Q&A: Can "Illegal Cause" (Fuho Gen'in Kyufu) Prevent Recovery of Payments Made Under Void Contracts in Japan?

In principle, when a contract is deemed void under Japanese law, particularly for reasons of illegality or because it contravenes public order and morals (as per Article 90 of the Civil Code), any performances already made under that void contract should be returnable. This return is typically sought under the doctrine of unjust enrichment, as the legal basis for the performance is absent. However, Japanese law carves out a significant exception to this recovery principle through Article 708 of the Civil Code, which deals with "payment for an illegal cause" (不法原因給付 - fuhō gen'in kyūfu). This doctrine can create an absolute bar to recovering such payments or transferred property, reflecting a strong public policy stance against judicial assistance for illegal or immoral transactions.

Q1: What is "Payment for an Illegal Cause" (Fuhō Gen'in Kyūfu) under Japanese Law (Civil Code Art. 708)?

• A. The General Rule – No Recovery:
  The main part of Article 708 of the Japanese Civil Code stipulates: "A person who has made a payment for an illegal cause may not demand the return of the thing so paid." This means that if a party voluntarily transfers money or property in furtherance of a cause that is deemed "illegal," they are generally precluded from later seeking its recovery through an unjust enrichment claim, even though the underlying contract or reason for the payment is void.
  • Rationale: "Clean Hands" Doctrine / Denial of Judicial Assistance: The fundamental policy behind this rule is often described by the "clean hands" principle. The law refuses to lend its assistance to a party who has engaged in an act contrary to fundamental social ethics or legality to help them recover what they have voluntarily parted with to achieve that illegal or immoral end. It aims to discourage such transactions by leaving the parties where it finds them, effectively penalizing the party who made the payment for an illegal cause by denying them restitution. The Supreme Court of Japan has affirmed this, stating that the law will not assist those who engage in socially repugnant acts to recover what they have provided (e.g., Supreme Court, March 8, 1962, Minshū Vol. 16, No. 3, p. 500).
• B. Common Examples of "Illegal Cause":
  While specific determinations are case-by-case, payments that have been considered to fall under "illegal cause" often relate to:
  • Payments made in connection with clearly criminal activities (e.g., bribes, proceeds of crime used for a transaction).
  • Payments for services or acts that grossly violate public morals (e.g., historically, payments made under contracts for prostitution, or payments to facilitate a crime).
  • Gambling debts incurred in illegal gambling operations.
• C. The Exception – Illegality Solely with the Recipient (Art. 708 Proviso):
  Article 708 contains an important proviso: "...However, this shall not apply if such illegal cause existed only on the part of the beneficiary [the recipient of the payment/property]."
  If the illegal purpose or the reprehensible nature of the transaction was solely attributable to the party who received the payment or property, and the party who made the payment was comparatively innocent or, for example, a victim of duress or exploitation connected to the illegal cause, then the payer can demand the return of what they provided.

Q2: What constitutes an "Illegal Cause" for the purpose of this doctrine? How does its scope relate to contracts simply being void for violating "Public Order and Morals" under Article 90 of the Civil Code?

This distinction is crucial for understanding the application of Article 708.

• A. Relationship between Article 90 (Public Order and Morals) and Article 708 (Illegal Cause):
  Article 90 of the Civil Code is the general provision that nullifies any juridical act (including contracts) that is contrary to public order or good morals (公序良俗違反 - kōjo ryōzoku ihan). This forms the basis for why the underlying contract or reason for payment is considered "illegal." Article 708 then addresses a specific consequence of performance rendered under such an illegal cause—namely, whether the party who performed can recover what they gave.
• B. "Illegal Cause" in Article 708 is Generally Interpreted More Narrowly than a simple Article 90 Violation:
  It is a widely accepted view in Japanese legal scholarship and court practice that not every contract or payment that is void under Article 90 for being contrary to public order or morals will automatically trigger the "no recovery" rule of Article 708. The term "illegal" (不法 - fuhō) in Article 708 is typically interpreted more restrictively and requires a higher degree of culpability or social repugnance.
  • Japanese courts have often stated that for Article 708 to bar recovery, the cause of the payment must be not merely contrary to a statute but also gravely offensive to fundamental social ethics and morality – something "repugnant," "odious," or "ugly" (shūaku na mono - 醜悪なもの) from a societal standpoint. The Supreme Court decision of March 8, 1962, characterized such acts as those ignoring the ethics and morals required by society.
  • For example, a contract that is void under Article 90 because it violates a specific economic regulation or constitutes an unreasonable restraint of trade might not necessarily mean that any payment made under it automatically becomes non-recoverable under Article 708, if the underlying conduct, while illegal in a regulatory sense, isn't seen as deeply immoral or reprehensible in the specific context of Article 708. The law distinguishes between "illegality" that merely renders an agreement unenforceable and "illegality" so tainted that it justifies barring any restitution.
    This narrower interpretation is partly due to the drastic consequence of Article 708, which can result in the permanent loss of property or payment, with ownership often passing to the recipient (see below).
• C. Comparative Illegality or Triviality of the Payer's Illegality:
  Building on the spirit of the Article 708 proviso (where illegality is solely with the recipient), Japanese case law has developed a principle of "balancing illegalities." Even if the payer is not entirely free from some involvement in an illegal or immoral transaction, if their degree of illegality or moral culpability is "markedly trivial" (甚だ微弱 - hanahada bijaku) or significantly less severe compared to that of the recipient, courts may still permit the payer to recover what they provided. This involves a judicial assessment and comparison of the blameworthiness of both parties. An early example involved a loan for smuggling activities, where the lender's culpability was deemed far less significant than that of the borrower who was actively engaged in the smuggling, allowing the lender to recover the principal (Supreme Court, August 31, 1954, Minshū Vol. 8, No. 8, p. 1557).

Q3: Does Article 708 only bar claims for unjust enrichment, or can it prevent recovery through other legal avenues as well?

The policy underlying Article 708 is robust and aims to prevent those involved in significantly illegal or immoral transactions from using the courts to undo the consequences of their actions.

• Analogical Application (類推適用 - Ruisui Tekiyō) to Other Claims:
  Yes, the prevailing view in Japanese jurisprudence and numerous Supreme Court precedents indicate that the preclusive effect of Article 708 is applied by analogy to bar claims for recovery based on other legal grounds as well, if the underlying transaction involved a "payment for an illegal cause."
  • Barring Claims Based on Ownership (Vindicatio - 物権的請求権 bukken-teki seikyūken): If a person transfers ownership of a thing (e.g., real estate, movables) for an illegal cause covered by Article 708, they generally cannot later reclaim the thing by asserting their original ownership right, even if the underlying contract causing the transfer was void under Article 90. The Supreme Court has held that allowing recovery based on an ownership claim would effectively circumvent the purpose and policy of Article 708 (e.g., Supreme Court, October 21, 1970, Minshū Vol. 24, No. 11, p. 1560).
  • Barring Tort Claims (不法行為 - Fuhō Kōi): Similarly, the payer typically cannot re-characterize their claim as a tort action (e.g., for conversion or damages equivalent to the value of the thing transferred) to recover what was given for an illegal cause.
  • Barring Contractual Performance Claims: It also follows that neither party can sue to enforce any remaining performance obligations under the illegal contract itself, as the contract is void under Article 90.

The rationale is consistent: the courts will not assist a party to an illegal transaction, regardless of the specific legal label attached to their claim for recovery or enforcement, if the core transaction falls foul of the fuhō gen'in kyūfu doctrine.

Q4: What constitutes a "Payment" or "Performance" (Kyūfu - 給付) for Article 708 to apply, and what is the consequence for the ownership of property transferred for an illegal cause?

• A. Requirement of "Completed" Performance (Kyūfu no Kanryō - 給付の完了):
  For Article 708 to operate and bar recovery, the "payment" or "performance" (kyūfu) rendered for the illegal cause must have been finally and definitively completed. If the performance is only partial, incomplete, or if further judicial assistance would be needed to finalize the illegal transfer, the policy of Article 708 (denying aid) might not fully apply to prevent recovery of what has been partially given, as allowing recovery could still serve to deter the full consummation of the illegal act.
  • Money or Movable Property: Actual physical delivery of the cash or movable goods to the recipient generally constitutes completed performance.
  • Real Estate: The determination of "completed performance" for real estate is more nuanced and often hinges on registration:
    • For unregistered buildings, physical delivery to the recipient has been considered by the Supreme Court to be sufficient completed performance for Article 708 purposes (Supreme Court, October 21, 1970).
    • For registered real estate (such as land or registered buildings), the Supreme Court has held that mere physical delivery is typically not sufficient. The "payment" or transfer is only considered fully completed for Article 708 purposes when ownership registration (登記 - tōki) has been formally transferred into the recipient's name (Supreme Court, October 28, 1971, Minshū Vol. 25, No. 7, p. 1069). The reasoning is partly that if registration has not yet passed to the recipient of a transfer based on an illegal (and void Art. 90) cause, the recipient might still require the court's assistance to perfect their title, and the law aims to avoid lending its aid to the consummation of illegal transactions. If registration has passed for an illegal cause, Article 708 then generally blocks the original provider from using an unjust enrichment claim (or an ownership claim) to undo that registered transfer.
• B. Passing of Ownership to the Recipient (所有権の帰趨 - Shoyūken no Kisū):
  If Article 708 of the Civil Code bars the payer/provider from recovering the property they transferred for an illegal cause, a critical question arises: who then owns the property? If the underlying illegal contract is void under Article 90, theoretically, ownership should not pass. However, if the provider is simultaneously barred from reclaiming it, the ownership status becomes uncertain.
  The Japanese Supreme Court (e.g., in its decision of October 21, 1970) has resolved this by holding that as a "reflexive effect" (反射的効果 - hansha-teki kōka) of Article 708 barring the provider's recovery, the ownership of the thing transferred is deemed to have passed to and vested in the recipient. This approach is favored to provide legal clarity and finality to the property's status, rather than leaving it in an ownership limbo or allowing the provider (who has "unclean hands") to assert ownership against innocent third parties while being unable to recover from the direct recipient. This transfer of ownership to the recipient is generally considered absolute and effective against the provider.

Q5: Can parties subsequently agree to the return of a payment or property that was originally transferred for an illegal cause?

• Agreements Made Before or At the Time of the Illegal Payment: If, as part of the illegal transaction itself, the parties agree that the payment will be returned under certain conditions (e.g., if the illegal purpose fails), such an agreement to return is generally void. Enforcing it would likely be seen as facilitating or encouraging the illegal transaction, which is contrary to public policy.
• Agreements Made After the Illegal Payment is Completed: However, if, after a payment or transfer for an illegal cause has already been made and completed (and Article 708 would normally bar its recovery by judicial means), the parties subsequently enter into a new and separate agreement for the recipient to voluntarily return the benefit, such a new agreement is generally considered valid and enforceable under Japanese law.
  The rationale is that Article 708's primary function is to deny judicial assistance to a party seeking to recover what they provided for an illegal cause based on the original transaction. It doesn't necessarily grant the recipient an indefeasible legal right to retain the benefit against all possible future voluntary arrangements or new, valid contracts. If the recipient later, by their own volition, decides to return what they received from the illegal transaction, the law generally does not prevent this new, independent act of restitution. This view has been supported by Japanese Supreme Court precedents (e.g., Supreme Court, January 22, 1953, Minshū Vol. 7, No. 1, p. 56; Supreme Court, May 25, 1962, Minshū Vol. 16, No. 5, p. 1195).

Conclusion

The doctrine of "payment for an illegal cause" (fuhō gen'in kyūfu) under Article 708 of the Japanese Civil Code represents a significant and somewhat severe public policy exception to the general principle of unjust enrichment. It underscores the legal system's refusal to aid parties who have voluntarily engaged in transactions that are not merely illegal in a technical sense but are considered gravely contrary to fundamental public order or morals. When Article 708 applies, it generally bars the provider from recovering any payment made or property transferred, and by a "reflexive effect," ownership of such property is deemed to pass to the recipient. This bar to recovery is broadly applied, extending to claims based on ownership or tort, not just unjust enrichment. However, the doctrine includes crucial exceptions, such as when the illegality lies solely with the recipient or when the provider's involvement in the illegality is comparatively trivial. For businesses, this doctrine serves as a stark reminder of the risks involved in any transaction that could be tainted by illegality or profound immorality, as the consequences can include the irrecoverable loss of assets transferred.