How is Performance ("Bensai no Jūtō") Applied When Multiple Debts or Components Exist in Japan?

Japanese Attorney at Law - Bengoshi L.L.

• 11 min read

In commercial and private dealings, it's not uncommon for a debtor to owe multiple distinct obligations to the same creditor. Alternatively, a single obligation might comprise various components, such as principal, accrued interest, and incurred expenses. A practical legal question arises when the debtor makes a payment or tenders performance that is insufficient to discharge all these outstanding amounts. Japanese law addresses this through a set of rules known as "Bensai no Jūtō" (弁済の充当), or the "application of performance." These rules provide a clear and hierarchical framework for determining precisely which debt or which part of a debt is extinguished by the partial performance, ensuring fairness and predictability in financial settlements.

General Principles of "Bensai no Jūtō"

The Meaning of Application of Performance

"Bensai no Jūtō" refers to the legal process of allocating a debtor's tendered performance to one or more of several obligations or to different parts of a single obligation (such as principal, interest, or costs) when the performance is not sufficient to satisfy all of them. Common scenarios where these rules become critical include:

  • A debtor having multiple outstanding loans from the same lender.
  • A tenant owing several months' rent.
  • A buyer in an installment sales contract making a payment that doesn't cover all due installments or associated charges.

The core purpose of these rules is to provide a clear method for determining which specific obligation is reduced or extinguished, thereby preventing ambiguity and potential disputes.

Burden of Pleading and Proof in Application of Performance Disputes

In legal proceedings, if a debtor claims to have performed an obligation (raising a defense of "bensai"), and the creditor acknowledges receipt of a certain performance but contends that it was applied to a different co-existing obligation of the same kind (e.g., an older debt), the burden of pleading and proving the specific application of that performance generally falls on the debtor. The debtor must demonstrate not only that a prestation was made but also that it was, or should have been, applied to the particular obligation currently being claimed by the creditor. A Supreme Court judgment dated October 14, 1960, affirmed that if a creditor establishes the existence of multiple similar debts, the debtor must then specify and prove the application of any given payment to the debt in question.

Hierarchy of Application Rules When Multiple Obligations of the Same Kind Exist

When a debtor owes a creditor several obligations requiring prestations of the same kind (e.g., multiple monetary debts), and a tendered performance is insufficient to discharge all of them, Japanese law establishes a clear hierarchy for determining the application of that performance. This hierarchy, primarily based on Articles 488 to 490 of the Civil Code, prioritizes party autonomy but provides default rules to ensure a definitive outcome. The order is:

  1. Agreed Application ("Gōi Jūtō" - 合意充当)
  2. Designated Application ("Shitei Jūtō" - 指定充当)
  3. Statutory Application ("Hōtei Jūtō" - 法定充当)

1. Agreed Application (Art. 490)

The paramount principle is party autonomy. If the person tendering performance (typically the debtor) and the creditor agree on the order in which the performance should be applied to the various debts, that agreement takes precedence over any other rule.

  • Scope of Agreement: Such an agreement on application can cover not only debts existing at the time of the agreement but also debts that may arise in the future. For example, in loan agreements with regular repayments, it's common to have clauses specifying how overpayments are applied, which could include application to future installments. Supreme Court judgments from July 24, 2014, and July 29, 2014, have dealt with such agreements in the context of overpayments in consumer loans and their application to future obligations.
  • Subsequent Modification: Even after a performance has been applied according to a certain rule (e.g., designation or statutory application), the parties can subsequently agree to change that application. However, such a post-facto agreement cannot adversely affect the rights of third parties who may have acquired an interest in the interim (e.g., a creditor who attached one of the debtor's claims based on the assumption it was still outstanding).
  • Performance by a Third Party: If a third party is making the performance on behalf of the debtor (where permissible), that third party generally has the right to designate the application, even if an agreement on application exists between the original debtor and the creditor.

2. Designated Application (Art. 488(1)-(3))

In the absence of an agreement on application, the right to designate which obligation the performance should be applied to falls to one of the parties.

  • Performer's Primary Right to Designate (Art. 488(1)): The person making the performance (usually the debtor, but could be a third-party performer) has the primary right to designate, at the time of tendering the performance, which specific obligation(s) the performance is intended to satisfy. The creditor generally cannot reject a valid designation made by the performer.
  • Creditor's Secondary Right to Designate (Art. 488(2)): If the performer fails to make a designation when tendering performance, the right to designate shifts to the person receiving the performance (the creditor). The creditor can make this designation "at the time of receipt" of the performance. This phrase is generally interpreted to mean "without delay after receipt".
    • Debtor's Right to Object: Crucially, if the creditor makes a designation, the performer (debtor) can "immediately" (again, interpreted as "without delay") object to it. If such an objection is made, the creditor's designation becomes ineffective. In this situation, where designation fails, the application is then determined by the statutory rules (hōtei jūtō) to ensure a swift resolution of the allocation.
  • Nature of Designation: The designation is a unilateral declaration. As such, it generally cannot be made conditional or be unilaterally revoked or altered by the designating party once made, unless there is a legitimate reason.
  • Default Rules (Nin'i Hōki - 任意法規): The rules in Article 488 paragraphs 1 and 2 regarding which party has the right to designate are default provisions. Parties can agree to different terms, for instance, by granting the creditor the primary right to designate or by specifying a different timeframe for designation. Bank transaction agreements often contain clauses giving the financial institution broad discretion in applying payments. However, even with such agreements, an excessively delayed designation by the empowered party could potentially be challenged under the principle of good faith if it causes undue uncertainty or prejudice, especially if third-party interests have arisen.

3. Statutory Application (Art. 488(4))

If there is no agreed application and no effective designated application (either because no designation was made or because a designation was validly objected to), the Civil Code provides a default order for applying the performance. This "hōtei jūtō" aims to apply the performance in a manner generally considered fair and reasonable. The statutory order is as follows:

  1. Due Debts First: Obligations that are already due and payable (弁済期にある債務 - bensaiki ni aru saimu) are satisfied before obligations whose due dates have not yet arrived. It's the arrival of the due date that matters, not necessarily that the debtor is already in default (rikō chitai - 履行遅滞).
  2. Debts More Beneficial to the Debtor: Among debts that are all due (or all not yet due), the performance is applied to the debt whose discharge is most beneficial to the debtor. Examples include:
    • Interest-bearing debts before non-interest-bearing debts.
    • Debts with higher interest rates before those with lower rates.
    • Debts secured by collateral (e.g., a mortgage) before unsecured debts, as discharging a secured debt frees up the collateral for the debtor's use or for securing other obligations.
    • Debts for which the debtor has been sued before those for which no legal action has been taken.
    • The determination of which debt is "more beneficial" can sometimes be complex. For instance, whether discharging a debt for which a third party stands as surety is more beneficial to the principal debtor than discharging an un-guaranteed debt is not always self-evident and depends on a comprehensive assessment of the circumstances.
  3. Earlier Due Dates: If the benefit to the debtor is equal among several debts, the performance is applied to the debt(s) with the earliest due date(s).
  4. Proportional Application: If all the above factors are equal (e.g., multiple debts with the same due date, interest rate, and benefit to the debtor), the performance is applied to the debts proportionally according to their respective amounts.

Application When Principal, Interest, and Expenses Are Due (Art. 489)

Often, a single obligation, particularly a monetary loan, will involve not only the principal amount but also accrued interest (risoku - 利息) and any associated expenses (hiyou - 費用) that the debtor is liable for. If a payment is made that is insufficient to cover all these components, Article 489 of the Civil Code provides specific rules for application.

Priority of Agreed Application (Art. 490)

As with multiple distinct obligations, if the debtor and creditor have an agreement on how payments should be applied among principal, interest, and expenses, that agreement will govern.

Default Order: Expenses > Interest > Principal (Art. 489(1))

In the absence of such an agreement, Article 489, paragraph 1 establishes a mandatory order of application (unless varied by agreement, this order cannot be changed by unilateral designation by either party):

  1. Expenses (費用 - Hiyō): Any expenses that the debtor is liable to pay in connection with the obligation (e.g., costs of performance borne by the creditor and claimable from the debtor, litigation costs, enforcement costs) are satisfied first.
  2. Interest (利息 - Risoku): Next, the payment is applied to any accrued interest, including default interest (chien risoku - 遅延利息) arising from delayed payment.
  3. Principal (元本 - Ganpon): Finally, any remaining amount of the payment is applied to the principal sum of the debt.

The rationale for this order is rooted in fairness and common financial practice. Expenses are often seen as direct outlays that should be reimbursed first. Applying payments to interest before principal prevents the principal from being reduced prematurely, which would otherwise stop further interest from accruing on that portion, a result generally contrary to a creditor's expectations. This order applies irrespective of whether the interest itself is formally "due" if the principal is due, or whether the principal's due date has passed while some interest payments were not yet technically due.

Application Among Multiple Obligations Involving Principal, Interest, and Expenses (Art. 489(2))

The situation becomes more complex if the debtor owes multiple obligations, and each (or some) of these involves principal, interest, and expenses. If a payment is insufficient to cover the total of all components across all such debts, and there's no agreement on application:

  1. Categorical Application First: The payment is first applied across the categories of debt components in the order specified by Article 489(1): first to cover all outstanding expenses from all relevant debts, then all outstanding interest from all relevant debts, and finally all outstanding principal amounts from all relevant debts.
  2. Application Within Categories: Once the payment is allocated to a general category (e.g., "total interest due"), if it's still insufficient to cover all items within that category (e.g., interest on debt A and interest on debt B), then the rules for applying payments to multiple distinct obligations (Article 488, regarding designated application and then statutory application) are applied mutatis mutandis to allocate the funds among the specific interest amounts (or expenses, or principals) of the different debts. The new Civil Code clarified this, ensuring that designated application has a role even within these sub-categories, a point that was less clear under the old law's wording.

For example, if a debtor owes expenses E1 and E2, interest I1 and I2, and principals P1 and P2, a partial payment would first go to E1 and E2 (applied between them based on Art. 488 rules if necessary), then to I1 and I2 (similarly applied), and finally to P1 and P2.

Application When Several Prestations Are Due for a Single Obligation (Art. 491)

Article 491 of the Civil Code addresses the scenario where a single underlying obligation requires the debtor to make several distinct prestations (e.g., an agreement to deliver goods in three separate installments, or a subscription service with monthly fees). If the debtor tenders a performance that is insufficient to cover all the due prestations under that single obligation, the rules governing the application of performance for multiple distinct obligations (Article 488) and the rules for applying performance among principal, interest, and expenses (Article 489) are to be applied mutatis mutandis. This means the same hierarchical logic (agreement, then designation, then statutory rules) would determine which installment or component of an installment is deemed satisfied.

Scope of the Civil Code Rules on Application of Performance

The principles of "Bensai no Jūtō" extend beyond voluntary payments by a debtor.

Applicability to Situations Other Than Voluntary Performance

The statutory application rules (hōtei jūtō), in particular, are seen as reflecting an objectively reasonable and fair method of allocation. As such, their underlying logic and standards of evaluation can be applied to situations where performance is being applied to obligations without the direct involvement or designation by the performing party or the creditor.

Application to Distributions in Civil Execution ("Minji Shikkō")

A significant area where these principles are applied is in the context of civil execution proceedings (民事執行 - minji shikkō), such as the distribution of proceeds from a court-ordered auction of a debtor's assets (e.g., a mortgaged property).

  • Application of Statutory Rules: Although not explicitly mandated by a specific statutory provision for all execution scenarios, Japanese courts have consistently held that the principles of statutory application (hōtei jūtō) are applicable when distributing proceeds from enforcement actions if those proceeds are insufficient to satisfy all claims of a creditor or multiple claims of the same creditor. A Supreme Court judgment of December 18, 1987, for instance, stated that in the context of a real estate auction pursuant to a mortgage, where a creditor holds multiple secured claims, statutory application is the most equitable and appropriate method, consistent with the objectives of the auction system.
  • Effect of Distribution: When a creditor receives a distribution from an execution proceeding, this payment satisfies the secured claims, and the claims are extinguished in whole or in part according to the rules of statutory application, effective from the time the creditor receives the distributed funds. A Supreme Court decision of October 27, 2015, clarified the timing aspect, especially when distributions are delayed due to objections, holding that the critical moment for application and extinguishment is when the funds are effectively made available to the creditor by the court, not necessarily the earlier date of deposit or the later date of physical receipt if delays occurred.
  • Agreements on Application Post-Distribution: While the execution process itself is governed by statutory application, this does not prevent the creditor and debtor from subsequently agreeing to a different allocation of the received funds among the various debts owed by the debtor to that creditor. Such an agreement would be valid between them. However, it cannot retroactively alter the legal effects of the court-supervised distribution with respect to third parties (e.g., other creditors, guarantors) whose rights might have been fixed based on the initial statutory application during the execution process. The Civil Code reform discussions considered codifying rules to allow for agreed application within the distribution process itself, but this was ultimately not enacted, leaving such complexities to judicial interpretation and specific procedural rules.

Application of Proceeds from a Joint Revolving Mortgage ("Kyōyō Ne-Teitōken")

In the case of a "joint revolving mortgage" (共用根抵当権 - kyōyō ne-teitōken), which is a type of mortgage securing unspecified future debts up to a maximum amount, often for multiple obligors (e.g., a company and its president), specific rules apply for the application of auction proceeds. If such a mortgage is executed and the proceeds are insufficient to cover all secured claims against all obligors, a Supreme Court judgment dated January 20, 1997, indicates a two-step process:

  1. The proceeds are first apportioned among the different obligors based on the respective amounts of their debts secured by the joint revolving mortgage at that time.
  2. The portion allocated to each obligor is then applied to their individual debts (if multiple) according to the standard rules of statutory application of performance.

Assignment Orders ("Tenpu Meirei") in Execution

When a creditor obtains an "assignment order" (転付命令 - tenpu meirei) in execution proceedings – an order by which a claim owed by a third party to the judgment debtor is assigned to the judgment creditor in satisfaction of their claim – different rules apply. Upon the assignment order becoming final and conclusive, the judgment creditor's claim against the judgment debtor and the execution costs are deemed to have been performed (paid) up to the face value of the assigned claim, effective as of the time the order was served on the third-party obligor (Article 160 of the Civil Execution Act). If the face value of the assigned claim is less than the total of the execution claim and costs, the standard rules regarding the application of performance (e.g., to costs, then interest, then principal) would determine how this deemed performance is applied.

Conclusion

The Japanese legal framework for "Bensai no Jūtō" provides a structured and logical approach to resolving the common issue of how to apply insufficient payments or performances across multiple debts or debt components. By prioritizing party agreement, then allowing for designation by the parties, and finally resorting to a detailed set of statutory rules, the system aims to achieve outcomes that are generally fair, predictable, and conducive to the efficient settlement of obligations. These principles not only govern voluntary performances but also find application in analogous situations such as the distribution of proceeds in civil execution, demonstrating their foundational importance in the broader landscape of Japanese obligations law.