How are Contracts Formed in Japan? Understanding Offer, Acceptance, and the "Meeting of Minds."

The formation of a legally binding contract is a critical process in any commercial endeavor. For businesses operating in or with Japan, understanding the nuances of Japanese contract law concerning formation is paramount to ensuring enforceability and mitigating risks. Japanese contract law, primarily governed by the Civil Code (Minpō), lays down specific principles for how parties create binding agreements. This article delves into these principles, focusing on the core elements of offer, acceptance, and the essential "meeting of minds," while also touching upon recent clarifications brought by the revised Civil Code, effective April 1, 2020.

The Foundation: Agreement (Gōi) and the Principle of Consensualism (Dakusei Shugi)

At its core, Japanese contract law adheres to the "principle of consensualism" (dakusei shugi). This means that, as a general rule, a contract comes into existence through the mere agreement (合意 - gōi) of the contracting parties. Article 522, paragraph 1 of the Japanese Civil Code stipulates that a contract is formed when an offer is accepted.

Further reinforcing this, Article 522, paragraph 2 establishes the "freedom of form" (hōshiki no jiyū), stating that "the formation of a contract shall not require compliance with any specific formality, except as otherwise provided by law." This implies that oral agreements can be just as binding as written ones, provided the essential elements of formation are present. The crucial element is the "meeting of minds" or, as it's often termed in Japanese legal discourse, the "concurrence of declarations of intent" (意思の合致 - ishi no gatchi). Both parties must intend to create a legally binding relationship based on mutually understood terms. The subjective intent of the parties to be legally bound by their agreement (hōteki kōsokuryoku o ukeru ishi) is a prerequisite for a valid contract.

The Building Blocks: Offer (Mōshikomi) and Acceptance (Shōdaku)

The traditional framework for achieving this meeting of minds involves an offer made by one party and an acceptance by the other.

Offer (申込み - Mōshikomi)

An offer, under Japanese law, is more than just a casual proposal. It is a clear declaration of intent by the offeror to enter into a contract on specific terms if the offeree accepts. The Civil Code implies that an offer must "indicate the contents of the contract and propose its formation." This means the offer must be sufficiently definite to allow the offeree to understand the proposed bargain and to form a contract by simply assenting.

Distinguishing Offers from Invitations to Treat (申込みの誘引 - Mōshikomi no Yūin):
It is important to distinguish a true offer from an "invitation to treat" (mōshikomi no yūin). An invitation to treat is merely an expression of willingness to negotiate or receive offers, and it does not demonstrate an immediate intent to be bound upon another party's assent. Common examples include:

• Advertisements in newspapers or online.
• Display of goods with price tags in a shop.
• Circulation of catalogues or price lists.

Whether a particular communication constitutes an offer or an invitation to treat depends on the objective interpretation of the communication, focusing on whether a reasonable person in the position of the recipient would understand it as evincing an intent to be bound. For instance, while a general advertisement is usually an invitation to treat, an advertisement offering a specific reward for a specific act (a "reward advertisement" – 懸賞広告 kenshō kōkoku, governed by Arts. 529 et seq.) is typically considered an offer. Similarly, while displaying goods is often an invitation, automated vending machines are generally seen as making standing offers. The PDF previously examined mentioned that displaying goods with a price in a retail store by a business operator, or listing products with prices in catalogues or on websites, could be presumed to be an offer, reflecting a modern trend to protect reasonable consumer expectations, unless circumstances indicate otherwise.

Effectiveness and Revocability of an Offer:
Once an offer reaches the offeree (Art. 97, Para. 1 – arrival principle for declarations of intent), it becomes effective. The question of its revocability then arises:

• Offer with a Fixed Period for Acceptance (承諾期間の定めのある申込み - shōdaku kikan no sadame no aru mōshikomi): If an offer specifies a period for acceptance, it cannot be revoked during that period (Article 523, paragraph 1). However, the offeror can reserve the right of revocation. If acceptance does not arrive within this period, the offer lapses (Article 523, paragraph 2).
• Offer without a Fixed Period for Acceptance (承諾期間の定めのない申込み - shōdaku kikan no sadame no nai mōshikomi): If no period for acceptance is specified, the offeror cannot revoke the offer for a "reasonable period" sufficient for the offeree to normally receive, consider, and respond to the offer (Article 525, paragraph 1). What constitutes a "reasonable period" depends on the circumstances, including the nature of the transaction and the means of communication.
  • For offers made between persons inter absentes (at a distance), this "reasonable period" is calculated.
  • However, for offers made inter praesentes (face-to-face or via instantaneous communication like telephone), if the offeror does not receive an acceptance immediately (or during the continuation of the dialogue), the offer generally loses its effect unless the offeror has indicated otherwise (Article 525, paragraph 3, reflecting a special rule for such interactions).

Acceptance (承諾 - Shōdaku)

Acceptance is an unequivocal declaration of intent by the offeree to assent to all the terms of the offer. It signifies the offeree's willingness to be bound by the contract proposed by the offeror.

The Mirror Image Rule and Qualified Acceptance:
Generally, Japanese law adheres to a version of the "mirror image rule": the acceptance must correspond to the terms of the offer without material modification. If the offeree purports to accept but adds new terms or modifies existing ones, this is not a valid acceptance. Instead, such a "qualified acceptance" (変更を加えた承諾 - henkō o kuwaeta shōdaku) is treated as a rejection of the original offer and constitutes a new counter-offer by the original offeree (Article 528). The original offeror must then accept this counter-offer for a contract to be formed.

It's worth noting that some international conventions and legal systems (e.g., UCC §2-207 in the US, CISG Art. 19(2)) have more flexible rules, sometimes allowing an acceptance with non-material alterations to form a contract. However, Japanese domestic law, as per Article 528, takes a stricter approach, emphasizing the need for a clear match between offer and acceptance for the gōi to be established.

The Crucial Moment: Timing of Contract Formation (契約の成立時期 - Keiyaku no Seiritsu Jiki)

The precise moment a contract is formed can have significant legal consequences (e.g., for risk allocation, applicability of laws). A major change introduced by the revised Japanese Civil Code concerns the principle governing when an acceptance becomes effective to form a contract.

Shift from Dispatch Principle to Arrival Principle (到達主義 - Tōtatsu Shugi):
Under the old Civil Code (former Art. 526, Para. 1), for contracts made inter absentes, the "dispatch principle" (hasshin shugi) applied to acceptances: a contract was formed when the notice of acceptance was dispatched by the offeree.
The revised Civil Code abolished this special rule. Now, the general principle for declarations of intent, the "arrival principle" (tōtatsu shugi) as stipulated in Article 97, paragraph 1, applies to acceptances as well. This means a contract is formed when the notice of acceptance reaches the offeror.

This shift has important practical implications:

• Risk of Non-Arrival/Delay: The risk of the acceptance being lost or delayed in transmission now falls on the offeree. If the acceptance does not reach the offeror (or does not reach within the stipulated or reasonable time), no contract is formed.
• Revocation of Acceptance: An offeree can revoke their acceptance if the revocation reaches the offeror before or at the same time as the acceptance itself.
• Revocation of Offer: If an offeror revokes an offer, and the notice of revocation reaches the offeree before the offeree's acceptance reaches the offeror, the offer is effectively revoked, and no contract can be formed by a subsequent acceptance.

This alignment with the arrival principle is consistent with many international legal instruments, such as the CISG (Article 18(2)), and is generally seen as promoting greater certainty for the offeror, who will only be bound once they have actually received the acceptance. The old dispatch rule was often criticized in the modern era of rapid communication as being less predictable.

Special Considerations for Offers and their Duration

Offers with a Fixed Period for Acceptance:
As mentioned, an offer stating a period for acceptance is irrevocable during that period (Art. 523, Para. 1). If an acceptance arrives after this period has expired, the offer has already lapsed. However, the offeror can treat a late acceptance as a new offer (Article 524), which the original offeror can then choose to accept, thereby forming a contract. The old Civil Code (former Art. 522) had complex rules regarding delayed acceptances that were dispatched in such a way that they would normally have arrived in time, obligating the offeror to give notice of delay; these have been removed with the adoption of the arrival principle.

Offers without a Fixed Period for Acceptance:
When no acceptance period is specified for an offer made inter absentes, the offer remains irrevocable for a "reasonable period" (Art. 525, Para. 1). After this reasonable period, the offeror can revoke the offer. However, even if not revoked, the offer does not remain open indefinitely. It will eventually lose its effect (shikkō) if not accepted within a further reasonable time, during which the offeror could reasonably assume the offeree is no longer considering it. The PDF previously examined noted that while the Civil Code does not explicitly state when such an offer loses its validity if not revoked, commercial law (Commercial Code Art. 508, Para. 1, for merchants) provides a rule for offers between merchants at a distance, and general contract law principles would lead to a similar conclusion.

For offers made inter praesentes (e.g., during a phone call), if an acceptance is not given immediately or during the continuous dialogue, the offer generally lapses, unless the offeror has indicated an intention for it to remain open (Art. 525, Para. 3).

Circumstances Affecting Offers and Acceptances

Certain events concerning the offeror or offeree can impact the validity of an offer or acceptance.
Article 526 of the Civil Code addresses the situation where an offeror, after dispatching an offer, dies, loses mental capacity to a constant degree, or becomes subject to a limitation of legal capacity. In such cases, if the offeror had expressed an intention that the offer would not be effective should such an event occur, or if the offeree learns of such fact before dispatching their acceptance, the offer does not become effective. This rule is an exception to the general principle in Article 97, paragraph 3 (that a declaration of intent is not precluded from taking effect if the declarant dies or has their legal capacity limited after dispatching the notice).

The Civil Code does not have a symmetrical provision for the death or incapacity of the offeree after they have dispatched an acceptance but before it reaches the offeror. The PDF previously reviewed indicates that there was debate during the drafting of the new law on whether to create such a rule, but ultimately, no specific provision was made. Thus, the general rule of Article 97, paragraph 1 (arrival principle for effectiveness of declarations of intent) and paragraph 3 would likely apply, meaning an acceptance dispatched by an offeree who subsequently dies or becomes incapacitated before the acceptance reaches the offeror would still form a contract upon arrival, unless specific circumstances dictate otherwise.

Beyond Offer and Acceptance: Other Modes of Formation

While the offer-and-acceptance model is standard, Japanese law recognizes that contracts can be formed in other ways:

• Formation by Conduct (意思実現による契約の成立 - Ishi Jitsugen ni Yoru Keiyaku no Seiritsu): Article 527 provides that when, by a declaration of intent of the offeror or by common custom, no notice of acceptance is necessary, a contract is formed at the time when any event occurs that can be recognized as a declaration of intent to accept. For example, if a seller sends goods in response to an order and the buyer starts using them, a contract may be formed by the buyer's conduct without formal acceptance.
• Crossed Offers (交叉申込み - Kōsa Mōshikomi): This occurs when two parties coincidentally dispatch offers to each other with identical terms. The PDF previously examined suggests that traditional scholarship was divided, with some views holding that a contract is formed when both offers have arrived, while other, more critical views (which the PDF author seemed to favor) doubted automatic contract formation simply because of the crossing of offers, emphasizing the lack of a true responsive acceptance. The Civil Code does not have a specific provision for this.
• Contracts Formed Through Iterative Negotiation (練り上げ型の契約 - Neriage-gata no Keiyaku): Many significant commercial contracts, such as M&A agreements or complex service contracts, are not formed by a single offer and a single acceptance. Instead, they result from a process of negotiation and drafting, where terms are gradually refined (neriage). In such cases, the key is to identify the point at which the parties have reached a "final agreement" (shūkyokuteki gōi) on all essential terms with the intention to be legally bound.
  • During such negotiations, parties may exchange various preliminary documents like "Certificates of Intent to Buy/Sell" (買付証明書 - kaitsuke shōmeisho; 売渡証明書 - uriwatashi shōmeisho), Memoranda of Understanding (MOU - 覚書 oboegaki), or Letters of Intent (LOI). Under Japanese law, these are generally considered non-binding expressions of current intent or frameworks for further negotiation, unless they clearly state that certain provisions (e.g., confidentiality, exclusivity in negotiations) are intended to be legally binding. The critical question is always the parties' manifest intention to be bound.

Exceptions to Consensualism: Formal and Real Contracts

While consensualism is the norm, Japanese law recognizes exceptions:

• Formal Contracts (要式契約 - Yōshiki Keiyaku): These are contracts that require a specific form, typically in writing, for their validity. As mentioned, guarantee contracts (Art. 446, Paras. 2 & 3) are a prime example. Consensual loans for consumption, if not made via delivery of money (i.e., not a "real contract"), also now require written form (or an electromagnetic record) to be effective as a consensual contract (Article 587-2). The rationale is often to ensure deliberation and provide clear evidence for particularly significant or one-sided obligations.
• Real Contracts (要物契約 - Yōbutsu Keiyaku): Traditionally, some contracts were "real contracts," requiring not only agreement but also the delivery of the subject matter for their formation. Examples under the old law included loans for consumption (old Art. 587), loans for use (old Art. 593), and deposits (old Art. 657). The revised Civil Code has largely moved away from the real contract model for these, making them consensual. For instance, a loan for consumption can now be formed by agreement alone if in writing (Art. 587-2), and loans for use (Art. 593) and deposits (Art. 657) are now consensual contracts. The primary remaining example of a real contract might be the establishment of a pledge (質権設定契約 - shichiken settei keiyaku, Art. 344), which requires delivery of the pledged item.

Conclusion: Ensuring Clarity in Contractual Beginnings

The formation of a contract under Japanese law hinges on a clear and mutual intention to be bound, typically manifested through an offer and its corresponding acceptance. The shift to the arrival principle for acceptances under the revised Civil Code brings Japanese domestic law more in line with international standards and enhances certainty for offerors. However, the overarching principle of consensualism is balanced by necessary exceptions and careful distinctions, such as that between an offer and an invitation to treat, and the specific rules for formal contracts. For businesses engaging in Japan, a thorough understanding of these formation rules, including the nuances of what constitutes a binding "meeting of minds" and the timing thereof, is crucial for establishing enforceable contractual relationships and effectively managing legal risk.