Beyond 'Defects': How Does Japan's New 'Non-Conformity' Liability Affect Sellers and Buyers?

For decades, Japanese sales law centered on the concept of "warranty against hidden defects" (瑕疵担保責任 - kashi tanpo sekinin) when goods delivered fell short of expectations. This traditional framework, however, had its limitations, often restricting buyers' remedies and focusing narrowly on defects that were not discoverable through ordinary inspection. Recognizing the need for a more modern and comprehensive approach, Japan's major Civil Code reform, effective April 1, 2020, has replaced this regime with a broader principle: "liability for non-conformity of the subject matter with the contract terms" (契約の内容に適合しないもの - keiyaku no naiyō ni tekigō shinai mono). This shift, aligning more closely with international commercial standards like the UN Convention on Contracts for the International Sale of Goods (CISG), significantly impacts the rights and obligations of both sellers and buyers when delivered goods do not match what was agreed.

The New Standard: "Non-Conformity with the Contract"

The cornerstone of the new liability regime, primarily detailed in Articles 562 through 566 of the Reformed Civil Code, is the seller's obligation to deliver goods that conform to the terms of the contract in kind (種類 - shurui), quality (品質 - hinshitsu), and quantity (数量 - sūryō).

The critical departure from the old law is the explicit emphasis on the "content of the contract" (契約の内容 - keiyaku no naiyō) as the benchmark for determining conformity. This means that the sales agreement itself—including all specifications, descriptions, stated purposes for which the goods are required (if communicated and agreed), samples, and models—becomes the primary reference point. If the delivered goods deviate from these agreed terms, they are considered non-conforming.

This is broader than the previous focus on "hidden defects" (kashi). While the buyer's own actions or negligence can still preclude them from remedies if the non-conformity is attributable to them (Reformed Civil Code, Article 562, Paragraph 2), the defect itself no longer needs to be "hidden" in the traditional sense for the seller to be liable. The inquiry shifts from whether a defect was latent to whether the goods delivered are what the contract stipulated.

Expanded Buyer's Remedies for Non-Conformity

One of the most significant changes is the expansion of remedies available to the buyer when non-conforming goods are delivered. The new framework offers a more flexible and buyer-centric approach:

1. Right to Demand Cure (追完請求権 - Tsuikan Seikyūken)

Under Article 562, the buyer has the primary right to demand that the seller take action to make the performance conform to the contract. This "cure" can take several forms, and the buyer generally has the right to choose among them:

• Repair of the goods (目的物の修補 - mokutekibutsu no shūho): If the goods are repairable, the buyer can demand the seller to fix them.
• Delivery of substitute goods (代替物の引渡し - daitaibutsu no hikiwatashi): If repair is not feasible or desired, or if the goods are fundamentally of the wrong kind or quality, the buyer can demand conforming replacement goods.
• Delivery of missing quantity (不足分の引渡し - fusokubun no hikiwatashi): If the quantity delivered is less than agreed, the buyer can demand delivery of the shortfall.

While the buyer typically chooses the method of cure, the seller is permitted to provide cure by a different method if that alternative does not impose an "unreasonable burden" on the buyer. For example, if the buyer requests a replacement, but a quick and effective repair would fully rectify the issue without significant inconvenience to the buyer, the seller might opt for repair.

Importantly, the buyer cannot demand cure if the non-conformity is due to a cause attributable to the buyer themselves.

2. Right to Demand Price Reduction (代金減額請求権 - Daikin Gengaku Seikyūken)

If the seller fails to provide cure within a reasonable period after the buyer's demand, or if cure is impossible from the outset, the buyer can then opt to demand a reduction in the purchase price (Article 563). The reduction should be proportionate to the degree of non-conformity.

A demand for cure is not a prerequisite for seeking a price reduction in certain situations, including:

• If cure is objectively impossible.
• If the seller has definitively refused to provide cure.
• If performance (and thus cure) by a specific date was an essential element of the contract (e.g., goods for a specific event), and that date has passed.
• If it is otherwise clear from the circumstances that demanding cure would be futile.

Like the right to demand cure, the buyer cannot demand a price reduction if the non-conformity is attributable to their own fault.

3. Right to Claim Damages (損害賠償請求権 - Songai Baishō Seikyūken)

The buyer retains the right to claim damages for losses suffered due to the non-conformity, either in addition to or as an alternative to demanding cure or price reduction (Article 564). This right is now explicitly linked to the general rules for damages arising from non-performance of obligations (Article 415).

A key aspect here is that the seller can avoid liability for damages if they can prove that the non-conformity was due to a cause not attributable to them. The standard for determining non-attributability is broad: "in light of the contract, the cause of the obligation, and common sense in transactions." While this moves away from a strict "fault" (negligence or willful misconduct) requirement, the seller bears the burden of proving their lack of responsibility for the non-conformity if they wish to escape damages.

4. Right to Terminate the Contract (契約の解除権 - Keiyaku no Kaijoken)

The buyer may also terminate the sales contract due to non-conformity (Article 564, referencing general termination rules in Articles 541 and 542).

• Termination after Demanding Cure (催告解除 - Saikoku Kaijo): Generally, the buyer must first demand that the seller provide cure within a reasonable period. If the seller fails to do so, the buyer can then terminate (Article 541).
• Limitation for "Trivial" Non-Conformity: A crucial limitation is that even if cure is not provided after a demand, the buyer cannot terminate if the non-conformity is "trivial" (keibi) when assessed in light of the contract terms and common commercial practice (Article 541, proviso). What constitutes "trivial" will be a case-by-case determination, likely focusing on the impact of the non-conformity on the buyer's intended use of the goods.
• Termination without Prior Demand (無催告解除 - Mu-saikoku Kaijo): Termination without first demanding cure is permissible in certain situations (Article 542), such as:
  • If cure is wholly impossible.
  • If the seller has definitively refused to provide cure.
  • If the non-conformity is so fundamental that the "purpose of the contract cannot be achieved" by the buyer (e.g., a wedding dress delivered after the wedding date, or a custom-ordered machine that cannot perform its specifically agreed core function, even if repairable in theory, might fall here if the purpose is frustrated).

Notably, and consistent with the general reforms to contract termination, the seller's fault or attributability for the non-conformity is generally not a prerequisite for the buyer's right to terminate the contract.

Buyer's Obligation: Timely Notification of Non-Conformity

For sales that are not between merchants, the buyer has an obligation to notify the seller of any non-conformity relating to the kind or quality of the goods within one year from the time the buyer became aware of it (Reformed Civil Code, Article 566). If the buyer fails to provide such notice within this one-year period, they will generally lose the right to exercise the remedies discussed above (cure, price reduction, damages, termination) based on that specific non-conformity.

This one-year period is for notification of the non-conformity; it is not the deadline for initiating legal proceedings (which would be governed by the general statute of limitations, typically five years from awareness of the right to claim). This is a change from the old law, which often required the "exercise of rights" within one year of discovery for hidden defects.

An exception to this notification requirement exists: if the seller was aware of the non-conformity at the time of delivery, or was unaware of it due to their own gross negligence, the buyer is not barred from remedies even if they fail to notify within the one-year period.

It is crucial to distinguish this rule under the Civil Code from the rules applicable to sales between merchants (商人 - shōnin). Under the Japanese Commercial Code (Article 526), merchant buyers have a much stricter and shorter obligation to promptly inspect goods upon receipt and immediately notify the seller of any discoverable defects or quantity shortages. Failure to comply with these Commercial Code obligations can quickly lead to a loss of remedies. The Civil Code's Article 566 provides a general fallback, but for B2B transactions, the Commercial Code's immediacy requirements are paramount.

Interaction with "Mistake" (錯誤 - Sakugo)

Under the old law, if goods had a significant defect, a buyer might have debated whether to pursue a claim under the warranty against hidden defects or to argue that the contract itself was void due to a fundamental mistake (sakugo) regarding an essential quality of the goods.

The reformed Civil Code now clarifies that a "mistake" relating to a "circumstance that was a basis of the juridical act" can make the contract rescindable (取消可能 - torikeshi-kanō) by the mistaken party, rather than automatically void, if the mistake is material in light of the purpose of the juridical act and common sense in transactions (Reformed Civil Code, Article 95).

The period for exercising this right of rescission due to mistake is generally five years from when rescission becomes possible (e.g., awareness of the mistake) or twenty years from the time of the act (contract formation). This is considerably longer than the one-year notification period for non-conformity under Article 566. While the doctrines are distinct—non-conformity relates to the performance not matching the contract, while mistake relates to a flawed understanding at the time of contracting—there can be overlap. The choice of legal route will depend on the specific facts and strategic considerations.

Impact and Strategic Considerations

For Sellers:

• Heightened Importance of Contractual Clarity: The primary defense against non-conformity claims is a meticulously drafted contract that precisely defines the kind, quality, quantity, specifications, and intended purpose (if relevant and agreed) of the goods. Ambiguity can lead to broader liability.
• Quality Control: Robust quality control processes are more critical than ever to ensure goods meet the agreed contractual standards.
• Cure Options: Understand the right to offer an alternative method of cure if it’s not unreasonably burdensome for the buyer.
• Record Keeping: Maintain detailed records of product specifications, delivery conditions, and all communications with buyers regarding the goods, especially any complaints or notifications of non-conformity.

For Buyers:

• Empowered with More Remedies: The range of remedies is significantly more advantageous than under the old system. The right to demand specific cure (repair, replacement, or completion) is a particularly strong tool.
• Adherence to Notification Deadlines: Observe the one-year notification period from awareness of non-conformity (under the Civil Code for non-merchant sales) or the much stricter immediate notification duties for merchant buyers under the Commercial Code. Failure is often fatal to a claim.
• Focus on Contractual "Content": Leverage the fact that the "content of the contract" is the benchmark. Ensure all essential requirements are clearly documented in the agreement.

Contractual Modification and the Emphasis on Party Intentions

The reformed Civil Code continues to respect party autonomy. Many of the default rules regarding non-conformity can be modified by agreement between the parties (e.g., limiting specific remedies, setting different standards for conformity, adjusting notification periods). Such contractual stipulations will generally be upheld, provided they do not violate public policy or mandatory provisions of law (such as consumer protection statutes if applicable).

The overarching theme of the reform in this area is an increased emphasis on "the intentions of the parties" as reflected in their agreement. This means that clearly articulating the purpose of the contract, the specific characteristics of the goods desired, and the consequences of any deviation becomes paramount in drafting effective sales agreements. For instance, if a buyer wants to ensure they can choose the method of cure, or if they wish to have the right to demand a price reduction without first demanding cure in certain scenarios, these should be explicitly stated in the contract.

Conclusion

The shift from a "hidden defect" liability to a broader "non-conformity with the contract" regime is a landmark change in Japanese sales law. It provides buyers with a more robust and flexible set of remedies when goods fail to meet contractual expectations. For sellers, it underscores the critical importance of precision in contractual drafting, adherence to agreed specifications, and effective quality management. Ultimately, this reform encourages clearer communication and more detailed agreements, aiming to better align legal outcomes with the actual, documented intentions of the contracting parties.