Extinguishing Old Debts in Japan: How Do "Novation" (Kokai), "Release" (Menjo), and "Merger" (Kondo) Work?

Beyond common methods like full performance, set-off, or the running of the statute of limitations, Japanese civil law recognizes several other distinct ways in which pre-existing obligations can be extinguished. Among these are "Novation" (Kokai 更改), "Release" (Menjo 免除), and "Merger" (Kondo 混同). Understanding these mechanisms can be crucial when restructuring debts, settling disputes, or analyzing changes in corporate or personal circumstances that affect existing liabilities. This article provides an overview of how these three methods operate under the Japanese Civil Code.

1. Novation (Kokai 更改): Replacing an Old Obligation with a New One

Novation, governed by Article 513 et seq. of the Japanese Civil Code, is a contractual mechanism by which parties agree to extinguish an existing valid obligation and simultaneously create a new one in its place. The new obligation must differ from the old one in an "essential element."

Core Concept and Requirements:
The essence of novation is the substitution of a new debt for an old one, with the old debt being discharged. For a valid novation to occur, the following conditions must generally be met:

1. Existence of a Valid Pre-existing Obligation: There must be an original, legally enforceable obligation to be novated. If the old obligation was void or already extinguished, novation cannot occur.
2. Creation of a Valid New Obligation: The parties must agree to create a new, distinct obligation that is itself valid and enforceable.
3. Change in an "Essential Element" of the Obligation: The new obligation must differ from the old one in a fundamental aspect. The Civil Code recognizes changes in:
   • The Debtor (Art. 514): This involves the original debtor, the creditor, and a new debtor agreeing that the new debtor will assume the obligation, and the original debtor will be discharged. This effectively operates as a "discharging assumption of debt" (menseki-teki saimu hikiuke) through novation.
   • The Creditor (Art. 515): This requires a tripartite agreement among the original debtor, the original creditor, and a new creditor, whereby the new creditor replaces the original creditor with respect to the claim against the debtor.
   • The Object of Performance (Art. 517): The core subject matter or "what" of the obligation is changed. For example, an obligation to repay a monetary loan might be novated into an obligation to deliver specific goods or provide a particular service. A mere modification of terms, such as changing the interest rate, extending the due date, or adding a penalty clause, does not usually constitute a novation unless there is a clear intent by the parties to extinguish the old obligation entirely and substitute it with a new one.
4. Intent to Novate (Kokai no Ishi 更改の意思): This is a crucial subjective element. The parties must have a clear intention to extinguish the old obligation and create a new one in its stead, rather than merely amending or supplementing the existing obligation. This intent can be expressed explicitly or implied from the circumstances, but it must be discernible. If the intent is merely to modify terms while keeping the original obligation alive, it's a contract modification, not a novation.

Effects of Novation:

• Extinguishment of the Old Obligation: The original debt, along with its specific terms and history, ceases to exist.
• Creation of a New Obligation: The relationship between the parties (or the new parties involved) is governed entirely by the terms of the new obligation.
• Fate of Accessory Rights (Security Interests, Guarantees): This is a significant consequence of novation.
  • Security Interests (Art. 513-2): Pledges, mortgages, or other security interests that were attached to the old obligation are generally extinguished and do not automatically transfer to the new obligation. For such security to continue for the new obligation, the parties (including any third-party security provider) must expressly agree to transfer it to the new obligation at the time of novation.
  • Guarantees (Art. 518): Similarly, any guarantees that secured the old obligation are extinguished upon novation. A new guarantee would need to be established for the new obligation.

The stringent effect on accessory rights is a key reason why parties must carefully consider whether they intend a true novation or merely a modification of an existing agreement.

2. Release (Menjo 免除): The Creditor Forgives the Debt (Art. 519)

A release, governed by Article 519 of the Civil Code, is an act by which a creditor extinguishes an obligation owed to them by manifesting an intention to forgive or waive the debt.

Nature and Requirements:

• Declaration of Intent by Creditor: The core of a release is the creditor's declaration of intent, made to the debtor, to discharge the obligation.
• Typically a Unilateral Act: A release is usually a unilateral act by the creditor. The debtor's consent or acceptance is generally not required for the release to be effective in extinguishing the debt.
• No Consideration Needed: Unlike some common law concepts of waiver or discharge, a release under Japanese law does not require any consideration or counter-performance from the debtor to be valid.
• Release by Agreement: While often unilateral, a release can also be effected through a mutual agreement between the creditor and debtor (a "contract of release" or menjo keiyaku 免除契約).
• Form: No specific form is generally required for a release, though for evidentiary purposes, a written release is advisable.

Effects of Release:

• Extinguishment of the Obligation: The obligation is extinguished, either in whole or in part, according to the terms and scope of the creditor's declared intention.
• Impact on Co-obligors and Guarantors:
  • If a creditor releases one of several joint and several debtors (rentai saimusha), this generally does not automatically release the other co-debtors from their obligations to the creditor. However, under the current Civil Code rules (post-2017 reforms), the release of one joint and several debtor benefits the others to the extent of the released debtor's internal share of the obligation (Art. 445).
  • A release of the principal debtor by the creditor typically also extinguishes the obligations of any guarantors, due to the accessory nature (fujusei 付従性) of guarantee obligations.
• Implied Release: In some situations, a release might be inferred from the creditor's conduct or the surrounding circumstances (e.g., prolonged inaction coupled with other indications of an intent to abandon the claim). However, courts are generally cautious in finding an implied release and usually require clear evidence of the creditor's intent to forgive the debt.

3. Merger (Kondo 混同): When Debtor and Creditor Become One (Art. 520)

Merger, governed by Article 520 of the Civil Code, is a mechanism by which an obligation is extinguished automatically by operation of law when the claim (saiken – the creditor's right) and the corresponding obligation (saimu – the debtor's duty) become vested in the same person in the same legal capacity.

Rationale and How Merger Occurs:
The underlying rationale is straightforward: a person cannot logically owe a debt to themselves or have a claim enforceable against themselves. Such a situation lacks practical meaning. Merger typically occurs in scenarios such as:

• Inheritance:
  • A debtor inherits the entire estate of their creditor, which includes the claim the creditor held against the debtor.
  • A creditor inherits the entire estate of their debtor, which includes the obligation the debtor owed to the creditor.
• Corporate Mergers/Acquisitions:
  • A creditor company merges with its debtor company (or vice versa), resulting in a single surviving entity.
  • A parent company that is a creditor to its subsidiary absorbs the subsidiary.
• Assignment of Claim to the Debtor: If a debtor, through assignment or other means, acquires the very claim that they owe.

Effects of Merger:

• Automatic Extinguishment of the Obligation: The obligation ceases to exist by operation of law from the moment the claim and obligation unite in the same person. No specific declaration or agreement is needed.
• Extinguishment of Accessory Rights: Generally, accessory rights tied to the extinguished obligation, such as guarantees or security interests provided by third parties for that obligation, are also extinguished.

Exception to Extinguishment (Art. 520, proviso):
There is an important exception to the rule of extinguishment by merger. If the claim itself is subject to a right of a third party, the obligation is not extinguished by the merger.

• Example: If Creditor A has pledged their claim against Debtor B to a third party (Pledgee C) as security for a loan from C to A. If Debtor B subsequently acquires Creditor A's claim (e.g., through inheritance or assignment), the claim (and B's corresponding obligation) would ordinarily merge and extinguish. However, because Pledgee C has a pledge over that claim, the claim (and B's obligation) is deemed to continue to exist notionally for the benefit of Pledgee C, so that C's security interest is not lost.

This exception ensures that the legitimate interests of third parties who have rights over the claim are not defeated by the fortuitous event of merger.

Conclusion

Novation, release, and merger represent distinct legal pathways under Japanese law for the extinguishment of pre-existing obligations, each operating under specific conditions and producing different consequences, particularly concerning the fate of associated security interests and guarantees. Novation involves replacing an old debt with a new one by changing a fundamental element, often with the loss of prior security. A release is typically a creditor's unilateral act of forgiving a debt. Merger occurs by operation of law when the roles of debtor and creditor unite in the same person. Understanding these mechanisms is important for parties considering debt restructuring, settlement negotiations, or analyzing the impact of events like inheritance or corporate reorganizations on existing legal relationships.