My Contract with a Japanese Company Prohibits Assignment of Claims: Is Such a "Restriction on Assignability" (Joto Seigen Tokuyaku) Enforceable?

Contracts often include clauses stating that rights or claims arising under them "shall not be assigned" or require prior consent for assignment. Such a provision is known in Japanese law as a "Joto Seigen Tokuyaku" (譲渡制限特約 – a special agreement restricting assignment). For businesses, particularly those involved in financing where accounts receivable are key assets, the enforceability of these restrictions is a critical concern. The Japanese Civil Code, especially after its significant 2017 reforms (effective April 1, 2020), provides a nuanced framework under Article 466 and related provisions, fundamentally altering how these clauses operate.

The Old vs. New Law: A Fundamental Shift in Approach

Understanding the current law requires appreciating the significant change from the pre-2017 legal landscape:

• Pre-2017 Reforms: Under the old Civil Code and prevailing case law, an assignment of a claim made in violation of a restriction on assignment clause was generally considered invalid (muko 無効) in principle. While there were some judicial exceptions developed to protect assignees who acted in good faith and without negligence, the starting point was the invalidity of the assignment itself.
• Post-2017 Reforms (Japanese Civil Code Art. 466, Para. 2): The reformed Civil Code brought about a fundamental reversal. Now, even if parties agree to restrict the assignability of a claim, an assignment made in breach of that restriction is legally valid. The claim is effectively transferred from the assignor (original creditor) to the assignee.

Why the Change? Facilitating Claim Assignment for Financing
This major shift was driven by a policy goal to promote the use of monetary claims, especially accounts receivable, as assets for financing (e.g., factoring, securitization, collateral for loans). The previous rule, which often rendered assignments void, created significant uncertainty and hindered the fluidity of claims as economic assets. The new approach aims to facilitate such assignments while still providing appropriate protections for the obligor (the party who owes the debt).

The Obligor's Protections Despite a Valid Assignment (Art. 466, Paras. 2 & 3)

Even though an assignment made in breach of a restriction is now considered valid, the obligor is not left without recourse against an assignee who was aware, or should have been aware, of the restriction.

For Monetary Claims (Art. 466, Para. 2)

If a monetary claim (kinsen saiken 金銭債権) subject to a restriction on assignment is assigned, the obligor can refuse to perform their payment obligation to the assignee under certain conditions. Specifically, the obligor can do so if the assignee, at the time of the assignment:

• Knew of the restriction on assignment; OR
• Was grossly negligent (judai na kashitsu ari) in not knowing of the restriction.

In such a scenario, the obligor can validly discharge their debt by performing to the original creditor (the assignor), even though the claim has technically been transferred to the assignee. The burden of proving the assignee's knowledge or gross negligence regarding the restriction generally rests on the obligor who wishes to refuse payment to the assignee.

For Claims Other Than Monetary Claims (Art. 466, Para. 3)

For claims requiring performance other than the payment of money (e.g., an obligation to provide a specific service or deliver unique goods), the obligor's protection is even stronger. The obligor can refuse to perform to an assignee who knew of the restriction or was grossly negligent in not knowing it, even if the original creditor (assignor) also demands that the obligor perform to the assignee. This enhanced protection acknowledges that for non-monetary obligations, the identity and specific performance capabilities of the creditor can be more critical to the obligor.

The Obligor's Safe Harbor: The Right to Deposit Performance (Kyotaku – Art. 466-2)

When a monetary claim subject to an assignment restriction has been assigned, the obligor can find themselves in a difficult position, potentially facing demands from both the assignee and the original creditor, or uncertainty about whom to pay. Article 466-2 of the Civil Code provides a "safe harbor" by allowing the obligor to discharge their debt by depositing the amount due with an official depository (the Legal Affairs Bureau – Homukyoku 法務局).

This right to deposit arises in several situations:

1. Assignee Demands Payment (Art. 466-2, Para. 1): If an assignee demands payment of a monetary claim that was subject to an assignment restriction, the obligor can deposit the money. The assignee then has the right to claim these deposited funds. This mechanism protects the obligor from having to determine the validity of the assignee's claim vis-à-vis the restriction and allows the assignee (even one who knew of the restriction) to eventually receive the funds.
2. Conflicting Demands or Uncertainty:
   • If the original creditor (assignor) demands payment after the assignment has occurred but before the assignment has been perfected against the obligor (e.g., by notice with a confirmed date), and the assignee objects to payment to the original creditor, the obligor can demand that the original creditor deposit the sum if they insist on receiving it (Art. 466-2, Para. 2).
   • If both the assignee (who knew of the assignment restriction or was grossly negligent in not knowing it) and the original creditor demand payment from the obligor, the obligor can deposit the sum (Art. 466-2, Para. 3).

This deposit system effectively allows the economic benefit of the claim to flow to the assignee (where appropriate under the priority rules) while insulating the obligor from the risk of double payment or making payment to the wrong party.

What Constitutes "Knowledge" or "Gross Negligence" by the Assignee?

The obligor's ability to refuse performance to an assignee often hinges on the assignee's state of mind regarding the restriction:

• Knowledge (akui 悪意): This means the assignee had actual awareness of the existence of the restriction on assignment at the time they took the assignment.
• Gross Negligence (judai na kashitsu 重大な過失): This implies a serious and blameworthy failure to exercise the ordinary degree of care that should have been exercised, which would have led to the discovery of the restriction. For example, if the underlying contract containing a clear assignment restriction clause was readily available for the assignee to review (e.g., in a due diligence process for a large receivables purchase), and they failed to do so, this might constitute gross negligence. Mere simple negligence might not be sufficient for the obligor to refuse performance.

Obligor's Set-Off Rights Preserved (Art. 466, Para. 4, applying Art. 469, Para. 1)

Article 466, Paragraph 4, protects the obligor's right of set-off. If an assignee knew of the assignment restriction or was grossly negligent in not knowing it, the obligor can still assert against that assignee any defenses, including rights of set-off (sosai 相殺) based on claims they held against the original creditor (assignor), provided those grounds for set-off arose before the obligor received notice of the assignment. This ensures that the obligor's pre-existing financial position vis-à-vis the original creditor is not unfairly prejudiced by an assignment made to a non-bona fide assignee.

Effect of Obligor's Subsequent Consent to Assignment

If, despite an existing restriction on assignment in the contract, the obligor subsequently gives their consent to a specific assignment of the claim, that consent effectively waives the restriction for that particular assignment. The assignee can then demand performance directly from the obligor without the obligor being able to invoke the original restriction.

Special Rules in Case of Assignor's Bankruptcy or Attachment of the Claim

The reformed Civil Code also introduced specific rules addressing the interplay between assignment restrictions and the assignor's bankruptcy or the attachment of the restricted claim by another creditor:

Assignor's Bankruptcy (Art. 466-3)

If the assignor (original creditor) enters bankruptcy proceedings after assigning a monetary claim that was subject to a restriction on assignment, the situation is generally favorable to the assignee.

• The assignee can demand that the obligor deposit the amount due with the official depository.
• Crucially, the assignee (even one who knew of the assignment restriction or was grossly negligent in not knowing it at the time of assignment) generally has the right to claim those deposited funds.
  This provision aims to protect the assignee's interest in the assigned claim against the assignor's bankruptcy trustee, thus supporting the use of such claims in financing even when restrictions exist.

Attachment of the Restricted Claim by Another Creditor of the Assignor (Art. 466-4)

Monetary claims subject to an assignment restriction can still generally be attached by other creditors of the assignor.

• If such a claim is attached, the obligor can deposit the payment with the official depository.
• An assignee of the restricted claim (even one who knew of the restriction or was grossly negligent) generally cannot assert their assignment against an attaching creditor if the attachment process (specifically, the service of the attachment order on the obligor, which constitutes perfection of the attachment) was completed before the assignment to them was perfected against the obligor (e.g., by notice with a confirmed date). This means a diligent attaching creditor can often take priority over an assignee of a restricted claim if the assignee has not yet perfected their rights against the obligor.

Conclusion

The 2017 reforms to the Japanese Civil Code fundamentally reshaped the legal landscape for "Restriction on Assignability Clauses" (Joto Seigen Tokuyaku). While such clauses no longer automatically invalidate an assignment, they provide significant leverage and protection for obligors when dealing with assignees who were aware (or grossly negligent in not being aware) of the restriction. Obligors can refuse performance to such assignees and make payment to the original creditor, or utilize the statutory deposit system to safely discharge their obligations when faced with conflicting demands or uncertainty. Furthermore, specific rules now clarify the assignee's position in the event of the assignor's bankruptcy or attachment of the restricted claim. This revised framework seeks to strike a balance: facilitating the use of claims as valuable assets for financing while safeguarding the legitimate interests and expectations of obligors who negotiated for such restrictions.