Q&A: What are the Core Principles of Japanese Contract Law and How Do They Differ from U.S. Law?

Japanese Attorney at Law - Bengoshi L.L.

06 Jun 2025 • 10 min read

Navigating the legal landscape of a foreign country is a critical task for any business. When it comes to Japan, understanding the foundational principles of its contract law is paramount for U.S. companies and legal professionals. While some concepts may seem familiar, the nuances and applications can diverge significantly from U.S. common law traditions. This Q&A aims to shed light on these core tenets.

Q1: What are the overarching principles governing contracts in Japan?

At the heart of Japanese contract law lie two fundamental principles: the Principle of Private Autonomy (私的自治の原則 - shiteki jichi no gensoku) and, stemming from it, the Principle of Freedom of Contract (契約自由の原則 - keiyaku jiyū no gensoku).

The Principle of Private Autonomy posits that individuals are free to form and shape their own legal relationships based on their own will, without undue interference from the state or others. The state, in turn, is expected to respect and protect these self-determined relationships. This principle empowers individuals and entities to manage their affairs and engage in transactions as they see fit.

The Principle of Freedom of Contract is the concrete manifestation of private autonomy in the contractual sphere. It generally means that parties are free to decide whether to enter into a contract, with whom, in what form, and with what content. This freedom is not absolute and is subject to certain limitations, which we will explore later. The Japanese Civil Code, particularly after its significant amendments effective from April 2020 (which largely codified existing case law and academic theories regarding contract law), underpins these freedoms.

Q2: What does "Freedom of Contract" specifically entail in Japan?

The Principle of Freedom of Contract in Japan is generally understood to encompass four distinct, yet interrelated, freedoms:

Freedom to Conclude a Contract (契約締結の自由 - keiyaku teiketsu no jiyū):
This is the liberty to decide whether or not to enter into a contract at all. No one can be compelled to conclude a contract against their will (codified in Article 521(1) of the Civil Code). If a party chooses not to contract, that decision is generally respected. This aligns with the basic premise in U.S. law that contract formation requires a mutual manifestation of assent.
Freedom to Choose the Other Party (相手方選択の自由 - aitekata sentaku no jiyū):
Parties are generally free to select with whom they wish to contract. While not explicitly stated in a single article for all contracts, this freedom is a recognized component of the broader principle of freedom of contract.
Freedom of Form (方式の自由 - hōshiki no jiyū):
Japanese contract law adheres to the principle of "consensualism" (諾成主義 - dakusei shugi), meaning that contracts are, as a rule, formed by mere agreement of the parties without any special formality. Article 522(2) of the Civil Code states that, unless otherwise provided by law or regulation, the formation of a contract does not require the creation of a document or any other specific formality. This is a notable point of comparison with the U.S. system, which, despite generally allowing oral contracts, has the Statute of Frauds requiring certain types of contracts to be in writing to be enforceable.
Freedom to Determine Content (内容形成の自由 - naiyō keisei no jiyū):
Parties have the liberty to freely decide the terms and conditions of their contract (Article 521(2) of the Civil Code). This freedom signifies that the justification for contractual norms lies in the will of the parties themselves. As an old French Civil Code provision puts it, "agreements lawfully formed take the place of law for those who have made them."

Q3: Are these freedoms absolute? What are the typical limitations in Japanese contract law?

No, these freedoms are not absolute. Japanese law, like legal systems worldwide, imposes certain limitations to protect public interest, ensure fairness, and safeguard weaker parties. These limitations are often rooted in specific statutes or derived from broader legal principles such as public order and morals or the principle of good faith.

Limitations on Freedom to Conclude a Contract:
In certain sectors, entities may have a statutory duty to contract if there is no justifiable reason to refuse. Examples include:

Common carriers (e.g., road transport, railways) regarding transportation services (e.g., Road Transport Act, Article 13).
Public utility providers (e.g., gas, water, electricity) concerning supply obligations (e.g., Gas Business Act, Article 16(1)).
Medical doctors and dentists who cannot refuse a request for medical treatment without a legitimate reason (Physicians Act, Article 19(1)).
Failure to comply can lead to administrative sanctions, and in some cases, civil liability for damages under tort law or even court-ordered specific performance (though typically through indirect compulsion).

Limitations on Freedom to Choose the Other Party:
This freedom is restricted primarily by anti-discrimination laws and constitutional principles.

Statutory Limitations: Laws like the Act on Securing of Equal Opportunity and Treatment between Men and Women in Employment (男女雇用機会均等法 - danjo koyō kikai kintō hō) restrict employers' freedom in hiring. Similarly, the Act for Promotion of Employment of Persons with Disabilities (障害者雇用促進法 - shōgaisha koyō sokushin hō) imposes obligations. While these laws might not directly compel contract formation, discriminatory acts can lead to tort claims for damages.
Constitutional Principles: Article 14 of the Constitution of Japan guarantees equality under the law. Intentional and negligent acts of discrimination in choosing a contracting party (e.g., refusing to lease an apartment to someone based on their foreign nationality) that infringe this right can be deemed a tort under Article 709 of the Civil Code, leading to liability for damages. This contrasts with the U.S. where extensive federal and state civil rights statutes provide more direct avenues for challenging discrimination in contracting.

Limitations on Freedom of Form (Exceptions to Consensualism):
While consensualism is the norm, certain contracts require specific formalities (要式契約 - yōshiki keiyaku) for their validity or enforceability. This is often to ensure cautious deliberation or to secure clear evidence of the contract.

Suretyship Contracts (Guarantee Contracts): These must be in writing (or recorded in an electromagnetic record) to be effective (Civil Code, Article 446(2) and (3)). This is somewhat analogous to suretyship provisions under the U.S. Statute of Frauds.
Certain Consumer Contracts: Laws like the Act on Specified Commercial Transactions (特定商取引法 - tokutei shō torihiki hō) mandate the delivery of documents and provide for cooling-off periods in specific types of transactions like door-to-door sales or installment sales.
Gifts Not in Writing: A gift not made in writing can be revoked by either party, except for the part that has already been performed (Civil Code, Article 550).
Other Specific Agreements: The reformed Civil Code introduced requirements for written form (or electromagnetic record) for certain types of consensual loan agreements (Article 587-2), and previously for gratuitous loans for use and certain deposits, though the latter are now consensual by default.

Limitations on Freedom to Determine Content:
This freedom, being central to private autonomy, is generally robust. However, contract terms must not violate:

Public Order and Morals (公序良俗 - kōjo ryōzoku): Article 90 of the Civil Code nullifies any juridical act that is contrary to public order or good morals. This is a broad concept, encompassing violations of mandatory laws (強行法規 - kyōkō hōki), usurious transactions, and other socially unacceptable agreements. Its application is highly fact-dependent and interpreted by courts.
Mandatory Provisions of Law (強行法規 - kyōkō hōki): Parties cannot contract out of mandatory legal provisions designed to protect weaker parties or fundamental public interests.
Unfair Contract Terms: The Consumer Contract Act (消費者契約法 - shōhisha keiyaku hō), for instance, invalidates certain unfair clauses in consumer contracts (e.g., clauses that unilaterally restrict consumer rights or expand business operator exemptions without justification, as per Article 10 of the Consumer Contract Act).
Standard Form Contracts (定型約款 - teikei yakkan): The revised Civil Code (Article 548-2 et seq.) now provides specific rules for standard form contracts. Significantly, terms within such contracts that unilaterally prejudice the other party's interests contrary to the fundamental principle of good faith (Civil Code, Article 1(2)) are deemed not to have been agreed upon (Article 548-2(2)). This is a key mechanism for controlling the content of adhesion contracts.

Q4: How strong is the binding force of contracts in Japan once they are validly formed?

Once a contract is validly formed in Japan, it carries significant binding force. This stems directly from the principle of private autonomy: because individuals freely decide to enter into and shape their contractual obligations, they must also bear the responsibility for those decisions. This is encapsulated in the maxim "pacta sunt servanda" (agreements must be kept - 合意は守られなければならない), a universally recognized principle in contract law, including Japan's.

The Japanese Civil Code presumes that a party that has manifested an intention to be bound will be held to that commitment. If a party fails to perform its contractual obligations (債務不履行 - saimu furikō), the other party has recourse to various legal remedies, including:

Specific Performance (履行の強制 - rikō no kyōsei): The court can order the breaching party to perform its obligations.
Damages (損害賠償 - songai baishō): The non-breaching party can claim compensation for losses suffered due to the breach.
Termination/Rescission (解除 - kaijo): The non-breaching party may be entitled to terminate the contract.

The Principle of Good Faith and Fair Dealing (信義誠実の原則 - shingi seijitsu no gensoku, often abbreviated to 信義則 - shingisoku), enshrined in Article 1(2) of the Civil Code, also plays a crucial role. It mandates that parties exercise their rights and perform their duties in good faith. This principle permeates all stages of the contractual relationship, from negotiation through performance and enforcement, and can influence how contractual obligations are interpreted and the availability of certain defenses or remedies. Its application can sometimes be seen as broader and more abstract than the duty of good faith and fair dealing found in specific contexts like the Uniform Commercial Code (UCC) in the U.S.

Q5: What are some key differences in these core principles when compared to U.S. contract law?

While the overarching themes of freedom of contract and binding force are common to both Japanese and U.S. legal systems, several differences in emphasis, application, and specific rules are noteworthy for American businesses:

Formality Requirements (Statute of Frauds vs. Consensualism):
- Japan: As mentioned, the general rule is consensualism (方式の自由 - hōshiki no jiyū); most contracts do not require written form to be valid or enforceable. Exceptions exist, such as for suretyship contracts.
- U.S.: The Statute of Frauds, a common law doctrine (also codified in state laws), requires certain types of contracts (e.g., contracts for the sale of land, contracts that cannot be performed within one year, suretyship agreements, sale of goods above a certain value under the UCC) to be in writing and signed by the party to be charged to be enforceable. This is a significant practical difference; an oral agreement perfectly valid in Japan might be unenforceable in a U.S. jurisdiction if it falls under the Statute of Frauds.
The Role and Scope of Good Faith (信義則 - Shingisoku):
- Japan: The principle of good faith (Article 1(2) of the Civil Code) is a fundamental, overarching principle of private law. It can influence contract interpretation, fill gaps in contracts, and limit the exercise of contractual rights in a way that might be considered more pervasive and abstract than in the U.S. system.
- U.S.: While the duty of good faith and fair dealing is well-recognized, its application is often more context-specific. For instance, the UCC imposes it on merchants in the sale of goods (UCC §1-304). In common law, it's generally implied in the performance and enforcement of contracts, but perhaps not as a free-floating principle to the same extent as Japan's shingisoku.
Regulation of Contract Content and Standard Form Contracts:
- Japan: The revised Civil Code has introduced specific, detailed provisions governing standard form contracts (定型約款 - teikei yakkan), including rules on their incorporation into the main contract and the invalidation of certain unfair terms (Article 548-2 et seq.). The Consumer Contract Act also provides robust protection against unfair clauses in consumer contracts.
- U.S.: Regulation of unfair terms often relies on doctrines like unconscionability, public policy, and rules governing contracts of adhesion. While consumer protection statutes exist at federal and state levels, the Japanese Civil Code's direct and systematic approach to standard form contracts is a more recent, codified development.
Codification vs. Common Law:
- Japan: Operates under a civil law system, with the Civil Code serving as the primary source of contract law. While court precedents (判例 - hanrei) are highly influential and often fill in gaps or interpret code provisions, the starting point is always the codified law.
- U.S.: Primarily a common law system (except Louisiana), where contract law principles are largely derived from judicial decisions built up over centuries. While statutes like the UCC have codified aspects of contract law (especially for sales of goods), case law remains a dominant source. This structural difference impacts legal reasoning and the way principles are developed and applied.
Limitations on Freedom to Choose Contracting Party:
- Japan: While anti-discrimination laws in employment are specific, broader discrimination in general contracting (e.g., housing, services) might rely more on the general tort provisions based on constitutional equality principles, which can be a less direct route than the comprehensive anti-discrimination statutes found in the U.S. (e.g., Civil Rights Act of 1964).
- U.S.: Has a more extensive and explicit statutory framework at both federal and state levels prohibiting discrimination in various contractual settings based on race, religion, national origin, sex, disability, etc.
Conceptualization of "Public Order and Morals" (公序良俗 - Kōjo Ryōzoku):
- Japan: Article 90 of the Civil Code serves as a general clause to invalidate contracts or terms contrary to public order and good morals. The content of kōjo ryōzoku evolves with societal values and is interpreted by the courts. It can encompass a wide range of situations, from illegal activities to grossly unfair bargains that shock the conscience of the community.
- U.S.: The common law doctrine of "public policy" serves a similar function, rendering contracts or terms unenforceable if they are injurious to the public or contravene established interests of society. While the goal is similar, the specific types of conduct or terms deemed to violate public policy can differ based on jurisdictional values and case law development.

Conclusion

The core principles of Japanese contract law—private autonomy and freedom of contract, along with its binding force—provide a familiar framework for U.S. businesses. However, the Japanese legal system, rooted in civil law traditions and influenced by its unique socio-cultural context, presents important distinctions in how these freedoms are defined, limited, and enforced. Key areas of divergence include the general absence of a Statute of Frauds, the pervasive role of the good faith principle, specific regulations for standard form contracts, and the distinct approaches to anti-discrimination. A nuanced understanding of these principles and their practical application is essential for successfully navigating contractual relationships in Japan and mitigating legal risks.