How Does Attachment of a Claim Affect the Right to Set-Off ("Sōsai") in Japan?

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

Set-off, or "Sōsai" (相殺), is a widely used and economically significant mechanism in Japanese law allowing parties with mutual obligations to extinguish them up to the corresponding amount. However, the exercise of this right can become complex when a third party intervenes by attaching one of these mutual claims. For instance, if Company A owes Company B money (Claim X), and Company B also owes Company A money (Claim Y), Company A might expect to set off Claim Y against Claim X. But what happens if one of Company B's external creditors attaches Claim X (the debt Company A owes to Company B) before Company A declares set-off? This creates a classic conflict: does the attaching creditor's right to seize Claim X prevail, or can Company A (the garnishee or "third-party obligor" in the attachment context) still exercise its right of set-off using Claim Y?

The Japanese Civil Code (Minpō - 民法), particularly in Article 511 (significantly revised effective April 1, 2020), provides specific rules to resolve this tension, balancing the security function inherent in the right of set-off against the need to ensure the effectiveness of civil execution proceedings.

The Core Issue: Competing Interests in Attachment vs. Set-Off

The conflict between an attaching creditor and a party wishing to set off (the garnishee) arises from their competing interests:

  • The Attaching Creditor: This creditor has a judgment or other enforceable title against their debtor (the party whose claim is being attached). They seek to satisfy their own claim by seizing an asset of their debtor – in this case, the debtor's claim against the garnishee.
  • The Garnishee (Set-Off Claimant / Third-Party Debtor): This is the party who owes the attached debt to the principal debtor but also holds their own claim (an active claim) against that same principal debtor. The garnishee often relies on the existence of this mutual indebtedness as a form of de facto security, expecting to use their active claim to set off (and thus not have to pay out) the debt that has now been attached.

Japanese law has long recognized the important functions of set-off, which include simplifying settlements, ensuring fairness between mutual debtors/creditors, and providing a measure of security. The rules governing its interaction with attachment attempt to uphold these functions where appropriate.

Historical Context and the Evolution of Rules (Brief Overview)

Prior to the recent Civil Code revisions, the rules governing the conflict between attachment and set-off, particularly concerning claims acquired by the garnishee before the attachment, were the subject of considerable academic debate and evolving Supreme Court jurisprudence. Former Article 511 of the Civil Code clearly stated that a garnishee could not use a claim acquired after receiving notice of attachment to defeat the attaching creditor. However, for claims acquired before attachment, several theories competed:

  1. "Sōsai Tekijō" Theory (相殺適状説 – Conditions Ripe for Set-Off Theory): This early view held that the garnishee could only set off if all conditions for set-off (mutuality, homogeneity, both claims being due) existed at or before the time of attachment.
  2. Restriction Theory / Due Date Priority Theory (制限説 / 弁済期先後基準説 – Theory of Restriction / Due Date Order Criterion): This theory, adopted by a Supreme Court Grand Bench decision in 1964, allowed set-off if the garnishee's active claim became due before, or at least no later than, the attached passive claim.
  3. Unlimited Theory (無制限説 – Unlimited Theory): A subsequent Supreme Court Grand Bench decision in 1970 overruled the 1964 decision and adopted this broader view, permitting set-off if the garnishee's active claim was acquired before the attachment, irrespective of the relative due dates of the claims.

This evolution reflected a growing recognition of the security function of set-off and the garnishee's legitimate reliance on their ability to net mutual positions.

The New Civil Code's Approach (Article 511): Enhanced Clarity and Protection

The revised Japanese Civil Code, effective April 1, 2020, significantly clarified and, in important respects, expanded the garnishee's right to set off in the face of an attachment. Article 511 now provides a more structured framework:

A. Set-Off with a Claim Acquired Before Attachment – Codification of the "Unlimited Theory"

The new Article 511, paragraph 1, second part, effectively codifies the "unlimited theory" established by the 1970 Supreme Court Grand Bench decision. It provides that the garnishee may assert a set-off against the attaching obligee based on a claim that the garnishee acquired against the obligor (the principal debtor whose claim was attached) before such attachment.

This means that if the garnishee held a claim against the principal debtor prior to the attachment of the debt they owed to that principal debtor, they can use this pre-existing active claim to set off against the attached passive debt. The relative due dates of the active and passive claims are not a barrier to set-off in this scenario. The rationale is to protect the garnishee's established expectation of set-off, which pre-dates the attaching creditor's intervention.

B. Set-Off with a Claim Acquired After Attachment – General Prohibition Reaffirmed

Article 511, paragraph 1, first part, reiterates the traditional rule: "A third party obligor who has received an order of attachment of a claim may not assert a set-off against the attaching obligee based on a claim that the third party obligor acquired against the obligor after such receipt."

This prohibition is crucial for the integrity of the attachment system. It prevents a garnishee, upon learning that a debt they owe has been attached, from opportunistically acquiring new claims against the principal debtor (e.g., by purchasing them at a discount from other creditors of the principal debtor) solely for the purpose of creating a set-off to defeat the attaching creditor. Such actions would allow the garnishee to unfairly prefer themselves or the seller of the claim over the attaching creditor.

C. Key Expansion: Set-Off with Post-Attachment Claims Arising from a "Pre-Attachment Cause" (Art. 511(2))

This is arguably the most significant development in the new Article 511, designed to provide more robust protection for the garnishee's reasonable expectations, particularly by aligning the rules for individual execution more closely with principles found in Japanese insolvency law (especially bankruptcy law).

Article 511, paragraph 2, main sentence, introduces an important exception to the general prohibition on using post-attachment acquired claims for set-off: "Notwithstanding the provisions of the preceding paragraph, if a claim prescribed in that paragraph [i.e., a claim acquired by the garnishee after attachment] arose from a cause (原因 - gen'in) that existed before the attachment, the third party obligor may assert a set-off against the attaching obligee based on such claim."

Meaning and Implications:

This provision allows a garnishee to effect a set-off using an active claim that technically "crystallized" or was fully acquired after the attachment, provided that the underlying legal basis or originating cause for that active claim was already in place before the attachment.

  • Common Example: Guarantor's Right of Reimbursement:
    Imagine Garnishee G had guaranteed Principal Debtor D's loan to Creditor C before External Creditor X attached a debt that G owed to D. After the attachment, D defaults on the loan to C, and G, as guarantor, pays C. G thereby acquires a reimbursement right (kyūshōken - 求償権) against D. Although this reimbursement right is fully acquired by G after X's attachment, it "arose from a cause (the guarantee agreement) that existed before the attachment." Under Article 511(2), Garnishee G can now use this post-attachment reimbursement right to set off against the debt G originally owed to D (which was attached by X).
  • Other Potential Examples:
    • Claims arising from a contract entered into before attachment, where a condition precedent for the claim's enforceability is fulfilled only after attachment.
    • Claims for damages arising from a breach of a pre-attachment contract, where the breach itself or the quantification of damages occurs after attachment. The "cause" (the contract) existed pre-attachment.

Rationale for the Expansion:

This expansion is largely motivated by a desire to "level" (平準化 - heijunka) the protection of set-off rights in individual execution proceedings with the broader protection afforded in insolvency proceedings (like bankruptcy). In bankruptcy, a creditor of the bankrupt entity who also owes a debt to the bankrupt can generally set off, even if their claim against the bankrupt was not yet due or was conditional at the time bankruptcy proceedings commenced, provided the basis for the claim existed pre-bankruptcy (see Bankruptcy Act - 破産法 - Hasan Hō, Arts. 67 et seq.). Article 511(2) brings a similar logic to individual attachments: if the fundamental reason for the garnishee's claim against the principal debtor was established before the attachment, their expectation of a potential set-off is deemed worthy of protection against the attaching creditor.

Important Exception to this Expansion (Art. 511(2), proviso):

The expanded right under Article 511(2) is itself subject to a crucial limitation: it does not apply if the garnishee acquired the claim (even if that claim itself arose from a pre-attachment cause involving the principal debtor and an original third party) from another person after the attachment.

  • For example, Garnishee A owes Debtor B. Creditor X attaches A's debt to B. After this attachment, Party Y holds a claim against Debtor B, and this claim Y has against B arose from a cause that existed before X's attachment. If Garnishee A now, after X's attachment, purchases Y's claim against B, Garnishee A cannot use this newly acquired claim (even though its ultimate origin was pre-attachment) to set off against the debt attached by X.
  • This proviso prevents garnishees from actively "trafficking" in claims post-attachment to engineer set-off opportunities that would defeat the rights of the attaching creditor.

Subrogation to Collateral ("Butsujō Dai'i") and Set-Off

A complex interplay can arise when set-off rights intersect with a secured creditor's right of "Butsujō Dai'i" (物上代位 – subrogation to collateral). Butsujō Dai'i allows a creditor with a security interest (e.g., a mortgagee) to pursue their claim against proceeds or substitute assets if the original collateral is disposed of or transformed (e.g., insurance payments for damaged collateral, or rental income from mortgaged property).

If a mortgagee, exercising Butsujō Dai'i, attaches rental payments owed by a tenant (garnishee) to the mortgagor (principal debtor), the question arises whether the tenant can set off a claim they have against the mortgagor (e.g., for the return of a security deposit, or for repair costs they advanced for the leased property) against this attached rent claim.

  • Previous Case Law (Often Based on "Time of Mortgage Registration"): Under the old law, influential Supreme Court decisions (e.g., March 13, 2001) often resolved this by looking at when the tenant's claim against the mortgagor arose relative to when the mortgage was registered. If the tenant's claim (the active claim for set-off) was acquired after the mortgage was registered, the tenant was generally barred from setting it off against rent payments attached by the mortgagee. The mortgage registration was seen as granting the mortgagee a prior, publicly notified interest in the property and its proceeds, including future rent.
  • Potential Impact of the New Civil Code: The principles underpinning the new Article 511—particularly the adoption of the "unlimited theory" for claims acquired pre-attachment and the allowance of set-off for post-attachment claims stemming from a "pre-attachment cause"—are likely to influence how these Butsujō Dai'i versus set-off conflicts are resolved. If a tenant's claim (e.g., the right to a security deposit refund, which originates from the pre-existing lease agreement) is considered to arise from a "cause existing before the mortgagee's attachment of rent" (even if the claim for the refund only crystallizes upon lease termination, which might be post-attachment), the tenant may now have a stronger argument for being able to set off against the rent claimed by the mortgagee under Butsujō Dai'i. The new framework may shift the balance more towards protecting the tenant's set-off expectations if their claim against the landlord has a sufficiently robust pre-existing legal basis.

Acceleration Clauses and Pre-Agreed Set-Off Mechanisms

Commercial contracts, especially loan agreements, frequently contain "acceleration clauses" (期限の利益喪失特約 - kigen no rieki sōshitsu tokuyaku). These clauses stipulate that the entire outstanding debt becomes immediately due and payable upon the occurrence of specified trigger events, such as the debtor's default on an installment payment, commencement of insolvency proceedings, or significantly, the attachment of the debtor's assets by another creditor.

  • Purpose: A primary purpose of such clauses is to enable the creditor (e.g., a bank) to achieve "Sōsai Tekijō" (conditions ripe for set-off) immediately when a trigger event occurs. This allows the bank, for example, to set off its loan claim against the debtor's deposits held at the bank before an attaching creditor can effectively seize those deposits.
  • Effectiveness Against Attaching Creditors: The prevailing view, strongly reinforced by the Supreme Court Grand Bench decision of 1970 and consistent with the principles of the new Article 511, is that if such an acceleration clause was validly agreed upon before an attachment, and the trigger event (which can be the attachment itself or notice thereof) occurs, the resulting Sōsai Tekijō and the subsequent set-off by the garnishee (e.g., the bank) can be validly asserted against the attaching creditor. The pre-existing contractual arrangement establishing the conditions for accelerated maturity and set-off is generally respected.
  • Tripartite Set-Off Agreements ("Sansha Kan Sōsai Yoyaku" - 三者間相殺予約): More intricate are preliminary agreements for set-off involving three or more parties, which aim to create netting possibilities across different pairings of obligations. The enforceability of such multi-party set-off arrangements against an attaching creditor of one of the claims is highly dependent on the specific structure of the agreement and whether it can be construed as creating clear, pre-existing rights (akin to an assignment or security interest with appropriate perfection) that can legitimately take priority over a subsequent attachment. Generally, for such complex arrangements to defeat an attachment, they must be very carefully drafted to establish such prior rights.

Conclusion

The Japanese Civil Code, through the revised Article 511, provides a more explicit and, in certain respects, more garnishee-protective framework for resolving the conflict between attachment and the right of set-off. By formally adopting the "unlimited theory" for claims acquired by the garnishee before attachment and, crucially, by allowing set-off for claims acquired post-attachment if they arise from a "pre-attachment cause," the law seeks to protect the legitimate expectations of parties who rely on mutual indebtedness as a basis for settlement and de facto security. These rules aim to strike a fair balance between ensuring the effectiveness of debt collection efforts through attachment and upholding the important commercial functions of set-off. Navigating these provisions requires careful attention to the timing of claim acquisition, the origin of those claims, and any pre-existing contractual arrangements governing the parties' mutual obligations.