The right of set-off, known as sōsai (相殺) in Japanese, is a fundamental commercial mechanism allowing parties who have mutual debts to extinguish them by offsetting corresponding amounts. This not only simplifies payment procedures but also serves as a crucial form of de facto security – a party holding a claim against another might rely on their own indebtedness to that party as a source of recovery. However, the situation becomes more complex when the claim owed by you to your counterparty is either assigned by them to a third party or attached (garnished) by one of their creditors. The amended Japanese Civil Code, effective April 1, 2020, has introduced significant clarifications and, in key respects, expanded the ability of a party (the debtor whose obligation has been assigned or attached) to exercise their right of set-off in these intricate scenarios.

General Principles of Set-Off (Sōsai)

Before diving into the complexities of assignment and attachment, it's worth recalling the basic conditions for set-off under Article 505, Paragraph 1 of the Civil Code (which itself was not substantively changed in the 2020 amendments):

1. Two parties have monetary obligations towards each other (mutuality of debts).
2. Both obligations are of the same kind (typically monetary).
3. Both obligations are due and payable.
4. The nature of the obligations does not preclude set-off (e.g., certain claims for wrongful acts cannot be easily set off by the wrongdoer).
5. There is no contractual prohibition against set-off (though, as we will see, the effect of such prohibitions has been altered).

If these conditions are met, either party can declare a set-off, and the mutual debts are extinguished retroactively to the point in time when they first became suitable for set-off (sōsai tekijō; 相殺適状).

Set-Off When the Claim Against You Has Been Attached (Garnished) by Your Counterparty's Creditor (Amended Article 511)

Imagine your company, Company X (the "third-party debtor" or daisan saimusha; 第三債務者), owes a debt to Company Y. A creditor of Company Y, let's call them Company Z (the "attaching creditor" or sashiosae saikensha; 差押債権者), obtains a court order to attach (garnish) Company Y's claim against your Company X. The question then is: can Company X still set off a claim that it holds against Company Y when Company Z comes to collect the attached amount? The amended Article 511 provides crucial guidance.

1. Using Claims Acquired Before Attachment (Article 511, Paragraph 1, latter part)

The amended Code explicitly codifies what was already the prevailing stance of Japanese Supreme Court case law (e.g., judgment of June 24, 1970 (Showa 45.6.24)), which supported the "unrestricted theory" (museigen-setsu; 無制限説) of set-off in this context.
This means that Company X (the third-party debtor whose obligation to Y was attached) can assert a set-off against the attaching creditor (Company Z) using a claim that Company X had acquired against Company Y before Company X received the official notice of attachment. This right exists even if Company X's claim against Y was not yet due, or if the conditions for set-off were not perfectly aligned at the exact moment of attachment, as long as the claim itself was acquired by Company X prior to the attachment becoming effective against X. This provides significant protection for the third-party debtor's expectation of set-off.

2. General Prohibition on Using Claims Acquired After Attachment (Article 511, Paragraph 1, former part)

As a general rule, and to protect the efficacy of the attachment process, Company X cannot use a claim that it acquired against Company Y after receiving the notice of attachment to set off against the attached debt when confronted by the attaching creditor, Company Z. This prevents Company X from deliberately acquiring claims against Company Y post-attachment simply to diminish the amount Company Z can recover.

3. Key Expansion: Using Claims Acquired After Attachment but Arising from a Pre-Attachment Cause (Article 511, Paragraph 2)

This is arguably the most significant and potentially complex change introduced by the amendments concerning set-off against attached claims. Article 511, Paragraph 2 carves out a major exception to the post-attachment acquisition prohibition.
Even if Company X (the third-party debtor) acquires its claim against Company Y (the original creditor whose claim was attached) after the notice of attachment, Company X can still assert this claim for set-off against the attaching creditor (Company Z) if that claim arose from a "cause that existed before the attachment" (sashiosae mae no gen'in ni motozuite shōjita mono; 差押え前の原因に基づいて生じたもの).

Rationale and Alignment: This provision aims to protect the third-party debtor's reasonable and pre-existing expectations of being able to set off mutual claims, especially where the claims are interconnected or stem from an ongoing relationship that was established before the attachment intervened. It also serves to harmonize the rules in the Civil Code with similar provisions in Japanese bankruptcy law (specifically, Article 67 of the Bankruptcy Act), which generally allow for set-off of claims arising from pre-bankruptcy causes.

Interpreting "Cause Existing Before Attachment": The phrase "cause existing before attachment" is not defined in the statute and is expected to be a focal point of judicial interpretation. The legal commentary provided with the source material discusses various potential interpretive approaches, reflecting the inherent ambiguity:

• Some theories focus on whether there was a "reasonable expectation" of set-off that was concretely grounded before the attachment.
• Others might try to limit the "cause" to more specific, direct, or fundamental elements of the claim's generation that pre-dated the attachment.
• Yet another approach looks at the "maturity" of the claim used for set-off by a certain critical point in the execution proceedings.

For example, consider a scenario where Company B (the third-party debtor) guaranteed a loan that Company A (the original creditor, whose claim against B is now attached by D) took from Bank C. If D attaches A's separate claim against B before B has to pay Bank C under the guarantee, but B subsequently does pay Bank C and thereby acquires a reimbursement claim against A, can B set off this reimbursement claim against D? The answer hinges on whether B's reimbursement claim (acquired post-attachment) is deemed to have arisen from a "pre-attachment cause" – likely the guarantee agreement itself, which was in place before the attachment. Legal commentary suggests that for such claims arising from pre-existing guarantee contracts, set-off is generally intended to be permissible.

Proviso to the Exception (Article 511, Paragraph 2, proviso): This right to use a post-attachment acquired claim (from a pre-attachment cause) for set-off is itself subject to an important limitation. It does not apply if the third-party debtor (Company X) acquired the claim against Company Y by taking an assignment of someone else's claim against Company Y after the attachment. This prevents Company X from actively purchasing claims at a discount post-attachment for the primary purpose of creating a set-off to defeat the attaching creditor.

Set-Off When the Claim Against You Has Been Assigned to a Third Party

The principles governing set-off when the claim against you has been assigned by your original counterparty to an assignee are found in Article 469 of the Civil Code. These rules run largely parallel to those for attachment, and the amendments to Article 511 regarding attachment were, in part, designed to create greater consistency.

• Claims Acquired Before Perfection of Assignment (Article 469, Paragraph 1): The debtor (your company, X) can set off against the assignee (Company A, who received the claim from Y) any claim that X held against the assignor (Y) which was acquired before the assignment was perfected against X (typically, before X received notice of the assignment from Y or consented to it).
• Claims Acquired After Perfection of Assignment (Article 469, Paragraph 2): Similar to the attachment rules, X can also set off against assignee A a claim that X acquired against assignor Y after the assignment was perfected, provided that claim arose from:
  1. A cause existing before the perfection of the assignment; OR
  2. The very same contract that gave rise to the assigned claim.
     This second limb (same contract origin) is specific to the assignment context and is somewhat broader than the "pre-existing cause" rule for attachment. It reflects the common situation in assignments where the underlying contractual relationship between the debtor (X) and the assignor (Y) might continue, and claims and counterclaims could arise from that same ongoing contract even after an initial claim has been assigned.

The Impact of Contractual Prohibitions on Set-Off (Sōsai Kinshi Tokuyaku) (Amended Article 505, Paragraph 2)

Parties to a contract can agree to prohibit or restrict their rights of set-off. The enforceability of such "set-off prohibition clauses" against third parties has been significantly revised.

• Previous Law: Under the old Civil Code, an agreement prohibiting set-off could not be asserted against a bona fide (good faith, unaware) third party.
• Amended Law (Article 505, Paragraph 2): An agreement by the original parties to prohibit or restrict set-off can now only be asserted against a third party (such as an assignee of one of the claims involved in the potential set-off, or an attaching creditor seeking to collect one of the claims) if that third party, at the relevant time, knew of the set-off prohibition clause or was grossly negligent in not knowing of it.

This change aligns the rule for set-off prohibition clauses with the stricter standard now applicable to anti-assignment clauses (under Article 466, Paragraph 3), both using "knowledge or gross negligence" as the threshold for a third party being bound. The burden of proving such knowledge or gross negligence on the part of the third party rests on the person seeking to enforce the set-off prohibition against that third party.

Consider a scenario: Your Company X has a contract with Company Y that includes a clause prohibiting set-off. Company Y assigns its claim against you (X) to Company A. If Company A was unaware of the set-off prohibition and not grossly negligent, your company X likely cannot now rely on that prohibition clause to prevent Company A from being subject to a set-off, assuming X has a valid, mature claim against Y that would otherwise be eligible for set-off against the original claim. Conversely, if Company A knew of the prohibition or was grossly negligent, Company X could assert the clause, meaning X would not be able to set off its claim against Y from what it owes to A (assignee).

Conclusion: Enhanced Protection for Set-Off Rights

The amendments to the Japanese Civil Code concerning set-off in the context of assigned or attached claims generally strengthen the position of the party wishing to exercise set-off (the debtor whose obligation has been targeted). The clear adoption of the "unrestricted theory" for claims acquired pre-attachment/pre-perfection, and the significant expansion allowing set-off for claims acquired post-attachment/perfection if they arise from a pre-existing cause, offer substantial protection for a debtor's reasonable expectation of netting out mutual obligations. This harmonization with bankruptcy law principles also brings greater coherence to the legal framework.

However, the interpretation of what constitutes a "cause existing before attachment" or "before perfection" will be critical and is likely to be developed through future case law. For businesses, this means that while their ability to set off has been enhanced, careful analysis of the origins of their claims will be necessary. Furthermore, the revised standard for enforcing set-off prohibition clauses against third parties means that such clauses are less of an absolute bar than they might have been previously, unless the third party's knowledge or gross negligence regarding the clause can be established. These changes require careful consideration in drafting contracts and in assessing rights and exposures when claims are transferred or subjected to execution proceedings in Japan.