Determining the Basis for Damage Calculation in Japan: What Is the "Substantive Pluralism Theory"?

Once it's established that a breach of contract has occurred and the aggrieved party (creditor) is entitled to damages, a critical and often complex question arises under Japanese law: as of what point in time should these damages be assessed and valued in monetary terms? This is particularly pertinent when the value of the contractual subject matter or the extent of the loss fluctuates between the time of breach and the time of judgment. The revised Japanese Civil Code, effective April 2020, did not codify a specific rule for determining this "reference time for calculating damages" (損害賠償額算定の基準時 - songai baishōgaku santei no kijunji), leaving this important issue to be shaped by judicial precedent and ongoing scholarly discourse. Among the influential academic theories is the "Substantive Pluralism Theory" (実体的多元説 - jittaiteki tagen setsu), which offers a flexible yet principled approach.

The Challenge: No Single Fixed Reference Point in Law or Practice

The monetary valuation of contract damages is a distinct issue from determining the scope of recoverable damages (i.e., which types of losses, like direct losses or lost profits, are compensable under Article 416 of the Civil Code). Even if a particular loss, such as the value of undelivered goods whose market price has escalated, is deemed recoverable, the specific value of that loss depends on the date chosen for its assessment.

Historically, Japanese courts, operating under the pre-revision Civil Code, did not consistently adhere to a single, fixed point in time for valuing damages in all breach of contract cases. Depending on the specifics of the case, various reference points were utilized by the judiciary:

• Time of Impossibility (履行不能時 - rikō funō ji): When performance became definitively impossible.
• Time of Contract Termination (解除時 - kaijo ji): When the creditor validly terminated the contract due to the breach.
• Original Due Date for Performance (履行期 - rikō ki): The date when performance was initially supposed to occur.
• Time of the Conclusion of Oral Arguments (事実審口頭弁論終結時 - jijitsushin kōtō benron shūketsuji): The point in the fact-finding stage of litigation when all evidence and arguments are considered complete, particularly for claims seeking preliminary compensation pending final execution of judgment (as seen in some older precedents, e.g., Supreme Court, January 21, 1955, Minshū Vol. 9, No. 1, p. 22).

This judicial flexibility, or perhaps inconsistency, highlighted the need for more robust theoretical frameworks to guide the determination of the appropriate reference time.

Scholarly Theories on the Reference Time

In response to this, Japanese legal scholars have developed several theories. While older theories often attempted to establish a single definitive reference point for all cases or for specific types of cases, discussions from the 1970s onwards introduced more nuanced perspectives.

1. The Judicial Discretion Theory (裁量説 - sairyō setsu)

Championed by scholars like Professor Yoshihisa Hirai, this theory posits that the monetary valuation of damages should not be rigidly dictated by substantive law rules fixing a specific time. Instead, it should largely be entrusted to the free discretion of the presiding judge. The court's aim, under this view, is to achieve a "full valuation" (全額評価の原則 - zengaku hyōka no gensoku) of the creditor's actual loss, taking into account all relevant circumstances as they appear at the time of the conclusion of oral arguments.

While this approach offers maximum flexibility to tailor the damage award to the specifics of each case, it has been criticized for potentially lacking clear, predictable standards, which could increase the burden on judges and lead to uncertainty for litigants. There are also concerns about its compatibility with the principle of party autonomy in civil litigation (where parties, not the court, define the scope of the dispute and relief sought).

2. The Substantive Pluralism Theory (実体的多元説 - jittaiteki tagen setsu)

This theory, advocated by prominent scholars such as Professors Zentaro Kitagawa, Masamichi Okuda, Tatsuaki Maeda, and Takeshi Awaji, has gained significant traction. It argues that there is no single, universally applicable reference time for damage valuation mandated by substantive law. Instead, it proposes that multiple, legally permissible reference points can exist, and the appropriate one depends on the specific factual pattern or "typology" of the case. Factors influencing this typology include the nature of the contract, the type of subject matter involved (e.g., specific vs. generic goods), the pattern of price fluctuations in the relevant market, the conduct of the parties, and prevailing economic conditions.

A key tenet of the Substantive Pluralism Theory is the creditor's right to choose. The creditor, when claiming damages, can select one of these legally permissible reference points, assert it, and provide evidence for the valuation at that chosen time. If the chosen point is indeed appropriate for the case type and the loss at that time is proven, the court should generally be bound by this assertion. Potential reference points frequently discussed include the time of impossibility, the time of contract termination, the original due date, or the time of the conclusion of oral arguments. Some interpretations extend this to allow the creditor to choose any point in time after their right to damages has arisen, provided they can substantiate the amount of loss as of that specific date.

The Substantive Pluralism Theory is often justified by the "policy of full compensation" (全額賠償のポリシー - zengaku baishō no porishī). This underlying principle holds that if a creditor suffers a loss that falls within the legally compensable scope of damages, they should receive full monetary redress for that loss. Allowing the creditor to choose from appropriate reference times helps ensure that the valuation reflects their actual damage in a fluctuating economic environment.

A significant concern raised against this theory is that it might empower creditors to engage in opportunistic behavior—for example, by waiting to claim damages until a market price peak to maximize their recovery. Proponents of the Substantive Pluralism Theory counter this by emphasizing that the creditor's choice is not unfettered. It is constrained by the duty to mitigate damages (損害軽減義務 - songai keigen gimu). A creditor cannot unreasonably delay their claim or choose an arbitrarily late valuation point if they could have reasonably taken steps to mitigate their losses at an earlier stage (e.g., by making a substitute transaction).

3. Type-Based Understanding with an Emphasis on the Duty to Mitigate (類型別理解 - ruikeibetsu rikai)

Another influential approach, notably advanced by Professor Takashi Uchida, also starts from the premise that the reference time is determined by substantive legal principles but places a very strong emphasis on the duty to mitigate damages. This duty is often linked to the "principle of substitution" (代替取引の原則 - daitai torihiki no gensoku), which suggests that a party should take reasonable steps to enter into a substitute transaction to cover their loss when a breach occurs, if a market for such a transaction exists.

Under this view, the appropriate reference time can differ based on the type of contractual subject matter:

• Specific Goods (特定物 - tokuteibutsu): For contracts involving unique, non-fungible goods, the goal of damages is to place the creditor in the economic position they would have occupied had the contract been performed. Therefore, a reference time as close as possible to the time of judgment (or conclusion of oral arguments) might be preferred to reflect the current cost of obtaining that unique benefit, unless it was highly probable that the creditor would have resold the item at an earlier specific time (in which case, the loss might be treated as lost profit, a scope of damages issue).
• Generic Goods (種類物 - shuruibutsu): For contracts involving generic or fungible goods for which a market exists, the creditor's duty to mitigate by making a substitute transaction (a cover purchase if they were the buyer, or a resale if they were the seller) becomes paramount. Case law often implicitly reflects this; for example, by choosing the time of contract termination or the original due date as the reference point, courts may be assuming that the creditor should have engaged in a substitute transaction around that time. Using the conclusion of oral arguments as the reference time for generic goods is viewed critically if prices have been rising, as it could overcompensate a creditor who failed to take reasonable steps to cover in the market earlier.

The Overarching Role of the Duty to Mitigate Damages

Regardless of which specific theory of reference timing one adheres to, the duty to mitigate damages (often considered an aspect of the principle of good faith or derived from Article 418 of the Civil Code concerning comparative negligence) serves as a crucial limiting principle. A creditor cannot passively allow their losses to accumulate or deliberately choose a valuation time that maximizes their claim if they had a reasonable opportunity to reduce or crystallize their loss at an earlier point through actions such as a timely cover transaction. Failure to mitigate can lead to a reduction in the recoverable damages.

This duty acts as an important check, particularly under the Substantive Pluralism Theory, ensuring that the creditor's choice of reference time is exercised reasonably and does not unduly penalize the breaching debtor for market movements that occurred after the creditor could have taken protective measures.

Interaction with Price Escalation Damages

The theories concerning the reference time for damage calculation are directly relevant to the issue of recovering damages for price escalation. If, as discussed in a previous article, courts permit recovery for the increased value of a contractual subject matter, the question of which specific escalated value (i.e., the value as of which date) is recoverable is determined by these principles governing the reference time. The choice of reference time will dictate the market conditions against which the original contract price is compared to ascertain the extent of the loss due to non-delivery in a rising market.

The New Civil Code and the Path Forward

As mentioned, the extensive revisions to the Japanese Civil Code did not result in specific statutory provisions dictating the reference time for damage calculation. The legislature evidently considered it preferable to allow this area to continue developing through judicial decisions and scholarly debate, likely due to the difficulty of formulating a single, universally applicable rule that could justly address the myriad factual situations that arise in contract disputes.

Consequently, the interplay between theories like Substantive Pluralism, the emphasis on the duty to mitigate, and judicial efforts to achieve fair and equitable outcomes will continue to shape the practice of damage valuation in Japan.

Conclusion

Determining the appropriate reference time for calculating contract damages in Japan remains a complex issue without a one-size-fits-all statutory answer. The "Substantive Pluralism Theory" offers a compelling framework that acknowledges this complexity by allowing for multiple permissible valuation points, granting the creditor a degree of choice. However, this choice is significantly tempered by the overriding duty to mitigate damages, which prevents opportunistic claims and encourages commercially reasonable behavior from the aggrieved party. For legal professionals and businesses, understanding these evolving principles is essential for navigating breach of contract scenarios and for realistically assessing potential damage awards in a Japanese legal context.