Can a Debtor Fulfill an Obligation with Substituted Performance ("Daibutsu Bensai") in Japan?

When an obligation arises under Japanese law, the most straightforward path to its extinguishment is for the debtor to render the exact performance originally agreed upon. However, practical circumstances or mutual agreement may lead parties to consider alternative means of satisfaction. One such mechanism is "Daibutsu Bensai" (代物弁済), often translated as "substituted performance" or "datio in solutum" (giving in payment). This legal concept allows a debtor, with the creditor's consent, to provide a different type of performance than what was initially due, thereby discharging the original obligation. Understanding Daibutsu Bensai is crucial as it offers a flexible, contract-based route to debt resolution, distinct from simple payment or more complex procedures like novation.

The Meaning and Nature of "Daibutsu Bensai"

Defining "Daibutsu Bensai" (Article 482 of the Civil Code)

"Daibutsu Bensai" is fundamentally an agreement (代物弁済契約 - daibutsu bensai keiyaku) entered into between the person who is to perform the obligation (who can be the original debtor or another party authorized to perform) and the obligee (creditor). The essence of this agreement is that the performer will provide a different prestation (the "substituted prestation" or "daibutsu kyūfu" - 代物給付) in place of the originally stipulated performance, with the mutual understanding that this substitute act will extinguish the original obligation.

Article 482 of the Japanese Civil Code provides the statutory basis: "When a person who may effect performance, in lieu of the performance for which such person is liable, effects any other performance with the consent of the obligee, such other performance shall have the same effect as the original performance." The new Civil Code's phrasing ("shall have the same effect as performance") replaced the older version's "the claim shall be extinguished," though this is generally seen as a linguistic clarification rather than a substantive change in the core effect: the extinguishment of the original debt upon completion of the substitute performance.

A common example illustrates this: a debtor owes a creditor a monetary sum of ¥2,000,000. Instead of paying cash, they mutually agree that the debtor will deliver a specific painting. Upon the successful delivery and acceptance of the painting as per the agreement, the ¥2,000,000 debt is discharged.

Distinction from Novation ("Kōkai" - 更改)

It is important to distinguish Daibutsu Bensai from "novation" (更改 - kōkai), which is governed by Article 513 of the Civil Code. Novation involves extinguishing an existing obligation and simultaneously creating a new one in its place (e.g., changing the essential elements of the obligation, or substituting the debtor or creditor). In Daibutsu Bensai, the original obligation remains in existence until the agreed-upon substitute performance is actually and fully completed. The Daibutsu Bensai agreement itself does not immediately extinguish the old debt; it merely sets the stage for its extinguishment through a different means. Historically, under very old versions of Japanese civil law (pre-dating the modern Civil Code), Daibutsu Bensai was sometimes viewed as a form of novation, but this is not the current understanding.

Legal Nature ("Hōteki Seishitsu") of the Daibutsu Bensai Agreement

Under the current Japanese Civil Code, particularly as clarified by modern legal scholarship, the agreement for Daibutsu Bensai is considered a consensual contract (諾成契約 - dakusei keiyaku). This means the agreement itself is formed and becomes binding upon the mere mutual consent of the parties, without requiring the actual delivery of the substitute item for its formation.

This marks a conceptual shift from some traditional interpretations under the old law, which often characterized Daibutsu Bensai as a "real contract" (要物契約 - yōbutsu keiyaku). Under the real contract theory, the Daibutsu Bensai contract itself would only come into existence upon the actual delivery of the substitute prestation. The modern view, however, aligns Daibutsu Bensai with general contract principles: the agreement is formed by consent, and this agreement then creates an obligation on the performer to tender the substitute performance. It is the fulfillment of this obligation to provide the substitute that ultimately extinguishes the original debt.

This distinction has practical implications, for example, regarding the burden of proof. A party alleging that an original debt was extinguished by Daibutsu Bensai must typically prove two things:

1. The existence of a valid Daibutsu Bensai agreement (i.e., the mutual consent to substitute performance).
2. The actual and complete delivery or rendering of the agreed-upon substitute prestation to the creditor in accordance with that agreement.

"Daibutsu Bensai Yoyaku" (Preliminary Agreement for Substituted Performance)

The concept of Daibutsu Bensai can also appear in the form of a "Daibutsu Bensai Yoyaku" (代物弁済予約), which is a preliminary agreement or reservation for substituted performance. Historically, these were sometimes used in loan transactions as a form of non-typical security (非典型担保 - hi-tenkei tanpo). For instance, a borrower might agree at the time of obtaining a loan that, in the event of default, title to a specific piece of real estate owned by the borrower will automatically transfer to the lender in satisfaction of the debt. Such agreements were often accompanied by a provisional registration (仮登記 - kari tōki) of title transfer to secure the lender's potential future claim to the property.

The primary purpose of such arrangements was often debt security rather than a simple alternative means of performance. However, the enforcement of these Daibutsu Bensai Yoyaku, particularly those involving the outright acquisition of property by the creditor upon default without a proper valuation and accounting for any surplus (a "forfeiture clause" or "ryūshichi keiyaku" - 流質契約, which is generally restricted for pledges and mortgages), came under scrutiny. The Act on Provisional Registration Security Contracts (仮登記担保契約に関する法律 - Kari Tōki Tanpo Keiyaku ni Kansuru Hōritsu) was enacted in 1978 (effective 1979, though the PDF mentions a 1983 date for the law reaching fruition, perhaps referring to its full impact or subsequent amendments) to regulate these arrangements more strictly, requiring a form of liquidation procedure that often involves accounting for the difference between the property's value and the debt amount. This legislation has significantly reduced the attractiveness and prevalence of Daibutsu Bensai Yoyaku as a primary security device because it limits the creditor's ability to achieve a "windfall" by acquiring property worth more than the outstanding debt.

The Original Obligation and the Consensual Daibutsu Bensai Agreement

Given that the Daibutsu Bensai agreement is now understood as a consensual contract, an important question arises: what is the status of the original obligation after the Daibutsu Bensai agreement is made but before the substitute performance is completed?

• Original Obligation Persists: The original obligation is not extinguished by the mere agreement to provide a substitute. It remains in full force and effect.
• Creditor's Right to Demand Original Performance: Consequently, the creditor can still demand performance of the originally agreed-upon prestation.
• Debtor's Right to Substitute: If the creditor demands the original performance, the debtor who has entered into a Daibutsu Bensai agreement generally has the option to discharge the obligation by rendering the agreed-upon substitute performance instead.
• Creditor's Demand for Substitute Performance: Conversely, if the creditor, based on the Daibutsu Bensai agreement, demands the substitute performance, can the debtor then opt to fulfill the original obligation? Scholarly opinion suggests that, unless the Daibutsu Bensai agreement specifies otherwise, the debtor retains the right to perform the original obligation, and the creditor cannot refuse it. The Daibutsu Bensai agreement, in this light, essentially grants the debtor a right or power of substitution (代用権 - daiyōken).

Requirements for a Valid "Daibutsu Bensai"

For a Daibutsu Bensai to effectively extinguish an obligation, certain conditions must be met:

1. Existence of the Original Claim ("Saiken no Sonzai")

A fundamental prerequisite is the existence of a valid, pre-existing obligation that the Daibutsu Bensai is intended to discharge.

• Non-Existent Debts: If the original obligation for which substituted performance is tendered does not actually exist (e.g., it was void from the outset, already paid, or prescribed), the act of providing the "substitute" cannot function as a Daibutsu Bensai. Instead, it might be treated as a "performance without legal basis" (非債弁済 - hisai bensai). In such cases, the person who made the prestation may have a claim for unjust enrichment (不当利得返還請求権 - futō ritoku henkan seikyūken) against the recipient, subject to certain defenses (e.g., Article 705 of the Civil Code, which restricts recovery if the performer knew at the time of performance that the debt did not exist, unless the performance was made under duress or for a moral obligation).
• "Causal Nature" ("Yūinsei" - 有因性) and Subsequent Invalidation of Original Debt: Daibutsu Bensai is generally considered "causal" in relation to the original obligation. This means its validity and effect are linked to the validity of the underlying debt. If the contract that gave rise to the original debt is subsequently rescinded or terminated with retroactive effect (e.g., due to fundamental breach, mistake, fraud, or duress), the legal basis for the Daibutsu Bensai also typically collapses. A Supreme Court decision of December 20, 1985, illustrates this: where a Daibutsu Bensai (transfer of land) was made as consideration for an underlying contract (assignment of a leasehold right) that was later terminated due to failure to obtain the lessor's consent, the property transfer made as Daibutsu Bensai was also considered to have lost its effect retroactively. This implies that the Daibutsu Bensai doesn't stand independently if its foundational obligation disappears.

2. Agreement for Substituted Performance

There must be a clear and mutual agreement between the performer and the creditor to the effect that:

• A prestation different from the one originally due will be made.
• This different prestation will be made in lieu of (代えて - kaete) the original one.
• The making of this substitute prestation will extinguish the original obligation.

The substitute prestation can be of any nature (e.g., goods for money, services for goods, one type of good for another) and does not necessarily have to be of objectively equivalent value to the original obligation. Party autonomy allows for this flexibility.

• Gross Disparity and Public Policy (Art. 90): However, a significant caveat exists. If the value of the substitute prestation is grossly disproportionate to the original debt (usually, much higher), and the agreement was procured by the creditor taking unfair advantage of the performer's distressed circumstances (窮迫 - kyūhaku), rashness (軽率 - keisotsu), or inexperience (無経験 - mukeiken), the Daibutsu Bensai agreement itself may be deemed a "profiteering act" (暴利行為 - bōri kōi). Such an agreement would be void under Article 90 of the Civil Code, which nullifies juristic acts contrary to public order and good morals. A District Court case (Kyoto District Court, January 28, 1983) found a Daibutsu Bensai agreement, where a person who accidentally caused a fire was made to transfer real estate in lieu of damage compensation, to be contrary to public order.

Completion of Substituted Prestation and Extinguishment of the Claim

Completion is Key ("Daibutsu Kyūfu no Kanryō")

As emphasized, the original obligation is not extinguished by the mere agreement for Daibutsu Bensai. Article 482 clearly indicates that the substitute performance must be effected (したとき - shita toki – when it has been done). The debt is discharged only when the agreed-upon substitute prestation has been actually and fully completed and, where necessary, accepted by the creditor.

• Real Property as Substitute: If the substitute prestation involves the transfer of real property, "completion" traditionally means not only the physical delivery of possession but also the completion of the registration of title transfer (所有権移転登記 - shoyūken iten tōki) in the land registry. This registration is generally necessary to perfect the transfer against third parties and often considered essential for the full "effecting" of the performance concerning real rights.
• Party Agreement on "Completion": However, parties can, by specific agreement, define an earlier point as constituting "completion" for the purpose of extinguishing the debt. For example, a Supreme Court decision of November 19, 1968, acknowledged that parties could validly agree that the debt would be extinguished merely upon the creditor receiving all necessary documents from the debtor to effect the registration of title transfer for a property, even before the registration itself was completed.

Non-Conformity of the Substituted Prestation ("Daibutsu to shite Kyūfu sareta Mono no Futekigō")

What if the thing or service provided as the substitute prestation is defective, non-conforming to what was agreed in the Daibutsu Bensai agreement, or otherwise problematic (e.g., it infringes a third party's rights)?

• Traditional View (Old Law): Under the older interpretations, particularly when Daibutsu Bensai was viewed as a real contract directly effecting extinguishment, the creditor's remedies were often thought to be limited. If the substitute was defective, the creditor might be able to terminate the Daibutsu Bensai transaction (effectively reviving the original debt) or claim damages, analogous to a buyer's remedies for defective goods. It was often argued that the Daibutsu Bensai itself didn't create a new obligation to provide a conforming substitute, but was a one-off act of extinguishment.
• Modern View (New Law & Consensual Contract Theory): With the understanding of the Daibutsu Bensai agreement as a consensual contract, the legal landscape regarding non-conforming substitutes has evolved. The Daibutsu Bensai agreement, while aimed at extinguishing a prior debt, is itself an onerous contract (有償契約 - yūshō keiyaku), creating an obligation on the performer to provide the agreed-upon substitute.
  • If the substitute prestation delivered is non-conforming, the creditor should generally have remedies similar to those available in other onerous contracts (like sale or exchange). This could include demanding cure or repair of the substitute item (追完請求 - tsuikan seikyū) to bring it into conformity with the Daibutsu Bensai agreement.
  • Until a conforming substitute is provided and the Daibutsu Bensai is thereby properly and fully completed, the original obligation remains unextinguished. This implies that the creditor, faced with a non-conforming substitute, could theoretically reject it (or accept it while reserving rights) and still demand performance of the original obligation (though this would typically require returning the non-conforming substitute).
  • If the substitute item turned out to belong to a third party (他人の物 - tanin no mono) and was subsequently reclaimed by the true owner from the creditor, the Daibutsu Bensai would fail, the original debt would not be considered extinguished, and the creditor could reassert their claim for the original performance against the debtor.

Conclusion

"Daibutsu Bensai" provides a valuable and flexible mechanism within Japanese law for parties to agree on an alternative means of satisfying an existing obligation. It underscores the principle of party autonomy, allowing for practical solutions when performing the original obligation becomes difficult or undesirable. Key to its operation is a clear mutual agreement to substitute performance and the actual, full completion of that substitute prestation. The modern understanding of the Daibutsu Bensai agreement as a consensual contract also brings greater clarity to the rights and remedies of the parties, particularly if issues arise concerning the conformity of the substitute performance itself. For businesses operating in Japan, understanding the nuances of Daibutsu Bensai—its distinction from novation, its requirements, and its effects on the original debt—can be instrumental in structuring effective debt settlements and workouts.