Default Interest in Japanese Commercial Transactions: How Does it Affect Your Deposit Obligations?

When commercial obligations in Japan are met with complications, such as a creditor's refusal to accept payment or uncertainty about the creditor's identity, Japan's "kyotaku" (deposit) system offers a pathway for debtors to legally discharge their responsibilities. A debtor can deposit the owed money or goods with a national deposit office, thereby achieving the legal effect of performance. However, for this "performance deposit" (bensai kyotaku) to be valid, it must meticulously align with the "main purport of the obligation" (sai務の本旨 - saimu no honshi). A critical component often overlooked, yet essential for validity, is the inclusion of accrued "chien songaikin" (遅延損害金) – default interest or damages for late payment – when such interest is due. Failure to account for this can render the entire deposit ineffective, leaving the debtor still liable.

This article delves into the concept of default interest in Japanese commercial dealings and its profound impact on the validity and effectiveness of performance deposits.

Decoding "Chien Songaikin": Default Interest under Japanese Law

"Chien songaikin" refers to the monetary compensation a debtor owes for failing to perform a monetary obligation by its due date. It is a form of damages for delay.

Legal Basis:
The primary legal framework for default interest stems from Japan's Civil Code:

• Article 415 provides the general rule for damages due to non-performance of an obligation. If a debtor fails to perform an obligation in accordance with its main purport, the creditor can claim damages.
• Article 419 lays down special rules for monetary obligations. Paragraph 1 states that damages for non-performance of a monetary obligation shall be determined by the statutory interest rate, although if an agreed rate exceeds the statutory rate, the agreed rate applies.
• Importantly, Article 419, Paragraph 2 stipulates that for monetary obligations, the creditor is not required to prove the actual amount of damages suffered due to the delay. The interest itself is deemed to be the damages.
• Furthermore, under Article 419, Paragraph 3, the debtor cannot use force majeure (an unforeseeable, unavoidable event) as a defense against liability for default interest on a monetary obligation.

Calculating Default Interest: Applicable Rates

The rate at which default interest is calculated depends on several factors:

1. Agreed Interest Rate (Yakujō Riritsu 約定利率): If the parties have contractually agreed on an interest rate for delayed payments, that rate generally applies, provided it is higher than the statutory rate. However, such agreed rates are subject to the caps imposed by the Interest Rate Restriction Act (利息制限法 - Risoku Seigen Hō). If the agreed rate is lower than the statutory rate, the statutory rate will apply for default interest calculations.
2. Statutory Interest Rate (Hōtei Riritsu 法定利率) under the Civil Code:
   • Prior to April 1, 2020: For obligations not arising from commercial acts, the statutory interest rate was a fixed 5% per annum (under then-Article 404 of the Civil Code).
   • From April 1, 2020 (Post-Civil Code Reform): The Civil Code was significantly reformed. The statutory interest rate was changed to an initial 3% per annum and became subject to a floating mechanism. This rate is reviewed every three years and may be adjusted based on changes in market interest rates (current Civil Code Article 404). This new variable rate applies to default interest for obligations where the default occurs on or after April 1, 2020, or for interest accruing from this date even if the obligation arose earlier but had no fixed due date or specific interest agreement.
3. Statutory Interest Rate for Commercial Acts (Shōi Kōi 商行為) under the Commercial Code:
   • Prior to April 1, 2020: For obligations arising from "commercial acts" (as defined in the Commercial Code), the statutory interest rate was 6% per annum (Commercial Code Article 514).
   • From April 1, 2020: The Commercial Code (Article 514) now states that if the statutory interest rate under the Civil Code (currently 3%, variable) is higher than the previously stipulated 6% commercial rate, then the Civil Code rate shall apply to obligations arising from commercial acts. Given that the current Civil Code rate is 3%, the 6% commercial rate generally continues to apply to commercial obligations unless a different rate is agreed upon or the Civil Code's variable rate eventually surpasses 6%. If an obligation arises from a commercial act performed by one or both parties, this commercial rate is typically the default for default interest.

It's worth noting that deposit offices, when processing deposits (such as for rent where the applicable rate might be ambiguous on the form), have historically accepted calculations based on either 5% or 6% if the basis wasn't clearly specified by the depositor. However, with the 2020 Civil Code reforms, clarity on the origin and timing of the obligation is paramount for accurate interest calculation.

When is Default Interest Due with a Performance Deposit? A Scenario-Based Guide

The fundamental principle is that a performance deposit is effective in discharging a debt only if it covers the entire obligation as per its "main purport." This includes the principal amount and any legally accrued default interest up to the point of valid tender or deposit. Depositing only the principal when default interest is also due generally does not constitute a tender that aligns with the main purport of the obligation and thus may not be a valid deposit.

While some older case law (e.g., Supreme Court judgment of December 15, 1960 (Shōwa 35)) recognized a deposit as valid despite a very minor shortfall in the total amount due, deposit office practice generally adheres to a stricter interpretation requiring full payment of principal and accrued interest for the deposit to be accepted as validly discharging the debt.

Let's examine common scenarios encountered in deposit practice:

Scenario 1: Creditor Refuses to Accept Payment (Juryō Kyohi 受領拒否)

If a debtor tenders performance after the due date (i.e., is already in default), any tender must include default interest calculated from the day following the original due date up to the date of the actual tender. If the debtor tenders only the principal amount, and the creditor refuses it (which they are entitled to do if default interest is also owed), the debtor cannot then make a valid deposit based on "refusal of acceptance" because the tender itself was incomplete. A fresh, complete tender (principal + all accrued default interest) would be necessary.

Scenario 2: Creditor is Unable to Accept Payment (Juryō Funō 受領不能)

This ground for deposit arises when the creditor, for reasons not attributable to the debtor, cannot receive the tendered performance.

• Obligations Performable at the Creditor's Domicile (Jisansaimu 持参債務 - Obligation to bring):
  If the debtor attempts to perform at the creditor's address after the due date (and is thus already in default), and finds the creditor, for example, temporarily absent, any subsequent deposit must include default interest up to the date of that attempted tender. The creditor’s temporary absence doesn’t excuse the prior default.
• Obligations Performable at the Debtor's Domicile (Toritatesaimu 取立債務 - Obligation for creditor to collect):
  Here, the creditor is obliged to collect performance from the debtor. If the creditor fails to do so by the due date, the debtor must make an "oral tender" (口頭の提供 - kōtō no teikyō). This involves notifying the creditor that preparations for performance are complete and requesting the creditor to come and accept it (Civil Code Article 493).
  If, after the due date has passed and the debtor has made such an oral tender, the creditor still fails to collect, the debtor can make a deposit on the grounds of "impossibility of acceptance." However, this deposit must include default interest calculated from the day after the original due date up to the date the oral tender was effectively made.
  • Exception for Certain Collection Obligations: For some types of collection obligations where the time and place of performance are clearly fixed and it's socially established that the creditor can receive payment at any time upon visiting (e.g., salaries paid by an employer, fixed-term bank deposits withdrawable by the depositor), the debtor (employer/bank) is generally considered to have fulfilled their duty by merely having the funds ready for collection. In these specific cases, the mere passing of the payment date might not automatically put the debtor into default if the creditor hasn't attempted to collect. Consequently, if a deposit is made due to the creditor's prolonged failure to collect, default interest may not be required, as the debtor wasn't technically in default.

Scenario 3: Creditor Refuses Acceptance in Advance (Arakajime Juryō Kyohi あらかじめ受領拒否)

If a creditor unequivocally states in advance that they will not accept performance, the debtor is relieved of the need to make an actual, physical tender. An oral tender (notifying the creditor that performance is ready and requesting acceptance) is sufficient to avoid being in default of tender (Civil Code Article 493, proviso).

• If this oral tender is made after the original due date, default interest must be included for the period from the day after the due date until the date of the oral tender.
• Absolute Refusal: If the creditor's advance refusal is absolute and unconditional (e.g., the creditor denies the existence of the contract itself or makes it clear that any form of tender will be rejected), the debtor may not even need to make an oral tender to avoid default. In such circumstances, if the due date passes without tender, default interest may not accrue because the debtor's failure to tender is directly attributable to the creditor's explicit and unyielding refusal (based on a Supreme Court judgment of June 5, 1957 (Shōwa 32)). Deposit offices often apply this reasoning in cases like ongoing disputes over rent increases, where a landlord has clearly stated they will not accept the previously agreed rent. The deposit officer will assess, based on the facts presented in the deposit application, whether the creditor's refusal was indeed "clear" and absolute.

Scenario 4: Creditor's Whereabouts are Unknown (Saikensha Fukakuchi 債権者不確知)

This occurs when the debtor, without negligence, cannot identify or locate the rightful creditor to make payment.

• Creditor Becomes Unascertainable Before Due Date: If the uncertainty arises before performance is due, and the debtor subsequently makes a deposit after the due date, the debtor might argue they were not at fault for not performing on the precise due date. In such cases, a deposit of the principal without default interest might be permissible. However, if the debtor delays the deposit itself, and includes default interest for that period of delay in depositing, it will be accepted.
• Creditor Becomes Unascertainable After Due Date: If the debtor was already in default (i.e., the due date passed) before the creditor became unascertainable, the debtor is responsible for that initial period of delay. The deposit must include default interest from the day after the original due date until the date of the deposit.
  When depositing under this ground, the basis for any default interest calculation (rate, period, amount) should be clearly stated in the remarks section of the deposit application form.

Scenario 5: Depositing Compensation for Torts (Fuhōkōi ni Motozuku Songai Baishō Saumu 不法行為に基づく損害賠償債務)

Obligations to pay damages arising from torts (illegal acts causing harm) have specific considerations regarding default interest.

• Accrual of Default Interest: Under Japanese law, default interest on tort damages is generally considered to begin accruing from the date the tort was committed (based on prevailing legal theory and Supreme Court of Cassation precedents, e.g., judgment of October 22, 1910 (Meiji 43)). This is because the obligation to compensate for the damage arises immediately at the time of the tort.
• Deposit Office Practice: When a tortfeasor makes a deposit to cover such damages (e.g., due to the victim refusing a settlement offer), deposit offices require the inclusion of default interest. This is calculated at the statutory civil rate (e.g., 3% per annum if the tort occurred post-April 1, 2020, or 5% if prior) from the date of the tort up to the date of the (attempted) tender to the victim.
• Disputed Damage Amounts: Even if the exact amount of tort damages is disputed between the tortfeasor and the victim, the tortfeasor can still make a deposit of an amount they unilaterally deem appropriate. Such a deposit can be valid under Civil Code Article 494 (e.g., if the victim refuses the offered amount), provided the requirements for deposit are otherwise met.
  It is advisable for the deposit application to clearly state the breakdown between the principal amount of damages and the accrued default interest to ensure clarity.

Default Interest in Enforcement Deposits (Shikkō Kyotaku)

Enforcement deposits occur when a third party who owes money to a debtor (the "third-party obligor") has that debt seized by the debtor's creditor. The third-party obligor may then deposit the seized amount with a deposit office.

• Salaries and Bank Deposits: As discussed under "impossibility of acceptance," if the seized debt is a salary or a bank deposit (often treated as obligations where the debtor, i.e., employer or bank, simply needs to be ready to pay), default interest might not automatically accrue against the third-party obligor merely because their payment date passed before the seizure, provided they were ready to pay.
• Other Seized Debts: For other types of commercial debts, if the third-party obligor was already in default to the original debtor before the seizure, or if they delay payment/deposit after being served with a seizure order, they must include default interest in their enforcement deposit. A seizure order prohibits payment to the original debtor but does not absolve the third-party obligor from liability for default interest if they unduly delay paying the seized sum to the seizing creditor or depositing it. The deposit officer will scrutinize whether the deposit covers the full seizable amount, including any applicable default interest owed by the third-party obligor.

Practicalities in Calculation and Deposit Submission

Accuracy in calculating default interest is vital, especially concerning the timing of the deposit.

• The Critical "Deposit Date": The amount of default interest is calculated up to the date the deposit is effectively made and accepted by the deposit office.
• Mail and Online Submissions:
  • Deposits by Mail with Cash Payment: If sending a paper application with cash (which is less common now but possible for certain amounts/offices), the depositor should use methods like registered mail to ensure arrival on a specific date that aligns with their interest calculation.
  • Online Applications with Subsequent Document Submission: For online applications where certain supporting documents must be mailed afterwards, there's a rule that if these documents arrive at the deposit office within three days of the online application's transmission (this period includes non-business days, and if the third day is a public holiday, it extends to the next business day), the legal "acceptance date" of the deposit can relate back to the online submission date. This mechanism, known as preserving the order of examination (審査順位の保全効 - shinsa juni no hozenkō), is crucial for fixing the amount of default interest calculated as of the online submission date.
• Rounding (Hassū Shori 端数処理): Unless the parties have a specific agreement, any fraction of a yen in the final default interest calculation is rounded. If the fraction is 0.5 yen (50 sen) or more, it's rounded up to the nearest whole yen; otherwise, it's rounded down. This is based on Article 3, Paragraph 1 of the Act on Currency Units and Coinage, etc.. The deposit application should note that rounding has been applied.
• Leap Year Calculations: When calculating daily interest, if the period for which interest is being calculated includes February 29th, or if a one-year interest calculation from a start date encompasses a February 29th, the denominator for the daily rate calculation should be 366 instead of 365.

The 2020 Civil Code Reform: A New Era for Statutory Interest

It is imperative to be aware of the significant reforms to the Japanese Civil Code that took effect on April 1, 2020. These reforms directly impact default interest calculations:

• Variable Statutory Civil Rate: The fixed 5% statutory interest rate under Civil Code Article 404 was replaced. The rate was initially set at 3% per annum and is now subject to review every three years. This means the applicable statutory rate for default interest on civil obligations can change over time. For defaults occurring or interest periods commencing on or after April 1, 2020, the then-current variable rate must be used.
• Impact on Commercial Statutory Rate: The Commercial Code (Article 514) was also amended in relation to the Civil Code changes. While it traditionally provided for a 6% commercial statutory rate, it now stipulates that if the Civil Code's statutory rate becomes higher than this, the Civil Code rate will apply. Given the Civil Code rate started at 3% and is variable, the 6% rate often remains relevant for purely commercial transactions lacking a specific agreed rate, but the interplay must be checked.

These reforms necessitate careful attention to the timing of the obligation's origin, its due date, and the period of default to apply the correct statutory interest rate.

Conclusion: Ensuring Your Deposit Obligation is Fully Discharged

Successfully navigating Japan's performance deposit (kyotaku) system requires more than just depositing the principal sum. When a payment is overdue, the inclusion of accurately calculated default interest (chien songaikin) is often a non-negotiable prerequisite for the deposit to be considered a valid discharge of the entire obligation.

The rules governing default interest, from its legal basis and applicable rates (including the significant 2020 Civil Code reforms affecting statutory rates) to its application in diverse scenarios like creditor refusal, impossibility of acceptance, or deposits for tort damages, are nuanced. Whether dealing with obligations performable at the creditor's or debtor's domicile, or facing advance refusals, the presence and quantum of default interest can determine the legal effectiveness of the deposit.

For businesses, especially those involved in cross-border transactions or complex commercial relationships in Japan, understanding these intricacies is vital. An improperly constituted deposit, particularly one omitting requisite default interest, may not extinguish the underlying debt, potentially leading to further claims and legal complications. Given the complexities, particularly with the reformed interest rate system and specific factual circumstances dictating outcomes, seeking timely legal counsel in Japan is often the most prudent course of action to ensure that any performance deposit achieves its intended legal effect.