For US companies engaged in the sale or purchase of goods with Japanese entities, a clear understanding of how Japanese law addresses situations where goods do not meet contractual expectations is vital. The 2020 amendments to the Japanese Civil Code brought significant changes in this area, shifting from the traditional concept of "latent defects" (瑕疵 - kashi) to a more comprehensive framework centered on "non-conformity with the contract" (契約不適合 - keiyaku futekigō). This shift has important implications for seller's liability and the remedies available to buyers. This article explores the key elements of this regime, offering insights for businesses navigating cross-border sales transactions.

The Evolution: From "Latent Defects" to "Non-Conformity"

Prior to the 2020 Civil Code reforms, Japanese sales law primarily addressed issues of defective goods through the doctrine of "liability for latent defects" (瑕疵担保責任 - kashi tanpo sekinin). This doctrine was often criticized for its limitations, particularly its focus on "hidden" defects not discoverable by a buyer exercising ordinary care, and a relatively narrow set of remedies, primarily damages and, in severe cases, contract rescission.

The amended Civil Code introduced the concept of "liability for non-conformity with the contract" (契約不適合責任 - keiyaku futekigō sekinin). This aligns Japanese law more closely with international standards, such as the UN Convention on Contracts for the International Sale of Goods (CISG), and provides a broader and more flexible framework.

Under the new regime, a seller is liable if the delivered goods do not conform to the terms of the contract with respect to type, quality, or quantity (種類、品質又は数量に関して契約の内容に適合しない - shurui, hinshitsu mata wa sūryō ni kanshite keiyaku no naiyō ni tekigō shinai) (Civil Code, Article 562, Paragraph 1). This is a significant departure, as liability is no longer restricted to "latent" defects but extends to any failure of the goods to meet the agreed-upon contractual standards, whether discoverable at the time of delivery or not (unless the buyer was aware of the specific non-conformity at the time of contracting and accepted it).

Defining the Benchmark: The "Content of the Contract"

The cornerstone of the non-conformity regime is the "content of the contract" (契約の内容 - keiyaku no naiyō). Whether goods are deemed non-conforming is determined by comparing the delivered goods against this benchmark. Establishing this "content" is, therefore, a critical exercise in contract interpretation. Legal scholarship and judicial practice suggest a nuanced approach to determining these contractual expectations, particularly regarding quality and specifications.

A Layered Understanding of Contractual Expectations

Drawing from analyses of how the previous "defect" concept was understood and how the new "non-conformity" principle is applied, contractual expectations for goods can be seen as having a layered structure:

1. Typical/Ordinary Contractual Content (典型的な契約内容 - tenkei-teki na keiyaku naiyō): This refers to the level of quality, functionality, and characteristics that are ordinarily expected for goods of that type within the relevant trade or market. This can be informed by:
   • Objective standards (e.g., industry regulations, certifications).
   • Common trade usage and customs.
   • The general purpose for which such goods are normally used.
     If the contract is silent on specific quality attributes, these "typical" standards often form the baseline expectation.
2. Specific/Individual Contractual Content (個別的な契約内容 - kobetsu-teki na keiyaku naiyō): This layer encompasses the specific agreements made between the buyer and seller regarding the goods. This is paramount and will override typical expectations if explicitly agreed. It can be established through:
   • Express terms in the contract (e.g., detailed specifications, technical drawings, performance requirements).
   • Descriptions provided by the seller that become part of the basis of the bargain.
   • Samples or models provided by the seller.
   • Specific qualities the seller has expressly warranted.

The Pivotal Role of "Contract Purpose" (契約目的 - keiyaku mokuteki)

The buyer's intended purpose for the goods, if known or reasonably knowable by the seller at the time of contracting, plays a crucial role in defining the expected quality and suitability.

• Typical Contract Purpose: If the goods are standard items, their usual purpose is generally presumed. For instance, a commercial printer is expected to produce clear prints.
• Specific Contract Purpose: If the buyer communicates a particular or specialized purpose for which the goods are intended (e.g., "I need this component to withstand X level of stress for Y application"), and the seller proceeds with the contract knowing this, the goods must be fit for that specific purpose. This specific purpose then becomes part of the "content of the contract" regarding quality.

Applying General Principles of Contract Interpretation

The task of defining the "content of the contract" with respect to the goods inevitably involves the application of general principles of contract interpretation, as discussed in previous articles in this series. In the Japanese context, this means:

• Ascertaining Common Understanding (本来的解釈 - honrai-teki kaishaku): If there's clear evidence that both parties shared a specific understanding about the type, quality, or quantity of the goods, that shared understanding will be given effect.
• Normative Interpretation (規範的解釈 - kihan-teki kaishaku): In the absence of a clear common understanding, the contract's terms regarding the goods will be interpreted based on what reasonable contracting parties, in their specific circumstances, would have understood them to mean. This involves looking at the ordinary meaning of terms, the overall contractual context, trade customs, and the principle of good faith.
• Supplementary Interpretation (補充的解釈 - hojū-teki kaishaku): If the contract is silent on a particular aspect of quality or specification that later becomes contentious, courts may fill this gap by considering what the parties would reasonably have agreed to, informed by default rules, customs, and good faith.

The interplay of these interpretive approaches is crucial for determining precisely what the seller was obliged to deliver.

Seller's Liability and Buyer's Remedies for Non-Conformity

If the delivered goods are found to be non-conforming to the contract, the Japanese Civil Code provides the buyer with a hierarchy of remedies:

1. Primary Remedy: Right to Demand Cure (追完請求権 - tsuikan seikyūken) - Article 562

The buyer's first and primary remedy is to demand that the seller "cure" the non-conformity. This can take the form of:

• Repair of the goods (目的物の修補 - mokutekibutsu no shūho).
• Delivery of substitute goods (代替物の引渡し - daitai-butsu no hikiwatashi).
• Delivery of any missing quantity (不足分の引渡し - fusoku-bun no hikiwatashi).

The buyer can choose the method of cure. However, the seller may propose a different method of cure if it does not impose an unreasonable burden on the buyer. If the non-conformity is due to reasons attributable to the buyer, the buyer cannot demand cure.

2. Right to Demand Price Reduction (代金減額請求権 - daikin gengaku seikyūken) - Article 563

The buyer can demand a reduction in the purchase price if:

• The seller fails to perform the cure within a reasonable period specified by the buyer, or refuses to perform the cure.
• The cure is impossible.
• It is clear that the seller will not perform the cure.
• Demanding cure first would be inappropriate given the nature of the non-conformity or other circumstances.

The amount of the price reduction should be proportionate to the degree of non-conformity.

3. Right to Claim Damages (損害賠償請求権 - songai baishō seikyūken) - Articles 564, 415

Regardless of whether the buyer seeks cure or price reduction, or terminates the contract, they may also claim damages for losses suffered due to the non-conformity. This is governed by the general rules for damages arising from breach of contract (Civil Code Article 415).

The scope of recoverable damages generally includes losses that would ordinarily arise from such non-conformity, as well as losses arising from special circumstances that the seller foresaw or should have foreseen. Importantly, under the amended Civil Code, the seller's liability for damages due to non-conformity is not a strict liability; the seller can be exempted if the non-conformity was not due to reasons attributable to the seller (i.e., if the seller was not at fault). This is a key difference from some interpretations of the old kashi tanpo sekinin.

4. Right to Terminate the Contract (契約解除権 - keiyaku kaijoken) - Articles 564, 541, 542

The buyer may terminate the contract if:

• The seller fails to perform the cure within a reasonable period after the buyer has demanded it, and the non-conformity is not trivial.
• The cure is impossible, or the seller clearly refuses to perform the cure.
• The non-conformity is so material that the purpose of the contract cannot be achieved by the buyer.

If the non-conformity is trivial, termination is generally not permitted, especially if cure or price reduction would adequately address the issue.

Critical Time Limits

Buyers must be mindful of strict time limits. For non-conformity related to the type or quality of goods, the buyer must generally notify the seller of the non-conformity within one year from the time the buyer became aware of it (Civil Code Article 566). Failure to do so can result in the loss of the right to exercise the above remedies. This period does not apply if the seller knew or was grossly negligent in not knowing of the non-conformity at the time of delivery. For quantity shortages, general statute of limitations periods for contractual claims apply.

Insights from Key Case Law: The Soil Contamination Case (Supreme Court, June 1, 2010)

While the "non-conformity" regime is new, the underlying principles of determining what the contract required often draw on judicial experience with the former "defect" (kashi) concept. Legal commentators, and indeed the drafters of the revised law, have noted that the Supreme Court's interpretation of kashi often approached a standard of "conformity with the contract."

A significant case in this context is the Supreme Court decision of June 1, 2010 (Heisei 22) (Minshū Vol. 64, No. 4, p. 953). This case involved a land sale where, after the transaction, the soil was found to contain fluorine exceeding regulatory standards. Crucially, at the time the contract was concluded, fluorine in soil was not subject to legal regulation, nor was it generally recognized in "transactional common sense" (取引観念 - torihiki kannen) as posing a health risk.

The Supreme Court held that the presence of fluorine did not constitute a kashi (defect) under the old law. The Court reasoned that whether the subject matter possessed the quality or performance expected by the parties should be judged by considering the transactional common sense prevailing at the time of contracting. Since, at that time, fluorine was not considered harmful or regulated, the land was not deemed "defective" for lacking a quality (fluorine-free) that was not then an expected attribute.

Although this case was decided under the old law, its emphasis on:

1. The time of contracting as the crucial point for assessing expected qualities.
2. The role of "transactional common sense" or prevailing trade understanding in determining those expectations.
3. The idea that liability hinges on the absence of qualities or performance levels reasonably expected by the parties under the contract,

provides a strong indication of the judicial mindset that continues to be relevant when interpreting "non-conformity with the contract." The "content of the contract" must be determined by reference to the objective circumstances and understandings at the time of formation.

Practical Considerations for US Businesses in Sales Transactions

The Japanese framework for non-conforming goods presents several important considerations for US companies:

1. Extremely Detailed Specifications: The most effective way to manage risk is to be as explicit and detailed as possible in the sales agreement regarding the type, quality, quantity, and performance standards of the goods. Include:
   • Precise technical specifications, measurements, materials, and functionalities.
   • Reference to industry standards or certifications if applicable.
   • Clear criteria for inspection and acceptance.
   • Protocols for handling samples and ensuring conformity to them.
2. Defining "Quality": Avoid vague terms like "good quality" or "standard quality." Instead, quantify quality attributes wherever possible (e.g., defect rates, tolerance levels, specific performance metrics).
3. Inspection and Notification Procedures:
   • Agree on clear procedures for the buyer to inspect goods upon delivery.
   • Understand and adhere to the one-year notification period for type or quality non-conformities from the time of discovery. Failure to provide timely notice can be fatal to a claim.
4. Negotiating Remedies and Liability Limitations:
   • The statutory remedies are default rules. Parties can, to some extent, contractually modify these (e.g., limiting remedies to repair or replacement, setting caps on liability).
   • However, clauses that entirely exempt the seller from liability for non-conformity, or that are deemed contrary to public policy or good faith, may not be enforceable.
5. Governing Law and Dispute Resolution:
   • For international sales, clearly specify the governing law. While the CISG may apply if both countries are signatories and it's not excluded, specific aspects of Japanese domestic law (like the interpretation of "content of the contract") will still be highly relevant if Japanese law is chosen or applies by default.
   • Consider arbitration as a dispute resolution mechanism, which can offer neutrality and specialized expertise.
6. Understanding Seller's Knowledge: The seller's actual or constructive knowledge of a non-conformity at the time of delivery can impact the buyer's rights, particularly concerning the one-year notification period.

Conclusion

The Japanese Civil Code's shift to a "non-conformity with the contract" framework for sales of goods provides a more modern and internationally aligned approach to seller's liability. For US businesses, the central takeaway is the critical importance of the "content of the contract." This is the yardstick against which the delivered goods will be measured.

Therefore, investing in meticulously drafted sales agreements that leave little room for ambiguity regarding type, quality, and quantity is paramount. Coupled with a solid understanding of the available remedies and the procedural requirements for asserting claims, US companies can more effectively manage risks and protect their interests when buying from or selling to Japanese counterparts. Given the nuances involved, particularly in interpreting contractual content and navigating remedies, seeking advice from legal professionals well-versed in Japanese contract and sales law is a prudent step in any significant transaction.