How Can Lenders Secure Repayment in Japanese Loan Agreement Disputes?

Successfully recovering loaned funds in Japan through civil litigation requires a lender to meticulously establish certain "essential facts" (要件事実 - yokenjijitsu). These are the core factual elements that underpin a legal claim. This article explores the fundamental requirements for lenders seeking repayment in Japanese loan agreement disputes, focusing on claims for principal, interest, and default interest, as well as common defenses borrowers might raise.

I. The Basics of Loan Agreements in Japan (日本における貸付契約の基礎)

Japanese law primarily recognizes two main types of loan agreements for money: the traditional "loan for consumption" and the more recently codified "consensual loan for consumption."

A. Loan for Consumption (消費貸借契約 - shohi taishaku keiyaku) - The Traditional Model

Historically, a loan for consumption was strictly a "real contract" (要物契約 - yōbutsu keiyaku). This meant the contract was only formed upon the actual delivery of the money from the lender (貸主 - kashinushi) to the borrower (借主 - karinushi), in addition to an agreement to repay. The mere promise to lend and repay, without the transfer of funds, did not constitute an enforceable loan for consumption under the traditional view. The subject matter of the claim in such a dispute typically comprises the principal amount, any accrued interest, and default interest, each potentially forming a distinct object of the claim (訴訟物 - soshōbutsu).

B. Consensual Loan for Consumption (諾成的消費貸借契約 - dakusei shohi taishaku keiyaku) - The Newer Model

The Japanese Civil Code, through amendments effective April 1, 2020, formally recognized "consensual loans for consumption" (Article 587-2 of the Civil Code). Unlike the traditional model, this type of loan is formed by the mere agreement between the parties that one will lend money and the other will repay it. However, a crucial formality is required: such an agreement is not effective unless it is made in writing or by way of an electronic record (書面又は電磁的記録 - shomen mata wa denji-teki kiroku). This formality aims to prevent rash promises and clarify the parties' intentions. Even under this model, the lender's obligation to deliver the money arises from the agreement, and the borrower's repayment obligation typically crystallizes after receiving the funds and upon maturity of the repayment term.

II. Lender's Claim for Repayment of Principal (貸主による元本返還請求)

Regardless of the type of loan agreement, a lender seeking repayment of the principal must establish several essential facts as their cause of action (請求原因 - seikyū gen'in).

A. Essential Facts for the Lender's Claim (請求原因)

1. Agreement to Repay (金銭返還の合意 - kinsen henkan no gōi): The lender must prove that there was an agreement with the borrower for the repayment of a sum of money.
2. Delivery of Money (金銭の交付 - kinsen no kōfu) (For traditional loans) or Agreement to Deliver and Actual Delivery (For consensual loans):
   • For a traditional loan for consumption, the actual delivery of the principal sum to the borrower is an indispensable element of contract formation and thus a core part of the cause of action.
   • For a consensual loan for consumption, while the contract is formed by the (formalized) agreement itself, the claim for repayment generally still presupposes that the lender has fulfilled their obligation to deliver the money, or that the agreed time for delivery has passed and the borrower is in breach of their repayment obligation which has become due.
3. Agreement on Repayment Term (弁済期の合意 - bensaiki no gōi): The lender must allege and prove that a repayment term (due date) was agreed upon. Some legal theories (often referred to as the "loan-type contract theory" - 貸借型理論 taishaku-gata riron) consider the agreement on a return period an essential element of loan-type contracts, not merely an ancillary term, because lending without any timeframe for return would be meaningless.
4. Maturity of the Repayment Term (弁済期の到来 - bensaiki no tōrai): The lender must demonstrate that the agreed-upon repayment term has arrived or passed.

B. Special Considerations:

• Loans Without a Fixed Repayment Date (弁済期の定めのない場合 - bensaiki no sadame no nai baai): If no specific repayment date was set, the Civil Code (Article 591(1)) provides that the lender may demand repayment by giving the borrower reasonable notice (催告 - saikoku) and allowing a reasonable period to elapse thereafter. The lender would need to prove such demand and the passing of a reasonable period.
• Acceleration Clauses (期限の利益喪失約款 - kigen no rieki sōshitsu yakkan): Loan agreements often contain acceleration clauses, stating that the borrower will forfeit "the benefit of time" (i.e., the right to repay in installments or by a future due date) and the entire outstanding amount will become immediately due if certain events occur (e.g., missing an installment payment). If relying on such a clause, the lender must prove the existence of the clause and the occurrence of the triggering event.
• "Upfront Interest Deduction" (利息の天引 - risoku no tenbiki) and its Impact on Principal: Sometimes, interest is deducted from the principal amount at the time the loan is disbursed (e.g., borrower receives ¥900,000 on a ¥1,000,000 loan agreement, with ¥100,000 treated as prepaid interest). When this occurs, the lender claiming repayment of the full nominal principal must prove not only the agreement to repay that nominal principal and the partial delivery but also the agreement to treat the difference as an upfront interest deduction. If this deduction results in an effective interest rate exceeding the limits prescribed by the Interest Rate Restriction Act (利息制限法 - Risoku Seigen Hō), the excess portion may be deemed by law to have been applied to reduce the principal, affecting the actual principal amount recoverable. For instance, if a ¥200,000 interest was deducted from a ¥1,000,000 loan (disbursing ¥800,000) for a one-year term, and this amount exceeds the statutory maximum interest on the received sum of ¥800,000 (e.g., if the limit calculates to ¥144,000), the excess (¥56,000) would be treated as repayment of principal, reducing the claimable principal to ¥944,000.

III. Claiming Interest and Default Interest (利息及び遅延損害金の請求)

Lenders often also claim accrued interest and default interest (damages for late payment).

A. Claiming Agreed or Statutory Interest (利息請求 - risoku seikyū)

To claim contractual interest, the lender must prove:

1. The essential facts establishing the principal debt (as above).
2. An agreement to pay interest (利息支払の合意 - risoku shiharai no gōi). Under the Civil Code (Article 589(1)), loans are presumed to be interest-free unless otherwise agreed.
   • An exception exists for loans between merchants, where statutory interest can be claimed even without express agreement (Article 513(1) of the Commercial Code). In such cases, the lender must prove both parties were merchants at the time of the contract.
3. The period for which interest has accrued (e.g., from the date the borrower received the money until the due date for repayment ).
4. The agreed interest rate. If no rate is agreed but interest is payable, or in the case of merchant loans, the statutory interest rate at the time the interest first accrued applies (Article 404 of the Civil Code). If a rate exceeding the statutory rate is claimed, this specific agreement must be proven. Rates are subject to the Interest Rate Restriction Act.

B. Claiming Default Interest (遅延損害金請求 - chien songaikin seikyū)

For default interest (damages for delay), the lender must prove:

1. The essential facts establishing the principal debt.
2. The repayment term has passed (弁済期が経過したこと - bensaiki ga keika shita koto). This means proving the original due date or the conditions for acceleration have been met.
3. The occurrence and amount of damages. For monetary obligations, unless otherwise agreed, default interest is claimable at the statutory rate applicable at the time the borrower first fell into default (Article 419(1) of the Civil Code). Proof of the period of delay is typically sufficient.
   • If a contractual interest rate higher than the statutory rate was agreed for the loan period, that rate might also apply as the default interest rate (proviso to Article 419(1)). Alternatively, if a specific rate for default damages was agreed (as a form of liquidated damages, Article 420(1)), that must be proven. These rates are also capped by the Interest Rate Restriction Act.

IV. Common Defenses by the Borrower (借主からの典型的な抗弁)

Once the lender establishes their prima facie case, the borrower may raise several defenses (抗弁 - kōben).

A. Defense of Payment (弁済の抗弁 - bensai no kōben)

The most straightforward defense is that the loan has been repaid, in whole or in part. The borrower must prove that they (or a third party) made a payment to the lender (or an authorized recipient) and that this payment was intended to satisfy the loan obligation in question.

B. Defense of Set-Off (相殺の抗弁 - sōsai no kōben)

A borrower may claim a set-off if they also have a monetary claim (自働債権 - jidōsaiken, the active claim) against the lender, which is due and of the same kind as the lender's claim (受働債権 - judōsaiken, the passive claim). The borrower must prove:

1. The essential facts giving rise to their claim against the lender.
2. That both debts were "ripe for set-off" (相殺適状 - sōsai tekijō), meaning, generally, both debts were due (Article 505(1) of the Civil Code). A Supreme Court judgment dated February 28, 2013 (Minshu Vol. 67, No. 2, p. 343) clarified that for a set-off involving a passive claim with a fixed due date, that due date must have actually arrived (e.g., through maturity, waiver, or forfeiture of the benefit of time).
3. That the borrower declared their intention to set off the debts. The set-off then takes effect retroactively to the point when the debts first became ripe for set-off (Article 506(2)).

A set-off cannot be conditional or subject to a future date (Article 506(1)). Also, if the nature of the lender's claim does not permit set-off (e.g., claims for damages arising from intentional unlawful acts, Article 509), this can be a counter-argument by the lender.

C. Defense of Statute of Limitations (消滅時効の抗弁 - shōmetsu jikō no kōben)

Loan repayment claims are subject to prescription (extinctive prescription or statute of limitations). Under the amended Civil Code (Article 166):

1. Limitation Periods:
   • A claim prescribes if not exercised for five years from the time the creditor became aware that the right could be exercised (subjective starting point - 主観的起算点 shukanteki kisanten).
   • A claim also prescribes if not exercised for ten years from the time the right could objectively be exercised (objective starting point - 客観的起算点 kyakkanteki kisanten), regardless of the creditor's awareness. (For claims arising from commercial activities, a shorter objective period of five years may apply under the Commercial Code, though the Civil Code's five-year subjective period often takes precedence if earlier).
     The borrower asserting this defense must prove:
   • The conditions making the right exercisable had occurred (this is usually evident from the lender's own claim).
   • The creditor was aware that the right could be exercised (for the five-year subjective period). For fixed-term loans, awareness is generally presumed from the due date.
   • The relevant limitation period (five or ten years) has passed since that starting point.
   • The borrower has invoked (or is invoking in the proceedings) the benefit of the statute of limitations (時効の援用 - jikō no en'yō) (Article 145). The effect of prescription is not automatic; it must be invoked by the party who benefits from it.
2. Interruption/Renewal of the Limitation Period (時効の更新 - jikō no kōshin):
   The lender can counter a statute of limitations defense by proving that the prescription period was "renewed" (effectively, restarted). Grounds for renewal include (Article 147, 148, 152):
   • Acknowledgment of the Debt (承認 - shōnin) by the borrower: This is a common basis for renewal and includes acts such as making a partial payment, requesting a deferral of payment, or paying interest. An acknowledgment is a notification by the debtor to the creditor that they are aware of the creditor's right.
   • A final and binding judgment, or commencement of certain legal proceedings that are not subsequently withdrawn or dismissed on procedural grounds.
     If a renewal event occurs, the limitation period starts anew from that time.
3. Suspension/Postponement of Completion of the Limitation Period (時効の完成猶予 - jikō no kansei yūyo):
   Certain events do not restart the clock but "postpone its completion". For example, a formal demand (催告 - saikoku, distinct from a mere reminder, often a written demand for payment) postpones the completion of the prescription period for six months from the time of the demand (Article 150). If legal proceedings are initiated during this six-month window, the postponement continues until the proceedings conclude. Other grounds include agreements to negotiate, commencement of mediation, etc..
4. Loss of the Right to Invoke Prescription (時効援用権の喪失 - jikō en'yōken no sōshitsu):
   Even if the limitation period has technically expired, a borrower may lose the right to invoke it. A key instance is when the borrower acknowledges the debt after the limitation period has already completed. The Supreme Court has held that such an acknowledgment, even if made without awareness that the prescription period had completed, prevents the borrower from subsequently invoking prescription, based on the principle of good faith (Judgment of the Supreme Court, April 20, 1966, Minshu Vol. 20, No. 4, p. 702). However, prescription will start to run anew from the time of this post-completion acknowledgment (Judgment of the Supreme Court, May 21, 1970, Minshu Vol. 24, No. 5, p. 393). This is distinct from a "waiver of the benefit of prescription" (時効利益の放棄 - jikō rieki no hōki), which generally requires awareness of the completion of prescription (Judgment of the Supreme Court, June 23, 1960, Minshu Vol. 14, No. 8, p. 1498).

V. Strategic Considerations for Lenders

To enhance the prospects of repayment and success in potential litigation, lenders should consider:

• Clear Documentation: Ensuring loan agreements are clearly drafted, specifying principal, interest rates, repayment schedules, events of default, and any acceleration clauses. For consensual loans for consumption, adhering to the written (or electronic record) formality is paramount.
• Evidence of Disbursement: Maintaining clear records of the money transfer to the borrower.
• Monitoring Repayment: Promptly addressing missed payments.
• Managing Limitation Periods: Being mindful of prescription periods and taking appropriate action (e.g., securing an acknowledgment, initiating legal proceedings) to prevent claims from becoming time-barred.
• Interest Rate Compliance: Ensuring all interest and default interest rates comply with the Interest Rate Restriction Act to avoid unenforceability of excess amounts and potential penalties.

Conclusion (結論)

Securing repayment in Japanese loan agreement disputes requires a thorough understanding of the essential facts underpinning a lender's claim for principal, interest, and default charges. While the Japanese Civil Code provides the framework, successful recovery often turns on the lender's ability to clearly prove the loan's terms and disbursement, and to effectively counter common borrower defenses such as payment, set-off, or the statute of limitations. Robust loan documentation and diligent management of the loan throughout its lifecycle are key to navigating these disputes effectively.