How Can We Settle a Lawsuit in a Japanese Court? Understanding In-Court Settlements

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read

While many envision litigation culminating in a hard-fought trial and a definitive court judgment, a significant number of civil lawsuits in Japan are resolved through settlement. Among the various forms of settlement, the "in-court settlement," or Soshō-jō no wakai (訴訟上の和解), holds a particularly important place. This mechanism involves the parties reaching an agreement with the involvement, or at least before the auspices, of the court, resulting in a resolution that carries the same formidable legal weight as a final and binding judgment. For businesses navigating disputes in Japan, understanding the nature, process, and powerful effects of in-court settlements is crucial for effective dispute resolution strategy.

I. Understanding In-Court Settlements (Soshō-jō no wakai) in Japan

A. What is an In-Court Settlement? (Code of Civil Procedure, Art. 267)

An in-court settlement is an agreement reached by the litigating parties (plaintiff and defendant) to resolve their dispute, which is then formally entered into the court record (protocol - chōsho 調書) during the course of pending litigation. Article 267 of Japan's Code of Civil Procedure (Minji Soshō Hō 民事訴訟法) stipulates that when a settlement is reached before the court and entered into the court record, that record has the same effect as a final and binding judgment.

B. Distinction from Out-of-Court Settlements (Jidan - 示談)

The key distinction between an in-court settlement and a private, out-of-court settlement (jidan 示談) lies in:

  1. Court Involvement: In-court settlements occur under the supervision or with the active facilitation of the court.
  2. Legal Effect: A properly recorded in-court settlement automatically acquires the force of a final judgment, including enforceability, without needing a separate lawsuit to enforce the settlement agreement itself (as might be required for a breached jidan).

C. The Dual Nature Theory (Ryōsei-setsu - 両性説): The Prevailing View on Its Legal Nature

The legal nature of an in-court settlement has been a subject of academic debate, but the prevailing view, supported by court precedent, is the "dual nature theory" (ryōsei-setsu 両性説, also sometimes referred to as nijūsei-setsu 二重性説). This theory posits that an in-court settlement has two coexisting aspects:

  1. A Substantive Aspect: It is a private law contract (a settlement agreement - wakai keiyaku 和解契約) between the parties, reflecting their mutual concessions and agreement on how to resolve the dispute.
  2. A Procedural Aspect: It is a procedural act that terminates the pending lawsuit.

This dual nature has important implications for the effects of the settlement and how any potential defects in its formation are addressed.

II. The Process of Reaching an In-Court Settlement

A. Court's Encouragement of Settlement (Wakai kanshi - 和解勧試) (Code of Civil Procedure, Art. 89)

A distinctive feature of Japanese civil litigation is the active role judges often play in encouraging settlement. Article 89 of the Code of Civil Procedure states that "the court may attempt to arrange a settlement at any stage of the action."

  • Judicial Facilitation: Judges may explore settlement possibilities with the parties, suggest potential terms, point out the strengths and weaknesses of each side's case, or even offer their views on a likely outcome if the case were to proceed to judgment. This is done to facilitate a mutually agreeable resolution.
  • Not Coercion: While judges can be persuasive, they cannot compel parties to settle. The decision to settle ultimately rests with the parties.

B. Settlement Discussions and Hearings (Wakai kijitsu - 和解期日)

Settlement discussions can occur at various points:

  • During scheduled oral argument dates (kōtō benron kijitsu 口頭弁論期日).
  • During preparatory proceeding dates (benron jumbi tetsuzuki kijitsu 弁論準備手続期日).
  • At dedicated settlement conference dates (wakai kijitsu 和解期日) specifically set by the court.
    These discussions are often held in a less formal setting than a full trial, allowing for more open negotiation, often with the judge acting as a mediator.

C. Drafting and Finalizing Settlement Terms (Wakai jōkō - 和解条項)

Once the parties reach a conceptual agreement, the precise terms of the settlement (wakai jōkō) are carefully drafted.

  • Clarity and Specificity: The terms must be unambiguous, specific, and capable of execution to avoid future disputes over interpretation. They should clearly outline each party's obligations (e.g., payment amounts and deadlines, actions to be taken or refrained from).
  • Court's Role: The judge will typically review the proposed terms to ensure they are lawful, not contrary to public policy, and appear to reflect the true intentions of the parties. The judge also confirms that the parties understand and voluntarily agree to the terms.
  • Comprehensive Resolution: Settlement terms often aim to achieve a comprehensive resolution of all or a specified part of the dispute between the parties.

D. Recording the Settlement in the Court Record (Wakai chōsho - 和解調書)

When the parties confirm their agreement to the final terms before the court, the settlement is formally entered into the court record (protocol). This act of recording is what gives the in-court settlement its powerful legal effect.

III. The Powerful Effects of a Recorded In-Court Settlement

The most significant consequence of a properly recorded in-court settlement is stipulated in Article 267 of the Code of Civil Procedure: it has "the same effect as a final and binding judgment" (kakutei hanketsu to dōitsu no kōryoku 確定判決と同一の効力). This encompasses several key effects:

A. Enforceability (Shikkō-ryoku - 執行力)
If one party fails to comply with the obligations set forth in the recorded settlement (e.g., an agreed-upon payment is not made), the other party can initiate compulsory execution proceedings based on the settlement record (wakai chōsho), just as they would with a final judgment for performance. The settlement record itself becomes an enforceable title of obligation (saimu meigi 債務名義).

B. Res Judicata (Kihan-ryoku - 既判力)
An in-court settlement generally has res judicata effect concerning the matters agreed upon and resolved by the settlement. This means the parties are precluded from re-litigating the same claims that were disposed of by the settlement. The precise scope of the res judicata effect will depend on the wording of the settlement terms and the claims that were intended to be covered. It is crucial that settlement clauses are drafted broadly enough to encompass all aspects of the dispute the parties intend to resolve finally.

C. Formative Effect (Keisei-ryoku - 形成的効力)
If the terms of the settlement themselves create, modify, or extinguish a legal right or relationship (e.g., the parties agree to terminate an existing contract as part of the settlement, or agree to new contractual terms), the settlement will have a direct formative effect, altering the legal status quo according to its terms.

D. Termination of the Lawsuit (Soshō shūryō-kō - 訴訟終了効)
Upon the valid conclusion and recording of an in-court settlement, the pending lawsuit is terminated with respect to the settled claims. No appeal can be filed against a settlement that has been validly reached and recorded, as it is based on the parties' agreement rather than a unilateral decision by the court.

IV. Defects in In-Court Settlements: Invalidation or Rescission

Given that an in-court settlement has a contractual component (due to the dual nature theory), its validity can be challenged if there were fundamental defects in its formation that would invalidate a private contract.

  • Grounds for Challenge: Such grounds might include:
    • Mistake (sakugo 錯誤): A fundamental mistake regarding an essential element of the settlement.
    • Fraud (sagi 詐欺): If one party was induced to enter the settlement by fraudulent misrepresentation.
    • Duress (kyōhaku 強迫): If one party was coerced into the settlement.
    • Lack of Capacity: If a party lacked the legal capacity to enter into the agreement.
    • Content Contrary to Public Policy: If the terms of the settlement are illegal or violate public order.
  • Procedural Avenues for Challenge: This is a procedurally complex area.
    • A party generally cannot simply "appeal" the settlement itself.
    • One potential method, if the defect relates to the procedural formation of the settlement before the court, is to file a "motion for the designation of a hearing date" (kijitsu shitei no mōshitate 期日指定の申立て) with the same court that recorded the settlement, arguing its invalidity due to flaws in how it was concluded in court (e.g., lack of true consent confirmed by the judge).
    • Alternatively, if the defect is more substantive (akin to a contractual defect like fraud that wasn't apparent to the court), a party might need to file a new, separate lawsuit seeking a declaration that the settlement agreement is null and void. The success of such challenges is generally difficult due to the strong policy favoring the finality of settlements that have received judicial imprimatur.

V. Advantages and Disadvantages of In-Court Settlements for Businesses

A. Advantages:

  • Speed and Cost-Effectiveness: Settlements can often be reached much more quickly than proceeding to a full trial and potential appeals, leading to significant savings in legal fees, executive time, and other litigation-related expenses.
  • Flexibility and Tailored Solutions: Parties have greater freedom to craft creative and customized solutions that may not be available through a court judgment. This can include future business arrangements, non-monetary considerations, apologies, or specific performance terms tailored to their needs.
  • Preservation of Business Relationships: Litigation can be highly adversarial and damaging to ongoing or future business relationships. A negotiated settlement can often be a less confrontational way to resolve a dispute, potentially allowing parties to continue working together.
  • Confidentiality: While the existence of a lawsuit is a matter of public record, the specific terms of an in-court settlement are typically recorded in the court protocol but are not as widely publicized as a full, reasoned judgment. Parties can also sometimes agree on additional confidentiality provisions regarding the settlement terms.
  • Higher Rate of Voluntary Compliance: Parties are generally more inclined to voluntarily comply with terms they have actively negotiated and agreed to, compared to a judgment imposed upon them.
  • Guaranteed Enforceability: As noted, a recorded in-court settlement is as enforceable as a final judgment, providing a strong mechanism for ensuring compliance.

B. Disadvantages:

  • Compromise is Inevitable: Settlement, by its nature, usually involves compromise from all sides. A party is unlikely to achieve 100% of what they might have hoped for if they had "won" at trial.
  • No Public Vindication or Precedent: If a party is seeking a public court ruling to establish a legal principle, clear their name, or set a precedent, a settlement will not achieve this.
  • Potential for Future Disputes over Interpretation: If settlement terms are not drafted with utmost clarity and precision, ambiguities can lead to new disagreements about their meaning or scope.
  • Loss of Chance for a More Favorable Judgment: There's always the possibility that by settling, a party forgoes the chance of obtaining an even more favorable outcome through a judgment, though this is balanced against the risks and costs of continued litigation.

VI. In-Court Settlements in International Disputes

For businesses involved in international disputes, an in-court settlement reached in a Japanese court can be particularly attractive. A settlement record that has the effect of a final and binding judgment in Japan may provide a more straightforward basis for seeking recognition and enforcement in other countries compared to a contested judgment, depending on applicable international treaties (like the Hague Convention on Choice of Court Agreements, if applicable to the settlement, or bilateral treaties) and the laws of the enforcing jurisdiction.

Conclusion

In-court settlements (Soshō-jō no wakai) represent a cornerstone of dispute resolution within the Japanese civil litigation system. Actively encouraged by the courts and imbued with the same legal force as a final judgment, they offer businesses a potent combination of flexibility, efficiency, and enforceability. While requiring compromise, the ability to tailor solutions, preserve relationships, and achieve a swift and certain end to litigation makes the in-court settlement a compelling strategic option that businesses should always consider when facing legal disputes in Japan.