My Japanese Counterparty's Claim Against Me Was Attached by Their Creditor. Can I Still Set Off My Claim Against My Counterparty?

In business relationships, it's common for parties to have mutual claims against each other. The right of set-off (相殺 - Sōsai) is a valuable tool under Japanese law, allowing a party to extinguish their debt by applying a claim they hold against their creditor. However, complications arise when a third party—a creditor of your original creditor—steps in and attaches the claim your original creditor has against you. If this happens, can you, as the debtor of the attached claim, still exercise your right of set-off? Article 511 of the Japanese Civil Code provides crucial guidance on this complex interaction.

The General Rule of Article 511: Protecting the Attaching Creditor's Interest

Imagine this scenario: Company A (you) owes Company B ¥10 million (this is your "passive claim" - 受働債権 - judō saiken, as you are the debtor of this claim, and it's an "active claim" for Company B). Company C, who is a creditor of Company B, obtains a court order and attaches Company B's ¥10 million claim against you. Now, Company A also happens to have a separate claim against Company B for ¥7 million (this is your "active claim" - 自動債権 - jidō saiken, as you are the creditor of this claim). Can Company A set off its ¥7 million claim against Company B, thereby reducing its obligation to the attaching creditor (Company C) to only ¥3 million?

The primary rule established by Article 511 of the Civil Code is designed to protect the attaching creditor (Company C). It states: "A debtor whose claim [i.e., the passive claim owed by Company A to Company B] has been attached may not assert against the attaching creditor a set-off using a claim [i.e., Company A's active claim against Company B] acquired against the obligee [Company B] after the attachment."

Rationale for the General Prohibition

The main purpose of this general prohibition is to preserve the effectiveness of the attachment process. If the debtor of an attached claim (Company A) could freely acquire new claims against their original creditor (Company B) after Company C has already attached B's claim against A, and then use these newly acquired claims for set-off, the value of the attached asset (B's claim against A) could be easily diminished or eliminated. This would undermine Company C's efforts to recover its debt from Company B.

Essentially, the law aims to:

• Prevent the attaching creditor's rights from being subsequently defeated by actions taken by the debtor of the attached claim.
• Discourage potential collusion between the debtor of the attached claim and their original creditor to frustrate the attachment.
• Uphold the principle that an attachment effectively "freezes" the state of the attached asset (the claim) as it existed at the moment of attachment, at least concerning newly arising set-off rights against it.

The Critical Exception: Pre-Existing Claims and Causes (Article 511 Proviso)

While the general rule protects the attaching creditor, Article 511 contains a vital proviso that safeguards the legitimate expectations of the debtor whose obligation has been attached (Company A in our example). This exception states that the general prohibition on post-attachment set-off does not apply if the active claim (the claim Company A wants to use for set-off against Company B) was either:

1. Acquired before the attachment occurred, OR
2. Arose from a cause that existed before the attachment.

This exception is fundamental because it recognizes that the debtor of the attached claim may have entered into their relationship with their original creditor relying on the potential to set off pre-existing or foreseeably arising mutual obligations. The attachment by an external third party should not retroactively strip away these established set-off expectations.

Let's break down these two limbs of the exception:

1. Active Claim Acquired Before Attachment (差押え前に取得した債権 - Sashiosae Mae ni Shutoku Shita Saiken)

If the party whose debt was attached (Company A) already held their active claim against their original creditor (Company B) before Company B's claim against Company A was attached by Company C, then Company A can generally use this pre-existing active claim to effect a set-off. The set-off will be effective against the attaching creditor (Company C).

• Timing of Acquisition is Key: The crucial factor is the moment the active claim legally "arose" or was "acquired" by Company A. For instance, if Company A had extended a loan to Company B on May 1st, and Company C attached Company B's claim against Company A on June 1st, Company A could use its loan claim (which arose on May 1st) for set-off.
• Active Claim Need Not Be Due at Time of Attachment: An important clarification from Japanese case law (e.g., Supreme Court of Japan, June 24, 1970, Minshu Vol. 24, No. 6, p. 609) is that the active claim held by Company A does not need to have been due and payable at the precise moment of the attachment. It is sufficient that the claim itself existed (was acquired) before the attachment. The active claim only needs to become due by the time Company A actually declares the set-off, in accordance with the general rules for set-off suitability (sosai tekijō).

2. Active Claim Arising from a "Cause Existing Before Attachment" (差押え前の原因に基づいて生じた債権 - Sashiosae Mae no Gen'in ni Motozuite Shōjita Saiken)

This part of the exception is often more complex and frequently subject to interpretation. It allows set-off even if the active claim itself only comes into existence (crystallizes or matures) after the attachment, provided that the underlying legal cause or foundation for that active claim already existed before the attachment took place.

• Meaning of "Cause Existing Before Attachment": This refers to a pre-existing legal relationship, contractual agreement, or a set of circumstances established before the attachment, from which the active claim would naturally, foreseeably, or logically arise. There must be a sufficiently direct and intrinsic connection between the pre-attachment "cause" and the post-attachment emergence of the claim. A remote, speculative, or purely coincidental link is generally not enough.
• Illustrative Examples:
  • Damages from a Pre-Attachment Breach: If Company A had a contract with Company B, and Company B breached that contract before the attachment (e.g., by delivering defective goods), Company A's claim for damages against Company B, even if the exact amount of damages is quantified or the claim formally arises after the attachment, can be used for set-off. The "cause" – the breach of the pre-existing contract – existed before the attachment. (Illustrative, based on genericized CASE 432).
  • Guarantor's Reimbursement Claim: If Company A acted as a guarantor for Company B's debt to another party, and the guarantee agreement was in place before the attachment, Company A's right to seek reimbursement from Company B if it later pays under the guarantee arises from a pre-attachment cause. Thus, if Company A makes the payment after Company B's claim against A is attached, A can still set off its reimbursement claim. (Illustrative, based on genericized CASE 433).
  • Claims from Continuous Pre-Existing Contracts: If Company A and Company B have an ongoing contractual relationship that predates the attachment (e.g., a long-term lease where B is the tenant and A is the landlord, or a running current account), claims accruing to A from B after the attachment but based directly on that pre-existing contractual framework (like rent for periods after attachment) can often be used for set-off. The lease agreement or current account agreement itself is the pre-existing cause. (Illustrative, based on genericized CASE 434).
  • Restitution Following Rescission/Termination of a Pre-Attachment Contract: If a contract between A and B existed before the attachment, and this contract is validly rescinded or terminated after the attachment (e.g., due to a fundamental breach that occurred pre-attachment), any claim for restitution (e.g., return of advance payments made by A to B) arising from that rescission/termination may be considered to stem from a pre-attachment cause (the original contract). (Illustrative, based on genericized CASE 435).
• What Generally Does Not Qualify as a "Cause Existing Before Attachment":
  • Claims Purchased Post-Attachment: If Company A, after learning that Company B's claim against it has been attached by Company C, goes out and purchases an unrelated pre-existing claim against Company B from a fourth party, Company A generally cannot use this purchased claim for set-off. The "cause" for Company A holding this active claim is the purchase transaction, which occurred after the attachment. (Illustrative, based on genericized CASE 436). Allowing this would too easily permit circumvention of the attachment.
  • Claims from Entirely New Post-Attachment Transactions: If Company A and Company B enter into a completely new and independent transaction after the attachment, any claim arising for A from this new transaction cannot typically be set off against the previously attached claim.

Japanese courts carefully examine the connection between the pre-attachment circumstances and the post-attachment claim to ensure that the third-party debtor's set-off expectation was legitimate and pre-dated the attachment's impact.

Rationale for the Exception: Protecting the Set-Off Expectation

The primary purpose of this crucial exception in Article 511 is to protect the security function of set-off for the third-party debtor (Company A). When Company A engaged in transactions with Company B, it might have done so with a reasonable and legitimate expectation that any mutual claims arising could be settled through set-off. This expectation forms part of the commercial risk assessment. The subsequent attachment of B's claim against A by an external creditor (Company C), who was not a party to the original A-B dealings, should not be allowed to retroactively destroy A's pre-existing rights or well-founded expectations regarding set-off. The exception thus strikes a balance between the attaching creditor's interest in effective enforcement and the third-party debtor's prior commercial position and set-off expectations.

Asserting Set-Off Against an Attaching Creditor

When an attaching creditor (Company C) takes steps to collect the attached claim from the third-party debtor (Company A) – for instance, by filing a collection lawsuit – Company A would assert its right of set-off as a defense in that proceeding. The declaration of set-off itself is technically made by Company A to its original creditor (Company B). However, the legal effect of this set-off (i.e., the extinguishment or reduction of Company A's debt to Company B) is then asserted against the attaching creditor (Company C), effectively reducing the amount Company C can recover through the attachment.

Broader Context: Similar Principles in Claim Assignment and Bankruptcy

The principles underlying Article 511 regarding the protection of pre-existing set-off rights also find echoes in other areas of Japanese law:

• Assignment of Claims (債権譲渡 - Saiken Jōto): When a claim is assigned by a creditor to an assignee, the debtor of that claim can generally assert against the assignee any defenses (including set-off rights) they held against the original assignor that arose before the debtor received notice of the assignment, or that were based on a cause existing before such notice (Article 469 of the Civil Code).
• Bankruptcy (破産 - Hasan): The Japanese Bankruptcy Act (Articles 67 et seq.) generally preserves a creditor's right to set off mutual claims against the bankrupt debtor, provided the conditions for set-off were met before the commencement of bankruptcy proceedings. However, there are specific anti-abuse provisions in bankruptcy law designed to prevent parties from strategically acquiring claims or incurring debts immediately prior to or in contemplation of bankruptcy solely for the purpose of creating a preferential set-off (e.g., Bankruptcy Act, Articles 71, 72). The principles of Article 511 are often considered by analogy when determining the validity of set-offs asserted against a bankruptcy estate.

Conclusion: Navigating Set-Off Rights in the Face of Attachment

The attachment of a claim by a third-party creditor introduces significant complexity into the ability of the debtor of that claim to exercise their own right of set-off. While Japanese law, through Article 511, generally seeks to protect the attaching creditor by prohibiting set-offs based on claims acquired after the attachment, it carves out a vital exception. A third-party debtor can still validly set off their own claim if that claim was either acquired before the attachment or, even if crystallizing after, arose from a legal cause that was already in existence before the attachment. This carefully balances the interests of the attaching creditor with the legitimate, pre-existing set-off expectations of the party whose debt has been targeted. For businesses, this underscores the critical importance of understanding the precise timing of when their mutual claims arise and the nature of their underlying legal causes when assessing their set-off rights in the shadow of a potential attachment.