Building on Illegality: Japanese Supreme Court on Void Construction Contracts and the Fate of Rectification Work

Judgment Date: December 16, 2011

Construction projects are governed by a web of laws and regulations designed to ensure safety, habitability, and proper land use. Chief among these in Japan is the Building Standards Act (BSA - 建築基準法). But what happens when parties deliberately enter into a construction contract with the explicit intention of circumventing these vital legal standards? Is such a contract enforceable? And if corrective work is later done to address some of the planned illegalities, can the contractor claim payment for that portion? The Supreme Court of Japan, Second Petty Bench, grappled with these questions in a significant decision on December 16, 2011 (Heisei 22 (Ju) No. 2324), offering critical insights into the interplay between contractual obligations and public policy.

The Illicit Agreement: A Plan to Circumvent Building Codes

The case involved Y, a client/developer, who had been commissioned by their own client, A, to construct two rental apartment buildings (Buildings Ko and Otsu, collectively "the Buildings"). Y and A had entered into a sub-lease arrangement whereby Y would also manage the completed buildings and guarantee A a certain level of rental income.

The core of the dispute stemmed from an agreement between Y and A to intentionally construct the Buildings in a manner that violated the Building Standards Act. Their plan was to maximize the number of rentable units, which would not be possible if they strictly adhered to the BSA. The scheme involved:

1. Preparing two sets of drawings: one set compliant with the BSA for submission to obtain the initial building confirmation (建築確認 - kenchiku kakunin), and another set of "actual construction drawings" (実施図面 - jisshi zumen) detailing the illegal modifications.
2. Obtaining the necessary building confirmation and, eventually, the certificate of inspection (検査済証 - kensa-zumishō) based on the compliant plans.
3. After these official approvals, proceeding with or implementing the illegal construction elements according to the "actual construction drawings." For Building Ko, this even included constructing an illegal basement from the outset.

Y then outsourced the construction work to X Construction Company (the plaintiff, whose interests were later represented by its bankruptcy trustee as the appellant). Crucially, Y fully disclosed this illicit plan to X, including the discrepancies between the official confirmation drawings and the actual (illegal) construction drawings. X Construction Company knowingly agreed to this plan and entered into contracts with Y to execute the work (referred to as "the Main Construction Work" - 本件本工事).

The planned BSA violations were numerous and severe, including infringements related to fire-resistant construction, north-side setback lines (北側斜線制限 - kitagawa shasen seigen), sun shadow regulations (日影規制 - hikage kisei), floor-area ratio (容積率 - yōsekiritsu), building coverage ratio (建ぺい率 - kenpei-ritsu), and the width of evacuation routes. If built according to the secret "actual construction drawings," the Buildings would be dangerously non-compliant.

Construction, Discovery of Illegalities, and Subsequent Disputes

X Construction Company commenced work. However, during the construction of Building Ko, the illegal basement work (which differed from the approved confirmation drawings) was discovered by the local Ward B Office. The Ward Office issued a correction order. Additionally, complaints arose from neighboring residents regarding various aspects of the construction of both Buildings Ko and Otsu.

As a result of these interventions and complaints, X was compelled to carry out "additional and modification work" (追加変更工事 - tsuika henkō kōji). This subsequent work included measures to rectify some of the illegal construction that had already been implemented under the initial plan, as well as other changes to address the issues raised.

After eventually completing the Buildings and obtaining the necessary certificates of inspection (presumably after some rectifications), X handed them over to Y. However, Y failed to pay a portion of the agreed construction price, amounting to over ¥26.1 million. X sued Y for this unpaid amount. Y, in turn, filed a counterclaim, alleging damages due to defects in the construction and uncompleted portions of the work.

Lower Court Rulings: Focus on Public Policy Violation

• The Tokyo District Court (first instance) partially granted both X's claim for payment and Y's counterclaim for damages, resulting in net amounts due between the parties.
• The Tokyo High Court, however, took a more fundamental stance. It ruled that the entire construction contract arrangement between X and Y—encompassing both the original Main Construction Work and the subsequent Additional/Modification Work—was void as being contrary to public policy and good morals (公序良俗違反 - kōjo ryōzoku ihan), due to its primary objective of constructing buildings in deliberate violation of the Building Standards Act. Consequently, the High Court dismissed all of X's claims for payment and, implicitly, Y's counterclaims based on the now-void contract. X (through its bankruptcy trustee) appealed this sweeping finding of invalidity to the Supreme Court.

The Supreme Court's Decision: Distinguishing Original Illegality from Corrective Action

The Supreme Court, in its judgment of December 16, 2011, partially overturned the High Court's decision. It agreed with the High Court regarding the initial illegal contract but found that the subsequent corrective work required a different assessment.

1. Main Construction Contract – Void as Against Public Policy:
   The Supreme Court strongly condemned the original agreement between Y and X.
   • It described the plan to circumvent the BSA by using deceptive drawing sets and constructing illegal buildings as "brazen and extremely malicious" (大胆で、極めて悪質なもの - daitan de, kiwamete akushitsu na mono).
   • It highlighted that the planned violations were not trivial; they pertained to fundamental safety aspects such as fire resistance and evacuation routes, as well as zoning compliance (setbacks, density). The resulting buildings, if built as per the illegal "actual construction drawings," would be dangerous to occupants and neighboring residents, and some of these illegalities would be extremely difficult or impossible to rectify post-completion.
   • While X Construction Company did not initiate the illegal plan, it was a professional entity that knowingly agreed to participate in this "brazen and extremely malicious" scheme. There was no indication that X was in a subordinate position where it was forced to accept Y's illegal demands.
   • Based on these severe circumstances, the Supreme Court concluded that the construction of these buildings as initially planned constituted a "grossly anti-social act" (著しく反社会性の強い行為 - ichijirushiku hanshakaisei no tsuyoi kōi). Therefore, the original contracts (the Main Construction Work) whose objective was such construction were void as contrary to public policy and good morals under Article 90 of the Civil Code.
   • Consequently, the Supreme Court affirmed the High Court's decision to dismiss X's claim for payment related to this main, illegal portion of the work.
2. Additional/Modification Work – Potentially Valid and Enforceable:
   The Supreme Court drew a critical distinction regarding the "additional and modification work" that X performed later.
   • This work arose from new circumstances that emerged after the main construction had commenced, namely the correction order from the Ward B Office and complaints from neighbors.
   • Importantly, a portion of this additional work explicitly involved rectifying parts of the Buildings that had already been illegally constructed under the void main contract.
   • Because this work was, at least in part, aimed at correcting illegalities and responding to official directives or public concerns, it could not fundamentally be seen as merely an extension or component of the original illegal Main Construction Work.
   • The Court acknowledged an exception: if any specific part of this additional/modification work itself involved perpetuating an existing illegality or making a change that was still illegal (without rectifying the underlying BSA violation), then that specific part would also be tainted by illegality and likely be deemed void.
   • However, for those parts of the additional/modification work that were genuinely aimed at rectification or were otherwise permissible changes not tied to the original illicit plan, there was no inherent reason to deem an agreement for such work as a "grossly anti-social act." Therefore, an agreement for such legitimate corrective or modifying work would not necessarily be void as contrary to public policy.
3. Remand for Clarification of Additional/Modification Work:
   The High Court had erred by treating all work (original and additional/modification) as uniformly void. However, X Construction Company, in its claim, had not clearly separated or itemized the costs associated with the original illegal Main Construction Work versus the costs of the (potentially valid) Additional/Modification Work. Due to this lack of differentiation in X's pleadings and the evidence presented, the Supreme Court found it could not definitively separate the claims.
   Therefore, while agreeing with the High Court that the main illegal contract was void, the Supreme Court found that the part of the High Court's judgment dismissing X's claim for the additional/modification work was in error. The entire portion of the judgment relating to X's claim was thus overturned, and the case was remanded to the High Court. The purpose of the remand was for the High Court to:
   • Determine the specific nature, scope, and cost of the Additional/Modification Work.
   • Identify which portions of this work constituted legitimate rectification of illegalities or permissible modifications, as distinct from any work that might have perpetuated or merely altered an existing illegality.
   • Calculate the appropriate payment, if any, due to X for any such valid and enforceable portions of the additional/modification work.

Analyzing the Ruling: Public Policy, Regulatory Statutes, and the Principle of Partial Invalidity

This Supreme Court decision carries significant weight in clarifying the legal consequences of contracts that deliberately aim to violate public safety laws like the Building Standards Act.

• BSA Violations and Public Policy: The Building Standards Act sets out minimum standards to protect the life, health, and property of citizens. The Supreme Court's ruling strongly affirms that intentionally planning to circumvent these fundamental safety and zoning provisions constitutes a "grossly anti-social act," rendering the primary contract for such illegal construction void under Civil Code Article 90 (public policy and good morals).
• Distinction Between "Regulatory Statutes" and Public Policy Violations: Legal commentary notes a traditional distinction between mere "regulatory statutes" (取締規定 - torishimari kitei), the violation of which might not automatically void a private contract, and "mandatory provisions" (強行規定 - kyōkō kitei) related to public order, the violation of which does lead to invalidity. This Supreme Court decision bases the invalidity firmly on public policy (a broader concept that often encompasses violations of critical mandatory statutes), reflecting the severity of the BSA violations planned in this case.
• The Principle of Partial Invalidity: The Court's careful distinction between the original, wholly illegal construction contract and the subsequent agreements for additional/modification work (particularly corrective work) aligns with general legal principles of partial invalidity. This means that even if a main contract is void due to illegality, subsequent or severable parts of a transaction might still be valid if they are not themselves tainted by that illegality and serve a legitimate purpose (such as rectifying the initial wrong).
• Incentivizing Rectification of Illegal Construction: By allowing contractors the possibility of being paid for work genuinely undertaken to correct illegal construction (even if that illegality stemmed from an initially void overall plan), the Supreme Court's approach can be seen as providing an incentive for such rectification. This serves the broader public interest in ensuring buildings are ultimately made safe and compliant with the law.

Conclusion

The Supreme Court's December 2011 judgment sends a clear message: contracts that have as their objective the deliberate and egregious violation of fundamental public safety laws like the Building Standards Act are void as contrary to public policy and good morals. Parties, including construction companies, who knowingly participate in such schemes cannot expect the courts to enforce claims for payment for the illicit work. However, the decision also pragmatically recognizes that work subsequently undertaken to rectify such illegalities, or to make other permissible modifications in response to changed circumstances or official directives, may stand on a different legal footing and could be compensable. This ruling emphasizes the judiciary's commitment to upholding public safety standards while also allowing for the potential validation of genuinely corrective actions within complex construction disputes.