Made a Mistake in a Contract? How "Mistake" (Sakugo) Affects Contracts in Japan

Mistakes are an inherent part of human interaction, and contractual dealings are no exception. A party might misunderstand a crucial term, misstate an offer, or enter into an agreement based on a fundamentally flawed assumption. In Japanese civil law, the doctrine of Sakugo (錯誤), or "Mistake," addresses such situations where a manifestation of intention is made based on an error by the declarant. Historically, certain mistakes could render a legal act void. However, significant reforms to the Japanese Civil Code, effective April 1, 2020, have substantially revised the treatment of mistake, notably changing the primary remedy from voidness to cancellability and clarifying the types of mistakes that can trigger this remedy. This article explores the current Japanese legal framework for mistake under the revised Article 95 of the Civil Code.

Understanding "Mistake" (Sakugo) Under the Revised Civil Code

At its core, a mistake under Japanese law refers to a situation where a declarant's manifestation of intention is flawed because of an unwitting error on their part. This is distinct from situations like "mental reservation" (shinri ryūho), where the declarant is aware of a discrepancy between their expressed and true intent, or "fictitious manifestation" (kyogi hyōji), which involves collusion with the other party to create a false appearance. In cases of mistake, the declarant is generally unaware of the error at the time the manifestation of intention is made.

The revised Article 95, Paragraph 1 of the Civil Code now provides that a manifestation of intention may be cancelled if it is based on a mistake that meets certain criteria. It identifies two main categories of actionable mistakes:

1. Type 1: Discrepancy Between Intention and Manifestation (Article 95(1)(i)): This category covers mistakes where "there is a lack of intention corresponding to the manifestation of intention." This broadly aligns with what was traditionally known as "mistake in the manifestation" or "display mistake" (hyōji no sakugo). It includes:
   • Mistakes in the expression itself (e.g., an individual intends to offer to sell an item for ¥100,000 but mistakenly writes or says ¥10,000).
   • Mistakes as to the objective meaning or content of the expression used (e.g., an individual uses a technical term believing it means one thing, when in common or legal usage it means another, leading to an expression that doesn't match their underlying intent).
2. Type 2: Mistake Regarding Circumstances Forming the Basis of the Juridical Act (Article 95(1)(ii)): This category addresses mistakes where "the declarant's understanding of circumstances that formed the basis of the juridical act was contrary to the truth." This corresponds to what was traditionally termed "mistake in motive" (dōki no sakugo). Here, the expressed intention matches the internal will to make that specific expression, but the underlying reason or assumption that induced the declarant to form that will and make that expression was fundamentally flawed. For instance, purchasing a piece of land based on the mistaken belief that zoning regulations permit a specific type of construction, when they do not.

Conditions for Cancellation Due to Mistake (Revised Article 95)

For a manifestation of intention to be cancellable due to mistake, several conditions must be met:

A. Materiality of the Mistake (Article 95, Paragraph 1, Main Text)

The overarching requirement is that the mistake must be "material in light of the purpose of the juridical act and common sense in transaction" (hōritsu kōi no mokuteki oyobi torihiki-jō no shakai-tsūnen ni terashite jūyō de aru mono - 法律行為の目的及び取引上の社会通念に照らして重要なもの). This "materiality" test involves a dual assessment:

1. Subjective Materiality: The declarant would not have made that particular manifestation of intention had they known the true state of affairs. There must be a causal link between the mistake and the decision to make the declaration.
2. Objective Materiality: A hypothetical reasonable person, placed in the same circumstances as the declarant, would also likely not have made such a manifestation of intention if they had been aware of the truth. This prevents parties from cancelling agreements based on trivial or purely idiosyncratic errors that would not normally influence a reasonable person's decision in that type of transaction.

Courts will assess materiality by considering the nature and purpose of the specific juridical act, the customs of the relevant trade or transaction, and all surrounding circumstances. For example, a mistake regarding the identity or essential qualities of the subject matter of a sale would generally be considered material, whereas a mistake about a minor, inconsequential detail might not.

B. Special Requirement for Mistake in Motive (Type 2 Mistake) (Article 95, Paragraph 2)

When the mistake falls under Article 95(1)(ii) – that is, a mistake concerning the circumstances that formed the basis of the juridical act (a mistake in motive) – an additional condition must be satisfied for cancellation to be permissible. Article 95, Paragraph 2 states: "If a mistake falls under item (ii) of the preceding paragraph, the manifestation of intention may be cancelled only if the circumstances that were the basis of the juridical act have been indicated as forming the content of the manifestation of intention."

This requirement addresses the inherent difficulty with mistakes in motive: motives are often internal to the declarant and not necessarily apparent to the other party. To allow cancellation based on a purely unexpressed, subjective mistaken motive could unfairly prejudice the other party who relied on the objective manifestation.

• "Indication" of Circumstances: The term "indicated" (hyōji sarete ita toki - 表示されていたとき) implies that the mistaken underlying assumption or circumstance must have been, in some way, communicated or made known to the other party, or otherwise recognized as part of the shared basis of the transaction. This indication can be explicit (e.g., a buyer stating, "I am buying this land because I intend to build a factory, and I understand it is zoned for industrial use") or implicit (e.g., where the nature of the transaction and surrounding communications make it objectively clear to both parties that a particular assumption is fundamental).
• Continuity from Pre-Reform Case Law: Pre-reform case law often required that for a mistake in motive to be actionable, the motive had to be "expressed and incorporated into the content of the juridical act." While the wording of the revised Article 95(2) focuses on "indication," official explanations accompanying the reforms suggest that a substantial departure from the established principles of case law (which often looked for some form of shared understanding or premise) was not intended. Thus, mere unilateral, uncommunicated mistaken motives will generally still not suffice. There needs to be a link between the mistaken circumstance and the "content" of the manifestation as understood or reasonably understandable between the parties.

Limitations on Cancellation: The Declarant's Gross Negligence (Revised Article 95, Paragraph 3)

Even if a material mistake (meeting the criteria of Paragraphs 1 and, if applicable, 2) exists, the declarant's right to cancel may be restricted by their own level of fault.

The first sentence of Article 95, Paragraph 1 provides an exception: cancellation is not permitted "...when the mistake was due to gross negligence (jūdai na kashitsu - 重大な過失) on the part of the declarant."

• "Gross Negligence" Defined: Gross negligence is a significantly high degree of carelessness. It implies a failure to exercise even the most basic level of caution or prudence that would be expected of a reasonable person under the circumstances. It's more than simple carelessness (ordinary negligence). Examples might include signing a contract without reading its crucial terms, or making a significant business decision based on unverified information when verification was easily possible and customary.

Exceptions to the Gross Negligence Bar

However, Article 95, Paragraph 3 provides important counter-exceptions. Even if the declarant was grossly negligent in making the mistake, they may still cancel their manifestation of intention if:

1. The other party knew of the declarant's mistake or was grossly negligent in not knowing of the mistake (Article 95(3)(i)). If the other party was aware of the declarant's error, or so careless that they failed to recognize an obvious mistake, their reliance on the mistaken declaration is not considered worthy of protection.
2. The other party was mistaken about the same matter (Article 95(3)(ii)). This refers to a "common mistake" (kyōtsū sakugo - 共通錯誤), where both parties shared the same fundamental misunderstanding. In such cases, there is no true meeting of minds on the actual facts, and allowing cancellation by the (grossly negligent) declarant does not unfairly prejudice an equally mistaken counterparty.

The rationale behind these exceptions is that if the other party is also at fault (by knowing or being grossly negligent) or shares the same misapprehension, they are not in a position to demand that the (grossly negligent) declarant be held to the mistaken transaction.

Effect of Cancellation Due to Mistake

When a manifestation of intention is validly cancelled due to mistake, it becomes void ab initio – meaning it is treated as if it never had any legal effect from the very beginning (this is the general effect of cancellation under Article 121 of the Civil Code).

The primary consequence is that any juridical act (e.g., a contract) based on that mistaken manifestation of intention is also rendered void. If the contract has not yet been performed, no obligations arise. If performance has already occurred (e.g., payment made, goods delivered), then the parties are generally required to restore each other to their pre-contractual positions. This typically involves claims for restitution based on principles of unjust enrichment (as outlined in Article 121-2 of the revised Civil Code, which deals with the effects of rescission of a juridical act).

Protection of Third Parties (Revised Article 95, Paragraph 4)

A significant clarification in the revised Civil Code concerns the protection of third parties. Article 95, Paragraph 4 states: "The cancellation of a manifestation of intention under paragraph (1) may not be asserted against a third party who is in good faith and without negligence."

• "Third Party": This refers to an individual or entity who, prior to the cancellation, acquired an independent legal interest based on the juridical act that was subsequently cancelled due to mistake (e.g., a person who purchased property from someone whose title was based on the mistaken transaction).
• "Good Faith and Without Negligence" (Zen'i de katsu Kashitsu ga nai - 善意でかつ過失がない): This sets a relatively high bar for third-party protection. The third party must not only have been unaware of the mistake (good faith) but also not have been negligent in being unaware of it at the time they acquired their interest.
• Rationale for the Stricter Standard: This standard ("good faith and without negligence") for third-party protection in mistake cases is notably stricter than that applicable to third parties in cases of fraud or duress (under Article 96, Paragraph 3, which generally only requires "good faith" for the third party). The rationale for this difference often cited is that the declarant who made the mistake, even if not grossly negligent, usually bears some degree of responsibility for the error. Therefore, while third-party reliance needs protection, it is balanced against the fact that the initial problem (the mistake) originated with one of the contracting parties, not necessarily through the wrongful act of the other contracting party (as in fraud or duress). This justifies a higher standard for the third party seeking to uphold their rights against the mistaken declarant.

Declarant's Potential Liability for Damages

The Civil Code, even in its revised form, does not explicitly state that a declarant who cancels a manifestation of intention due to mistake is liable for damages to the other party. However, this has been a subject of scholarly discussion.

It is often the case that a declarant who makes an actionable mistake has been, at least to some degree, negligent (even if not "grossly" negligent). If the other party suffers losses because they relied on the validity of the now-cancelled manifestation (e.g., incurred expenses in preparation for performance), the question arises whether the mistaken declarant should compensate for these "reliance damages."

Some legal scholars argue that, under general principles of tort law (Article 709 of the Civil Code, covering unlawful acts causing damage), a mistaken declarant whose negligence caused foreseeable harm to the other party by inducing reliance on a flawed transaction might be held liable for such reliance damages. This would not be to enforce the contract (as it is cancelled) but to compensate for losses incurred due to the mistaken declaration. This allows for a more nuanced balancing of interests than a simple all-or-nothing approach based solely on the validity or cancellation of the contract. It recognizes that even if a mistake justifies cancellation, the mistaken party's actions might still have had adverse consequences for an innocent counterparty.

Conclusion: Navigating Unwitting Errors in Japanese Agreements

The Japanese Civil Code's provisions on Sakugo (Mistake), particularly as refined by the 2020 revisions, provide a detailed framework for addressing situations where a party's manifestation of intention is based on an unwitting error. The shift from voidness to cancellability, the clear categorization of actionable mistakes (discrepancy between intention and manifestation, and mistakes in underlying circumstances/motive), the stringent materiality requirement, the conditions for indicating a mistaken motive, the nuanced rules regarding the declarant's gross negligence, and the specific standard for protecting third parties all contribute to a system that attempts to balance the interests of the mistaken declarant, their counterparty, and the broader need for transactional security.

For parties involved in contractual or other legal dealings in Japan, this underscores the importance of clarity in communication, due diligence in understanding the terms and fundamental basis of any agreement, and careful verification of critical facts to minimize the risk of errors that could lead to the subsequent unwinding of a transaction. When mistakes do occur, Article 95 provides the pathway, albeit a conditional one, for potential relief.