Navigating New Agency Rules in Japan: What Do US Businesses Need to Know After the Civil Code Reform?

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

Agency (代理 - dairi), the legal concept allowing one person (the agent) to act on behalf of another (the principal) and create legal effects directly for the principal, is a cornerstone of modern commerce. The comprehensive reforms to Japan's Civil Code, effective from April 1, 2020, brought significant clarifications and some substantive changes to the rules governing agency. While many amendments codify long-standing judicial precedents, others refine existing principles or introduce new considerations for parties relying on or acting as agents. For US businesses engaging in transactions involving Japanese agents, or appointing agents in Japan, a clear understanding of this revised framework is essential for smooth and legally sound operations.

The Core Framework of Agency in Japan

Before delving into the specifics of the reforms, it's helpful to recap the fundamental elements of agency under Japanese law:

  1. Grant of Authority (代理権授与 - dairiken juyo): The agent must possess the authority to act for the principal. This authority can be conferred by the principal's own will, known as "voluntary agency" (任意代理 - nin'i dairi), such as through a power of attorney or an agency agreement. Alternatively, it can arise by operation of law, termed "statutory agency" (法定代理 - hōtei dairi), like the authority of a parent for a minor child or a court-appointed guardian for an adult.
  2. Indication of Agency (顕名 - kenmei): When performing a legal act, the agent must generally disclose to the third party that they are acting on behalf of a specific principal (Reformed Civil Code, Article 99, Paragraph 1). This is known as the kenmei principle. If the agent fails to disclose this and acts as if for themselves, the act is generally considered to bind the agent personally, unless the third party knew or should have known that the agent was acting for the principal (Reformed Civil Code, Article 100).
  3. The Agency Act (代理行為 - dairi kōi): This refers to the legal act itself (e.g., concluding a contract, making a declaration of intent) performed by the agent within the scope of their authority, which then binds the principal.

Key Reforms and Clarifications to Agency Law

The Civil Code reform touched upon several critical aspects of agency law, aiming for greater precision and alignment with established judicial interpretations.

1. Defects in Intention or Knowledge in Agency Acts (代理行為の瑕疵)

The validity of a legal act can be affected by factors such as mistake, fraud, duress, or a party's knowledge (or negligent ignorance) of certain facts. When an agent is involved, the question arises as to whose state of mind or knowledge is relevant.

  • General Rule: Agent as the Standard: The reformed Civil Code (Article 101, Paragraphs 1 and 2) clarifies that if the effect of an act of agency is influenced by a defect in intention (e.g., the agent was defrauded), or by knowledge or negligent ignorance of certain circumstances, the existence or non-existence of such facts shall be determined based on the agent. For example, if a third party defrauds the agent into making a contract, the principal can rescind the contract based on the agent's experience of fraud. Similarly, if an agent, in making a purchase for the principal, was aware of a defect in the goods, that knowledge is attributed to the principal.
  • Exception: Principal's Specific Instructions and Knowledge: An important exception exists. If a principal entrusts an agent with a specific legal act (e.g., "buy this particular painting"), and the principal themselves knew of certain circumstances relevant to that act (e.g., the painting was a forgery), or was negligent in not knowing, then the principal cannot assert the agent's ignorance of those circumstances to avoid liability (Reformed Civil Code, Article 101, Paragraph 3). The reform notably removed the phrase "in accordance with the principal's instructions" (本人の指図に従って - honnin no sashizu ni shitagatte) from the previous corresponding article. This aligns the Code with judicial precedent that did not always require such explicit, detailed instructions if there was a specific entrustment of a particular legal act.

2. Agent's Capacity to Act (代理人の行為能力)

The rules regarding an agent's own legal capacity have been maintained and slightly clarified:

  • An agent is not required to have full legal capacity to act (e.g., a minor can act as an agent for an adult principal) (Reformed Civil Code, Article 102). The rationale is that the legal effects of the agent's actions accrue to the principal, who is assumed to have capacity.
  • However, an important clarification arises when a person with limited capacity (e.g., a minor or an adult ward) acts as a statutory agent for another person who also has limited capacity. In such specific cases, the act performed by the statutory agent can be rescinded on the grounds of their limited capacity (Reformed Civil Code, Article 120, Paragraph 1, referencing the situation under Article 13, Paragraph 10, Item 2 concerning a person under curatorship acting as a statutory agent for another with limited capacity). This protects the ultimate principal (the person with limited capacity being represented) from potentially disadvantageous acts performed by a statutory agent who also lacks full capacity.

3. Appointment and Responsibility for Sub-Agents (復代理人)

The rules concerning the appointment of sub-agents (fukudairinin) by a voluntary agent have been liberalized:

  • Previously, a voluntary agent could only appoint a sub-agent with the principal's permission or due to unavoidable circumstances. The reform removed these restrictions (by deleting former Articles 104 and 105). Now, voluntary agents generally have more freedom to delegate their tasks to sub-agents, unless the nature of the agency or the principal's express intent prohibits it.
  • Consequently, the voluntary agent's liability for the acts of a sub-agent is no longer limited to "selection and supervision" as under the old law. Instead, their liability will be determined according to the general principles of breach of contract (債務不履行 - saimu furikō). This could potentially broaden the scope of the agent's responsibility for a sub-agent's misconduct.

4. Abuse of Agency Authority (代理権の濫用)

A significant development is the introduction of an explicit statutory provision dealing with the "abuse of agency authority" (dairiken no ranyō) (Reformed Civil Code, Article 107). This largely codifies pre-existing case law.

  • The provision states that if an agent, while acting ostensibly within the scope of their authority, performs an act primarily for their own benefit or the benefit of a third party (and not for the principal's benefit), such an act is treated as an act performed by an unauthorized agent if the third party dealing with the agent knew, or should have known, of the agent's improper purpose.
  • In such cases, the principal is not bound by the agent's act unless the principal subsequently ratifies it. This provides a clearer basis for principals to protect themselves against disloyal agents, provided the third party's awareness (actual or constructive) of the abuse can be established.

5. Self-Dealing and Dual Agency (自己契約及び双方代理)

The traditional prohibitions against an agent engaging in "self-dealing" (自己契約 - jiko keiyaku, where the agent acts as the third party in a transaction with the principal) or "dual agency" (双方代理 - sōhō dairi, where the agent represents both parties in a transaction) are maintained in the Reformed Civil Code (Article 108, Paragraph 1).

  • The key reform here is the clarification of the effect of such prohibited acts. The Code now explicitly states that acts contravening these prohibitions are treated as acts performed by an unauthorized agent. This means they are not automatically void but are not binding on the principal unless the principal chooses to ratify them. This aligns the Code with established case law.
  • Furthermore, a new provision (Article 108, Paragraph 2) extends this treatment to other situations where there is a conflict of interest between the agent and the principal, even if not strictly self-dealing or dual agency. This enhances protection for the principal against potentially harmful acts by an agent with conflicting interests.

6. Apparent Agency (表見代理)

Apparent agency (hyōken dairi) doctrines protect third parties who reasonably rely on the appearance of agency authority, even if actual authority is lacking or has been exceeded. The reforms have clarified and expanded these rules, largely by codifying judicial precedents.

  • Apparent Agency by Indication of Grant of Authority (代理権授与の表示による表見代理): If a principal has indicated to a third party that they have granted agency authority to a certain person, the principal is bound by acts performed by that person within the scope of the indicated authority, provided the third party acted in good faith and without negligence (Reformed Civil Code, Article 109, Paragraph 1).
    A crucial addition is Article 109, Paragraph 2, which covers situations where the person represented as having authority then acts beyond the scope of that indicated authority. In such cases, the principal will still be bound if the third party had justifiable grounds to believe the agent possessed such extended authority. This codifies prior Supreme Court rulings (e.g., Supreme Court, July 28, 1970, which dealt with the overlapping application of former Articles 109 and 110).
  • Apparent Agency for Acts Exceeding Authority (権限外の行為の表見代理): Governed by Article 110, this applies when an agent who possesses some actual authority acts beyond that scope. The principal is bound if the third party had justifiable grounds to believe the agent had the authority to perform the act in question.
  • Apparent Agency After Termination of Authority (代理権消滅後の表見代理): Article 112 deals with situations where a person who previously had agency authority continues to act as an agent after that authority has been terminated.
    • Paragraph 1 clarifies that a third party is protected if they were in "good faith" regarding the termination – meaning they were unaware of the termination of a previously existing authority.
    • Paragraph 2, a new addition, codifies case law (e.g., Supreme Court, November 29, 1957) that extends apparent agency to cases where a former agent, after their authority has terminated, performs an act that is beyond the scope of their original, now-terminated authority. The principal will be bound if the third party had justifiable grounds to believe the former agent still possessed such authority.

These clarifications provide more robust protection for third parties who rely on reasonable appearances of authority, while also defining the conditions for such reliance.

7. Unauthorized Agency (無権代理)

When a person acts as an agent without any authority, or exceeds their authority without the conditions for apparent agency being met, it is considered "unauthorized agency" (muken dairi).

  • Burden of Proof: The reformed Code (Article 117, Paragraph 1) clearly places the burden on the person who purported to act as an agent to prove either that they possessed the necessary authority or that the principal ratified the act. If they cannot, they are liable to the third party.
  • Liability of the Unauthorized Agent: An unauthorized agent can be held liable by the third party, either to perform the contract or to pay damages. However, an important refinement in Article 117, Paragraph 2, Item 2, concerns the agent's own knowledge. If the unauthorized agent knew they lacked authority, they cannot escape liability to the third party even if the third party was merely negligent in not realizing the lack of authority (provided the third party was not actually aware of the lack of authority). This strengthens the third party's position against an agent who knowingly acts without authority.

Transitional Provisions: Which Law Applies?

Understanding which version of the Civil Code applies is crucial for ongoing or new agency arrangements:

  • The reformed agency rules (e.g., concerning the agent's capacity, abuse of authority, apparent agency) generally apply if the agency authority itself was granted on or after April 1, 2020. If the authority was granted before this date, the provisions of the old Civil Code continue to apply to acts performed by that agent, even if the specific act of agency occurs after April 1, 2020.
  • For issues of unauthorized agency, the reformed rules (e.g., regarding the liability of the unauthorized agent) apply if the unauthorized act was committed on or after April 1, 2020.

Practical Considerations for Businesses

The reforms to Japanese agency law, while often clarifying rather than revolutionizing, have several practical implications:

  • Clarity in Granting Authority: When appointing agents in Japan, principals should clearly and precisely define the scope and limits of the agent's authority in the agency agreement or power of attorney. This helps mitigate risks associated with agents exceeding authority or potential abuse.
  • Due Diligence by Third Parties: Businesses dealing with individuals or entities claiming to act as agents for a Japanese principal should exercise due diligence. This includes verifying the agent's disclosure of acting for a principal (kenmei) and, where appropriate, seeking confirmation of the scope of their authority from the principal.
  • Understanding Abuse of Agency: Principals should be aware of the new Article 107. While it offers protection against disloyal agents, the condition that the third party "knew or should have known" of the improper purpose can be a high bar. Internal controls and clear communication with agents are vital.
  • Apparent Agency Risks: Principals must be cautious about creating situations that could give rise to apparent agency. This includes promptly notifying third parties if an agent's authority is terminated or restricted.
  • Transitional Rules: For agency relationships that span the reform date, it's important to determine whether the old or new rules apply, particularly if disputes arise.

Conclusion

The revisions to Japan's agency law within the Civil Code reform largely aim to provide greater statutory clarity, codify established judicial interpretations, and offer a more nuanced framework for common agency scenarios such as abuse of authority and apparent agency. While the fundamental structure of agency remains, the detailed amendments require businesses to ensure their practices for appointing and dealing with agents are aligned with these updated provisions. A thorough understanding of these rules will contribute to more secure and predictable commercial dealings in Japan.