How Do Agreements Restricting Assignment ("Jōto Seigen Tokuyaku") Affect Claim Assignments in Japan?

Japanese Attorney at Law - Bengoshi L.L.

• 12 min read

In Japanese commercial law, while claims are generally considered transferable assets, parties to a contract—the original creditor and the obligor—can mutually agree to limit or entirely prohibit the assignment of a claim arising from their relationship. Such an agreement is known as a "Jōto Seigen Tokuyaku" (譲渡制限特約 – agreement restricting assignment). The legal effect of these restrictions, particularly on the validity of an assignment made in breach of such an agreement and on the rights of third-party assignees, has been a subject of considerable legal evolution in Japan, culminating in significant reforms under the revised Japanese Civil Code (Minpō - 民法), effective April 1, 2020.

Understanding "Jōto Seigen Tokuyaku": Meaning, Purpose, and Function

Meaning of "Jōto Seigen Tokuyaku"

A "Jōto Seigen Tokuyaku" is a contractual provision or a separate agreement between an obligor and their original creditor whereby the creditor's ability to assign the claim they hold against the obligor is restricted or entirely prohibited. The new Civil Code uses the broader term "manifestation of intention to restrict assignment" (譲渡制限の意思表示 - jōto seigen no ishi hyōji) to encompass restrictions that might arise not just from bilateral agreements but also from unilateral acts creating an obligation (e.g., in a will), though contractual agreements are the most common context.

These restrictions can vary in form:

  • An absolute prohibition on assignment.
  • A requirement that the obligor's consent must be obtained for any assignment to be effective.
  • A stipulation that even if the claim is assigned, the obligor can continue to discharge their obligation by performing to the original assignor.

Purpose and Function: The Obligor's Interest in Fixing the Creditor

The primary purpose of allowing Jōto Seigen Tokuyaku is to protect certain legitimate interests of the obligor, often referred to collectively as the "benefit of fixing the creditor" (債権者固定の利益 - saikensha kotei no rieki). These interests include:

  1. Administrative Simplicity: For an obligor, particularly one dealing with numerous claims or complex payment schedules, having a stable, known creditor simplifies administrative processes, payment tracking, and communication. Frequent changes in creditors can create confusion and increase administrative burdens.
  2. Preservation of Set-Off Rights: An obligor may have existing or anticipated claims against their original creditor. If the original creditor assigns the claim, the obligor's ability to set off their claims against the original creditor might be complicated or lost with respect to the new assignee. A Jōto Seigen Tokuyaku can help preserve this set-off potential against the known original creditor.
  3. Maintenance of a Specific Relationship: In ongoing contractual relationships (e.g., long-term supply agreements, service contracts), the obligor may value the specific relationship, trust, or established working practices with the original creditor. Assignment to an unknown third party could disrupt this.
  4. Preventing Assignment to Undesirable Parties: An obligor may wish to prevent their debt from falling into the hands of assignees they consider undesirable, aggressive in collection, or with whom they do not wish to have any dealings for reputational or other reasons.

While Jōto Seigen Tokuyaku serve these obligor interests, they also inherently conflict with the broader economic policy of promoting the free circulation of claims as transferable assets, which is vital for financing mechanisms like factoring, asset-based lending, and securitization. The evolution of Japanese law in this area reflects an attempt to balance these competing considerations.

To appreciate the significance of the current rules, it's helpful to briefly understand the approach under the old (pre-2020 reform) Civil Code.

The Core Debate: "Property-like Effect" vs. "Obligatory Effect"

The central debate revolved around the fundamental effect of a Jōto Seigen Tokuyaku on an assignment made in breach of it:

  1. Property-like Effect Theory (物権的効力説 - Bukken-teki Kōryoku Setsu): This was the prevailing view adopted by the Supreme Court (e.g., decision of July 19, 1973). It held that a Jōto Seigen Tokuyaku rendered an assignment made in breach of it void as against the obligor, provided the assignee knew of the restriction or was grossly negligent in not knowing. The rationale was that the agreement directly affected the "assignability" attribute of the claim itself, making it inherently non-transferable to such an assignee. The obligor's subsequent consent could retroactively validate an otherwise void assignment.
  2. Obligatory Effect Theory (債権的効力説 - Saiken-teki Kōryoku Setsu): A significant minority of legal scholars argued that the assignment itself should be considered valid even if it breached the Jōto Seigen Tokuyaku. Under this view, the restriction merely created a contractual obligation on the assignor not to assign. A breach of this obligation would make the assignor liable for damages to the obligor but would not invalidate the transfer of the claim to the assignee. The obligor's remedy against a knowing assignee would be limited to asserting the restriction as a defense.

The old law's framework, particularly the property-like effect theory, was criticized for unduly hindering claim fluidity and for being used in ways that did not always align with its original purpose of protecting obligors (e.g., in disputes between competing assignees where the obligor was indifferent).

The New Civil Code's Approach (Article 466): A Paradigm Shift

The revised Civil Code, effective April 1, 2020, introduced a fundamental shift in the legal treatment of Jōto Seigen Tokuyaku, moving away from the default invalidity of assignments made in breach.

A. Validity of the Assignment Itself (Art. 466(2)) – The New Default

The cornerstone of the new regime is Article 466, paragraph 2: "Even if the parties have manifested an intention to prohibit or restrict the assignment of a claim (hereinafter referred to in this Section as a 'manifestation of intention to restrict assignment'), the assignment of the claim shall not be precluded from taking effect."

  • Implication: This means that an assignment of a claim made in breach of a Jōto Seigen Tokuyaku is now generally considered valid and effective. The assignee legally acquires the claim from the assignor. This applies regardless of whether the assignee knew about the Jōto Seigen Tokuyaku or was grossly negligent in not knowing about it.
  • Rationale: This significant change was driven by the policy of promoting the liquidity and transferability of claims as economic assets. It aims to facilitate financing mechanisms (like asset-based lending and factoring) and securitization, where the practical burden and risk of verifying the absence of assignment restrictions on numerous individual claims could be a major impediment under the old "property-like effect" regime.

B. Obligor's Ability to Assert the Restriction Against Certain Assignees (Art. 466(3))

While the assignment itself is valid, the new law still provides avenues to protect the obligor's legitimate interest in creditor stability, but it does so through a different mechanism than voiding the assignment.

Article 466, paragraph 3 stipulates that, with respect to an assignee or any other third party (such as a pledgee of the claim) who, at the time of the assignment (or pledge), knew of the manifestation of intention to restrict assignment, or was grossly negligent in not knowing of it, the obligor may:

  1. Refuse to perform their obligation to such assignee/third party.
  2. Assert against such assignee/third party any matter of defense that has arisen against the assignor (e.g., by making a payment to the assignor, which would discharge the debt as against such a knowing or grossly negligent assignee).

In essence, while the claim has legally transferred to the assignee, a knowing or grossly negligent assignee cannot compel direct performance from the obligor if the obligor invokes the Jōto Seigen Tokuyaku. The obligor can effectively continue to treat the original assignor as the party entitled to receive performance. The burden of proving the assignee's knowledge (akui - 悪意) or gross negligence (jūkashitsu - 重過失) regarding the restriction lies with the obligor who wishes to assert the restriction.

The obligor always retains the ability to waive the benefit of the Jōto Seigen Tokuyaku by consenting to the assignment. If the obligor gives their consent (which can be to the assignor or the assignee), they can no longer assert the restriction, even against an assignee who knew of it or was grossly negligent. This consent effectively nullifies the obligor's defense based on the Jōto Seigen Tokuyaku. This was generally the interpretation under the old law as well and continues to hold true.

D. Protection of the Knowing/Grossly Negligent Assignee: Breaking Deadlocks (Art. 466(4))

A novel and important provision in the new Civil Code is Article 466, paragraph 4. It addresses a potential deadlock situation where:

  • A claim subject to a Jōto Seigen Tokuyaku has been assigned to an assignee who knew of the restriction or was grossly negligent in not knowing of it (so the obligor can refuse to pay the assignee directly under Art. 466(3)).
  • The obligor also fails to perform its obligation to the assignor (who, despite the valid assignment, can still validly receive performance from the obligor as against such an assignee).

In this scenario, where the obligor is effectively not paying anyone, Article 466(4) provides a mechanism for the (knowing or grossly negligent) assignee to break the impasse:

  1. The assignee may demand that the obligor perform its obligation to the assignor within a reasonable period designated by the assignee.
  2. If the obligor fails to perform to the assignor within that reasonable period, then the obligor loses the right to assert the Jōto Seigen Tokuyaku against the assignee.
  3. Consequently, the assignee can then directly demand performance from the obligor.

This provision prevents an obligor from using a Jōto Seigen Tokuyaku to indefinitely avoid performing a valid underlying obligation when faced with an assignment to a knowing or grossly negligent assignee. It ensures that the economic benefit of the claim eventually flows to the assignee, who is, after all, the legal owner of the claim.

Jōto Seigen Tokuyaku and the Deposit System (Arts. 466-2, 466-3)

The revised Civil Code also introduced special rules concerning deposits (kyōtaku - 供託) in the context of assigned claims subject to Jōto Seigen Tokuyaku. These aim to protect obligors from the risk of double payment and to facilitate recovery for assignees, especially when the assignor becomes bankrupt.

A. Obligor's Right to Deposit (Art. 466-2)

If a monetary claim subject to a Jōto Seigen Tokuyaku is assigned, Article 466-2(1) grants the obligor the right to deposit the full amount of the monetary claim with a competent official deposit office.

  • This right exists regardless of the assignee's knowledge or negligence concerning the Jōto Seigen Tokuyaku.
  • It provides a safe harbor for obligors who are uncertain about whom to pay due to the interplay of a valid assignment and a (potentially assertable) restriction. By depositing the funds, the obligor can effectively discharge their obligation.
  • The obligor must then notify both the assignor and the assignee of the deposit (Art. 466-2(2)).
  • Generally, only the assignee (as the legal owner of the claim) is entitled to claim the deposited funds from the deposit office (Art. 466-2(3)). The original assignor cannot claim these funds.

B. Assignee's Right to Demand Deposit (in Assignor's Bankruptcy) (Art. 466-3)

A particularly significant provision is Article 466-3, which applies when the assignor enters bankruptcy proceedings: If a monetary claim subject to a Jōto Seigen Tokuyaku has been assigned in its entirety, and the assignee has duly perfected the assignment against third parties (e.g., by obtaining a fixed-date stamp on the notice/acknowledgment) before the commencement of the assignor's bankruptcy proceedings, then the assignee can demand that the obligor deposit the full amount of the claim.

  • This allows the assignee to secure the funds for themselves, effectively removing them from the assignor's bankruptcy estate. It is a powerful tool for achieving "bankruptcy remoteness" for the assigned claim, even if the assignee was aware of the Jōto Seigen Tokuyaku at the time of assignment.
  • This provision strongly favors assignees in the financing context, ensuring that their rights to assigned receivables are robust even in the face of the assignor's bankruptcy and a Jōto Seigen Tokuyaku.
  • Once the obligor makes such a deposit upon the assignee's demand, only the assignee can claim the deposited funds.

Compulsory Execution Against Claims with Jōto Seigen Tokuyaku (Art. 466-4)

What happens if a creditor of the original creditor (the assignor) attempts to attach a claim that is subject to a Jōto Seigen Tokuyaku?

  • General Rule: Execution Permitted (Art. 466-4(1)): Article 466-4, paragraph 1, states that an obligor cannot assert a Jōto Seigen Tokuyaku against a creditor who has initiated compulsory execution (e.g., attachment) against that claim. This codifies the principle established by earlier Supreme Court case law (e.g., decision of April 10, 1970), which held that private agreements restricting assignment cannot generally create an "attachment-proof" asset that is shielded from the assignor's creditors. The attaching creditor can proceed with the execution regardless of the Jōto Seigen Tokuyaku and regardless of their knowledge of it.
  • Exception for Creditors of a Knowing/Grossly Negligent Assignee (Art. 466-4(2)): A crucial exception is provided in paragraph 2. If the attaching creditor is seeking to execute against the claim as an asset of an assignee (not the original assignor), and that assignee had acquired the claim with knowledge or gross negligence of the Jōto Seigen Tokuyaku, then the obligor can assert against this attaching creditor the same defenses (including refusal to perform and right to perform to the original assignor) that it could have asserted against that knowing/grossly negligent assignee directly. This prevents the creditors of a "tainted" assignee from achieving a better position regarding the claim than the assignee themselves had.
  • Execution to Enforce a Security Interest: The phrasing of Article 466-4(1) ("compulsory execution against a claim") has been interpreted during legislative drafting to primarily refer to general execution by unsecured creditors. The situation where a secured creditor (e.g., a pledgee of the restricted claim) seeks to enforce its security interest is largely governed by the direct application of Article 466(3). If a pledgee took a pledge of a claim knowing of a Jōto Seigen Tokuyaku, the obligor could assert that restriction against the pledgee's enforcement attempts.

Special Rules for Assignment Restriction Agreements on Deposit Claims (Art. 466-5)

The new Civil Code carves out a significant exception to its general approach for Jōto Seigen Tokuyaku when it comes to "yochokin saiken" (預貯金債権 – claims for bank deposits or postal savings).

  • Return to "Property-like Effect" for Bank Deposits (Art. 466-5(1)): For these types of claims, Article 466-5, paragraph 1, provides that a Jōto Seigen Tokuyaku can be asserted against an assignee or other third party who knew of the restriction or was grossly negligent in not knowing of it. The practical effect is that an assignment of a restricted deposit claim to such a knowing or grossly negligent assignee is ineffective; the claim does not validly transfer to them. This is essentially a reinstatement of the old law's "property-like effect" theory, but specifically limited to deposit claims.
  • Rationale for Special Treatment: This distinct treatment for deposit claims stems from their unique characteristics and the operational realities of financial institutions:
    • Deposits are highly fungible, and account balances fluctuate constantly.
    • Financial institutions handle an enormous volume of transactions and rely on the stability of creditor identity for operational efficiency, fraud prevention, and risk management. Allowing free assignability of restricted deposits, even to knowing parties, could create significant operational disruptions.
    • Deposit claims are already considered highly liquid (akin to cash equivalents), so the policy imperative of promoting their further fluidity through unrestricted assignment is less pressing compared to other types of commercial receivables that are often used for financing.
    • It is widely understood in banking practice, and often explicitly stated in account agreements, that deposit claims are generally non-assignable without the bank's consent. Assignees are therefore typically on notice of potential restrictions.
  • Non-Application of General Rules: Consequently, the general rules found in Article 466(3) (obligor can pay assignor when assignee is knowing/grossly negligent), Article 466(4) (assignee's right to demand obligor pay assignor to break deadlock), and the special deposit system rules in Articles 466-2 and 466-3 do not apply to these restricted deposit claims when an assignment is made to a knowing or grossly negligent party, because the assignment itself is deemed ineffective in such cases.
  • Exception for Attaching Creditors (Art. 466-5(2)): However, consistent with the general principle for other claims, an obligor (the bank) cannot assert the Jōto Seigen Tokuyaku on a deposit claim against a creditor who is conducting compulsory execution against that deposit claim as an asset of the depositor (the original creditor/assignor).

Future Claims and Subsequently Added Assignment Restrictions (Art. 466-6(3))

A specific rule addresses the scenario where future claims are assigned, and after this assignment has been perfected against the obligor, the original creditor (assignor) and the obligor then agree to impose a Jōto Seigen Tokuyaku on those future claims.

Article 466-6, paragraph 3, provides that if the perfection of the assignment of future claims against the obligor (through notice from the assignor or acknowledgment by the obligor) occurred before the Jōto Seigen Tokuyaku was subsequently agreed upon for those future claims, the obligor cannot assert that subsequently agreed restriction against the assignee. The assignee's rights, once perfected, are protected against later agreements between the assignor and obligor that would impair them.

Conversely, if the Jōto Seigen Tokuyaku was already in place or was agreed upon for the future claims before the assignment of those claims was perfected against the obligor, then the assignee is deemed to have known of the restriction (or to have been grossly negligent in not knowing). In such a case, the obligor can assert the restriction against the assignee pursuant to the general rules (Article 466(3), or Article 466-5(1) if it's a deposit claim). This rule prioritizes legal effects based on the timing of the perfection of the assignment versus the creation (or perfection against the assignee) of the restriction.

Conclusion

The revised Japanese Civil Code has significantly reshaped the legal landscape concerning agreements restricting the assignment of claims ("Jōto Seigen Tokuyaku"). The default position has shifted towards recognizing the validity of assignments made even in breach of such restrictions, thereby promoting the fluidity of claims as financial assets. However, the law concurrently provides robust mechanisms to protect the legitimate interests of obligors, particularly by allowing them to continue dealing with the original assignor if the assignee knew of the restriction or was grossly negligent. Special provisions for deposit claims and for situations involving assignor bankruptcy or compulsory execution further refine this balance. This new framework endeavors to harmonize the needs of modern commerce and finance with the traditional protections afforded to obligors.