossible. In such situations, a critical question arises: what happens to the other party's obligations, particularly the obligation to pay? Does the party whose performance became impossible still get their payment, or does the loss fall on them? This complex area of contract law is known in Japan as kiken futan (危険負担), which translates to "risk allocation" or "bearing of risk," specifically concerning the "counter-performance risk" (taika kiken). This article explores the principles governing how Japanese law allocates this risk when contractual performance becomes impossible without the fault of either party.

I. Understanding Kiken Futan (Risk Allocation) in Japanese Contract Law

A. The Core Problem: Impossibility of Performance Without Fault

The doctrine of kiken futan comes into play when the performance of an obligation under a bilateral contract (a contract with mutual obligations) becomes impossible due to a cause not attributable to the fault of either the obligor (the party due to perform the now-impossible obligation) or the obligee (the party due to receive that performance). Typical examples include the destruction of a unique subject matter by a natural disaster, a government expropriation making delivery illegal, or the accidental death or incapacity of a person contracted for unique personal services.

It's crucial to distinguish this from situations where impossibility is due to the obligor's fault. In such cases, the issue is one of default (saimu furikō), which would lead to remedies like damages or contract termination, rather than the specific rules of kiken futan.

The central question in kiken futan is: if one party (e.g., a seller) can no longer perform their primary obligation (e.g., deliver specific goods) due to no fault of their own, is the other party (e.g., the buyer) still obligated to render their counter-performance (e.g., pay the price)?

B. Two Main Approaches to Risk Allocation

Conceptually, there are two primary ways this risk can be allocated:

  1. Debtor-Risk Principle (Saimusha Shugi): Under this principle, the obligor of the performance that has become impossible (the "debtor" of that specific obligation) bears the risk. This means that if their performance becomes impossible without their fault, they also lose the right to claim the counter-performance (e.g., payment) from the other party.
  2. Creditor-Risk Principle (Saikensha Shugi): Conversely, this principle places the risk on the obligee of the performance that has become impossible (the "creditor" for that specific obligation, who is also the debtor of the counter-performance). If the primary performance becomes impossible without the obligor's fault, the obligor still retains the right to claim the counter-performance. The "creditor" of the impossible part must pay, even though they will not receive what they bargained for.

II. The General Rule Under the Japanese Civil Code: Debtor Bears the Risk (Article 536, Paragraph 1)

A. The Principle of Saimusha Shugi

Article 536, Paragraph 1 of the Japanese Civil Code establishes the debtor-risk principle as the general rule for bilateral contracts. It states: "Except as provided in the following paragraph and Article 534 and Article 535 [N.B.: Article 534 and 535 were deleted in the 2020 Civil Code reform, a critical change discussed below], if the performance of an obligation becomes impossible due to a cause not attributable to either of the parties, the obligor is not entitled to demand the counter-performance."

This means that if a party's obligation becomes impossible to perform due to circumstances for which neither party is responsible, that party (the obligor of the impossible performance) generally loses the right to claim the counter-payment or other counter-performance from the other party. This is widely considered the more equitable default position, reflecting the inherent interdependence of obligations in a bilateral contract: if one party cannot deliver their promised performance, they generally should not be able to demand the other party’s performance.

B. Illustration of the General Rule

Consider a contract where an event organizer (Party A) engages a renowned speaker (Professor B) to deliver a unique keynote lecture for a fee of ¥1,000,000. A few days before the event, Professor B is unexpectedly hospitalized due to a sudden, severe illness (not attributable to any fault of Professor B) that makes it impossible for her to deliver the lecture.

  • Professor B's obligation to deliver the lecture is extinguished due to impossibility.
  • Under the general rule of Article 536(1), Party A's obligation to pay the ¥1,000,000 fee to Professor B is also extinguished.
  • Professor B (the debtor of the impossible performance) bears the risk of not receiving the payment.

III. Exceptions: When the Creditor Bears the Risk (Saikensha Shugi)

While the debtor-risk principle is the default, the Japanese Civil Code outlines specific situations where the risk shifts to the creditor of the impossible performance. In these exceptional cases, the party who was to receive the now-impossible performance must still render their own counter-performance (e.g., make payment).

A. Impossibility Due to a Cause Attributable to the Creditor (Article 536, Paragraph 2, first part)

The first major exception is when the impossibility of performance is due to a cause attributable to the creditor (the party who was to receive the performance that has now become impossible). In such cases, the obligor (whose performance became impossible) does not lose their right to claim the counter-performance.

  • Illustration: Company X commissions Artisan Y to craft a custom-made piece of furniture for a price of ¥500,000, with Company X supplying a rare, specific type of wood. Before Artisan Y can begin work, Company X, through its own negligence, allows the supplied wood to be irreparably damaged by water, making it impossible for Artisan Y to craft the furniture as specified.
    • Artisan Y's obligation to craft the furniture is extinguished (as the impossibility is not Y's fault).
    • Because the impossibility is attributable to Company X (the creditor of the furniture-crafting service), Company X's obligation to pay Artisan Y the ¥500,000 remains intact. Company X bears the risk.
  • Benefit Accruing to the Debtor (Article 536, Paragraph 2, second part): If the obligor (Artisan Y in the example), by being excused from performing their own obligation, gains some benefit (e.g., saves on other material costs they would have incurred, or is able to use the freed-up time for other paid work), they must pass this benefit on to the creditor (Company X). For instance, if Artisan Y saved ¥50,000 in other material costs, this amount would typically be deducted from the ¥500,000 that Company X owes. This principle of accounting for saved benefits applies generally when the creditor bears the risk.

B. Creditor's Delay in Acceptance (Article 536, Paragraph 2, first part - a distinct scenario)

The same provision (Article 536, Paragraph 2, first part) also stipulates that the obligor does not lose the right to claim counter-performance if the performance became impossible during a period when the creditor was in delay of accepting such performance (juryō chitai), provided that such impossibility was not caused by the obligor's fault.

  • Illustration: Seller S is contracted to deliver a specific, perishable product to Buyer B's warehouse on a particular date. Seller S duly tenders delivery on that date, but Buyer B, without justification, refuses or fails to accept the delivery. While the goods are awaiting Buyer B's delayed acceptance (and Seller S is taking reasonable care of them), they perish due to an unexpected natural event (e.g., a sudden, extreme heatwave not attributable to Seller S).
    • Seller S's obligation to deliver those specific perished goods is extinguished.
    • Because the impossibility occurred during Buyer B's delay in acceptance, Buyer B's obligation to pay the price remains. Buyer B bears the risk.
    • This rule incentivizes creditors to cooperate in the performance process by timely accepting the tendered performance.

C. The Historical Exception for Contracts for the Transfer of Rights in Specific Things (The Now-Abolished Article 534)

Prior to the major reform of the Japanese Civil Code that came into effect on April 1, 2020, there was a significant and highly debated exception concerning contracts for the transfer of rights in specific things (e.g., the sale of a particular, identified painting, a unique piece of machinery, or a specific plot of land). This was governed by the former Article 534, Paragraph 1.

  • The Old Rule (Pre-2020 Art. 534(1)): This article stipulated that if the creation or transfer of a real right (bukken) over a specific thing was the object of a bilateral contract, and that thing was lost or damaged due to a cause not attributable to the obligor (e.g., the seller), then that loss or damage fell upon the obligee (e.g., the buyer). This meant the buyer was still obligated to pay the full purchase price even if the specific item was destroyed by, for example, an accidental fire after the contract was signed but before delivery, provided the seller was not at fault.
  • Rationale – "Owner's Risk" (Shoyūsha Kiken Futan): The traditional justification for this rule was rooted in the principle (under Article 176 of the Civil Code) that ownership of a specific thing generally passes to the buyer at the moment the contract of sale is formed, even before physical delivery. Therefore, the reasoning went, any subsequent accidental loss should be borne by the new owner—the buyer (creditor of the delivery obligation).
  • Criticism: This rule was subjected to intense criticism in Japanese legal scholarship for decades. Critics argued it was unfair, as the buyer often had no control over or possession of the specific item when the risk passed. It prioritized a formalistic view of title transfer over the practicalities of risk and control, and it starkly contrasted with the general debtor-risk principle of Article 536(1). Academics and practitioners often sought ways to limit its application, for example, by arguing that risk should only pass upon delivery, registration, or when the seller had completed all necessary preparations for delivery, thereby aligning risk more closely with the notion of control.
  • Generic Goods Identified (Old Art. 534(2)): A similar creditor-risk rule also applied under the old Article 534, Paragraph 2, if generic goods were subsequently identified or "specified" to fulfill the contract and were then destroyed without the seller's fault.

D. The Landmark 2020 Civil Code Reform: Abolition of Article 534

Recognizing the long-standing criticisms and the desire to align Japanese contract law more closely with international standards and contemporary notions of fairness, the 2017 Civil Code reform (which took full effect on April 1, 2020) completely abolished Article 534.

This abolition represents a fundamental shift in risk allocation for contracts involving specific things:

  • Current Law: With Article 534 gone, the general debtor-risk principle under Article 536, Paragraph 1 now applies broadly to all bilateral contracts, including those for the sale or transfer of rights in specific things.
  • Implication: Under the current law, if a specific item subject to a sales contract is lost or destroyed due to a cause not attributable to either party before the risk has otherwise passed to the buyer (e.g., by specific contractual agreement, upon delivery according to the contract, or under specific rules for carriage of goods), the seller's obligation to deliver that specific item is extinguished. Crucially, the buyer's corresponding obligation to pay the price is also generally extinguished. The risk, by default, now remains with the seller (the debtor of the delivery obligation) until a point more closely aligned with the transfer of control or benefit, or as otherwise agreed.
  • This reform simplifies the landscape of risk allocation, making it more intuitive and generally aligning it with the principle that the party better able to control or insure the goods should bear the risk of their accidental loss.

IV. Contractual Freedom in Risk Allocation

It is essential to remember that the Civil Code provisions on kiken futan are, for the most-part, default rules. Parties, especially in commercial B2B contracts, are generally free to allocate risks differently through specific clauses in their agreement. Common methods include:

  • Force Majeure Clauses: These clauses define supervening events that may excuse performance and often detail the consequences for both parties, including who bears what risk.
  • Clauses Specifying Passage of Risk: Contracts can explicitly state when the risk of loss or damage to goods passes from the seller to the buyer (e.g., upon shipment, upon delivery to a specific location).
  • Use of Incoterms®: In international sales contracts, parties frequently use Incoterms® (e.g., FOB, CIF, EXW) published by the International Chamber of Commerce to clearly define the point at which risk, as well as costs and responsibilities, transfer from seller to buyer.

V. Conclusion

The Japanese Civil Code's approach to risk allocation (kiken futan) in bilateral contracts, particularly after the significant 2020 reforms, centers on the general principle that the debtor of an impossible performance also loses the right to claim counter-performance (Article 536(1)). This "debtor-risk" rule applies broadly, including to contracts for specific things since the abolition of the historically problematic Article 534.

Exceptions where the creditor bears the risk are primarily limited to situations where the impossibility is attributable to the creditor's own fault or arises during the creditor's delay in accepting performance. While these statutory rules provide a default framework, businesses retain considerable freedom to define their own risk allocation through careful contract drafting. For those engaging in contracts under Japanese law, understanding these default principles is a critical first step, followed by a considered approach to contractual risk management tailored to the specific transaction.