"Good Faith and Fair Dealing" (Shingi Seijitsu no Gensoku / Shingisoku) in Japanese Contract Law: How Does This Principle Impact Contractual Relationships?

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read

The principle of "good faith and fair dealing" is a cornerstone of many modern legal systems, reflecting the expectation that parties to a legal relationship will act honestly, fairly, and with due regard for the legitimate interests of others. In Japanese law, this principle is enshrined in Article 1, paragraph 2 of the Civil Code (Minpō - 民法), which states: "The exercise of rights and performance of duties must be done in good faith." This doctrine, known as Shingi Seijitsu no Gensoku (信義誠実の原則) or more commonly shortened to Shingisoku (信義則), is a fundamental and pervasive principle that significantly impacts all stages of contractual relationships in Japan, from negotiation through performance and even after termination.

While not a standalone cause of action in itself, Shingisoku serves as a vital interpretive tool for courts, a source of implied duties, a limitation on the exercise of contractual rights, and an underlying justification for several specific legal doctrines. For businesses engaging with Japanese contract law, understanding the potential influence of Shingisoku is crucial.

The Statutory Basis: Article 1, Paragraph 2 of the Civil Code

The concise statement in Article 1(2) – "The exercise of rights and performance of duties must be done in good faith" – lays the foundation. This provision is not limited to contract law but applies broadly across all areas of private law in Japan. Its origins can be traced to influences from continental European legal systems, particularly the German concept of Treu und Glauben (good faith). The term "good faith" (shingi - 信義) in this context implies honesty, fairness, and a commitment to observe common standards of decency and commercial reasonableness.

Key Functions of Shingisoku in Japanese Contract Law

The principle of Shingisoku operates in multiple ways to shape contractual relationships:

1. Guiding Contract Interpretation (契約解釈の指針 - Keiyaku Kaishaku no Shishin)

When contractual terms are ambiguous or their literal application would lead to an unreasonable or unjust outcome, Shingisoku provides a guiding principle for courts.

  • Beyond Literalism: Courts may use Shingisoku to interpret terms in a manner that aligns with the parties' reasonably inferred common intentions, the overall purpose of the contract, and what would be considered fair and equitable in the specific circumstances. This allows for a degree of flexibility beyond a strictly literal interpretation if such an interpretation would defeat the contract's spirit.
  • Supplementary Interpretation (Hojūteki Kaishaku - 補充的解釈): Shingisoku plays a role in "supplementary interpretation," where courts infer terms that the parties likely would have agreed upon had they specifically addressed an unforeseen issue or gap in their contract. The court asks what reasonable parties, acting in good faith, would have stipulated in such a situation. For example, if a long-term contract is silent on a minor procedural matter necessary for its continued smooth operation, a court might imply a reasonable procedure based on good faith.

2. Implying Duties Not Explicitly Stated (黙示の義務の賦課 - Mokuji no Gimu no Fuka)

Shingisoku is a significant source of implied duties that may not be expressly written into the contract but are deemed necessary for its fair and effective execution, or for the protection of the legitimate interests of the parties. The nature and extent of these implied duties are highly context-dependent, arising from the specific type of contractual relationship, the parties' reliance, and prevailing commercial norms. Common examples include:

  • Duty of Cooperation (Kyōryoku Gimu - 協力義務): Parties may be found to have an implied obligation to cooperate with each other to facilitate the performance of the contract and the achievement of its objectives, especially in complex or long-term agreements.
  • Duty of Disclosure, Information Provision, or Explanation (Jōhō Teikyō Gimu - 情報提供義務 / Setsumei Gimu - 説明義務): A duty to disclose material information or provide adequate explanations may be imposed, particularly where there is a significant information asymmetry between the parties, or where one party reasonably relies on the other's expertise or access to information. This is prominent in areas like financial product sales, professional services, and contracts involving complex technical matters. Failure to provide necessary information that good faith would require can lead to liability.
  • Protective Duties (Hogo Gimu - 保護義務): In the course of performing a contract, a party may have an implied duty to take reasonable care to avoid causing harm to the other party's person, property, or other legally protected interests that are closely connected to the contractual relationship. For instance, a contractor performing work on a client's premises has a duty to ensure their operations do not negligently damage the client's property.
  • Duty of Loyalty (in specific fiduciary-like relationships): While not a general implied term in all contracts, relationships that involve a high degree of trust and confidence (e.g., agency, partnership, certain types of directorships) inherently carry strong duties of loyalty derived from or reinforced by Shingisoku.

3. Limiting the Exercise of Contractual Rights (権利行使の制限 - Kenri Kōshi no Seigen)

Shingisoku can act as a constraint on how a party exercises its contractual rights. Even if a contract grants a party a specific right, exercising that right in a manner that is abusive, oppressive, unfairly detrimental to the other party, or contrary to the overall spirit and purpose of the agreement may be deemed a violation of good faith.

  • This function is closely related to, and often overlaps with, the doctrine of "abuse of rights" (kenri no ran'yō kinshi - 権利の濫用禁止), which is stipulated in Article 1, paragraph 3 of the Civil Code ("No abuse of rights is permitted."). Both principles serve to prevent the unjust or inequitable assertion of technically valid rights.
  • Examples might include:
    • Insisting on strict adherence to a minor contractual formality when it would cause disproportionate hardship to the other party and serves no legitimate interest of the right-holder.
    • Exercising a right of termination for a trivial breach in a way that exploits the other party's vulnerability or aims to achieve an ulterior, unfair advantage.
    • A landmark Supreme Court case (judgment of January 18, 1983) involved a situation where a lessor refused to consent to a lessee subletting part of the premises. While the lease required lessor's consent, the court found that if the refusal was without justifiable reason and solely to extract an unreasonable payment, it could constitute an abuse of right contrary to good faith.

4. Providing a Foundation for Specific Legal Doctrines

Several important contractual doctrines in Japanese law are either explicitly based on or heavily influenced by the principle of Shingisoku:

  • Doctrine of Change of Circumstances (Jijō Henkō no Hōri - 事情変更の法理): This non-codified doctrine, which allows for the modification or termination of a contract due to unforeseen, fundamental changes in the circumstances forming its basis, is deeply rooted in Shingisoku. The core idea is that enforcing the original terms under such radically altered and unforeseeable conditions would be contrary to good faith and equity.
  • Pre-Contractual Liability (Keiyaku Teiketsu-jō no Kashitsu - 契約締結上の過失): The duties of care that arise during the negotiation phase of a contract—such as the duty not to unjustifiably break off advanced negotiations where significant reliance has been induced, or the duty to disclose material information—are frequently justified by reference to the good faith obligations that parties owe each other once they enter into a serious negotiation relationship.
  • Control of Unfair Standard Form Contract Terms (定型約款 - Teikei Yakkan): The revised Civil Code (Article 548-2, paragraph 2) provides that a standardized term is deemed not to have been agreed upon if it unilaterally prejudices the interests of the other party "contrary to the fundamental principle provided for in paragraph (2) of Article 1 [i.e., Shingisoku]." This directly links the control of unfair terms in standard contracts to the good faith principle.

Shingisoku Across the Contract Lifecycle

The influence of good faith is not confined to a single stage of the contractual relationship:

  • Pre-Contractual Stage (Negotiation): As noted, Shingisoku underpins duties of care and fair dealing even before a contract is formally concluded.
  • Performance Stage: It guides how existing contractual obligations should be performed (e.g., with honesty, cooperation, and due care) and can be a source of implied ancillary duties.
  • Post-Contractual Stage (Keiyaku no Yogokō - 契約の余後効 - "Lingering Effects of Contract"): Even after the main performance obligations under a contract have been discharged or the contract has been formally terminated, Shingisoku can give rise to certain "lingering duties." These are obligations that extend beyond the formal life of the contract to protect residual interests or ensure a fair winding up of the relationship. Examples include:
    • A duty of confidentiality regarding sensitive information acquired during the contractual relationship.
    • In certain situations (e.g., after an employment or partnership agreement), a limited and reasonable duty not to engage in unfairly competitive activities for a defined period.
    • A duty to provide necessary post-termination information or assistance if reasonably required to allow the other party to manage the consequences of the contract's end.

Challenges and Judicial Application

While fundamental, Shingisoku is, by its nature, a broad and somewhat abstract principle. This has led to some criticisms:

  • Vagueness and Potential for Unpredictability: Its application depends heavily on the specific facts of each case, which can sometimes make it difficult to predict outcomes with certainty. Critics occasionally argue that its breadth can grant excessive discretion to judges.
  • Risk of Undermining Contractual Certainty: There's a theoretical tension between upholding the clearly agreed terms of a contract (sanctity of contract) and using a general principle like good faith to modify or override those terms.

In practice, Japanese courts tend to apply Shingisoku with a degree of caution and deference to the express terms agreed by the parties. It is most often invoked as:

  • An interpretive aid to resolve ambiguity in line with fairness.
  • A basis for implying terms where necessary to give business efficacy to the agreement or prevent manifest injustice.
  • A corrective mechanism to prevent clear abuses of rights or patently unfair outcomes that would shock the conscience.
    Courts typically engage in a comprehensive assessment of all circumstances, including the nature of the contract, the relationship between the parties, their reasonable expectations, and prevailing commercial practices and ethical standards.

Relevance for International Businesses

For international companies doing business in Japan or under contracts governed by Japanese law, an awareness of Shingisoku is important for several reasons:

  • Contract Interpretation and Implied Terms: It can influence how a Japanese court will interpret contractual provisions and may lead to the implication of duties not explicitly stated in the written agreement.
  • Negotiation and Performance Conduct: It underscores the importance of conducting all dealings—from negotiation through performance and termination—with honesty, transparency, and a sense of fairness. Practices that might be considered aggressive but acceptable in some jurisdictions could be viewed less favorably if they are seen to violate fundamental expectations of good faith under Japanese norms.
  • Dispute Resolution: In a dispute, arguments based on fairness and the reasonable expectations of the parties, grounded in Shingisoku, can be persuasive before a Japanese court or arbitral tribunal.
  • Beyond Explicit Terms: While clear and comprehensive contractual drafting is always the first line of defense and highly recommended, Shingisoku serves as a background principle that can fill gaps, moderate the strict application of terms in exceptional cases, and ensure that contractual relationships operate in a fundamentally fair manner.

Conclusion

The principle of good faith and fair dealing, or Shingisoku, is a deeply embedded and influential doctrine within Japanese contract law. Codified in Article 1(2) of the Civil Code, it functions as more than just an ethical guideline; it is a dynamic legal principle that courts use to interpret contracts, imply obligations, limit the exercise of rights, and underpin specific remedial doctrines. While its application is context-dependent and generally approached with judicial caution to avoid unduly unsettling clear contractual arrangements, Shingisoku reflects the Japanese legal system's commitment to ensuring that contractual relationships are conducted not only in accordance with their letter but also with their spirit of fairness, honesty, and mutual respect. For international businesses, appreciating the role of Shingisoku provides valuable insight into the underlying norms that shape contractual enforcement and dispute resolution in Japan.