Can a Business Sue After Losing a Bid to Take Over a Publicly-Run Facility in Japan?

Japanese Attorney at Law - Bengoshi L.L.

• 6 min read

As Japanese local governments increasingly turn to public-private partnerships (PPPs) to deliver essential services, opportunities for private companies to manage and operate public facilities are on the rise. Municipalities now regularly solicit bids from private entities to run everything from nursing homes and childcare centers to libraries and sports arenas. This trend creates a competitive environment where businesses invest significant resources to win long-term operational contracts.

But what happens when a company believes it was unfairly passed over in a selection process? If a municipality awards a lucrative project to a competitor, does the losing bidder have any legal recourse to challenge the decision itself?

This question strikes at the heart of a complex area of Japanese administrative law. The answer hinges on whether a city's decision to select a private partner is considered a formal, legally challengeable "administrative disposition" (行政処分, gyōsei shobun) or merely a preparatory step in a private contracting process. This article examines the prevailing judicial interpretation through a case study involving the privatization of a public nursing home and outlines the limited, but important, legal avenues available to an unsuccessful applicant.

A Case Study: The Privatization of a Municipal Nursing Home

To frame the legal issues, consider a representative case. A Japanese city decided to privatize a municipally owned and operated nursing home. The plan involved transferring the facility’s buildings and equipment to a private social welfare corporation that would take over its management.

The city initiated a public recruitment process, publishing a detailed set of "Recruitment Guidelines" (募集要綱, boshū yōkō) that outlined the selection criteria and process. Five organizations submitted proposals. An external selection committee was formed to review the applications, conduct interviews, and recommend a top candidate. Based on the committee's recommendation, the mayor formally selected one social welfare corporation as the winning candidate and notified it of the decision.

One of the four unsuccessful applicants, believing the selection process was flawed and that its own proposal was superior, wished to challenge the mayor's decision in court. They sought to have the selection of their competitor nullified and to be given a fair chance at securing the project.

In Japanese law, the primary vehicle for challenging a government action is a revocation lawsuit (取消訴訟, torikeshi soshō) under the Administrative Case Litigation Act. However, this type of lawsuit can only be filed against an "administrative disposition" (行政処分, gyōsei shobun).

The Supreme Court of Japan, in a landmark case from 1964, established the classic definition of a disposition: an act by a government body, based on its public authority, that directly creates or alters the legal rights and duties of citizens. This is the gateway to administrative litigation. If an action does not meet this test, it generally cannot be the subject of a revocation lawsuit.

The central legal question, therefore, is whether the mayor's notification to the winning bidder qualifies as a disposition. Does this act, by itself, directly change the legal status of the losing bidders? Or is it something else entirely?

The Prevailing Judicial View: A Preparatory Act, Not a Disposition

The Supreme Court of Japan addressed this very issue in a key decision on June 14, 2011. The Court concluded that such a selection notification is not an administrative disposition. This view is based on a "dissection" of the privatization process, which distinguishes between preparatory acts and the final, legally binding act.

The Court's reasoning follows two main lines:

1. The Contract Is the Final, Legally Binding Act

The prevailing judicial view is that the notification of selection does not, on its own, create the final legal relationship. It is an internal, preparatory step that merely identifies a preferred partner for future negotiations. The actual rights and obligations—the transfer of property, the duty to operate the nursing home, the right to receive subsidies—are only established through the subsequent signing of formal contracts between the city and the selected entity.

From this perspective, the legal process unfolds as follows:

  • Selection: The city, acting like a private party choosing a business partner, identifies the most suitable candidate. This is a preparatory stage.
  • Negotiation: The city and the selected candidate negotiate the final terms of the asset transfer and management agreements.
  • Contracting: The parties sign legally binding contracts. It is this final step that creates the definitive legal rights and duties.

Because the selection notice is not the final act and does not independently alter the legal landscape, it lacks the necessary finality to be considered a disposition.

2. The Framework is Contractual, Not Regulatory

While the project involves a public service, the legal mechanism chosen by the city in this type of privatization is contractual. The city is engaging in acts that lead to a transfer of its property (a gift or sale) and the formation of a management agreement. These are fundamentally acts governed by the principles of private and commercial law, where parties have the freedom to choose their contracting partners.

Disputes arising from the formation of a contract are traditionally handled within the realm of civil law, not administrative law. The selection process is seen as part of the contract formation, and thus the rejection of one potential partner in favor of another is not viewed as an exercise of superior public power over a citizen, but as a party's choice in a competitive negotiation.

Based on this logic, which separates the preparatory selection from the final contract, Japanese courts have consistently held that a losing bidder cannot file a revocation lawsuit to challenge the selection of a competitor in such a privatization process.

The Counterarguments: Why It Feels Like a Disposition

While the Supreme Court's position is clear, it is useful to understand the counterarguments, as they highlight the significant impact of the selection decision on the participants.

  • Public Law Character: This is not a simple procurement of office supplies. The process involves entrusting a vital public service—the care of vulnerable elderly citizens—to a private entity. The process is guided by public interest goals, such as ensuring the quality and continuity of care, and involves the transfer of public assets. This strong public-law character makes it feel distinct from a purely private transaction.
  • Direct and Final Effect on Losers: From the perspective of the unsuccessful applicants, the selection decision is absolutely final. It definitively and irrevocably closes their path to securing the project. This has a concrete and immediate negative effect on their legal and commercial position, an effect that feels very much like a formal disposition.
  • Formalized, Rule-Bound Process: The process itself—involving a public call for proposals, review by a formal committee against published criteria—closely resembles the award of a government license or permit, which are classic examples of administrative dispositions. This quasi-adjudicative procedure distinguishes it from an informal, open-ended private negotiation.

Despite the force of these arguments, they have not persuaded the judiciary to alter the primary legal classification of the selection notice as a non-dispositive, preparatory act.

If a direct legal challenge to overturn the selection is not possible, is a losing bidder left without any remedy? Not entirely, but the available path is narrower and more difficult.

The most viable alternative is to file a lawsuit for damages (損害賠償請求, songai baishō seikyū) against the municipality under the State Redress Act (国家賠償法, Kokka Baishō Hō).

This shifts the focus of the lawsuit. The claim is not "the city chose the wrong winner," but rather "the city conducted the selection process illegally." To succeed, the losing bidder would have to prove that the municipality or its selection committee breached a legal duty of fairness in the process. This could involve demonstrating:

  • A clear violation of the city’s own published Recruitment Guidelines.
  • Provable bias or a conflict of interest on the part of the selection committee.
  • A decision-making process so flawed and irrational that it amounted to negligence.

This is a high evidentiary bar. Even if successful, the recoverable damages are typically limited to the reliance damages—that is, the costs the company incurred in preparing and submitting its proposal. The court would not award damages for lost profits from the project itself, as there was never a guarantee of being selected. This limitation makes a damages lawsuit a far less attractive option than overturning the decision and getting another chance at the project.

Conclusion

The privatization of public facilities in Japan presents significant opportunities for private businesses. However, the legal framework surrounding the selection process offers limited recourse for unsuccessful applicants. The prevailing judicial view treats the selection of a private partner as a preparatory step leading to a contract, not as a challengeable administrative disposition.

Consequently, a losing bidder cannot use a revocation lawsuit to have the decision overturned. The primary, though challenging, legal avenue is a lawsuit for damages, which requires proving a specific illegality in the selection process itself. This legal landscape emphasizes that for businesses competing for these public-private partnership projects, the most critical phase is the proposal stage. The focus must be on submitting a compelling, compliant, and superior application from the outset, as the legal tools to challenge an unfavorable outcome after the fact are intentionally limited.