Forming a Contract in Japan: Beyond a Handshake, What Constitutes "Offer and Acceptance"?

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

In the intricate dance of international business, establishing clear and enforceable agreements is paramount. When operating in Japan, understanding the precise legal requirements for contract formation can prevent costly misunderstandings and disputes. While a mutual understanding might seem sufficient, Japanese law, like many civil law jurisdictions, delineates specific elements that transform a mere discussion into a binding contract. This article explores the foundational principles of contract formation in Japan, focusing on the crucial concepts of "offer" and "acceptance," and delves into related complexities such as contracts between distant parties and the impact of supervening events like death or incapacity.

I. The Foundation: Agreement as the Basis of Contract Formation (Gōi ni yoru Keiyaku no Seiritsu)

At its core, a contract under Japanese law is born from an agreement—a meeting of minds—between two or more parties. This principle underscores the importance of mutual assent in creating legally enforceable obligations.

A. Consensual Contracts (Dakusei Keiyaku) as the Norm

The vast majority of contracts in Japan are "consensual contracts" (dakusei keiyaku). This means they are formed and become legally binding solely through the mutual agreement of the parties. Generally, no special formalities, such as a written document signed before witnesses or notarization, are required for the validity of most contracts. A verbal agreement can be just as binding as a written one. However, from a practical and evidentiary standpoint, written contracts are highly advisable to clearly document the terms and prevent future disputes about the contract's existence or content.

This contrasts with two other categories:

  • Formal Contracts (Yōshiki Keiyaku): Certain types of contracts require a specific form to be valid. A prime example is a contract of guarantee, which, under Article 446, Paragraph 2 of the Civil Code, must be in writing (or recorded in an electromagnetic record) to be enforceable.
  • Real Contracts (Yōbutsu Keiyaku): These contracts require not only the parties' agreement but also the delivery of the subject matter of the contract for their formation. A common example is a loan for consumption (shōhi taishaku), such as a money loan; the contract is perfected only when the lender delivers the money to the borrower. Other historical examples include deposits for safe-keeping (kitaku) and loans for use (shiyō taishaku).

B. The Core Mechanism: Offer (Mōshikomi) and Acceptance (Shōdaku)

The standard and most common way a consensual contract is formed is through a clear "offer" made by one party and an unequivocal "acceptance" of that offer by the other party. The alignment of these two declarations of intent signifies the requisite meeting of minds.

1. What is a Legally Effective "Offer"?

An offer, in the legal sense, is more than a casual suggestion or an opening for discussion. To be effective under Japanese law, an offer must:

  • Be a definite proposal to enter into a specific contract.
  • Contain sufficiently clear terms (e.g., subject matter, price, quantity) so that acceptance can result in an enforceable contract.
  • Be made with the intention to be bound (kōsoku o ukeru ishi) by those terms if the offer is accepted by the offeree.

It is crucial to distinguish a legal offer from an "invitation to treat" (or "invitation to make an offer" - mōshikomi no yūin). An invitation to treat is merely an expression of willingness to negotiate or to receive offers. Examples include:

  • Advertisements in newspapers or online (generally seen as invitations to treat).
  • Price tags on goods displayed in a shop (usually considered invitations for customers to offer to buy at that price).
  • Auctioneers' calls for bids.

The critical factor is whether the party making the statement intended to be bound without further negotiation upon a simple "yes" from the other side. For instance, a taxi displaying a "vacant" sign is generally understood to be making an offer for transportation, which a passenger accepts by boarding.

2. What Constitutes a Legally Effective "Acceptance"?

Acceptance is the offeree's unequivocal and unconditional agreement to all the terms of the offer. Key aspects include:

  • Mirror Image Rule: The acceptance must exactly mirror the terms of the offer.
  • Acceptance with Modifications (Civil Code Art. 528): If the offeree purports to accept but introduces new terms or modifies existing ones, this is generally not a valid acceptance. Instead, it is treated as a rejection of the original offer and constitutes a counter-offer. The original offeror then becomes the offeree with respect to this new counter-offer and must accept it for a contract to be formed.
  • Communication of Acceptance: Generally, acceptance must be communicated to the offeror to be effective (see discussion on distant parties below).

II. Alternative Modes of Contract Formation

While offer and acceptance is the standard model, Japanese law recognizes other ways a contract can come into being:

A. Contract Formation by Realization of Intent (Ishi Jitsugen) (Civil Code Art. 526(2))

In some situations, a contract can be formed even without an explicit communication of acceptance from the offeree. If the offeror, either by the terms of the offer or through trade custom, does not require a notice of acceptance, and the offeree performs an act that can objectively be regarded as an expression of intent to accept, the contract is formed when that act occurs.

A classic example is a regular customer sending a facsimile order for 10kg of rice to their local rice shop, and the shop, without sending a confirmation, delivers the 10kg of rice to the customer's doorstep while they are out. The act of delivery, in this context, constitutes the realization of the intent to accept.

B. Crossed Offers (Kōsa Mōshikomi)

A contract can also be formed when two parties dispatch offers to each other, and these offers happen to contain identical terms. For instance, if Party A sends a letter to Party B offering to sell a specific item for ¥100,000, and Party B, without knowledge of A's offer, simultaneously sends a letter to Party A offering to buy the same item for ¥100,000, a contract is concluded. According to the Civil Code, when such crossed offers are made, the contract is deemed to be formed when the later of the two offers reaches the respective party. If the offers have different terms, they would be treated as mere proposals, and no contract would arise from the crossing itself.

III. Timing of Contract Formation: Contracts Between Distant Parties (Kakuchisha-kan no Keiyaku)

When parties are not negotiating face-to-face (e.g., communication via post or, historically, telegraph), specific rules determine when the contract is formed and how offers and acceptances operate. These rules have been significantly impacted by modern electronic communication, as discussed later.

A. Revocability and Binding Force of an Offer

Once an offer is made, the offeror is not always free to withdraw it.

  • Offer with a Fixed Period for Acceptance (Civil Code Art. 521(1)): If an offeror specifies a period during which the offer must be accepted, they cannot revoke the offer within that period. This is often referred to as the "binding force of an offer" (mōshikomi no kōsokuryoku), distinct from the binding force of a concluded contract.
  • Offer without a Fixed Period for Acceptance (Civil Code Art. 524): If no period for acceptance is stated, the offeror cannot revoke the offer for a "reasonable period" that is considered necessary for the offeree to receive the offer, consider it, and dispatch an acceptance. What constitutes a "reasonable period" depends on the circumstances, including the nature of the transaction and the means of communication.

B. When is Acceptance Effective? The "Dispatch Rule" vs. "Arrival Rule"

The effectiveness of an acceptance in contracts between distant parties has traditionally been a nuanced area, with different rules applying based on the nature of the offer.

  • Offer with a Fixed Period for Acceptance: For an offer that stipulates a period for acceptance, the acceptance must arrive at the offeror's end within that designated period to be effective and form a contract. This aligns with the general principle for declarations of intent (Civil Code Art. 97(1), which requires arrival for effectiveness) and the interpretation of Article 521(2) (offer loses effect if notice of acceptance doesn't arrive within the period).
    • Delayed Acceptance (Civil Code Art. 522): If an acceptance is dispatched at such a time that it would ordinarily have arrived within the period, but it is delayed due to unforeseen circumstances, a contract is still formed unless the offeror promptly dispatches a notice of the delay to the offeree. However, if the offeror has already dispatched a notice of anticipated delay before the acceptance arrives, then no further notice of delay is needed from the offeror, and the late acceptance will not form a contract.
    • The offeror can also choose to treat a late acceptance as a new offer from the offeree, which the original offeror can then accept (Civil Code Art. 523).
  • Offer without a Fixed Period for Acceptance: The "Dispatch Rule" (Civil Code Art. 526(1)): In a significant exception to the general arrival principle, if an offer is made to a distant party without specifying a period for acceptance, the contract is deemed to be formed when the notice of acceptance is dispatched by the offeree. This is often referred to as the "dispatch rule" and is somewhat analogous to the "mailbox rule" in common law systems.
    • Once the acceptance is dispatched, the offeree generally cannot revoke it.
    • The offer itself may lapse if a "reasonable period for receiving notice of acceptance" passes before the offeree dispatches their acceptance. The determination of this "reasonable period" is case-specific. Some scholars draw an analogy from Article 508 of the Commercial Code (which states an offer between merchants without a set acceptance period lapses if not accepted promptly) to suggest that a civil offer might also lose effect after a further "reasonable period" beyond the initial one for receiving acceptance, even without explicit revocation.
    • Revocation of Offer vs. Dispatch of Acceptance (Civil Code Art. 527): If an offeror dispatches a notice of revocation of the offer (after the initial "no-revocation period" under Art. 524 has passed), but the offeree dispatches their acceptance before the notice of revocation arrives, a contract is generally formed at the time the acceptance was dispatched. However, Article 527 provides a complex exception: if the offeree could have known that a notice of revocation had been dispatched by the offeror at a time when it would normally have arrived before their own dispatch of acceptance, then the offeree must promptly dispatch a notice of the delay of the revocation to the offeror. Failure to do so results in the contract being deemed not to have been formed.

C. Special Rules for Electronic Contracts

Recognizing the speed and nature of modern electronic communications, Japan enacted the "Act on Special Rules of Civil Code Concerning Electronic Consumer Contracts and Electronic Acceptance Notices" (often shortened to the Electronic Contract Act).

  • This Act significantly alters the traditional "dispatch rule" for acceptances in many electronic contexts.
  • Under Article 4 of this Act, for electronic acceptances (e.g., via email or website interactions), the arrival rule generally applies. This means the contract is formed when the electronic notice of acceptance reaches the offeror's server or designated system, making it retrievable. This applies even to offers made without a fixed period for acceptance, thus making Articles 526(1) and 527 of the Civil Code inapplicable to such electronic acceptances. This shift aligns Japanese law more closely with international trends in e-commerce, such as the UNCITRAL Model Law on Electronic Commerce.

D. Contracts Between Parties in Conversation (Taiwasha-kan no Keiyaku)

When parties are in direct conversation (e.g., face-to-face or by telephone), the rules are more straightforward. While the Civil Code itself doesn't have a specific provision, Article 507 of the Commercial Code states that if an offer is made between persons in conversation, it loses its effect unless the offeree accepts it immediately. This principle is widely considered applicable by analogy to non-commercial contracts under the Civil Code. Thus, an offer made in conversation generally requires immediate acceptance to form a contract, unless the offeror has indicated they will keep the offer open for a longer period.

IV. Supervening Events: Death or Incapacity of a Party (Tōjisha no Shibō mata wa Kōi Nōryoku no Sōshitsu)

What happens if a party involved in contract formation dies or loses legal capacity (e.g., due to being placed under guardianship) after an offer has been made but before a contract is fully concluded?

The general principle for declarations of intent (Civil Code Art. 97(2)) is that if the declarant dispatches a notice and subsequently dies or loses capacity before it arrives at the recipient, the declaration of intent does not thereby lose its effect.

However, Article 525 of the Civil Code provides an exception for offers:
An offer loses its effect if the offeror dies or becomes subject to an order commencing guardianship that restricts their legal capacity (seigen kōi nōryokusha) after dispatching the offer but before the acceptance has taken effect (or, under some interpretations, before the offer itself reaches the offeree), IF:

  1. The offeror had expressed an intention that the offer would lapse in such an event; OR
  2. The offeree learned of the offeror's death or the commencement of such guardianship proceedings before their acceptance became effective.

The prevailing scholarly view, as noted in legal commentaries, tends to interpret the second condition narrowly: the offer loses effect under this limb only if the offeror dies or loses capacity after dispatching the offer but before the offer arrives at the offeree, AND the offeree learns of this fact also after dispatch but before the offer arrives. This interpretation aims to balance the offeror's changed circumstances with the offeree's potential reliance once the offer is known to them.

Regardless of the mechanics of offer and acceptance, a fundamental prerequisite for contract formation is that the parties must have intended to create legally binding relations. Social arrangements, casual promises, or actions not intended to have legal consequences will not give rise to an enforceable contract, even if they resemble the outward forms of offer and acceptance. For example, waving to a friend across the street, if misinterpreted by a taxi driver as an attempt to hail the cab, would not form a contract for carriage because the requisite contractual intent is absent on the part of the person waving.

VI. Conclusion

The formation of a contract under Japanese law is a structured process primarily centered on a clear offer and a corresponding acceptance, signifying a genuine meeting of minds. While most agreements are consensual and do not require strict formalities, the nuances surrounding the timing of acceptance, especially in dealings between distant parties, the specific rules for electronic communications, and the impact of supervening events like death or incapacity, highlight the precision of the Japanese Civil Code. For businesses, ensuring clarity in offers, unequivocal acceptance, and an understanding of these formation principles are vital steps in establishing solid and enforceable contractual relationships in Japan.