Our Contract with a Japanese Company Has an "Anti-Assignment Clause" (Jōto Seigen Tokuyaku). Is it Enforceable in Japan?

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read

Anti-assignment clauses (譲渡制限特約 - jōto seigen tokuyaku) are common fixtures in commercial contracts worldwide. These provisions aim to restrict or entirely prohibit a party (the creditor) from transferring their contractual rights (typically the right to receive payment or other performance, known as a 債権 - saiken) to a third party without the consent of the other contracting party (the debtor). But how effective are these clauses under Japanese law? The Japanese Civil Code, particularly following its significant revisions effective April 1, 2020, provides a nuanced framework that balances the creditor's freedom to alienate their assets against the debtor's interest in controlling who they owe obligations to.

What is an "Anti-Assignment Clause" (Jōto Seigen Tokuyaku)?

An anti-assignment clause is a contractual term agreed upon by the original creditor and debtor that expressly forbids or limits the creditor's ability to assign their claim to someone else. For example, a clause might state: "The rights and obligations under this Agreement may not be assigned by either party without the prior written consent of the other party."

From the debtor's perspective, such clauses can serve several purposes:

  • Maintaining a Fixed Creditor: The debtor might have specific reasons for wanting to deal only with the original creditor. This could be due to an established business relationship, reliance on the original creditor's specific performance of related obligations, expectations regarding set-off rights against the original creditor, or simply a desire to avoid the administrative complexities and potential risks of dealing with unknown assignees.
  • Control over Counterparties: For obligations that involve ongoing interaction or where the creditor's identity is material to the debtor, restricting assignment gives the debtor control over who they are ultimately obliged to.

This desire for control, however, often conflicts with the creditor's interest in treating their claims as valuable assets that can be freely sold, factored, or used as collateral for financing.

The Modern Japanese Approach Under the Revised Civil Code (Article 466)

The revised Japanese Civil Code has significantly changed the legal landscape regarding the enforceability of anti-assignment clauses. The previous interpretation often led to assignments made in breach of such clauses being considered invalid or at least ineffective against the debtor if they objected. The new approach, embodied in Article 466, aims to enhance the liquidity of claims while still providing protections for the debtor.

Core Principle: General Assignability of Claims

Article 466, Paragraph 1 reaffirms the general principle that "A claim may be assigned unless its nature does not permit such assignment." This establishes free assignability as the default rule, recognizing claims as transferable assets.

Effect of an Anti-Assignment Clause on the Validity of the Assignment Itself (Article 466(2))

This is where the most significant change lies. Article 466, Paragraph 2 states: "Even if the parties manifest their intention to prohibit or restrict the assignment of a claim... the assignment of the claim shall not be prevented from taking effect."

This means that, under current Japanese law, an assignment made in breach of an anti-assignment clause is still legally valid and effective in transferring the claim from the assignor to the assignee. The clause itself does not render the assignment void or ineffective per se.

The primary rationale for this shift was to promote the use of claims as a means of financing. If assignments could be easily invalidated by such clauses, it would severely hamper practices like factoring, securitization of receivables, and using claims as collateral, thereby restricting access to capital for businesses.

Debtor's Protection: The Right to Refuse Performance to Certain Assignees (Article 466(3))

While the assignment itself is valid, Article 466, Paragraph 3 provides the debtor with a crucial shield. It stipulates: "If an intention... to prohibit or restrict the assignment of a claim is manifested, the obligor [debtor] may refuse to perform their obligation to the assignee... if the assignee knew of such manifestation of intention or was grossly negligent in not knowing of it."

This means the debtor can still rely on the anti-assignment clause to refuse direct performance to an assignee if that assignee, at the time of taking the assignment, either:

  1. Had Actual Knowledge (悪意 - Akui) of the anti-assignment clause.
  2. Was Grossly Negligent (重過失 - Jūkashitsu) in not knowing about the clause. "Gross negligence" implies a marked or serious lack of ordinary care that would have been expected in the circumstances (e.g., failing to make basic inquiries about assignability when dealing with contracts where such clauses are common, or when red flags were present). Simple negligence on the part of the assignee is not sufficient to trigger this debtor protection.

The burden of proving that the assignee had such knowledge or was grossly negligent typically rests with the debtor who is seeking to refuse performance to the assignee.

  • If the Assignee Knew or Was Grossly Negligent: The debtor can legitimately refuse to pay or perform to such an assignee. In this situation, the debtor can discharge their obligation by performing to the original assignor (see below) or, in certain cases, by making a deposit. The assignee's recourse would then be against the assignor for breaching the terms of the assignment agreement. (Illustrative, based on genericized CASE 470: A debtor, faced with a demand from an assignee who clearly knew of an anti-assignment clause, validly pays the original creditor instead).
  • If the Assignee Was in Good Faith and Not Grossly Negligent: If the assignee acquired the claim without knowledge of the anti-assignment clause and was not grossly negligent in failing to discover it, the debtor cannot invoke the clause to refuse performance to this assignee. The assignment is fully effective against the debtor, and they must perform to the assignee.

Further Mechanisms Protecting the Debtor

The Civil Code provides additional mechanisms to protect the debtor caught in a situation where a claim has been assigned despite an anti-assignment clause, especially when the assignee is one to whom performance can be refused:

  1. Debtor's Right to Perform to the Original Assignor (Article 466(4)):
    Even if an assignment is valid (as per Art. 466(2)), if the assignee is one to whom the debtor can legitimately refuse performance under Article 466(3) (due to the assignee's knowledge or gross negligence of the anti-assignment clause), the debtor can validly discharge their obligation by performing to the original assignor. The assignor who receives such performance is then, in turn, obliged to transfer that performance (or its value) to the assignee, as per their internal assignment agreement.
  2. Debtor's Right to Deposit (供託 - Kyōtaku) (Article 466-2):
    If a claim subject to an anti-assignment clause has been assigned, and the assignee (to whom the debtor could refuse performance under Art. 466(3)) nevertheless demands performance from the debtor, the debtor is not left in limbo. The debtor can request the original assignor to perform the obligation (i.e., instruct the debtor to pay the assignee or arrange for the assignee to receive the benefit) within a reasonable period specified by the debtor.
    If the assignor fails to ensure such performance to the assignee within that period, the debtor can then validly discharge their obligation by depositing the subject matter of the performance (e.g., money) with an official depository (kyōtakusho). This provides a safe and definitive way for the debtor to fulfill their obligation when faced with conflicting claims or uncertainty due to the breach of the anti-assignment clause. (Illustrative, based on genericized CASE 472).
  3. Assignee's Recourse Against the Assignor:
    If the debtor properly performs to the original assignor or makes a valid deposit, an assignee who knew or was grossly negligent about the anti-assignment clause cannot then pursue the debtor. Their primary recourse is against the assignor for breaching the assignment agreement (e.g., for assigning a claim that was not freely transferable without consequence) or to claim the funds that were deposited.
  4. Effect in the Assignor's Insolvency (Article 466-3):
    If the assignor becomes bankrupt after assigning a claim in breach of an anti-assignment clause, an assignee who had knowledge of, or was grossly negligent in not knowing of, that clause cannot assert their rights as an assignee against the debtor in preference to other general creditors in the bankruptcy proceedings. This aims to prevent such an assignee from gaining an unfair advantage over other creditors when the assignor becomes insolvent, unless the assignor had specifically instructed the debtor (prior to bankruptcy) to pay the assignee directly.

Special Considerations for Certain Types of Claims

The general rules in Article 466 are subject to important modifications for specific types of claims:

Monetary Claims Assigned for Security Purposes

The revised Civil Code does not create a blanket override of anti-assignment clauses simply because a monetary claim is assigned for security purposes (e.g., as collateral for a loan). The general rules of Article 466(2) (assignment is valid) and Article 466(3) (debtor can refuse performance to an assignee with knowledge/gross negligence of the anti-assignment clause) continue to apply. This was a point of considerable debate during the law reform process, as the financial industry advocated for making anti-assignment clauses completely ineffective for security assignments of monetary claims to facilitate lending. The final legislation represents a compromise, maintaining a degree of debtor protection even in security assignment contexts.

Absolute Ineffectiveness for Assignments of Bank Deposit Claims (Article 466-5)

A very significant and distinct exception is made for claims for bank deposits or savings (預貯金債権 - yo chokin saiken). Article 466-5, Paragraph 1 provides that an anti-assignment clause concerning a claim for a deposit or savings is absolutely ineffective against an assignee if either:

  1. The assignment is made for the purpose of securing an obligation (担保目的 - tanpo mokuteki), OR
  2. The assignment occurs in the ordinary course of a business that includes the receiving of assignments of claims (e.g., factoring companies).

In these specific scenarios, the assignee does not need to be in good faith or without negligence regarding the anti-assignment clause for the assignment to be fully effective against the debtor bank. Furthermore, Article 466-5, Paragraph 2 states that such an anti-assignment clause relating to a deposit claim cannot be asserted even against other third parties, such as an attaching creditor of the depositor.

Rationale for this Strong Exception:

  • Promoting Liquidity for Financing: This rule is designed to strongly promote the use of bank deposits as collateral for financing and to facilitate their transfer in the financial markets, recognizing their high liquidity and importance.
  • Nature of the Debtor (Bank): The debtor in this case (the bank) is typically a sophisticated financial institution capable of managing the administrative aspects of assignments. Their interest in keeping the identity of the depositor fixed is generally considered less critical than the broader economic benefits of facilitating deposit-backed lending and claim transfers.
  • Fungibility of Monetary Claims: Deposit claims are purely monetary, making the identity of the ultimate creditor less relevant to the bank's ability to perform its obligation (which is simply to pay out the money).

Consequence: Banks generally cannot refuse to pay an assignee of a deposit claim based on an anti-assignment clause in their standard deposit agreements if the assignment meets the conditions of Article 466-5(1) (e.g., assignment as security for a loan). (Illustrative, based on genericized CASE 476).

Conclusion: A Balanced Approach to Anti-Assignment Clauses

The Japanese Civil Code, through Article 466 and its related provisions, adopts a modern and balanced approach to anti-assignment clauses. It recognizes the economic importance of allowing claims to be freely assigned, particularly for financing purposes, by stipulating that an assignment made in breach of such a clause is not automatically invalid. However, it simultaneously protects the legitimate interests of the debtor by granting them the right to refuse performance to an assignee who took the assignment with knowledge of, or gross negligence in not knowing of, the restriction.

Further mechanisms, such as the debtor's right to perform to the original assignor or to make a deposit, provide safe harbors for debtors caught in the middle. The special, robust rule rendering anti-assignment clauses on bank deposit claims ineffective for security assignments underscores the policy of promoting the use of such liquid assets in finance. For businesses contracting under Japanese law, this framework means that while anti-assignment clauses are not an absolute bar to the transfer of claims, they retain significance in defining the debtor's obligations towards different parties and require careful consideration by all involved – assignors, assignees, and the debtors of the underlying claims.