Default Clauses in Japanese Settlements: Debtor's Path to Challenge Enforcement

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read
Default Clauses in Japanese Settlements: Debtor's Path to Challenge Enforcement

Settlement agreements reached in court, known as "judicial settlements" (裁判上の和解 - saibanjō no wakai), are common in Japan and, like final judgments, serve as enforceable "titles of obligation" (債務名義 - saimu meigi). These settlements often include "default clauses" (過怠約款 - katai yakkan), which stipulate specific consequences if a party fails to meet certain obligations—for example, if a tenant misses rent payments, the lease may be terminated, and eviction can be enforced; or if a debtor misses an installment payment, the entire remaining debt may become immediately due.

A critical procedural question arises when a creditor claims that such a default has occurred and seeks to enforce the settlement. If the debtor disputes the occurrence of the default, or claims to have rectified it, what is the proper legal avenue to challenge the enforcement? A landmark 1966 decision by the Supreme Court of Japan provided a foundational answer, establishing that the debtor generally cannot simply object to the issuance of the writ of execution but must instead file a more substantive "action of objection to claim."

Background of the Dispute

The case involved a dispute between tenants, Mr. X and others (hereinafter "X"), and their landlord, Mr. Y. X leased a house from Y. Previously, Y had initiated an eviction lawsuit against X, which concluded with a judicial settlement on July 12, 1957.

The key terms of this settlement included:

  1. Y would continue to lease the house to X for an indefinite period (Clause 2).
  2. A default clause (Clause 5) stipulated: "If X fails to pay the agreed rent two or more times consecutively, Y may terminate the lease... without prior demand, and X shall not object to compulsory execution for immediate eviction from the house and for recovery of unpaid overdue rent."

Subsequently, Y alleged that X had failed to pay rent for July and August 1957. Based on this alleged default, Y sent X a written notice on September 21, 1957, declaring the termination of the lease agreement pursuant to Clause 5 of the settlement.

X contested this, arguing that they had not, in fact, failed to pay rent two or more times consecutively. To prevent Y from enforcing the eviction based on the settlement agreement, X filed a lawsuit with two alternative claims:

  • Primary Claim: An "action of objection to claim" (請求異議の訴え - seikyū igi no uttae) under Article 545 of the then-Code of Civil Procedure (old CCP). This action sought to declare that Y had no enforceable claim for eviction.
  • Alternative (Preliminary) Claim: An "action of objection to the grant of a writ of execution" (執行文付与に対する異議の訴え - shikkōbun fuyo ni taisuru igi no uttae) under Article 546 of the old CCP. This action aimed to prevent the court clerk from issuing the writ of execution necessary for Y to enforce the settlement.

The Osaka District Court (court of first instance) ruled that the alleged fact of rent non-payment, which would trigger the termination under the settlement's default clause, constituted one of the "other conditions" (他ノ条件 - ta no jōken) mentioned in Article 518, Paragraph 2 of the old CCP. This article stated that if a judgment's enforceability depended on such "other conditions," a writ of execution could only be granted if the creditor proved with documents that the condition had been fulfilled. Therefore, the District Court held that X should challenge the enforcement by objecting to the grant of the writ, not through an action of objection to claim. It dismissed X's primary claim. However, it upheld X's alternative claim, finding Y's termination notice ineffective (presumably because it found no qualifying default or that X had made a valid tender of payment).

Mr. Y appealed the part of the decision concerning the alternative claim to the Osaka High Court. The High Court found that X had indeed defaulted on the rent payments. Consequently, it reversed the first instance court's ruling on the alternative claim and dismissed X's objection to the grant of the writ of execution. Mr. X then appealed to the Supreme Court of Japan.

The Supreme Court's Decision

The Supreme Court of Japan overturned the Osaka High Court's decision and remanded the case for further proceedings.

1. On the Merits of Default and Tender of Payment:
The Supreme Court first addressed the factual question of default. It noted that the High Court's own findings indicated that X had attempted to pay two months' rent to Y's agent on two occasions (around September 18-19 and again on September 20, 1957), but the agent had refused to accept the payment. The Supreme Court pointed out that if X's offer to pay constituted a "real tender" (現実の提供 - genjitsu no teikyō), meaning an actual presentation of the due amount in accordance with the terms of the obligation, then Y's right to terminate the lease due to the prior non-payment would have been extinguished. This is because even if a small amount of late payment interest was not included in the tender, it would be negligible and would not prevent the tender from being considered substantially in accordance with the debt (citing a 1920 Great Court of Cassation precedent). If, however, X had merely made an oral offer to pay without actually presenting the funds, this would generally not be a valid tender unless Y had already unequivocally refused to accept payment. The Supreme Court found the High Court's findings unclear on this point (whether it was a real or merely oral tender) and also noted that if the High Court believed that a right to terminate, once accrued, could not be extinguished by a subsequent valid tender before the termination was declared, this view was contrary to established Supreme Court precedent. Thus, the High Court's judgment was flawed for insufficient deliberation, inadequate reasoning, or misapplication of law regarding contract termination.

2. The Crucial Procedural Ruling: Proper Avenue for Challenging Default:
The most significant part of the Supreme Court's decision was its clarification of the correct procedural path for X to challenge the enforcement:

  • The Supreme Court held that when a judicial settlement (which acts as a title of obligation) contains a clause allowing the landlord to terminate a lease upon rent arrears (a default clause), the factual occurrence of such rent non-payment does NOT fall under the category of "other conditions" as contemplated by Article 518, Paragraph 2 of the old Code of Civil Procedure.
  • Therefore, if the debtor (X) wishes to dispute the alleged fact of non-payment and thereby challenge the enforceability of the settlement agreement (i.e., prevent eviction), the proper legal recourse is to file an action of objection to claim under Article 545 of the old CCP. It is NOT an action of objection to the grant of a writ of execution under Article 546 of the old CCP.
  • Reasoning: The Supreme Court explained that the "conditions" mentioned in Article 518, Paragraph 2 of the old CCP are matters that the creditor is required to prove with documentary evidence before a writ of execution can be issued. However, in the context of a default clause like the one for rent payment, the fact of non-payment is not considered a matter for the creditor to affirmatively prove for the writ to issue. Instead, the Court found it more consistent with the "concept of fairness" (kōhei no kannen) for the debtor to bear the responsibility of proving the fact of payment (or valid tender, or the non-occurrence of the default conditions) in order to prevent the enforcement of the claim as set out in the title of obligation (the settlement agreement).
  • Consequences of Misinterpretation by Lower Courts: Based on this reasoning, the Supreme Court concluded that the Osaka High Court had erred in law by treating X's claim as a procedurally proper action of objection to the grant of a writ of execution. Similarly, the Osaka District Court had erred in its interpretation by dismissing X's primary claim (the action of objection to claim). The Supreme Court suggested that if X were to file a cross-appeal during the remanded proceedings, the High Court should then properly adjudicate X's primary claim (the action of objection to claim) on its merits.

Significance and Analysis of the Decision

This 1966 Supreme Court judgment is a landmark ruling in Japanese civil execution law. It has had a lasting impact on how defaults under "default clauses" in titles of obligation are handled procedurally.

  • Establishes Prevailing Practice: The decision established the fundamental principle that the occurrence of a default event as stipulated in a default clause (e.g., non-payment of rent or an installment) is generally not considered a "fact to be proven by the creditor" for the purpose of obtaining a writ of execution. This interpretation has been carried forward into the current Civil Execution Act (specifically Article 27, Paragraph 1, which deals with when a claim's enforceability "is dependent on the arrival of a fact to be proved by the creditor"). Consequently, the burden falls on the debtor to proactively challenge the alleged default by filing an action of objection to claim.
  • "Negative Theory" Adopted: The ruling decisively sided with what was known as the "negative theory" (shōkyoku setsu) in a long-standing academic debate concerning the interpretation of old CCP Article 518(2).
    • The Negative Theory (prevailing view, adopted by the Court): This theory argued that the "other conditions" requiring proof by the creditor for writ issuance are only those where the burden of proof naturally falls on the creditor. For defaults like non-payment, the debtor typically possesses the evidence of payment (e.g., receipts). Thus, it is fairer for the debtor to prove they fulfilled their obligation if they wish to prevent execution.
    • The Positive Theory (minority view): This theory contended that writ issuance procedures are distinct from substantive law's burden of proof rules. Requiring the debtor to initiate a full lawsuit (an action of objection to claim) to disprove a default, while the creditor can obtain a writ more easily, places an unfair burden on the debtor that goes beyond merely proving a fact.
    • The negative theory countered that requiring the creditor to prove a negative fact (e.g., that payment was not made) would be practically impossible and would almost always force the creditor into a lawsuit just to obtain a writ of execution, undermining the efficiency of enforcement based on a settlement.
  • Nature of the Default Clause as Key: The core of the issue often lies in whether the obligation under the default clause is considered to have "actualized" or "become current" by the terms of the agreement itself. Default clauses vary widely, from those triggering acceleration of debt (loss of benefit of time for installments) to those allowing lease termination or imposing penalties. The commentary suggests that when parties, with mutual involvement, agree to a default clause in a judicial settlement or mediation, there's an implicit understanding that the creditor gains the ability to execute swiftly upon the occurrence of the specified default. The debtor, in effect, accepts this expedited enforcement possibility, perhaps in return for avoiding a more immediately harsh outcome at the time of settlement.
  • Debtor's Proactive Stance Required: Therefore, if a debtor believes that the conditions of a default clause have not been met, or that any default has been cured, they cannot passively wait to object to the issuance of a writ of execution. Instead, they must take the initiative by filing an action of objection to claim (under Article 35 of the current Civil Execution Act) to have a court adjudicate the dispute and prevent wrongful enforcement.
  • Evolution of Academic Discussion: While this Supreme Court decision set a clear direction, academic discussions continued. Some scholars, seeking to balance the burdens, proposed compromise solutions, such as requiring the court clerk, before issuing a writ based on a default clause, to notify the debtor and provide a period to submit proof of non-default (by analogy to procedures for deemed declarations of intent under Article 177, Paragraph 3 of the Civil Execution Act). However, the prevailing interpretation, rooted in this 1966 judgment, generally does not require such an intermediate step for common payment-related default clauses, maintaining that the primary onus is on the debtor to challenge via an action of objection to claim.

Conclusion

The Supreme Court's 1966 decision decisively clarified the procedural landscape for disputes arising from default clauses in judicial settlements and other titles of obligation in Japan. By holding that the occurrence of a default is generally not a "condition" requiring proof by the creditor for the issuance of a writ of execution, the Court placed the onus on the debtor to proactively challenge the alleged default through an "action of objection to claim." This ruling, grounded in considerations of fairness and the practicalities of proof, has shaped Japanese civil execution practice for decades, emphasizing the debtor's responsibility to actively protect their rights if they contest the factual basis upon which a creditor seeks to enforce a default provision.