Can I Use Set-Off if My Claim Against a Japanese Counterparty is Attached by Its Creditor?

Imagine your company (let's call it "Garnishee Co.") owes a debt to a Japanese business partner ("Principal Debtor Co."). Suddenly, Garnishee Co. is served with an attachment order from a court, initiated by another creditor ("Attaching Creditor Co.") who has a claim against Principal Debtor Co. The attachment order essentially freezes the debt Garnishee Co. owes to Principal Debtor Co., directing Garnishee Co. to pay it to Attaching Creditor Co. instead. Now, what if Garnishee Co. also has its own claim against Principal Debtor Co.? Can Garnishee Co. still declare a set-off, using its claim against Principal Debtor Co. to reduce or eliminate the debt that has been attached? This complex interplay is governed by Article 511 of the Japanese Civil Code.

The Purpose of Article 511: Balancing Competing Interests

Article 511 of the Japanese Civil Code attempts to strike a delicate balance between two competing legitimate interests:

1. The Attaching Creditor's Interest: The attaching creditor has taken legal steps to secure collection of their claim against the principal debtor by attaching a specific asset – namely, the claim owed by the garnishee to the principal debtor. They rely on the availability of this asset.
2. The Garnishee's Interest: The garnishee (the party whose debt to the principal debtor has been attached) may have been relying on their own claim against the principal debtor as a form of de facto security, expecting to use set-off to ensure its satisfaction. The set-off right, with its "security function," is a valuable tool.

Article 511 aims to resolve this conflict by establishing rules based primarily on the timing of when the garnishee's claim (the one they wish to use for set-off) arose or was acquired, relative to the attachment.

The General Rules and Key "Timing" Tests Under Article 511

The permissibility of a garnishee setting off their active claim (the claim held by the garnishee against the principal debtor) against their passive claim (the debt owed by the garnishee to the principal debtor, which has been attached) is determined as follows:

Scenario 1: Active Claim Acquired or Due Before Service of Attachment Order (Art. 511, Para. 1)

If the garnishee's active claim against the principal debtor either:

• (i) was acquired before the attachment order was served on the garnishee, OR
• (ii) became due before the passive claim (the attached debt) became due, even if acquired after the passive claim became due,

then set-off is generally ALLOWED.
This also covers the situation where the active claim, though acquired before attachment, becomes due after the attachment order is served. The critical factor is the pre-attachment acquisition or the active claim's due date preceding that of the passive claim.

Rationale: In these cases, the garnishee's expectation of being able to set-off their claim (and thus rely on its security function) existed before the attaching creditor's rights crystallized through the service of the attachment order. The law prioritizes this pre-existing reliance.

Scenario 2: Active Claim Acquired After Service of Attachment Order (Art. 511, Para. 2)

If the garnishee's active claim against the principal debtor was acquired after the attachment order was served on the garnishee, then set-off using this active claim against the attached passive claim is generally PROHIBITED.

Rationale: To allow set-off with a claim acquired after the garnishee became aware of the attachment would unfairly undermine the attaching creditor's position. The attaching creditor relied on the existence of an unencumbered (by such subsequent set-off rights) claim at the time of attachment.

The Crucial Exception: Active Claim Arising from a "Cause Existing Before Attachment" (Art. 511, Para. 1)

This is the most nuanced and often litigated part of Article 511. Even if the garnishee's active claim was acquired or became due after the attachment order was served (which would normally prohibit set-off under Scenario 2), set-off IS ALLOWED IF that active claim arose from a "cause that existed before the attachment was effected" (sashiosae-mae no gen'in ni motozuki shojita mono de aru toki 差押え前の原因に基づいて生じたものであるとき).

What Constitutes a "Cause Existing Before Attachment"?
This means that the fundamental legal or factual basis from which the garnishee's active claim would naturally or foreseeably arise was already in place before the garnishee received notice of the attachment. The claim itself might crystallize or become quantified later, but its seed was sown pre-attachment.

Examples commonly recognized by courts and legal scholarship include:

• Claims under a Pre-existing Continuous Contract: Rent installments accruing after attachment under a lease agreement that was concluded before attachment.
• Claims for Counter-Performance: If the garnishee and the principal debtor had a bilateral contract predating the attachment, and the garnishee had already performed (or substantially performed) their part of the bargain before the attachment, their right to claim counter-performance from the principal debtor (which becomes their active claim for set-off) is considered to arise from a pre-attachment cause, even if it technically becomes due post-attachment.
• Damages Claims from Pre-Attachment Breaches: A claim for damages that the garnishee has against the principal debtor due to a breach of contract committed by the principal debtor before the attachment. The damages claim itself might be quantified or formally asserted after the attachment, but its "cause" (the breach) existed prior.
• Claims from a Running Account or Ongoing Business Relationship: If there was an ongoing transactional relationship established before attachment, claims arising from that relationship (e.g., for goods supplied or services rendered by the garnishee to the principal debtor, even if invoiced post-attachment) may qualify.

The Dominant "Unrestricted Theory" (Museigen-Setsu 無制限説):
Japanese Supreme Court case law (e.g., judgment of June 24, 1970, Minshu 24-6-587) and prevailing scholarly opinion generally interpret this "pre-existing cause" exception quite broadly. This is often referred to as the "unrestricted theory." It does not require that the garnishee, at the time of attachment, had a specific, concrete expectation of setting off that particular future active claim against the specific passive claim that was attached. Instead, the theory protects the garnishee's more general reliance on their overall financial and contractual relationship with the principal debtor, from which such active claims could reasonably be expected to arise and be available for set-off. This approach gives significant weight to the security function of set-off for the garnishee.

A minority "restricted theory" (seigen-setsu) argues for a narrower interpretation, suggesting the exception should only apply if the garnishee had a more direct and foreseeable link between the future active claim and the now-attached passive claim at the time of attachment. However, the unrestricted theory remains dominant.

Consequences if Set-Off is Prohibited by Article 511

If set-off is prohibited under Article 511 (e.g., because the garnishee's active claim was acquired after attachment and did not arise from a pre-existing cause), the legal consequences are:

• The garnishee must pay the full amount of the attached debt to the attaching creditor (or deposit the sum with the Legal Affairs Bureau if, for example, there are multiple competing attachments or other uncertainties).
• The garnishee still retains their active claim against the principal debtor. However, they lose the valuable ability to satisfy that claim through set-off against the debt they owed to the principal debtor (which has now been paid to the attaching creditor). Collection of that active claim becomes a separate matter, and it may now be an unsecured claim whose recovery depends on the principal debtor's overall financial health.

Nature of Article 511

Article 511 lays down rules that balance the interests of the attaching creditor and the garnishee. While parties in a contract (i.e., the garnishee and the principal debtor) can often agree to modify default rules of the Civil Code, an agreement between them that attempts to allow set-off in a way that would prejudice an attaching creditor contrary to the protective principles of Article 511 would likely be considered ineffective against that attaching creditor. The rights of the attaching creditor, once an attachment is properly effected, are given significant protection.

Conclusion

Japanese Civil Code Article 511 provides a detailed, if complex, framework for determining when a garnishee can set off their own claim against a principal debtor against a debt that has been attached by a creditor of that principal debtor. The "timing tests"—whether the garnishee's active claim was acquired before the attachment or arose from a cause existing before the attachment—are paramount. While the law aims to safeguard the efficacy of attachments for diligent creditors, it also acknowledges and protects the garnishee's often legitimate reliance on the set-off mechanism, especially under the broadly interpreted "pre-existing cause" exception. For any business finding itself in the position of a garnishee in Japan, a careful analysis of these rules is essential to understand its rights and obligations concerning set-off against an attached debt.