Q&A: Forming a Contract in Japan: Are Oral Agreements Enforceable, and What Are the New Rules on Standard Form Contracts?

Understanding how contracts are formed is fundamental to any business engagement. When operating in Japan, or with Japanese counterparties, it's crucial to grasp the local legal framework governing contract formation. Key questions often arise regarding the enforceability of oral agreements and the treatment of standard terms and conditions, especially in light of recent significant amendments to the Japanese Civil Code.

Q1: How is a contract generally formed in Japan, and are oral agreements enforceable?

A. The Principle of Consensualism: Agreement is Key

Japanese contract law is fundamentally based on the principle of consensualism (諾成主義 - dakusei shugi). This means that, as a general rule, a contract is formed simply by the mutual assent (合意 - gōi) of the parties involved. Article 522, Paragraph 2 of the Japanese Civil Code explicitly states that, unless otherwise provided by law or regulation, the formation of a contract does not require the creation of a written document or adherence to any other specific formality.

This leads to a significant implication: oral agreements are generally valid and legally enforceable in Japan. If parties reach a clear agreement on the essential terms of their deal, even verbally, a binding contract can come into existence. The challenge with oral contracts, as in many jurisdictions, often lies not in their inherent invalidity but in proving their existence and specific terms should a dispute arise.

B. The Mechanics: Offer and Acceptance

The mutual assent required for contract formation is typically achieved through the traditional mechanism of offer and acceptance (申込みと承諾 - mōshikomi to shōdaku).

• An offer is defined as an expression of intent to conclude a contract that indicates the proposed terms with sufficient clarity for the other party to understand what is being proposed (Civil Code, Article 522, Paragraph 1). It must be distinguished from a mere "invitation to treat" (申込みの誘引 - mōshikomi no yūin), which is simply an invitation to others to make offers (e.g., advertisements, price lists generally). The crucial factor is the objective manifestation of an "intent to be bound" upon acceptance.
• An acceptance is an unequivocal expression of intent by the offeree to form a contract in accordance with the terms of the specific offer. Japanese law generally adheres to the "mirror image rule," meaning the acceptance must precisely match the terms of the offer. An acceptance that modifies or adds to the terms of the offer is not a true acceptance but is typically treated as a rejection of the original offer and a counter-offer (Civil Code, Article 528).

C. Exceptions to Consensualism: When Formality is Required (要式契約 - Yōshiki Keiyaku)

Despite the general principle of freedom of form, Japanese law mandates specific formalities for certain types of contracts (要式契約 - yōshiki keiyaku). These requirements are imposed for various policy reasons, such as ensuring serious deliberation by the parties, providing clear evidence of the agreement, or protecting weaker parties. Failure to comply with these formal requirements can render the contract invalid or unenforceable. Notable examples include:

• Suretyship Agreements (Guarantees): To be effective, a suretyship agreement must be made in writing or recorded in an electromagnetic record (e.g., an electronic document) (Civil Code, Article 446, Paragraphs 2 and 3). This aims to protect potential guarantors from inadvertently undertaking significant financial obligations.
• Consensual Loans for Consumption Made Without Delivery (書面による消費貸借 - shomen ni yoru shōhi taishaku): If parties agree to form a loan for consumption (e.g., a money loan) by agreement alone, without the immediate physical delivery of the money or goods, this agreement must be in writing or an electromagnetic record (Civil Code, Article 587-2, Paragraphs 1 and 4). If such an agreement is not in writing, the contract is formed only upon the actual delivery and receipt of the subject matter (making it a "real contract" or 要物契約 - yōbutsu keiyaku under Article 587).
• Gifts Not Made in Writing: A promise to make a gift that is not in writing may be revoked by either the donor or the donee at any time before the performance of the gift is completed (Civil Code, Article 550). This rule reflects a policy of allowing parties to reconsider informal promises of gratuitous transfers.
• Contracts Governed by Specific Regulatory Laws: Various statutes aimed at consumer protection or regulating specific industries often impose formal requirements. For example, the Act on Specified Commercial Transactions (特定商取引に関する法律 - tokutei shō torihiki ni kansuru hōritsu) mandates the delivery of detailed written documents for certain transactions like door-to-door sales, installment sales, and specified continuous service contracts, and often provides for cooling-off periods.

D. Practical Considerations for Oral Agreements

While oral contracts are generally legally binding in Japan (outside the specific exceptions), relying on them for significant business transactions is fraught with practical difficulties. Proving the existence of an oral agreement and its precise terms in the event of a dispute can be extremely challenging. Memories fade, misunderstandings arise, and the lack of a written record can lead to protracted and uncertain litigation. Therefore, standard business practice in Japan, as elsewhere, strongly favors the use of written contracts, especially for agreements involving substantial obligations, complex terms, or long-term relationships.

E. Time of Contract Formation: The Arrival Rule (到達主義 - Tōtatsu Shugi)

For communications like offers and acceptances, the Japanese Civil Code generally adopts the arrival rule (到達主義 - tōtatsu shugi). This means that such a communication takes legal effect when it reaches the addressee (Civil Code, Article 97, Paragraph 1). This is particularly important for acceptances. The amended Civil Code (effective 2020) clarified this by effectively abolishing the previous "dispatch rule" (発信主義 - hasshin shugi) that applied to acceptances in contracts between remote parties under the old law. Now, an acceptance generally forms a contract when it arrives with the offeror, providing greater certainty as to the moment of formation.

Q2: What are "Standard Form Contracts" (Teikei Yakkan) and how does the amended Japanese Civil Code regulate them?

A. Background and Rationale for the New Rules

Modern commerce heavily relies on standard terms and conditions, known in Japanese as yakkan (約款). These pre-drafted sets of clauses are used by businesses to streamline transactions with numerous parties. However, their "take-it-or-leave-it" nature often means the other party (especially consumers or small businesses) has little to no opportunity to negotiate the terms, potentially leading to unfair outcomes.

Recognizing this, the 2020 amendments to the Japanese Civil Code introduced a new, dedicated chapter (Articles 548-2 to 548-4) specifically regulating "Standard Form Contracts" (定型約款 - teikei yakkan). These provisions aim to strike a balance between the efficiency afforded by standard terms and the need to protect parties from unfair or surprising clauses.

B. Defining a "Standard Form Contract" (Teikei Yakkan)

Under Article 548-2, Paragraph 1 of the Civil Code, teikei yakkan are defined as "terms of a contract prepared by one party as a part of a transaction which is intended to be entered into with an unspecified large number of persons (不特定多数の者を相手方として行う取引 - futokutei tasū no mono o aitekata to shite okonau torihiki), where the content of such transaction is, in whole or in part, uniform and such uniformity is objectively reasonable for both parties".

Key elements of this definition include:

• Prepared by one party: The terms are not individually negotiated.
• For transactions with an unspecified large number of persons: Targeting a mass audience, not unique, bespoke deals. This can include B2B transactions if the criteria are met, not just B2C.
• Uniformity is objectively reasonable for both parties: The nature of the transaction must be such that standardized terms make sense for efficiency and consistency, benefiting both sides (e.g., utility contracts, software licenses, transport agreements).
• Individually negotiated clauses within an otherwise standard agreement are not considered part of the teikei yakkan and are governed by general contract principles.

C. Incorporation of Standard Form Contract Terms (みなし合意 - Minashi Gōi / Deemed Agreement)

For teikei yakkan to become part of a binding contract, Article 548-2, Paragraph 1 provides two main pathways for their incorporation:

1. The parties have explicitly agreed that the teikei yakkan will constitute the contents of their contract; OR
2. The party that prepared the teikei yakkan (the "preparer") has indicated to the other party beforehand that these teikei yakkan will form the content of the contract. This "indication" can often be satisfied by making the terms reasonably accessible (e.g., displaying them, providing a link, or referencing them in the primary agreement document) such that the other party is aware they are intended to apply.

D. Disclosure of Standard Form Contract Terms (内容の表示 - Naiyō no Hyōji)

To ensure fairness and transparency, the Civil Code imposes disclosure obligations:

• Pre-contractual Disclosure upon Request: If the other party requests it before concluding the contract, the preparer must, without delay, disclose the content of the teikei yakkan by an appropriate method (Article 548-3, Paragraph 1).
• Post-contractual Disclosure upon Request: Even if no pre-contractual request was made, if the other party requests disclosure within a reasonable period after concluding the contract, the preparer must still disclose the terms, unless they have already provided a document or electromagnetic record of the terms (Article 548-3, Paragraph 1).
• Consequence of Refusal to Disclose Pre-Contractually: If the preparer, without justifiable reason, refuses a pre-contractual request for disclosure, the teikei yakkan will not be deemed to have been agreed upon and thus will not be incorporated into the contract (Article 548-3, Paragraph 2). This is a powerful tool for the party facing standard terms.

E. Exclusion of Unfair Clauses (不当条項の規制 - Futō Jōkō no Kisei)

Perhaps the most significant protection is provided by Article 548-2, Paragraph 2. This provision states that, among the clauses of teikei yakkan that are otherwise deemed incorporated, any clause that meets the following two conditions shall be deemed not to have been agreed upon:

1. It restricts the rights or expands the duties of the other party (i.e., the party who did not prepare the terms); AND
2. It unilaterally harms the interests of the other party in contravention of the fundamental principle of good faith and fair dealing (as stipulated in Article 1, Paragraph 2 of the Civil Code), when considered in light of the nature of the transaction, its actual conditions, and customary commercial practices.

This rule provides a substantive check on the fairness of standard terms. It means that even if standard terms are formally incorporated, specific clauses within them can be rendered ineffective if they are deemed overly one-sided and contrary to good faith. The assessment of "unilateral harm" is a flexible standard to be applied by courts based on the specific context.

F. Modification of Standard Form Contract Terms (定型約款の変更 - Teikei Yakkan no Henkō)

The amended Civil Code also addresses the common business need to update standard terms. Article 548-4 allows the preparer to unilaterally modify teikei yakkan for existing contracts under certain conditions:

1. If the modification is generally to the benefit of the other parties; OR
2. If the modification is deemed reasonable. Reasonableness is assessed by considering various factors, including the necessity for the change, the appropriateness of the modified content, whether the original teikei yakkan contained a clause permitting modification, and other relevant circumstances surrounding the change.

When a modification is made based on its "reasonableness" (but not if it's solely for the other parties' benefit), the preparer must, prior to the modification taking effect, make the fact of the modification, the content of the modified terms, and the effective date known to the other parties by an appropriate method, such as posting on the internet (Article 548-4, Paragraphs 2 and 3). Failure to properly publicize a "reasonable" modification means it will not take effect.

These rules attempt to balance the preparer’s need for operational flexibility in managing numerous contracts based on standard terms with the protection of the other parties from arbitrary or unfair changes.

Q3: How do these Japanese rules compare to U.S. approaches to oral agreements and standard form contracts?

Oral Agreements:

• Japan: As discussed, oral agreements are generally enforceable under the principle of consensualism, with specific, codified exceptions requiring formality (e.g., suretyship). The primary challenge is evidentiary.
• U.S.: While many oral contracts are also enforceable, the Statute of Frauds is a significant differentiating factor. This doctrine, varying by state but with common themes (and codified in UCC §2-201 for sales of goods over $500), requires certain categories of contracts (e.g., contracts concerning interests in land, suretyship agreements, contracts not to be performed within one year) to be evidenced by a signed writing to be enforceable against the party to be charged. Thus, an oral agreement that might be perfectly valid in Japan could be unenforceable in a U.S. jurisdiction if it falls within the Statute of Frauds.

Standard Form Contracts (Often termed "Contracts of Adhesion" in the U.S.):

• Japan: The new Civil Code provisions for teikei yakkan create a specific, systematic, and generally applicable statutory framework within the Civil Code itself. This framework addresses incorporation, disclosure, substantive fairness control (exclusion of unfair terms contrary to good faith), and unilateral modification. This is complemented by the Consumer Contract Act for B2C specific protections.
• U.S.: There isn't a single, overarching federal statute or uniform code provision that comprehensively regulates all standard form contracts (B2B and B2C) in the same detailed manner as Japan's new Civil Code articles. Instead, U.S. law addresses issues related to "contracts of adhesion" through a combination of common law doctrines and specific statutes:
  • Incorporation: Courts often examine whether the adhering party had "reasonable notice" of the terms and manifested assent (e.g., issues with "browsewrap" versus "clickwrap" agreements for online terms).
  • Substantive Fairness: The primary tool for policing unfair terms is the common law doctrine of unconscionability, which has both procedural (unfair surprise, lack of meaningful choice) and substantive (overly harsh or one-sided terms) aspects. If a term or an entire contract is found unconscionable, a court may refuse to enforce it, enforce the remainder without the unconscionable term, or limit its application. Specific terms might also be voided as against public policy.
  • Interpretation: Ambiguous terms in contracts of adhesion are often interpreted against the drafter (the rule of contra proferentem).
  • Consumer Protection: Numerous federal and state consumer protection laws target specific unfair or deceptive practices and terms in consumer contracts.
  • Modification: Unilateral modification of existing standard form contracts by the preparer is generally viewed with skepticism in the U.S. and typically requires clear language in the original agreement permitting such changes under fair and specific conditions, and often, new consideration or continued assent. The Japanese Civil Code's Article 548-4 provides a more structured, albeit conditional, statutory pathway for such modifications.

The Japanese Civil Code's recent reforms provide a more codified and somewhat centralized approach to the general regulation of standard form contracts, including those in B2B contexts if the definitional criteria are met, compared to the U.S.'s more doctrine-based and often consumer-specific statutory interventions. The "deemed not agreed upon" mechanism for unfair clauses in Japan's Art. 548-2(2) is a notable feature for directly addressing problematic terms.

Conclusion

In summary, Japanese contract law largely embraces informality in contract creation, recognizing the general enforceability of oral agreements. However, the practical imperative for clear evidence means written contracts remain the standard for prudent business dealings. For standard form contracts, the amended Japanese Civil Code has introduced a comprehensive regulatory regime governing their incorporation, the obligation of disclosure, the control of unfair terms based on the principle of good faith, and the conditions under which they can be modified. Businesses engaging with or utilizing standard terms in Japan must be cognizant of these detailed rules to ensure compliance and manage their contractual risks effectively. While fairness and party protection are concerns in both U.S. and Japanese law, the specific legal mechanisms and the extent of codification differ significantly, particularly concerning standard form agreements.