I am a Guarantor for a Japanese Company's Debt. What are the Key Features of a "Guarantee Obligation" (Hoshō Saimu) Under Japanese Law?

Acting as a guarantor (保証人 - hoshōnin) for a company's debt is a significant legal commitment. Under Japanese law, a "Guarantee Obligation" (保証債務 - Hoshō Saimu) imposes direct responsibility on the guarantor to perform the principal debtor's obligation if the principal debtor defaults. Understanding the key features of these obligations, including their fundamental nature, how they are formed, the scope of liability, and the special protections that may apply, is crucial for anyone considering or currently in such a position.

What is a Guarantee Obligation (Hoshō Saimu)?

Article 446, Paragraph 1 of the Japanese Civil Code defines a guarantee obligation as one where the guarantor undertakes to perform the obligation owed by a "principal debtor" (主たる債務者 - shutaru saimusha) to a "creditor" (債権者 - saikensha) in the event that the principal debtor fails to do so. Essentially, the guarantor provides the creditor with a secondary source of recovery, thereby securing the creditor's claim against the principal debtor.

Fundamental Characteristics of a Guarantee Obligation

Guarantee obligations in Japan possess several inherent legal characteristics:

1. Accessory Nature (付従性 - Fujūsei)

This is a cornerstone of guarantee law. The guarantee obligation is dependent on the existence, validity, and scope of the principal obligation it secures. This "accessoriness" has several implications:

• Existence and Validity: If the principal debt is void from the outset (e.g., due to illegality or lack of capacity of the principal debtor), or if it never came into existence, the guarantee obligation generally cannot exist either. Similarly, if the principal debt is later invalidated or extinguished (e.g., through performance by the principal debtor, prescription making it unenforceable, or release by the creditor), the guarantee obligation also typically ceases to exist or is correspondingly affected. (Illustrative, based on genericized CASE 667, 668: If a loan contract is found to be void, the guarantee for that loan is also void).
• Scope of Liability: The guarantor's obligation generally cannot be more onerous than that of the principal debtor (Article 448). If the principal debt is for ¥10 million, the guarantee cannot validly be for ¥12 million for that same underlying obligation. If the terms of the principal obligation are altered (e.g., the principal amount is increased or the interest rate raised), the guarantor's liability for such increased burden typically requires their specific consent.

2. Supplementary Nature (補充性 - Hojūsei) – For "Ordinary" Guarantees

For what is known as an "ordinary" or "simple" guarantee (普通保証 - futsū hoshō), the guarantor's obligation is supplementary or secondary to that of the principal debtor. This means the creditor should, in principle, first seek performance from the principal debtor before turning to the guarantor. This supplementary nature gives rise to specific defenses for the ordinary guarantor:

• Defense of Demand (催告の抗弁権 - Saikoku no Kōbenken) (Article 452): If a creditor demands performance directly from an ordinary guarantor without first demanding it from the principal debtor, the guarantor can insist that the creditor first make a demand on the principal debtor. This defense is available provided the guarantor can show that (a) the principal debtor has the means to perform the obligation, and (b) execution on the principal debtor's assets would not be difficult. (Illustrative, based on genericized CASE 671).
• Defense of Search / Benefit of Discussion (検索の抗弁権 - Kensaku no Kōbenken) (Article 453): Even if the creditor has already made a demand on the principal debtor, if the ordinary guarantor can prove that the principal debtor still possesses sufficient assets to satisfy the debt and that levying execution on those assets would be easy, the guarantor can demand that the creditor first attempt to enforce the debt against the principal debtor's assets before coming back to the guarantor. (Illustrative, based on genericized CASE 672).

Crucial Exception: Joint and Several Guarantee (Rentai Hoshō) (Article 454)

It is critically important to understand that the vast majority of guarantees encountered in practice in Japan, especially in commercial and financial contexts, are "Joint and Several Guarantees" (連帯保証 - Rentai Hoshō). When a guarantee is "joint and several":

• The guarantor loses the defenses of demand and search mentioned above.
• The creditor can demand full performance from the joint and several guarantor immediately upon the principal debtor's default, without any obligation to first pursue the principal debtor or their assets.
• The joint and several guarantor is, in terms of their liability to the creditor, in a position very similar to that of a joint and several principal debtor. This makes their obligation much more direct and onerous than that of an ordinary guarantor.

Because joint and several guarantees are so prevalent, individuals and entities acting as guarantors must be acutely aware of whether this specific form of guarantee is being undertaken, as it significantly curtails their procedural protections.

Formation of a Guarantee Agreement (保証契約 - Hoshō Keiyaku)

A guarantee obligation arises from a guarantee agreement (保証契約 - hoshō keiyaku) entered into between the creditor and the guarantor. The principal debtor is the beneficiary of this agreement (as it provides security for their debt) and often requests the guarantee, but they are not typically a direct contracting party to the guarantee agreement itself.

Strict Formal Requirement: Must Be in Writing (Article 446(2) & (3))

A highly significant formal requirement for the validity of a guarantee agreement is that it must be made in writing or recorded in an electromagnetic record (e.g., a digital contract satisfying certain criteria). Article 446, Paragraph 2 explicitly states that a guarantee agreement that is not made in writing is void. This strict formality is designed to:

• Protect potential guarantors by ensuring they make a deliberate and considered decision before undertaking such a significant liability.
• Provide clear evidence of the existence and terms of the guarantee.
  (Illustrative, based on genericized CASE 673: An oral promise to guarantee a debt is unenforceable). The writing (or electromagnetic record) must clearly evidence the guarantor's unequivocal intention to guarantee the specific principal debt owed by the principal debtor to the creditor.

Information Disclosure Duties in Certain Contexts

The revised Japanese Civil Code (effective 2020) introduced or strengthened duties regarding information disclosure in certain guarantee situations, particularly to protect individual guarantors:

• Duty of Principal Debtor to Disclose Financial Information (Article 465-10): When an individual is asked to guarantee certain business-related debts of a principal debtor (who is not a corporation), the principal debtor has a duty to provide that individual guarantor with accurate information about their financial status (assets, income, other debts) before the guarantee contract is concluded. If the principal debtor fails to provide this information or provides false information, and the guarantor entered into the guarantee based on this lack of or misleading information, the guarantor may have grounds to rescind the guarantee.
• Duty of Creditor to Provide Information (in some cases): Creditors may also have duties to provide information about the status of the principal debt to a guarantor upon request, particularly if the guarantor is an individual and the principal debt is business-related.

Scope of the Guarantor's Obligation (Article 447)

Unless the guarantee agreement specifically limits its scope, a guarantor's obligation is quite broad and typically covers the entirety of the principal debtor's obligation to the creditor. According to Article 447, this includes:

1. The principal amount of the debt.
2. Any interest (contractual or statutory) accrued on the principal debt.
3. Any damages for non-performance (e.g., delay damages) owed by the principal debtor due to their default.
4. Any contractual penalties stipulated in the principal agreement that become payable by the principal debtor.
5. Any costs related to the pursuit or enforcement of the principal debt that the principal debtor is legally liable to pay to the creditor (e.g., certain collection or litigation costs).

(Illustrative, based on genericized CASE 678: If a guarantor guarantees a loan of ¥10 million with 5% annual interest, and the principal debtor defaults, the guarantor can be liable for the ¥10 million principal, accrued interest, and any delay damages until payment).
Parties are, of course, free to contractually limit the guarantor's liability (e.g., guaranteeing only the principal amount, guaranteeing up to a specified maximum monetary cap, or limiting the duration of the guarantee).

Defenses Available to the Guarantor (Article 457)

A guarantor is not without defenses when faced with a demand from the creditor:

1. Defenses of the Principal Debtor (Article 457(1)):
   The guarantor can assert against the creditor any defenses that the principal debtor holds against the creditor regarding the principal obligation. This is a crucial protection derived from the accessory nature of the guarantee. Examples include:
   • The principal contract giving rise to the debt was invalid or has been validly rescinded or terminated.
   • The principal debtor has already performed the obligation (in whole or in part).
   • The creditor's claim against the principal debtor is time-barred by the statute of limitations (prescription).
   • The principal debtor has a right of set-off against the creditor.
     (Illustrative, based on genericized CASE 701, 702: If the principal debtor already paid the debt, the guarantor can raise this as a defense when the creditor demands payment from the guarantor).
     This ensures the guarantor is not forced to pay a debt that the principal debtor themselves is not, or is no longer, legally obliged to pay.
2. Principal Debtor's Unexercised Rights of Set-Off, Rescission, or Termination (Article 457(2) & (3)):
   Even if the principal debtor has not yet formally exercised a right of set-off, rescission, or termination that they hold against the creditor, the guarantor can refuse to perform their guarantee obligation to the creditor to the extent that the principal debtor would be relieved of their obligation if they were to exercise such rights. This prevents the creditor from circumventing the principal debtor's defenses by pursuing the guarantor first.
3. Guarantor's Own Defenses:
   The guarantor can also raise any defenses that arise from their own guarantee agreement with the creditor. For example:
   • The guarantee agreement itself was invalid (e.g., not in writing, lack of capacity, mistake, fraud, or duress affecting the guarantor's consent).
   • The creditor has released the guarantor from their guarantee obligation.
   • The conditions of the guarantee have not been met.

Special Types of Guarantees and Protections

Japanese law recognizes certain special types of guarantees and has introduced specific rules, particularly to protect individual guarantors from overly burdensome or open-ended liabilities:

1. Joint and Several Guarantee (Rentai Hoshō) – Article 454

As emphasized earlier, this is the most common form in practice. Its defining characteristic is the absence of the supplementary defenses of demand and search. The creditor can proceed directly against the joint and several guarantor upon the principal debtor's default. This makes the guarantor's position significantly more exposed.

2. Comprehensive Guarantee (Ne-Hoshō) – Articles 465-2 to 465-5

A "comprehensive guarantee" is one that covers a series of unspecified future obligations that may arise from certain types of ongoing or continuous transactions between the creditor and the principal debtor. It is often used in business relationships involving, for example, a continuous supply of goods on credit, or an open line of credit.

• Key Requirement: Maximum Limit Amount (極度額 - Kyokudogaku): For a comprehensive guarantee to be valid, especially if given by an individual, it must stipulate a maximum limit amount in writing (or electromagnetic record) for which the guarantor will be liable (Article 465-2). This prevents individuals from being exposed to unlimited liability for a potentially ever-increasing series of debts incurred by the principal debtor.
• Restrictions on Certain Comprehensive Guarantees by Individuals: For certain types of comprehensive guarantees provided by individuals, particularly those securing "loans and bill discounts" (貸金等根保証契約 - kashikin-tō ne-hoshō keiyaku), there are strict rules concerning the principal determination date (元本確定日 - ganpon kakuteibi) – a date after which no new principal debts are covered by the guarantee – and the maximum duration of the guarantee. These rules aim to prevent individuals from being locked into open-ended and indefinitely long guarantee commitments for fluctuating business debts.

3. Special Rules for Individual Guarantees for Business Debts (Articles 465-6 to 465-10)

Recognizing that individuals guaranteeing business debts (事業のために負担した貸金等債務 - jigyō no tame ni futan shita kashikin-tō saimu) are often in a vulnerable position (e.g., due to personal relationships or lack of business acumen), the revised Civil Code introduced significant new protections for them, unless the individual guarantor is a director, controlling shareholder of the principal debtor (if a corporation), or a spouse actively involved in the principal debtor's business.

• Requirement of a Notarized Declaration of Intent (公正証書による保証意思宣明手続 - Kōsei Shōsho ni yoru Hoshō Ishi Senmei Tetsuzuki) (Article 465-6):
  For an individual to validly guarantee such business debts, they must, within one month before concluding the guarantee contract, appear before a notary public and declare their genuine intention to provide the guarantee. The notary then creates a notarized deed (保証意思宣明公正証書 - hoshō ishi senmei kōsei shōsho) confirming this declaration. This formal, independent procedure is designed to ensure that the individual fully understands the significant risks and liabilities they are undertaking before committing. Failure to comply with this notarization requirement renders the guarantee agreement void.
• Principal Debtor's Duty to Disclose Information (Article 465-10):
  As mentioned earlier, the principal debtor (if not a corporation) seeking an individual guarantee for their business debts has a positive duty to provide the prospective guarantor with accurate information about their financial condition (assets, liabilities, income, etc.) before the guarantee contract is signed. If the principal debtor fails to provide this information, or provides materially false information, and the guarantor entered into the guarantee based on this misleading situation, the guarantor may have the right to rescind (cancel) the guarantee contract.

Conclusion: A Serious Undertaking with Legal Safeguards

A guarantee obligation (Hoshō Saimu) under Japanese law is a serious legal commitment that can expose the guarantor to significant financial liability. While its accessory nature links it to the principal debt, and ordinary guarantees offer certain procedural defenses, the prevalence of "joint and several guarantees" means that guarantors often face direct and immediate liability upon the principal debtor's default.

The requirement for guarantee agreements to be in writing is a fundamental protection. Furthermore, Japanese law, especially through its recent Civil Code revisions, has implemented important safeguards for individual guarantors, particularly those guaranteeing business debts or entering into comprehensive guarantee arrangements. These include mandatory maximum limit amounts for comprehensive guarantees, the crucial requirement for a notarized declaration of intent for individuals guaranteeing business debts, and duties of information disclosure.

Anyone considering acting as a guarantor for a Japanese company's debt must meticulously review the terms of the proposed guarantee, understand whether it is an ordinary or a joint and several guarantee, be aware of the scope of their potential liability, and, if an individual guaranteeing business debts, ensure all procedural protections like the notarized declaration are properly followed. Seeking independent legal advice before signing such an agreement is always highly recommended.