In commercial dealings, it's not uncommon for a debtor facing cash flow issues to offer an asset other than money to satisfy an existing monetary debt. This could involve transferring real estate, goods, or other property rights. In Japan, this practice is known as daibutsu-bensai (代物弁済), which translates closely to "substitute performance" and is analogous to the common law concept of "accord and satisfaction" or "datio in solutum." The Japanese Civil Code has always recognized daibutsu-bensai, but the significant amendments to the Code, effective April 1, 2020, have brought important clarifications regarding the legal nature and effect of such agreements, particularly concerning when the agreement is formed and when the original debt is actually extinguished.

Understanding Daibutsu-Bensai

At its core, daibutsu-bensai is an agreement between a debtor (or a person entitled to make payment on the debtor's behalf) and a creditor, whereby the creditor agrees to accept a different type of performance from what was originally due, in full satisfaction of the original debt. For example, if a company owes a supplier JPY 10 million, they might agree that the debt will be settled by the company transferring ownership of a piece of machinery to the supplier. The creditor's consent to accept this substitute performance is a fundamental prerequisite.

The Traditional View: Daibutsu-Bensai as a "Real Contract"

Under the interpretation of the pre-amendment Civil Code (former Article 482), daibutsu-bensai was widely understood to be a "real contract" (yōbutsu keiyaku; 要物契約). A real contract, in Japanese legal terminology, is one that requires not only the mutual consent of the parties but also the actual delivery or transfer of the subject matter for the contract itself to be formed and take effect.

In the context of daibutsu-bensai, this meant that the mere agreement between the debtor and creditor to substitute performance was not, in itself, considered a completed daibutsu-bensai. The daibutsu-bensai was only deemed to have occurred—and consequently, the original debt was only extinguished—once the debtor actually delivered the substitute asset (e.g., transferred title and possession of the machinery). For instance, a Supreme Court judgment from April 30, 1965 (Showa 40.4.30) indicated that in the case of real estate offered as daibutsu-bensai, the transfer of ownership registration and delivery were necessary for the debt to be extinguished.

This "real contract" nature posed certain theoretical and practical complexities, particularly regarding the status of the parties' obligations between the time of their agreement to substitute performance and the actual execution of that substitute performance.

The Amended Civil Code (Article 482): A Shift to a Consensual Agreement

The amended Article 482 of the Civil Code has refined the understanding of daibutsu-bensai, moving away from the strict "real contract" interpretation for the formation of the agreement itself.

The revised Article 482 now essentially states:
"When a person who can make payment (hereinafter referred to as the 'payer') makes a contract with the creditor to the effect that the debtor's debt shall be extinguished by making another performance in lieu of the performance which the debtor bears, if the payer makes said other performance, said performance shall have the same effect as a payment (i.e., extinguishment of the original debt)." (Emphasis added)

Key Changes and Their Meanings:

1. Consensual Nature of the Daibutsu-Bensai Agreement:
   The phrasing "makes a contract...to the effect that the debt shall be extinguished by making another performance" signals a crucial shift. The agreement to engage in daibutsu-bensai is now considered a "consensual contract" (dakusei keiyaku; 諾成契約). This means that the contract for substitute performance is formed and becomes binding upon the mere mutual consent of the payer and the creditor. The actual rendering of the substitute performance is not a prerequisite for the formation of this new agreement to substitute. This approach aligns with more recent prevailing scholarly views in Japan that advocated for recognizing the consensual nature of the commitment to provide a substitute.
2. Extinguishment of the Original Debt Still Requires Substitute Performance:
   While the agreement for daibutsu-bensai is formed by consent, the amended Article 482 is clear that the original debt is extinguished only when the payer actually makes (completes) the agreed-upon substitute performance. This two-stage process is critical:
   • Stage 1: Formation of a binding daibutsu-bensai contract by mutual agreement. This creates a new obligation on the payer to render the substitute performance.
   • Stage 2: Extinguishment of the original debt upon the successful completion of this substitute performance.
3. Identity of the Payer:
   The amended article refers to "a person who can make payment" (bensai o suru koto ga dekiru mono) as the party making the substitute performance. This explicitly includes not only the original debtor but also any third party who is legally entitled to make payment on the debtor's behalf (as generally permitted under Article 474, concerning payment by a third party).

Implications of the Shift to a Consensual Daibutsu-Bensai Agreement

This clarification of the daibutsu-bensai agreement as consensual, with debt extinguishment contingent on the later substitute performance, has several important implications:

1. Creation of a New Obligation

Once the daibutsu-bensai contract is validly formed by mutual consent, the payer (debtor or entitled third party) is now under a new, legally binding contractual obligation to provide the specified substitute performance. Failure to deliver this substitute performance would constitute a breach of this daibutsu-bensai contract, potentially giving rise to claims for damages or specific performance of the substitute, separate from the original debt.

2. Status of the Original Debt Pending Substitute Performance

This is a nuanced area where the amended law's effects become particularly pertinent. Since the original debt is extinguished only when the substitute performance is fully rendered, what is the status of that original debt in the interim period—after the daibutsu-bensai contract is made but before the substitute asset is delivered?

• Can the Creditor Still Demand Original Performance? The legal commentary provided suggests that, because the original debt is not yet extinguished by the mere agreement for daibutsu-bensai, the creditor may still be able to demand the original performance (e.g., the cash payment). This could lead to a situation where the debtor has agreed to provide an asset, but the creditor could theoretically revert to demanding cash if the asset isn't delivered promptly or if other circumstances change.
• Can the Debtor Choose to Fulfill the Original Obligation Instead? Conversely, if the creditor demands the substitute performance, can the debtor opt to provide the original performance instead (e.g., pay the cash debt rather than transfer the agreed asset)? The commentary suggests that such questions—whether the debtor has an option or is now solely bound to provide the substitute—would depend on the specific interpretation of the daibutsu-bensai agreement itself. Did the parties intend for the original obligation to be suspended? Did they intend to create an alternative obligation at the debtor's option, or a firm commitment to the substitute?

This interim period uncertainty highlights the need for careful drafting of daibutsu-bensai agreements.

Practical Considerations When Structuring Daibutsu-Bensai in Japan

Given the framework of the amended Article 482, parties entering into a daibutsu-bensai arrangement should consider the following:

• Clear Definition of Substitute Performance: The agreement must precisely describe the asset or service being offered as a substitute, including its condition, quantity, and any relevant specifications. For real estate, this would include a full legal description.
• Timing for Substitute Performance: The agreement should stipulate a clear deadline or timeframe for the rendering of the substitute performance.
• Status of the Original Obligation: To avoid ambiguity, parties may wish to explicitly address the status of the original debt after the daibutsu-bensai agreement is signed but before the substitute performance is completed. For instance:
  • Is the creditor's right to demand the original performance suspended?
  • Does the agreement create an exclusive obligation to provide the substitute, barring the debtor from reverting to the original performance?
    While the default statutory position is that the original debt persists until the substitute is rendered, specific contractual terms might seek to manage this interim state.
• Consequences of Failure to Provide Substitute Performance: The agreement should outline the consequences if the payer fails to deliver the substitute performance as promised. This might include the revival of the creditor's full rights under the original debt, claims for damages for breach of the daibutsu-bensai agreement, or other remedies.
• Third-Party Rights and Consents: If the substitute asset is encumbered or if its transfer affects third-party rights, these issues must be addressed. For example, transferring mortgaged property would require dealing with the mortgagee.

Illustrative Example:
Suppose Company D owes Company C JPY 50 million. Company D is short on cash but owns a valuable piece of industrial equipment. They agree in writing that Company D will transfer this equipment to Company C, and upon successful transfer, the JPY 50 million debt will be considered paid in full.

• Under amended Article 482, the moment Company D and Company C sign this agreement, a valid daibutsu-bensai contract is formed. Company D is now contractually obligated to transfer the equipment.
• The JPY 50 million debt is legally extinguished only when Company D completes the transfer of ownership and possession of the equipment to Company C in accordance with their agreement.
• If, after the agreement but before the equipment is transferred, Company C demands the JPY 50 million cash payment, Company D might, according to some interpretations of the new law's implications, still be technically liable for the original cash debt (as it's not yet extinguished). Company D’s primary path to discharge is now the delivery of the equipment.
• If Company D fails to deliver the equipment as agreed, Company C would have remedies for breach of the daibutsu-bensai contract (e.g., damages or compelling delivery of the equipment if feasible) and could potentially still pursue the original JPY 50 million debt if it's not deemed to have been effectively suspended or novated by the mere agreement.

Conclusion

The amendment to Article 482 of the Japanese Civil Code, clarifying that the agreement for daibutsu-bensai is a consensual contract, brings Japanese law more into line with modern transactional realities and prevailing legal theory. This "denial of the real contract nature" (yōbutsu keiyakusei no hitei) for the formation of the accord is a significant theoretical shift.

However, the equally crucial point that the original debt is extinguished only upon the actual completion of the substitute performance remains firmly in place. This two-tiered structure—a consensual agreement creating an obligation to perform a substitute, followed by debt extinguishment upon that performance—means that businesses and their legal counsel must draft daibutsu-bensai agreements with considerable care. Explicitly addressing the status of the original obligation during the interim period, the timelines for substitute performance, and the consequences of non-performance of the substitute will be key to avoiding uncertainty and potential disputes when using this valuable mechanism for debt settlement in Japan.