Engaging Legal Counsel in Japan: Key Considerations for Your Retainer Agreement?

For any business venturing into the Japanese market or facing legal disputes within Japan, securing proficient local legal counsel (bengoshi) is a critical first step. The relationship with your bengoshi is formalized through a retainer agreement, known in Japanese as an inin keiyaku (委任契約). This document is more than a mere formality; it defines the scope of work, outlines financial obligations, and sets the expectations for both parties. Understanding its key components and the surrounding legal and ethical framework is crucial for a smooth and effective attorney-client relationship.

This article delves into the essential considerations for businesses when structuring and entering into retainer agreements with Japanese attorneys, shedding light on pre-contractual diligence, critical clauses within the agreement, financial aspects, and the overarching principles that govern these engagements.

The Foundation: Legal and Ethical Framework for Retainer Agreements

The engagement of a bengoshi and the terms of the retainer agreement are not set in a vacuum. They are governed by a combination of Japanese law and robust ethical rules set forth by the Japan Federation of Bar Associations (JFBA or Nichibenren).

1. Governing Laws and Rules:
   • The Attorney Act (弁護士法 - Bengoshi Hō) provides the fundamental legal basis for the practice of law in Japan, including the qualifications and general duties of attorneys.
   • The Basic Rules of Bengoshi Duties (弁護士職務基本規程 - BENGOSHI Shokumu Kihon Kitei), established by the JFBA, are a comprehensive set of ethical and professional conduct guidelines. These rules heavily influence the content and interpretation of retainer agreements, particularly concerning an attorney's obligations to their client.
   • The JFBA Rules Concerning Attorney's Fees (弁護士の報酬に関する規程 - BENGOSHI no Hōshū ni Kansuru Kitei) and the JFBA Rules on Handling of Client Funds, etc. (預り金等の取扱いに関する規程 - Azukarikin-tō no Toriatsukai ni Kansuru Kitei) provide specific directives on fee structures, transparency, and the management of client monies.
2. Overarching Principles:
   • Duty of Sincerity and Good Faith: Bengoshi are bound to perform their duties sincerely and in good faith, always prioritizing the client's legitimate interests.
   • Clarity and Transparency: Agreements should be clear, and attorneys are expected to explain the terms, especially regarding fees and scope, thoroughly to their clients.
   • Fair and Reasonable Fees: While Japan has largely liberalized attorney fee structures, moving away from former mandatory fee schedules, Article 24 of the Basic Rules of Bengoshi Duties stipulates that fees must be fair and reasonable, considering factors such as the economic benefit to the client, the complexity of the case, the time and effort required, and other circumstances.

Pre-Contractual Diligence: What to Expect from Your Bengoshi

Before a formal retainer agreement is signed, a diligent bengoshi will typically undertake several preparatory steps. This phase is crucial for establishing a mutual understanding and ensuring the ethical and practical viability of the engagement.

1. Initial Consultation and Case Assessment:
   The process usually begins with an initial legal consultation. During this meeting, the bengoshi will listen to the client's situation, gather preliminary facts, and provide an initial assessment of the case. This often includes discussing the potential legal issues, the prospects of success, the possible strategies for resolution (e.g., negotiation, mediation, litigation, or other forms of Alternative Dispute Resolution - ADR), and an estimation of the likely costs and duration involved. Article 29, Paragraph 1 of the Basic Rules of Bengoshi Duties obliges attorneys to explain the case outlook and the proposed course of action.
2. Conflict of Interest Checks:
   A fundamental ethical obligation for bengoshi is to avoid conflicts of interest. Before accepting a case, an attorney must diligently check whether representing the potential client would conflict with their duties to current or former clients, or with their own interests (as per Article 25 of the Attorney Act and Articles 27 and 28 of the Basic Rules of Bengoshi Duties). This is a critical step to ensure the attorney's loyalty and impartiality. Firms will typically have internal procedures for conducting these checks.
3. Client Identification and Verification (KYC):
   In line with international efforts to combat money laundering and other illicit activities, Japanese attorneys are subject to client identification and verification requirements. The JFBA has established specific "Rules Concerning Client Identification and Record Keeping, etc." (Irainin no Honnin Tokutei Jikō no Kakunin oyobi Kiroku Hozon-tō ni Kansuru Kitei). Especially when handling significant client assets (e.g., sums exceeding JPY 2 million outside of court-related deposits) or certain types of transactions like real estate deals or company formations, attorneys must verify the client's identity (and in some cases, the beneficial owner). This may involve requesting official identification documents (for individuals) or corporate registration documents (for legal entities). This diligence also serves to accurately identify the parties for the purpose of the retainer agreement itself and to prevent impersonation.
4. Discussion on the Scope of Engagement:
   A clear understanding of the scope of the attorney's services is paramount. The bengoshi should discuss and agree with the client on precisely what tasks are included in the retainer. Will it cover only initial negotiations, or extend to litigation? If litigation, which court levels (first instance, appeal, final appeal)? Will it include enforcement proceedings or ancillary matters like provisional remedies? Ambiguity in scope is a common source of later misunderstandings, so this should be defined as clearly as possible.

Deconstructing the Japanese Retainer Agreement (Inin Keiyakusho): Key Clauses and Considerations

Under Article 30 of the Basic Rules of Bengoshi Duties and Article 5 of the JFBA Rules Concerning Attorney's Fees, attorneys are generally required to provide their clients with a written document outlining the terms of engagement, especially concerning fees, upon or promptly after accepting a mandate. This usually takes the form of a formal inin keiyakusho. While specific formats may vary, certain key elements are consistently addressed.

1. Mandatory Written Agreement:
   The emphasis on written agreements aims to ensure transparency and prevent disputes regarding the terms of engagement, particularly concerning fees. This document serves as the primary reference point for the attorney-client relationship.
2. Identification of Parties and the Matter (Jiken no Hyōji):
   The agreement must clearly identify the client and the attorney (or law firm). It will also contain a precise description of the legal matter being entrusted to the attorney. This might include case names, opposing parties, and the specific legal issue or dispute.
3. Scope of Services (Junin Han'i):
   This is one of the most critical sections. It delineates the specific legal services the bengoshi is being retained to perform. For example:
   • Pre-litigation negotiations and settlement discussions.
   • Representation in litigation at specific court levels (e.g., District Court, High Court, Supreme Court). It should specify if it covers counterclaims (hanso).
   • Handling ADR procedures like mediation (chōtei) or arbitration (chūsai).
   • Applying for provisional remedies (hozen shobun) such as preliminary attachments or injunctions.
   • Assisting with enforcement of judgments (kyōsei shikkō).
     For foreign clients, it's particularly important to ensure their assumptions about the breadth of services align with what is stated, as legal system practices can differ significantly.
4. Attorney's Fees (Bengoshi Hōshū):
   This section details the remuneration structure. Japanese law allows for flexibility, but fees must always be "fair and reasonable." Common fee components include:
   • Liberalization and the "Fair and Reasonable" Standard: Japan has moved away from the strict, regulated fee schedules that once existed. While the old JFBA fee standards (kyū-kitei) are sometimes still referred to informally for guidance, particularly for litigation, attorneys now have more discretion in setting fees. However, this discretion is bounded by the ethical obligation that fees be appropriate to the case.
   • Retainer Fee (Chakushukin - 着手金): This is an upfront, typically non-refundable fee paid to the attorney to commence work on the matter. Its amount is usually determined based on the "economic benefit" (keizaiteki rieki) at stake for the client (e.g., the amount claimed or disputed) and the complexity of the case. It is compensation for initiating the legal services, irrespective of the ultimate outcome. The timing of payment is usually upon execution of the retainer agreement.
   • Success Fee (Hōshūkin - 報酬金): This fee is contingent upon achieving a successful outcome, as defined in the agreement. Like the retainer fee, it is often calculated as a percentage of the economic benefit obtained by the client (e.g., amount recovered, or amount successfully defended against). It is crucial to have a clear definition of "success" and how the "economic benefit" will be calculated to avoid future disputes. The payment is due upon the conclusion of the matter.
     • Note for US readers: While a "success fee" might sound like a US-style contingency fee, there are differences. The chakushukin is usually required, and the percentage for the hōshūkin might be applied differently or be lower than typical US contingency fee percentages, especially as the old fee schedules often used a tiered percentage system that decreased as the economic benefit increased. Pure contingency fees (no retainer, fee only upon success) are rare in Japanese litigation practice, though they might be encountered in certain niche areas.
   • Time Charges (Jikansei Hōshū or Time Charge - 時間制報酬): While less common for traditional litigation matters which often rely on the retainer/success fee model, time-based billing is used for corporate advisory work, complex international cases, or when the scope of work is difficult to predict. If time charges apply, the agreement should specify:
     • The hourly rate(s) of the attorney(s) involved (rates may vary based on experience and seniority).
     • The minimum billing unit (e.g., 6-minute or 15-minute increments).
     • Whether an upper limit (jōgen) on total time charges will be set.
     • The frequency of reporting and invoicing for time spent.
       Transparency in time recording and billing is essential if this model is adopted.
   • Fixed Fees for Specific Tasks: For certain well-defined tasks, such as drafting a particular type of contract or handling a routine registration, a fixed fee (tesūryō - 手数料) might be agreed upon.
   • Actual Expenses / Disbursements (Jitsupi - 実費 or Yobi-kin - 預り金): This covers out-of-pocket expenses incurred by the attorney on the client's behalf. Common examples include:
     • Court filing fees (stamp duties).
     • Travel expenses.
     • Photocopying, postage, and communication costs.
     • Fees for expert witnesses or translators.
     • Costs for obtaining official documents.
       Attorneys will usually request an advance deposit (azukarikin or yobi-kin) to cover these anticipated expenses. The JFBA Rules on Handling of Client Funds require attorneys to manage these funds separately from their own firm's operational accounts, typically in a dedicated client trust account (azukarikin kōza). The agreement should specify how these expenses will be accounted for and when any unused portion of the deposit will be refunded or additional funds requested.
5. Payment Terms and Schedule:
   The agreement must clearly state when each component of the fee (retainer, success fee, time charges, expense deposits) is due and the accepted methods of payment.
6. Termination of the Agreement (Kaijo - 解除):
   Both the client and the attorney generally have the right to terminate the retainer agreement before the completion of the services, although the conditions and consequences may differ.
   • Client's Right to Terminate: Clients can typically terminate the agreement at any time, though they may be liable for fees earned up to the point of termination and any non-refundable retainer.
   • Bengoshi's Right to Terminate: Attorneys may also terminate under certain circumstances, such as a breakdown of the relationship of trust and confidence, the client's failure to cooperate or provide necessary information, or non-payment of fees or expenses.
   • Settlement of Fees upon Mid-Term Termination (Chūto Shūryōji no Seisan - 中途終了時の清算): The agreement must stipulate how fees will be calculated and settled if the engagement ends prematurely. This usually involves assessing the work performed by the attorney up to the termination date. The retainer fee (chakushukin) is generally non-refundable, but any success fee would typically not be payable if termination occurs before a successful outcome.
7. Confidentiality:
   Although the duty of confidentiality is an overriding ethical obligation, it is often explicitly restated in the retainer agreement to emphasize its importance.
8. Conflict Resolution:
   Some agreements may include clauses regarding how disputes between the client and attorney (e.g., over fees) will be handled, often referencing mediation or dispute resolution services offered by the local bar association. Article 26 of the Basic Rules of Bengoshi Duties encourages attorneys to endeavor to resolve fee disputes through bar association mediation.
9. Client Identification Clause:
   To ensure compliance with KYC obligations, agreements may include a clause requiring the client to cooperate with the attorney's requests for identification documents and to notify the attorney of any changes to their identification information.
10. Suspension of Services for Non-Payment (Jiken no Chūshi-tō - 事件の中止等):
    It is common for agreements to include a provision allowing the attorney to suspend or cease work if the client fails to pay agreed-upon fees or expense deposits after a reasonable notice period.

Navigating Financial Aspects: Practicalities for Foreign Clients

Understanding and managing the financial aspects of engaging Japanese counsel is crucial.

1. Understanding "Economic Benefit" (Keizaiteki Rieki) as a Fee Basis:
   For many Japanese bengoshi, particularly in litigation, the retainer and success fees are calculated based on the "economic benefit" to the client. This concept can sometimes be complex to quantify, especially in non-monetary disputes or cases with multiple claims. It's essential for foreign clients to have a detailed discussion with their bengoshi at the outset to understand precisely how this "economic benefit" will be defined and valued for fee calculation purposes in their specific case.
2. International Wire Transfers and Tax Implications:
   When making payments from overseas, clients should consider bank charges for international wire transfers. Furthermore, attorney fees in Japan are generally subject to Japanese Consumption Tax (JCT). Clients should clarify with their bengoshi whether quoted fees are inclusive or exclusive of JCT and understand any potential cross-border tax implications.
3. Options for Clients with Financial Constraints:
   While the standard fee structures are common, some flexibility may be possible, particularly if the client faces financial difficulties.
   • Negotiating Payment Structures: In some instances, clients might be able to negotiate installment payments for the retainer fee, although this is generally not preferred by attorneys. Adjusting the balance between the retainer and success fee (e.g., a lower retainer with a slightly higher success fee percentage) might also be an option in specific circumstances.
   • Legal Aid (Hōterasu - 法テラス): The Japan Legal Support Center (Hōterasu) provides legal aid services, including financial assistance for attorney fees, to individuals who meet certain financial eligibility criteria. However, its applicability to corporate entities, especially foreign corporations, is generally limited. It is primarily designed for individuals with limited means. Article 33 of the Basic Rules of Bengoshi Duties obliges attorneys to inform clients about such systems if applicable.
   • Attorney Fee Insurance (Bengoshi Hiyō Hoken - 弁護士費用保険): Attorney fee insurance products exist in Japan, covering legal costs for certain types of disputes. These are more commonly held by individuals (e.g., as part of auto or homeowner's insurance) but some business-oriented policies may also be available. It's worth investigating if any existing insurance policies held by the company or its Japanese subsidiary might offer coverage for legal expenses. The scope and limits of such insurance vary widely.

Post-Engagement: Ongoing Communication and Management

The signing of the retainer agreement marks the formal beginning of the attorney-client relationship. Effective management of this relationship is ongoing.

1. Importance of Regular Updates:
   Article 36 of the Basic Rules of Bengoshi Duties requires attorneys to report to their clients, as necessary, on the progress of their case and any matters that may affect the outcome, and to proceed with the case in consultation with the client. Foreign clients should establish clear expectations with their bengoshi regarding the frequency and format of updates.
2. Reviewing the Scope:
   As a case evolves, the initial scope of services might need adjustment. If new issues arise or the complexity of the matter changes, it may be necessary to revisit and amend the retainer agreement or enter into a new one for additional services.

Conclusion

Engaging legal counsel in Japan is a significant step that requires careful consideration of the retainer agreement. This document, grounded in Japanese law and ethical principles, forms the bedrock of the attorney-client relationship. For foreign businesses, paying close attention to the scope of services, the fee structure (particularly the calculation of chakushukin and hōshūkin based on "economic benefit"), termination clauses, and ensuring transparent communication with their chosen bengoshi are paramount. A well-drafted and thoroughly understood inin keiyaku not only clarifies obligations but also fosters the trust and collaboration necessary to navigate the Japanese legal system effectively. By proactively addressing these key considerations, businesses can lay a strong foundation for a successful partnership with their Japanese legal advisors.