Dealing with Multiple Debtors or Creditors in Japan: Key Reforms to Joint and Several Obligations

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read

Commercial transactions frequently involve multiple parties on one side of an obligation. A single debt might be owed by several companies acting as co-debtors, or a single contractual right might be held by multiple entities as co-creditors. Japanese law provides various frameworks for managing these multi-party relationships, with "joint and several obligations" (連帯債務 - rentai saimu) being a particularly common and potent tool for creditors. The comprehensive reforms to Japan's Civil Code, effective April 1, 2020, have brought significant clarifications and changes to the rules governing these obligations, particularly concerning how an event affecting one debtor or creditor impacts the others. The reforms also formally codified rules for "joint and several claims" (連帯債権 - rentai saiken).

Joint and Several Obligations (連帯債務 - Rentai Saimu)

A joint and several obligation arises when multiple debtors are each individually liable to the creditor for the entire performance of the same obligation. The creditor enjoys the significant advantage of being able to demand full performance from any single debtor, from some of them, or from all of them collectively, until the obligation is fully satisfied. This structure provides robust security for the creditor. The reformed Civil Code clarifies that such liability can arise either by operation of law or by an agreement among the parties (Reformed Civil Code, Article 436).

The Pivotal Shift: "Relative Effect" (相対効) Becomes the Default

The most fundamental change introduced by the reform concerning joint and several obligations is the strengthened principle of "relative effect" (sōtaikō). Previously, certain events concerning one joint and several debtor could have an "absolute effect" (zettaikō), meaning they would automatically affect the obligations of all other co-debtors.

The new Article 441 of the Reformed Civil Code establishes that, as a general rule, events occurring with respect to one joint and several debtor—other than actual performance of the obligation or events for which specific statutory provisions dictate an absolute effect—will now have only relative effect. This means such an event typically does not alter the rights or obligations of the other co-debtors vis-à-vis the creditor.

Impact of Specific Events on Co-Debtors:

This shift to relative effect has profound consequences for several common scenarios:

  1. Demand for Performance (履行の請求 - Rikō no Seikyū):
    • Under the old law, a demand made by the creditor to one joint and several debtor generally had an absolute effect, notably interrupting the extinctive prescription period (statute of limitations) for all co-debtors.
    • Under the new law (Article 441), a demand made to one joint and several debtor now has only relative effect. It will renew the prescription period (or suspend its completion, under the new terminology) only for that specific debtor. To manage prescription effectively against all debtors, the creditor must now take separate action (e.g., make individual demands, file lawsuits) against each one.
  2. Release of Debt (免除 - Menjo):
    • Previously, if a creditor released one joint and several debtor from their obligation, this often had an absolute effect to the extent of that released debtor's internal share of liability (負担部分 - futan bubun), thereby reducing the total amount the creditor could claim from the remaining co-debtors.
    • The new rule (Article 441) dictates that a release of debt granted to one joint and several debtor has only relative effect. It discharges only that specific debtor from their obligation to the creditor. The other co-debtors, in principle, remain liable to the creditor for the full amount of the original obligation (though their internal recourse rights are affected, as discussed below).
  3. Completion of Extinctive Prescription (時効の完成 - Jikō no Kansei):
    • Similar to a release, under the old law, if the prescription period for one joint and several debtor's obligation completed, it often had an absolute effect concerning that debtor's internal share, benefiting the other co-debtors.
    • Now, the completion of prescription for one joint and several debtor's obligation to the creditor has only relative effect (Article 441). It extinguishes only that specific debtor's liability to the creditor. The other co-debtors remain fully liable if prescription has not completed for their own obligations.

Events Still Carrying Absolute Effect:

Despite the general shift to relative effect, certain events continue to have an absolute effect on all joint and several debtors:

  • Performance (弁済 - Bensai): If one joint and several debtor performs the entire obligation, it discharges all other co-debtors from their obligation to the creditor. Partial performance by one also reduces the debt for all. This fundamental principle remains.
  • Novation (更改 - Kōkai): If the creditor and one joint and several debtor enter into a novation agreement that extinguishes the original joint and several obligation and replaces it with a new one, this has absolute effect, binding all original co-debtors by extinguishing the old debt (Reformed Civil Code, Article 438).
  • Set-Off by a Debtor (相殺 - Sōsai): If one joint and several debtor has a valid claim against the creditor and successfully exercises a set-off, this has absolute effect. The joint and several obligation is extinguished for all co-debtors to the extent of the amount set off (Reformed Civil Code, Article 439, Paragraph 1).
  • Confusion/Merger (混同 - Kondō): If one of the joint and several debtors also becomes the creditor (e.g., through inheritance or assignment), the obligation is generally extinguished for all due to merger of debtor/creditor status (Reformed Civil Code, Article 440).

Recourse Among Joint and Several Debtors (求償関係)

The rules governing recourse (the right of a debtor who has paid more than their share to claim reimbursement from co-debtors) have also been clarified (Reformed Civil Code, Articles 442-445):

  • A debtor who performs the obligation has a right of recourse against the other co-debtors for their respective internal shares (futan bubun), which are presumed equal unless agreed otherwise.
  • The reformed Code clarifies that even partial performance that discharges the common debt to some extent gives rise to a right of recourse (Article 442, Paragraph 1).
  • Crucially, due to the shift to relative effect for release and prescription, a debtor who performs the obligation can now seek recourse even from a co-debtor who was individually released by the creditor or whose direct obligation to the creditor was extinguished by prescription (Reformed Civil Code, Article 445). This is because the performing debtor's recourse right is a distinct claim.
  • If a co-debtor is insolvent, their unrecoverable share is borne proportionally by the performing debtor and the other solvent co-debtors (Article 444). The reform also codified case law for situations where no debtor has an internal share (e.g., all are accommodation parties), stipulating that an insolvent party's share is borne equally by the others (Article 444, Paragraph 2).
  • The duty for a debtor who has paid, or received a demand, to notify other co-debtors is now explicitly limited to cases where they know of the existence of other co-debtors (Article 443).

Divisible and Indivisible Obligations

  • Divisible Obligations (可分債務 - Kafun Saimu): If an obligation is divisible by nature (e.g., payment of a sum of money where shares can be separated), and there are multiple debtors or creditors without a joint and several agreement, each debtor is generally liable only for their share, and each creditor can only claim their share.
  • Indivisible Obligations (不可分債務 - Fukabun Sa(i)mu): Where the subject matter is indivisible by its nature (e.g., the delivery of a single, unique painting), the reformed Code (Article 430) clarifies that indivisibility now refers to the nature of the obligation itself, not merely the parties' intent. If multiple debtors owe an indivisible obligation, the rules for joint and several obligations largely apply (e.g., the creditor can demand full performance from any one debtor). One notable change is that a novation concerning an indivisible obligation by one debtor now has absolute effect, consistent with the rules for joint and several obligations.

Joint and Several Claims (連帯債権 - Rentai Saiken) – Newly Codified

The reformed Civil Code has introduced new, explicit provisions for "joint and several claims" (Articles 432-435-2), where multiple creditors are each entitled to demand the entire performance of an obligation from a single debtor.

  • Formation: Such claims arise by law or by agreement of the parties when the object of the claim is divisible by its nature (Article 432).
  • Effects of Events Concerning One Joint and Several Creditor:
    • General Principle: Relative Effect (Article 435-2). Events occurring with respect to one joint and several creditor generally do not affect the rights of the other co-creditors against the debtor.
    • Performance to One Creditor: If the debtor performs the entire obligation to one of the joint and several creditors, the obligation is discharged with respect to all creditors (absolute effect).
    • Set-Off by Debtor Against One Creditor: If the debtor has a claim against one of the joint and several creditors and exercises a valid set-off, this extinguishes the debtor's obligation to all joint and several creditors to the extent of the set-off (Article 434 - absolute effect).
    • Novation or Release Involving One Creditor: If one joint and several creditor enters into a novation with the debtor or releases the debtor from the obligation, the other co-creditors can no longer claim the portion of the benefit that would have been internally apportioned to the creditor who entered into the novation or granted the release, had they not lost their right (Article 433 - a qualified absolute effect).
    • Confusion/Merger Involving One Creditor: If one of the joint and several creditors also becomes the debtor, the debtor is deemed to have performed the obligation, extinguishing it for all (Article 435 - absolute effect).

Indivisible Claims (不可分債権 - Fukabun Saiken)

Where multiple creditors are entitled to an indivisible performance (e.g., co-owners of a painting seeking its return), each creditor can demand entire performance from the debtor for the benefit of all creditors (Reformed Civil Code, Article 428). The rules for joint and several claims largely apply by analogy. However, a key difference is that a novation or release between the debtor and only one indivisible creditor has only relative effect and does not affect the rights of other indivisible creditors (Article 429) – unlike the qualified absolute effect seen in joint and several claims. The reform also clarified that indivisible claims now only arise from the nature of the claim itself, not by party intent if the claim is divisible by nature.

Transitional Application

For all these types of multi-party obligations and claims (joint and several obligations, indivisible obligations, joint and several claims, and indivisible claims), the reformed Civil Code provisions generally apply if the obligation or claim itself arose on or after April 1, 2020. If it arose before this date, the rules of the old Civil Code continue to govern the effects of events concerning co-obligors or co-creditors (as per Article 20 of the Supplementary Provisions of the Amending Act).

Practical Implications for Businesses

These reforms have wide-ranging practical implications:

  • For Creditors with Joint and Several Debtors: Increased diligence is required. To effectively manage the statute of limitations, creditors must now make demands or take other necessary actions against each joint and several debtor individually. While releasing one debtor no longer automatically diminishes the claim against others, this also means the creditor must be mindful of the overall recovery strategy and the potential for recourse claims among debtors.
  • For Joint and Several Debtors: The shift to relative effect means that benefits like a release or completed prescription obtained by one co-debtor from the creditor do not automatically shield that debtor from recourse claims by other co-debtors who ultimately pay more than their internal share. Clear internal agreements among co-debtors regarding their respective shares, responsibilities, and recourse mechanisms are more crucial than ever.
  • For Parties Involved in Joint and Several Claims: The new statutory framework provides greater clarity but also requires an understanding of how actions by or against one co-creditor can (or cannot) affect the rights of the others.
  • Contract Drafting: When structuring multi-party arrangements, if joint and several liability or entitlement is intended, this should be explicitly stated in the agreement. Furthermore, internal agreements among co-debtors or co-creditors are vital to manage their relationships, particularly regarding the allocation of burdens and the procedures for recourse.

Conclusion

The Japanese Civil Code reform has brought substantial changes to the legal framework governing obligations and claims involving multiple parties. The pronounced shift towards "relative effect" for events concerning one joint and several debtor, alongside the formal codification of rules for joint and several claims, demands a more nuanced understanding from all parties involved. These changes impact how creditors must manage their claims, how co-debtors and co-creditors interact with each other regarding internal shares and recourse, and how multi-party transactions should be structured to align with these updated legal principles.