Agency and Service Agreements in Japan: The Scope of a Mandatary's (Junin) Duty of Care and Loyalty

When businesses or individuals in Japan entrust another party with the management of their affairs, the performance of services, or the execution of legal acts on their behalf, the governing contractual framework is often an inin (委任 – mandate) or a jun-inin (準委任 – quasi-mandate) agreement. These contracts are fundamentally built on a relationship of trust (shinnin kankei – 信頼関係) between the principal (the one entrusting, ininsha – 委任者) and the mandatary (the one entrusted, junin – 受任者). This foundation of trust gives rise to significant duties for the mandatary, most notably the "duty of care of a good manager" (zenkan chūi gimu – 善管注意義務) and an increasingly emphasized "duty of loyalty" (chūjitsu gimu – 忠実義務). This article explores the scope and implications of these crucial obligations under Japanese law.

I. Understanding Inin (Mandate) and Jun-Inin (Quasi-Mandate) in Japan

A. Definition and Scope

1. Mandate (Inin) (Japanese Civil Code Article 643):
   A mandate contract is formed when one party (the mandator or principal) entrusts another party (the mandatary) with the performance of a "juridical act" (hōritsu kōi – 法律行為), and the mandatary accepts this entrustment. Juridical acts are acts intended to create, alter, or extinguish legal rights and obligations, such as entering into contracts on behalf of the principal, initiating or defending lawsuits, or registering property rights.
2. Quasi-Mandate (Jun-Inin) (Japanese Civil Code Article 656):
   Article 656 states that the provisions concerning mandate apply mutatis mutandis (with necessary changes) to the entrustment of affairs that do not constitute juridical acts. These are often referred to as "factual affairs" (jijitsu kōi – 事実行為) or services. Examples of quasi-mandate are numerous and diverse, including:For most practical legal purposes, especially concerning the duties of the entrusted party, the rules governing inin and jun-inin are largely identical. Therefore, throughout this article, the term "mandate" will generally be used to encompass both unless a specific distinction is necessary.
   • Medical diagnosis and treatment by a doctor.
   • Consulting services provided by professionals.
   • Management of property.
   • Childcare or eldercare services.
   • Accounting or tax advisory services.

B. Nature of the Mandate Contract

• Consensual Contract: A mandate is formed by the mutual agreement of the principal and the mandatary; no specific formalities are generally required for its validity.
• Generally Gratuitous by Default (Civil Code Article 648(1)): A distinctive feature of mandate under the Japanese Civil Code, stemming from its Roman law origins where such services were often performed by esteemed individuals as a matter of honor rather than for payment, is that it is presumed to be gratuitous unless the parties specifically agree on remuneration for the mandatary.
• Onerous Mandates are Common and Permissible: Despite the default presumption, in contemporary commercial and professional contexts, most significant mandate agreements are, in fact, onerous (i.e., involve agreed-upon remuneration for the mandatary's services). The Civil Code explicitly allows for such agreements (Article 648, Paragraph 1).
• Foundation of Trust (Shinnin Kankei): The paramount characteristic of a mandate relationship is the special trust and confidence that the principal places in the mandatary. This personal element is considered central and underpins the stringent duties imposed on the mandatary.

II. The Mandatary's Primary Duty: Duty of Care of a Good Manager (Zenkan Chūi Gimu) (Civil Code Article 644)

The cornerstone of a mandatary's obligations is laid down in Article 644 of the Civil Code: "A mandatary is obligated to manage the affairs entrusted to it with the care of a good manager, in accordance with the tenor of the mandate." This is commonly referred to as the zenkan chūi gimu.

A. The Standard of Care: "Care of a Good Manager"

The phrase "care of a good manager" (zenryō naru kanrisha no chūi o motte – 善良なる管理者の注意をもって) establishes an objective standard of care. This is not the (potentially lower) degree of care that the specific mandatary might exercise in managing their own personal affairs. Instead, it refers to the higher level of diligence, prudence, and skill that would be reasonably expected from a person in the same professional or social position as the mandatary, possessing similar expertise and experience, when entrusted with managing such affairs for another.

• For example, a lawyer acting as a mandatary is expected to exercise the care of a reasonably competent lawyer in that field; a financial advisor is held to the standard of a reasonably prudent financial advisor.

B. Application to Gratuitous Mandates

A particularly noteworthy aspect of Article 644 is that this heightened standard of care—the care of a good manager—applies even if the mandate is gratuitous (i.e., the mandatary is not being paid). This distinguishes mandate from certain other gratuitous arrangements, such as a gratuitous deposit (mushō kitaku), where the depositary is only required to exercise the same degree of care as they do for their own property (Civil Code Article 659). The rationale for imposing this stricter standard in gratuitous mandates lies in the special relationship of trust and confidence reposed by the principal in the mandatary. When someone accepts an entrustment, even without pay, they are implicitly undertaking to act with a professional or responsible level of diligence.

C. "In Accordance with the Tenor of the Mandate"

The obligation to act "in accordance with the tenor of the mandate" (inin no honshi ni shitagai – 委任の本旨に従い) means that the mandatary must not only be careful in how they perform the entrusted tasks but must also ensure their actions are aligned with the purpose, objectives, and scope of the mandate as understood from the agreement between the parties and the surrounding circumstances. This implies a duty to act in the principal's best interests as defined by the terms and goals of the entrustment.

D. Consequences of Breach

A failure by the mandatary to meet the standard of care of a good manager, or to act in accordance with the tenor of the mandate, constitutes a breach of their contractual obligations. If this breach causes loss or damage to the principal, the mandatary may be held liable to compensate the principal for such losses.

III. The Mandatary's Duty of Loyalty (Chūjitsu Gimu)

While the general mandate provisions in the Civil Code (Articles 643-656) do not contain a separately titled, explicit "duty of loyalty" in the same way that specific statutes like the Companies Act (for company directors, Article 355) or the Trust Act (for trustees, Article 30) do, the concept of a mandatary's duty of loyalty is increasingly emphasized in Japanese legal discourse and practice. This duty is seen as an inherent component of the mandate relationship, flowing directly from the foundational element of trust (shinnin kankei).

A. Rooted in the Relationship of Trust

The duty of loyalty obliges the mandatary to act with utmost good faith and to prioritize the principal's interests above their own or those of third parties when managing the entrusted affairs. It reflects the fiduciary-like nature of many mandate relationships, especially those involving professionals or where significant discretion is granted to the mandatary.

B. Core Elements of the Duty of Loyalty

While not exhaustively defined in a single Civil Code provision for general mandates, the duty of loyalty typically encompasses the following core elements:

1. Acting Solely for the Principal's Benefit: The mandatary must manage the entrusted affairs with the primary objective of advancing the principal's interests. They should not exploit the mandate relationship for their own personal profit or to benefit a third party at the principal's expense.
2. Avoiding Conflicts of Interest: The mandatary has a duty to avoid situations where their personal interests, or the interests of another party to whom they might owe a conflicting duty, come into conflict with the interests of the principal. If such a conflict arises or is reasonably foreseeable, the mandatary generally has an obligation to:
   • Promptly and fully disclose the conflict to the principal.
   • Obtain the principal's informed consent to proceed despite the conflict, or
   • In some cases, withdraw from the mandate if the conflict cannot be appropriately managed.
3. Prohibition on Self-Dealing (General Principle): Unless specifically authorized by the principal (after full disclosure), a mandatary should not engage in transactions concerning the entrusted affairs where they are effectively on both sides of the deal. For example, a mandatary entrusted to sell a property for the principal should not, without clear consent, purchase that property for themselves.

C. Relationship with the Duty of Care of a Good Manager (Article 644)

Many Japanese legal commentators and court interpretations tend to view the duty of loyalty not as an entirely separate obligation from Article 644, but rather as being encompassed within or a specific manifestation of the broader duty to manage affairs "in accordance with the tenor of the mandate" and "with the care of a good manager." The reasoning is that acting disloyally—such as by prioritizing one's own interests or engaging in undisclosed conflicts of interest—would inherently be contrary to the fundamental purpose and spirit of the entrustment (the "tenor of the mandate") and would certainly not meet the standard of care expected of a "good manager" acting diligently in the principal's interests.

Specialized laws governing particular professions (e.g., lawyers, doctors, financial instrument business operators under the Financial Instruments and Exchange Act) or roles (e.g., company directors) often contain more explicit and detailed provisions regarding duties of loyalty and the management of conflicts of interest, which build upon and elaborate these general Civil Code principles.

IV. Other Key Duties of the Mandatary (Illustrating Care and Loyalty)

Beyond the overarching duties of care and loyalty, the Civil Code specifies other obligations that further illustrate the mandatary's responsibilities:

• Duty to Follow Principal's Instructions: If the principal provides specific, lawful instructions concerning the management of the entrusted affairs, the mandatary is generally bound to follow them. This is because the affairs are ultimately those of the principal. However, if an instruction is clearly detrimental to the principal's own interests, illegal, or unethical, the mandatary's duty of care (and loyalty) might require them to raise concerns with the principal, report the potential negative consequences (see next point), and seek clarification or revised instructions, rather than blindly executing a harmful directive.
• Duty of Personal Performance (Jiko Shikkō Gimu) and its Modern Limits: Traditionally, the personal trust vested in the mandatary implied a duty to perform the entrusted affairs personally, prohibiting delegation to a sub-mandatary without the principal's consent (Civil Code Article 104 addresses restrictions on an agent appointing a sub-agent). However, in modern complex business environments, strict personal performance is often impractical. It is generally accepted that mandataries can use employees or assistants (rikō hojosha – 履行補助者) under their direct supervision. Furthermore, for specialized aspects within a broader mandate, delegation to another expert (e.g., a lawyer engaging a specialized forensic accountant) may be permissible or even required by the duty of care, ideally with the principal's knowledge and consent, or if such delegation is customary and reasonable for the type of affair. The mandatary typically remains ultimately responsible to the principal for the overall management, including work done by those they engage.
• Duty to Report (Civil Code Article 645): A mandatary must, at the request of the principal, report on the status and progress of the entrusted affairs at any time during the mandate. Furthermore, upon the termination or completion of the mandate, the mandatary must promptly render a full and accurate account (tenmatsu o hōkoku – 顛末を報告) of their management of the affairs. This ensures transparency and enables the principal to oversee the process and make informed decisions.
• Duty to Deliver Property and Transfer Rights (Civil Code Article 646): The mandatary is obligated to deliver to the principal any money, documents, or other property they have received or collected in the course of managing the entrusted affairs. This includes any "fruits" or profits derived from the principal's property or the mandated activities. If the mandatary acquires any rights in their own name but actually on behalf of or for the benefit of the principal (e.g., in cases of indirect agency), they have a duty to take the necessary steps to transfer those rights to the principal.
• Liability for Money Consumed for Self-Use (Civil Code Article 647): If a mandatary uses for their own benefit any money that should have been delivered to the principal or applied for the principal's affairs, they are liable to pay interest on that sum from the date of consumption. Furthermore, if the principal suffers any additional damages beyond the interest, the mandatary must also compensate for those. This is a specific consequence of breaching the duties of care, loyalty, and proper accounting.

V. Conclusion

The inin (mandate) and jun-inin (quasi-mandate) agreements under Japanese law form the bedrock for a vast array of agency, service, and entrustment relationships. Central to these agreements are the significant duties placed upon the mandatary, the party in whom the principal reposes trust and confidence. The duty of care of a good manager (Article 644 of the Civil Code) sets an objective and high standard for diligence and prudence, applicable even when the mandate is undertaken gratuitously. Flowing from the essential trust inherent in the relationship, and often seen as an integral part of acting "in accordance with the tenor of the mandate," is the duty of loyalty, which demands that the mandatary act with utmost good faith, prioritize the principal's interests, and avoid conflicts. These core duties are further fleshed out by specific obligations regarding reporting, accounting for property, and following instructions. A clear understanding of the scope and rigor of these mandatary duties is indispensable for both principals seeking to engage services and for mandataries undertaking responsibilities within the Japanese legal framework.