Can My Business Rely on Promises or Past Practices of Japanese Administrative Agencies?

Businesses frequently interact with government administrative agencies, whether seeking permits, clarifying regulations, or responding to inquiries. In the course of these interactions, officials may offer advice, provide interpretations, make assurances, or establish consistent patterns of administrative practice. A critical question for any business is: to what extent can we legally rely on these governmental representations or established practices, especially if the agency later adopts a different stance, interpretation, or policy that adversely affects our interests? This article explores how the principles of "good faith and fair dealing" (shingi-soku) and the "protection of legitimate expectations/trust" (shinrai hogo no gensoku) are applied, albeit cautiously, within Japanese administrative law, drawing upon key judicial precedents.

The General Legal Tension: Legality vs. Reliance

At the outset, it's important to understand a fundamental tension in administrative law. On one hand, there is the Principle of Legality (hōritsu ni yoru gyōsei no genri), which encompasses both the Supremacy of Law (hōritsu no yūi – meaning administrative actions cannot violate the law) and the Reservation of Law (hōritsu no ryūho – meaning certain administrative actions require a basis in law). This principle dictates that administrative agencies are bound by, and must act in accordance with, democratically enacted laws. Generally, an agency cannot be compelled to act contrary to a clear statutory provision, even if it previously gave incorrect advice or followed a different, legally erroneous practice. The public interest in lawful and consistent administration is a paramount consideration.

Consequently, unlike some common law jurisdictions where doctrines like promissory estoppel might more readily bind governmental bodies to informal promises or representations, Japanese administrative law does not feature such a broad, easily invoked estoppel against the government. Courts are generally hesitant to allow informal agency statements or past practices to override clear legal mandates or to grant substantive rights that are not permitted by law.

However, Japanese courts have also recognized that a rigid and unyielding application of the principle of legality, without any regard for the fairness of administrative conduct or the impact on citizens and businesses who have acted in good faith reliance on agency representations, can lead to unjust outcomes. It is in this context that principles analogous to good faith and the protection of legitimate expectations come into play, though their application is often reserved for specific and compelling circumstances.

The Principle of Good Faith (Shingi Soku) in Administrative Law

The principle of good faith and fair dealing (shingi seijitsu no gensoku, often abbreviated as shingi-soku) is explicitly stated in Article 1, Paragraph 2 of the Civil Code of Japan as a general guiding principle for the exercise of rights and performance of duties. While primarily a private law concept, courts have acknowledged that shingi-soku can also function as a general principle of law applicable to the conduct of administrative agencies. In the administrative law context, it implies that public authorities should act honestly, fairly, without arbitrariness, and in a manner that does not unreasonably defeat the legitimate expectations they have created through their words or actions.

Application in Tax Law: A High Threshold – The Blue Tax Return Case

The application of shingi-soku in tax law, where the principle of statutory taxation (sozei hōritsu shugi) is particularly strong, has been notably restrictive. The Blue Tax Return Case (Supreme Court, October 30, 1987; related to case 2-6) provides a clear illustration.

In this case, a taxpayer had been filing tax returns using "blue forms" (which offer certain tax advantages) for a number of years. The local tax office had accepted these returns and had continued to send the taxpayer blank blue forms for subsequent years. Later, the tax office determined that the taxpayer had, in fact, never received formal approval for blue return status for some of the earlier years in question. Consequently, it issued a corrective tax assessment, effectively treating those years as if they had been filed on standard "white forms," resulting in a higher tax liability. The taxpayer argued that the tax office's long-standing acceptance of the blue returns and provision of blue forms had created a legitimate expectation that their blue return status was valid, and that the corrective assessment violated the principle of good faith.

The Supreme Court acknowledged, in principle, that shingi-soku could apply in tax law to invalidate a tax disposition that is otherwise substantively correct under the tax statutes. However, it set a very high threshold for such an application. The Court stated that invoking good faith to overturn a legally grounded tax assessment would only be justified in "exceptional circumstances where it would be contrary to justice to uphold the tax disposition, even if doing so might come at the expense of [strict adherence to] equality and fairness among taxpayers."

To establish such "exceptional circumstances," the Supreme Court outlined several key conditions that typically need to be met:

1. "Public Expression of View" (Kōteki Kenkai Hyōji) by the Tax Authority: The tax authority must have made a clear, affirmative statement or representation regarding the tax treatment or status in question, upon which the taxpayer could reasonably rely. This requires something more than mere passive acceptance of filings or routine administrative actions like sending out standard forms.
2. Taxpayer's Reliance: The taxpayer must have actually and reasonably relied on this public expression of view and acted accordingly (e.g., by organizing their affairs or making financial decisions based on that understanding).
3. Contradictory Subsequent Action: The tax authority must have subsequently taken an action (such as issuing a corrective assessment) that directly contradicted its earlier public expression of view.
4. Economic Detriment: This contradictory action must have caused economic detriment or loss to the taxpayer.
5. No Fault on the Part of the Taxpayer: The taxpayer must not have been at fault in relying on the authority's view. For instance, they should not have provided misleading information to the agency or willfully ignored clear and unambiguous legal provisions that contradicted the agency's representation.

In the specific facts of the Blue Tax Return Case, the Supreme Court found that the tax office's actions—merely accepting tax returns filed on blue forms over several years or sending blank blue forms to the taxpayer—did not amount to a "public expression of view" that definitively affirmed the taxpayer's blue return status was formally approved for all the years in question. Without such a clear, official representation, the Court concluded that the conditions for applying the good faith principle to invalidate the corrective assessment were not met.

The implication for businesses is clear: successfully invoking the good faith principle against a tax assessment (or, by analogy, other adverse administrative dispositions) generally requires more than just an assumption based on past inaction or routine processing by an agency. A relatively clear and affirmative representation from the administrative authority, coupled with demonstrable and justifiable reliance by the business, is usually necessary.

Protection of Legitimate Expectations/Trust (Shinrai Hogo no Gensoku)

The principle of protection of legitimate expectations or trust (shinrai hogo no gensoku) is closely related to, and often overlaps with, shingi-soku. It aims to protect a party who has reasonably relied on an assurance, representation, specific policy, or consistent past practice of an administrative agency, from arbitrary or unfair changes in the agency's position that would cause them significant detriment. This principle is particularly relevant when an agency's actions have induced a specific course of conduct or investment by a private party.

Inducement by Public Entities and Subsequent Policy Reversals: The Ginoza Village Factory Invitation Case

A landmark case illustrating the application of protection of trust is the Ginoza Village Factory Invitation Case (Supreme Court, January 27, 1981; related to case 2-7).

In this case, a village in Okinawa had actively solicited a private company to establish a factory within its jurisdiction. The village administration provided various assurances of cooperation, including assistance with acquiring land for the factory site and promises of infrastructure support. Relying on these specific inducements and the proclaimed policy of factory invitation, the company made substantial investments, incurred expenses in preparation for construction, and entered into various commitments. Subsequently, following a local election, a new village mayor and administration came into office, who were opposed to the factory project. The new administration then reversed the village's policy and took actions that effectively obstructed the factory's construction (e.g., by refusing to forward necessary building confirmation applications to the relevant prefectural authorities). The company sued for damages.

The Supreme Court, in its judgment, emphasized that even in the absence of a formal, legally binding contract between the village and the company, a special relationship of trust had been created. It held that if a public entity makes specific, individualized recommendations, solicitations, or assurances to a particular party, thereby encouraging that party to undertake activities or make investments that presuppose the continuation of a stated long-term public policy, and the party reasonably relies on these inducements in making substantial commitments, then the general principles of good faith and equity (shingi-soku ni terashi) become operative in governing the relationship.

The Court reasoned that if a subsequent, abrupt change in that public policy by the entity causes the party who relied on the initial inducements to suffer "unavoidable active damages that cannot be overlooked from a societal perspective" (shakai kannenjō kanka suru koto no dekinai teido no sekkyokuteki songai)—such as significant wasted investments—then the public entity's failure to provide some form of compensatory measures or transitional relief before implementing the policy change can render the policy change itself an unlawful act (a tort, giving rise to a claim under the State Compensation Act). This would be particularly true if the policy change was not necessitated by genuinely unavoidable objective circumstances beyond the public entity's control. The Court found that such an uncompensated reversal of policy would unreasonably destroy the relationship of trust that had been carefully built upon the initial governmental inducements.

The Ginoza Village case establishes that while public entities retain the power to change their policies in the public interest, they cannot do so in a manner that arbitrarily disregards the significant and foreseeable harm to those who have acted in good faith and made substantial commitments based on specific prior governmental assurances or inducements. The manner of the policy change, and the consideration given to those who relied on the previous policy, are subject to the requirements of good faith and protection of trust.

Erroneous Advice or Official Misconduct Leading to Detriment

The principle of good faith can also be relevant when individuals suffer detriment due to clearly erroneous advice or improper actions by public officials, especially if this leads to long-term reliance.

• The National Pension Non-Payment Case (Tokyo High Court, October 20, 1983; related to case 2-8) involved a foreign national who, under the then-existing law, was not eligible for Japan's national pension scheme due to nationality requirements. Despite this, a local ward official erroneously solicited him to enroll in the scheme. Relying on this official solicitation, he diligently paid pension premiums for over ten years. When he later reached pensionable age and applied for benefits, his application was denied based on his original ineligibility. The Tokyo High Court, invoking principles of good faith and equity (shingi kōhei no gensoku), ruled in favor of the individual. It found that a significant relationship of trust had been established due to the official's erroneous solicitation and the individual's prolonged, good-faith payment of premiums. The Court held that the administrative authorities could only renege on this established trust if there was an "unavoidable public necessity" for doing so. Simply pointing to the original nationality requirement—which the soliciting official had either overlooked or misrepresented—was not, in these specific circumstances, deemed a sufficient "unavoidable public necessity" to justify denying all pension rights derived from the long period of induced payments. The administrative decision denying the pension was consequently revoked. This case suggests that while erroneous advice generally cannot create a substantive legal right contrary to a clear statute, significant detrimental reliance induced by such official missteps may, under principles of good faith, require the administration to find a way to mitigate the harshness of a strict application of the law, particularly if doing so does not severely harm an overriding public interest.
• The Change of Residence Status Without Applicant's Intent Case (Supreme Court, July 2, 1996; related to case 2-9) involved an immigration authority that, during a renewal process for a foreign national's "Spouse of Japanese National" residence status, unilaterally processed it as a change to "Short-Term Stay" status without her genuine consent or application for such a change. This effectively deprived her of the opportunity to apply for a straightforward renewal of her original, more stable status. When she later applied for an extension of the "Short-Term Stay" status, it was denied. The Supreme Court found this outcome to be an abuse of discretion. It reasoned that, given the problematic circumstances under which her status had been altered (essentially against her will and without proper procedure), the immigration authority was, under the principle of good faith, obliged to provide her with a meaningful opportunity to apply for a change back to her original "Spouse of Japanese National" status and have that application duly considered on its merits, before simply denying her continued stay based on the expiry of the improperly imposed "Short-Term Stay" status. The failure to consider this background and offer a fair procedural path was a key factor in finding an abuse of discretion.

Reliance on Established Administrative Practices and Unnotified Changes

Businesses often adapt their operations based on consistent past practices or interpretations followed by administrative agencies, even if these are not formally enshrined in published regulations. An unannounced or poorly communicated change in such practices can lead to significant disruption and unfairness.

The Stock Option Taxation Case (Supreme Court, October 24, 2006; related to case 1-6) addressed such a scenario. For several years, the tax authorities had, through their unwritten internal handling and guidance found in published materials supervised by tax officials, treated gains from certain types of employee stock options as "temporary income" for tax purposes. Many taxpayers had filed their returns based on this prevailing understanding. Subsequently, the tax authorities internally changed this interpretation and began treating such gains as "salary income" (which often resulted in a higher tax burden). They then applied this new interpretation retroactively and, importantly, sought to impose penalties for underpayment on taxpayers who had followed the previous, albeit unwritten, administrative practice. This change in interpretation was not initially announced via a formal administrative circular (tsūtatsu) or other clear public notification.

The Supreme Court, while acknowledging that the reclassification of the income as "salary income" might be substantively correct as a matter of pure tax law interpretation, focused on the fairness of imposing penalties for underpayment in these circumstances. The Court held that it was improper to impose such penalties because taxpayers had a "justifiable reason" (seitō na riyū) for their original tax declarations. This justifiable reason stemmed from their reliance on the previously prevailing (though informal) administrative practice, especially given the lack of clear and formal notification by the tax authorities about the significant change in interpretation.

The Court strongly emphasized that when tax authorities intend to alter an established interpretation or administrative handling—particularly one that has been publicly indicated through official publications or consistently followed for some time and has created public reliance—they should ideally achieve this through a formal revision of the law or, at the very least, by issuing a clear and prospective administrative circular (tsūtatsu) to ensure that taxpayers are adequately informed of the change and have an opportunity to adapt. Imposing penalties for conduct that was consistent with a past practice actively fostered or tolerated by the authorities themselves, without such clear advance notification of a change, was deemed unfair.

This case suggests that businesses may have a legitimate basis to resist penalties or unduly harsh retroactive applications of new administrative interpretations if they can demonstrate reasonable reliance on a previously consistent and ascertainable administrative practice, especially if the change in that practice was not clearly and formally communicated to the public in a prospective manner.

Limits to the Protection of Trust and Good Faith

It is crucial to recognize that the principles of good faith and protection of trust, while providing important safeguards, are not absolute shields against all administrative actions. Courts in Japan remain generally reluctant to allow these principles to:

• Compel an administrative agency to act in clear and direct violation of an unambiguous statute.
• Grant a substantive legal right or benefit that the law explicitly does not permit.
• Protect reliance that was unreasonable or where the party claiming reliance was themselves at fault (e.g., by providing incomplete or misleading information to the agency, or by ignoring clear legal provisions).

The "public expression of view" requirement, as articulated in the Blue Tax Return Case, indicates that vague assurances, informal advice that clearly contradicts known law, or mere administrative inaction are unlikely to be sufficient to create legally protected reliance. Furthermore, even if a degree of reliance is established, courts will still weigh this against the overriding public interest. If enforcing the reliance created by an agency's past conduct would lead to a result that is severely detrimental to a significant and clearly defined public interest, courts may hesitate to provide full protection to that reliance, opting instead for solutions that might mitigate the harm to the reliant party without compelling an unlawful act.

Conclusion

While Japanese administrative law firmly upholds the principle of legality—requiring administrative agencies to act in accordance with the law—it also recognizes, through the application of doctrines analogous to good faith (shingi-soku) and the protection of legitimate expectations/trust (shinrai hogo no gensoku), the need to ensure fairness and prevent undue hardship arising from arbitrary or unfair administrative conduct.

These principles are not as broadly or frequently invoked as doctrines like estoppel in some common law jurisdictions, and their successful application often depends on demonstrating "exceptional circumstances." However, landmark judicial decisions illustrate that Japanese courts are prepared to intervene where:

• An administrative agency makes a clear, official "public expression of view" upon which a party justifiably relies to its significant detriment, and it would be grossly unjust to allow the agency to subsequently renege on that representation without strong justification (though the conditions, as seen in tax law, can be very stringent).
• A public entity, through specific and concrete assurances or policies, induces substantial investment or action by a private party, and then arbitrarily reverses its course, causing significant and unavoidable damage to the reliant party without offering appropriate mitigation or compensation, especially if the policy change is not driven by overriding, objective necessities.
• Erroneous or misleading advice from officials leads to prolonged and detrimental reliance by an individual or business, and a strict, unmitigated application of the letter of the law would result in an unconscionably harsh outcome.
• An established and reasonably ascertainable administrative practice, upon which the public has come to rely, is changed without clear, formal, and prospective notification, particularly if penalties or other disadvantages are then applied for conduct that was consistent with the old, un-revised practice.

For businesses interacting with Japanese administrative agencies, it remains prudent to seek clarity on important matters, to document significant communications and official assurances, and to be aware that while reliance on agency representations or past practices is not an absolute guarantee against future changes, principles of fairness, good faith, and protection of trust do have a recognized, albeit carefully circumscribed, place in Japanese administrative law. In appropriate circumstances, these principles can offer a basis for seeking legal redress or mitigation when administrative actions unfairly undermine legitimately formed expectations.