In "work-for-hire" contracts, known in Japan as ukèoi keiyaku (請負契約), a contractor undertakes to complete a specific piece of work—such as constructing a building, developing software, or manufacturing custom goods—and the client (or orderer) agrees to pay remuneration upon the successful completion of that work. A common and often contentious issue arises when, for various reasons, the project is not fully completed. Is the contractor who performed part of the work entitled to any payment, or does the "all-or-nothing" principle of payment upon full completion prevail? The Japanese Civil Code, as significantly amended effective April 1, 2020, has introduced specific provisions in Article 634 that directly address the contractor's right to claim proportional remuneration for partially completed work under certain circumstances.

The General Rule: Remuneration Tied to Completion

The fundamental principle of an ukèoi contract is that the contractor's primary obligation is to achieve a specific result—the completion of the agreed-upon work. Consequently, the client's obligation to pay remuneration is generally tied to this completion (and delivery, if the work involves a deliverable object, as per Article 632 and 633 of the Civil Code). If the work is not completed as per the contract, the contractor, in principle, cannot claim the full contract price. This underlying premise remains. The challenge arises with partially performed work.

The Legal Landscape Before the Codification of Article 634

Prior to the explicit introduction of Article 634, the legal treatment of payment for incomplete work under ukèoi contracts was less straightforward and often depended on the reason for non-completion and general contract principles:

• Non-Completion Due to the Client's Fault: If the client (orderer) was responsible for preventing the completion of the work, the contractor generally did not lose their right to remuneration. Under Article 536, Paragraph 2 of the Civil Code (governing creditor's risk in bilateral contracts), the contractor could typically claim the full agreed remuneration, though they would have to account for any expenses saved by not having to complete the work. This principle remains applicable even after the amendments for client-fault scenarios.
• Non-Completion Due to Other Reasons (e.g., Impossibility Not Attributable to Client, Contract Termination): This was a more complex area.
  • Some judicial approaches, focusing on risk allocation, might have left the contractor with no claim if the work was not finished and no tangible benefit had passed to the client (e.g., Supreme Court, February 22, 1977 (Showa 52.2.22), which dealt with risk allocation).
  • However, there was a growing body of lower court case law and academic opinion arguing for a more equitable solution where the client had demonstrably benefited from the partially completed work. These often allowed for proportional payment based on the value of the work done and accepted by the client (e.g., Okayama District Court, January 18, 1971 (Showa 46.1.18); Sapporo District Court, February 26, 1976 (Showa 51.2.26)).
  • Similarly, if a contract was terminated (for instance, due to the contractor's breach), but the work was divisible and the client had received a useful, completed portion, case law sometimes allowed the contractor to claim payment for that beneficial part.

The Amended Civil Code: Article 634 – Right to Proportional Remuneration

The amended Civil Code, through the newly formulated Article 634, now provides a clearer statutory basis for a contractor to claim remuneration for work done even if the entire project is not completed.

Article 634 states, in essence:
"In the following cases, if the client receives a benefit from a divisible part of the work already performed by the contractor, that part shall be deemed to be completed work. In such a case, the contractor may demand remuneration in proportion to the benefit received by the client:
(1) When completion of the work has become impossible due to a cause not attributable to the client.
(2) When the ukèoi contract is terminated before the completion of the work."

Let's break down the crucial conditions for this right to arise:

1. Specific Circumstances of Non-Completion

Article 634 applies in two main scenarios:

• (a) Impossibility Not Due to Client's Fault (Item 1): The work becomes impossible to complete for reasons that are not the client's fault. This could include:
  • Force majeure events.
  • Unforeseen objective circumstances that make further performance impossible under the agreed terms (e.g., fundamental changes in site conditions not contemplated by the parties).
  • Issues arising from materials or instructions supplied by a third party, where neither the contractor nor the client is responsible for the third party's failure.
    It's also implicit that for the contractor to claim remuneration under this item, the impossibility should also not be due to a cause attributable to the contractor (otherwise, the client would likely have grounds for termination and damages, potentially offsetting any claim for partial work).
• (b) Contract Termination Before Completion (Item 2): This is a broad category and can cover various forms of contract termination occurring before the work is fully completed. This might include:
  • Termination by the client under their statutory right (Article 641 of the Civil Code, which allows the client to terminate an ukèoi contract at any time before completion, though they must then compensate the contractor for any damages suffered).
  • Termination by mutual agreement of the parties.
  • Potentially, termination by the contractor due to a breach by the client, if the other conditions of Article 634 (divisibility and benefit) are met.
    The legal commentary suggests that Article 634 codifies the trend in case law that allowed for remuneration for work done even if the contract ended prematurely, provided value was delivered.

2. Divisible Part of the Work (Kabun na Bubun; 可分な部分)

A key requirement is that the work already performed by the contractor must constitute a "divisible part" of the total work undertaken. This means the completed portion must be practically and conceptually separable from the uncompleted portion and have its own identifiable utility or value. For example, in a large construction project, completing the foundation might be considered a divisible part. In software development, completing a distinct functional module could be seen as divisible. If the partial work is so intertwined with the uncompleted portion that it has no independent utility, this condition might not be met.

3. Client Receives a Benefit (Rieki o Ukeru; 利益を受ける)

Crucially, the client must actually derive a tangible benefit from this divisible, partially completed work. If the partial work performed, even if divisible, is of no use or value to the client in its incomplete state, then the contractor cannot claim proportional remuneration under Article 634. The "benefit" here is assessed from the client's perspective.

Consequence: Deemed Completion and Proportional Payment

If all the above conditions are satisfied—(i) impossibility not due to client's fault OR pre-completion termination, (ii) the work done is a divisible part, AND (iii) the client receives a benefit from that part—then:

• That divisible and beneficial part of the work is deemed to be completed work.
• The contractor is entitled to demand remuneration in proportion to the benefit received by the client.

This "proportional remuneration" is not necessarily based solely on the contractor's costs incurred or the percentage of physical work done. It is tied to the benefit the client actually obtains from the partial performance. Calculating this can be complex and may involve assessing the value of the completed portion relative to the overall contract price and the intended purpose of the entire work.

Important Distinction: Non-Completion Due to Client's Fault

It is vital to distinguish the scenarios covered by Article 634 from situations where the work cannot be completed due to a cause attributable to the client (the orderer).

If the client's actions, omissions, or breaches prevent the contractor from completing the work, Article 634 does not apply. Instead, the situation is typically governed by Article 536, Paragraph 2 of the Civil Code, which deals with "creditor's risk" in bilateral contracts. Under Article 536(2):

• The contractor (as the performing party, or "debtor" of the work obligation) does not lose their right to claim the full agreed remuneration from the client (who is the "creditor" with respect to the work, but whose fault prevented completion).
• However, the contractor must pass on to the client any benefit they gained by being discharged from their own obligation to complete the remaining work (e.g., costs of materials and labor saved for the uncompleted portion).
  So, in client-fault scenarios, the contractor is generally entitled to the full price less savings, rather than just proportional payment for work done.

What if Non-Completion is Due to the Contractor's Own Fault?

If the project isn't completed because of the contractor's own breach of contract or fault, and the client terminates the contract for that reason, the contractor's position regarding remuneration is more tenuous.
Article 634, Item 2, broadly refers to "when the ukèoi contract is terminated before the completion of the work." Read literally, this could include termination due to the contractor's fault. If so, and if the client still received a divisible benefit from some completed work, the contractor might technically be able to invoke Article 634 to claim proportional payment.

However, in such a case, the client would simultaneously have a counterclaim against the contractor for damages arising from the contractor's breach (e.g., costs to complete the work with another contractor, losses due to delay). This damage claim could very well offset or exceed any claim for proportional remuneration by the defaulting contractor. The primary utility of Article 634 appears to be for situations where the non-completion is not predominantly a straightforward case of the contractor defaulting on their core obligations without providing any separable value.

Practical Implications for Contracting Parties

The introduction of Article 634 brings more structure but also necessitates careful consideration:

• Defining "Divisible Part" and "Benefit": These concepts are inherently fact-dependent and can be sources of disagreement. What constitutes a "divisible part" that provides a "benefit" to the client will need to be assessed in the context of each specific project. For example, half-completing a custom-designed sculpture might offer no divisible benefit, whereas completing one of several independent software modules might.
• Calculating Proportional Remuneration: The "proportion to the benefit received by the client" can be challenging to quantify. It's not merely the contractor's costs or time spent. It involves valuing the utility of the partial work from the client's perspective relative to the total contract price and the overall objectives.
• Importance of Contractual Clarity: To minimize disputes, parties involved in ukèoi contracts in Japan are well-advised to include specific clauses addressing:
  • Milestone Payments: Linking payments to clearly defined, verifiable stages of completion.
  • Termination Clauses: Specifying the consequences of termination by either party at different stages, including how work performed up to that point will be valued and compensated.
  • Definition of Deliverables and Acceptance Criteria: Clearly defining what constitutes a completed (and beneficial) part of the work can help in applying Article 634 if needed.

Conclusion

Article 634 of the amended Japanese Civil Code represents a significant step towards providing a more equitable framework for remunerating contractors for partially completed work in "work-for-hire" (ukèoi) agreements, particularly when full completion becomes impossible for reasons not attributable to the client, or when contracts are terminated before completion. By allowing proportional payment for divisible parts of the work that genuinely benefit the client, the law moves away from a potentially harsh all-or-nothing outcome.

However, this right is contingent on the specific conditions of impossibility or termination, the divisibility of the work performed, and the actual benefit conferred upon the client. It is also clearly distinct from situations where non-completion is due to the client's own fault, in which case the contractor may be entitled to the full remuneration less any saved expenses. For both contractors and clients in Japan, understanding the nuances of Article 634, and supplementing it with clear contractual provisions regarding partial completion, payment milestones, and termination, is crucial for managing expectations and mitigating risks in complex projects.