How Has Japan's Civil Code Reform Changed the Rules for Contract Formation?

The landscape of Japanese contract law underwent a significant transformation with the reforms to its Civil Code, which came into effect on April 1, 2020. These changes, the first major overhaul of contract law provisions in over a century, aimed to modernize the legal framework, enhance clarity, and align Japanese law more closely with international standards and contemporary business practices. For businesses and legal professionals engaging with Japanese counterparts, understanding these revised rules, particularly those governing how contracts are formed, is crucial. This article explores the key modifications to the principles of offer and acceptance and the codification of fundamental contractual freedoms.

The Bedrock: Offer and Acceptance (申込みと承諾)

At its core, a contract under Japanese law, both before and after the reform, is formed through a mutual agreement between parties—a "meeting of the minds." This is typically achieved through a process of offer (申込み - moushikomi) and acceptance (承諾 - shoudaku). It's a foundational principle that the mere creation of a formal, written contract document is not usually a prerequisite for a contract's existence; the agreement itself, demonstrating corresponding intentions, is what brings the contract into being. However, in business, written contracts remain indispensable for clearly evidencing the terms agreed upon and preventing future disputes. The reforms have reinforced the importance of clearly articulating what the parties have actually agreed to.

Defining the Offer: Clarity and Intent

The reformed Civil Code now explicitly states that for an offer to be legally effective, it must "indicate the content (内容 - naiyō) of the contract and an intention to be bound by its acceptance" (Reformed Civil Code, Article 522, Paragraph 1). This codification brings greater clarity to what constitutes a binding offer.

Distinguishing Offers from Invitations to Treat

A critical distinction exists between a definitive offer and a mere "invitation to treat" (申込みの誘引 - moushikomi no yūin). An invitation to treat—such as advertisements, price lists, or proposals that lack essential terms or a clear intention to be bound upon a simple "yes"—does not, upon a response, create a contract. Instead, it invites the other party to make an offer. If an "offer" lacks sufficient definiteness regarding the "content of the contract," it may be construed as merely an invitation to treat. Businesses should therefore ensure their proposals are specific and clearly express an intention to be bound if they wish for them to be treated as legal offers.

The Binding Nature and Duration of an Offer

Once an offer reaches the offeree, it generally becomes binding on the offeror, restricting their ability to unilaterally withdraw it under certain conditions. The rules governing how long an offer remains open for acceptance have been clarified:

1. Offers with a Stipulated Acceptance Period (承諾期間の定めのある申込み): If an offeror specifies a period during which acceptance must be made (承諾期間 - shōdaku kikan), the offeror generally cannot revoke the offer within that period (Reformed Civil Code, Article 523, Paragraph 1). However, the reform explicitly allows an offeror to reserve the right to revoke the offer even during this period, provided this reservation is clearly communicated (Reformed Civil Code, Article 523, Paragraph 1, proviso). If the acceptance period lapses without acceptance, the offer loses its effect.
2. Offers without a Stipulated Acceptance Period (承諾期間の定めのない申込み): Where no acceptance period is set, an offeror cannot revoke their offer for a "reasonable period" during which they can expect to receive an acceptance (Reformed Civil Code, Article 525, Paragraph 1). What constitutes a "reasonable period" will depend on the circumstances, such as the nature of the transaction and the means of communication used. Again, the offeror can reserve the right to revoke.
3. Offers Made in Dialogue (対話者間の申込み): For offers made between parties in direct dialogue (e.g., in person or by telephone), if no specific acceptance period is mentioned, the offer loses its effect unless the offeree accepts it immediately, during the continuation of the dialogue. The exception is if the offeror indicates that the offer will remain open even after the dialogue ends (Reformed Civil Code, Article 525, Paragraph 3). During the dialogue itself, the offeror can generally revoke the offer at any time before acceptance (Reformed Civil Code, Article 525, Paragraph 2).

The Acceptance: The "Arrival Principle" Takes Center Stage

Acceptance is the offeree's unequivocal assent to the terms of the offer. A purported acceptance that modifies the terms of the offer is not a true acceptance but rather a rejection of the original offer and a counter-offer.

The Shift to the Arrival Principle (到達主義)

One of the most significant changes introduced by the reform concerns the timing of when an acceptance becomes effective. Previously, for contracts made between remote parties (隔地者間の契約 - kakchisha-kan no keiyaku), the "dispatch principle" (発信主義 - hasshin shugi) applied to acceptance (Old Civil Code, Article 526). This meant an acceptance was effective when dispatched by the offeree, regardless of when it reached the offeror.

The reformed Civil Code has abolished this rule and unified the approach under the "arrival principle" (到達主義 - tōtatsu shugi). Now, an acceptance, like other declarations of intent, generally becomes effective when it reaches the offeror (Reformed Civil Code, Article 97, Paragraph 1, applied via the effect of Reformed Civil Code, Article 522, Paragraph 1, and the deletion of the former dispatch rule for acceptances).

Implications of the Arrival Principle

This shift has practical consequences:

• Risk of Delay or Loss: The risk of an acceptance being delayed or lost in transmission now primarily falls on the offeree. If the acceptance does not reach the offeror, or does not reach them within the acceptance period (if any) or a reasonable time, a contract is not formed.
• Alignment with Electronic Contracts: This change aligns the general rule for contract formation with the principles already in place for electronic consumer contracts under the "Act on Special Provisions to the Civil Code Concerning Electronic Consumer Contracts and Electronic Acceptance Notices," which also adopted the arrival principle for electronic acceptances. The general rule now consistently applies this principle across different modes of communication for acceptance.
• Revocation of Acceptance: Since an acceptance is effective upon arrival, an offeree can, in theory, revoke their acceptance by communicating the revocation to the offeror before or at the same time as the acceptance arrives.

Parties engaging in contractual negotiations, especially across distances or using mail, should be mindful of this change. Offerees should use reliable communication methods and may consider obtaining confirmation of receipt from the offeror to ensure their acceptance is effective and a contract is formed.

Codification of Freedom of Contract (契約自由の原則)

While the principle of freedom of contract (契約自由の原則 - keiyaku jiyū no gensoku) has long been a cornerstone of Japanese contract law, it was largely an unwritten, albeit fundamental, premise. The reformed Civil Code now explicitly codifies this principle.

Article 521 of the Reformed Civil Code states that no one shall be bound to conclude a contract unless by their own will, and that parties are free to determine the content of their contract. Furthermore, Article 522, Paragraph 2 clarifies that, subject to provisions of laws and regulations concerning the method of contract, the formation of a contract does not require a specific formality, such as being in writing.

This codification encompasses several facets of contractual freedom:

• Freedom to Conclude a Contract: Parties are generally free to decide whether or not to enter into a contract.
• Freedom to Choose the Counterparty: Parties can choose with whom they wish to contract.
• Freedom to Determine Content: Parties can freely negotiate and decide the terms and conditions of their agreement.
• Freedom of Form/Method: As a general rule, contracts can be formed in any manner—orally, in writing, or by conduct—unless specific laws mandate a particular form (e.g., certain types of guarantee contracts).

Of course, this freedom is not absolute. The Civil Code itself, along with other laws, imposes limitations, such as those relating to public order and morality (公序良俗 - kōjo ryōzoku), mandatory legal provisions, and consumer protection laws. The explicit recognition of contractual freedom, however, underscores the judiciary's primary role in interpreting and enforcing the agreement as intended by the parties.

Practical Implications and Best Practices for Business

The reforms to contract formation rules, while in some areas codifying existing practices, introduce changes that necessitate careful consideration by businesses:

1. Clarity in Offers: Offerors should ensure their communications are sufficiently detailed regarding the "content of the contract" and clearly express an intention to be bound to avoid them being treated as mere invitations to treat. If setting an acceptance period, be aware that the offer is generally irrevocable during this time unless the right to revoke is expressly reserved.
2. Ensuring Acceptance Arrives: For offerees, the shift to the arrival principle means that the onus is on them to ensure their acceptance reaches the offeror within the prescribed or a reasonable timeframe. Using traceable and reliable communication methods, and potentially seeking acknowledgments of receipt for critical contracts, is advisable.
3. Documenting the "Content" of the Contract: The reformed Code repeatedly emphasizes the "content of the contract" as the benchmark for various legal assessments (e.g., non-conformity of goods). This makes it even more crucial for parties to meticulously document all agreed terms, specifications, and purposes of their contract.
4. The Enduring Value of Written Agreements: While Japanese law generally doesn't require contracts to be in writing for their formation, the practical necessity of written agreements in business transactions cannot be overstated. Written contracts serve as primary evidence of the parties' agreement, helping to prevent misunderstandings and providing a clear basis for resolving disputes. The reforms, with their focus on the actual agreement, further highlight the value of well-drafted written contracts.
5. Awareness of Revocation Rights: Both offerors and offerees should be clear on when an offer can be revoked. Offerors wishing to retain flexibility should explicitly reserve the right to revoke. Offerees should act promptly, especially when no acceptance period is set.

Conclusion

The amendments to Japan's Civil Code concerning contract formation have brought increased clarity and a degree of modernization. The explicit definition of an offer, the consistent application of the arrival principle for acceptance, and the codification of the freedom of contract provide a more transparent framework. While some changes formalize established practices, the shift in the timing of acceptance is a notable alteration. Businesses operating in or with Japan must adapt their contractual practices to these revised rules to ensure their agreements are formed effectively and their rights are protected, always remembering that the ultimate foundation of a contract lies in the clearly expressed and mutually understood intentions of the parties.