Revolving Guarantees (根保証) by Individuals in Japan: What Special Protections Exist Regarding Maximum Amounts and Duration?

Revolving guarantees, known in Japanese as ne-hoshō (根保証), are a common feature in ongoing commercial relationships. Unlike a guarantee for a single, specific debt, a revolving guarantee covers a series of unspecified future obligations that may arise within a defined scope of continuous transactions (e.g., under a line of credit, a continuous supply agreement, or a lease). While commercially useful, this type of guarantee can expose guarantors, particularly individuals, to potentially vast and unpredictable liabilities that can accumulate over time.

Recognizing these risks, the Japanese Civil Code, especially after significant amendments focusing on guarantor protection, has implemented special rules when an individual (個人, kojin, a natural person as opposed to a corporation) acts as a revolving guarantor. These protections primarily revolve around mandatory maximum liability amounts and provisions concerning the duration or determination of the scope of guaranteed principal.

What is an Individual Revolving Guarantee?

An individual revolving guarantee is one where:

1. The guarantor is a natural person.
2. The guarantee covers "a series of unspecified obligations falling within a certain scope" (Article 465-2, Paragraph 1 of the Civil Code). This "certain scope" refers to the underlying continuous transactions from which the guaranteed debts will arise.

Japanese law further distinguishes a sub-category:

• Individual Revolving Loan Guarantees (個人貸金等根保証, kojin kashikin tō ne-hoshō): This refers to individual revolving guarantees where the scope of the principal obligations specifically includes "debts incurred by receiving a loan of money or a discount of a negotiable instrument" (貸金等債務, kashikin tō saimu). This category is subject to even stricter protective rules regarding duration.

Mandatory Protection 1: Stipulation of a Maximum Amount (極度額, Kyokudogaku)

The most fundamental protection for all individual revolving guarantors is the requirement for a maximum amount of liability.

• Ineffectiveness Without a Maximum Amount: Article 465-2, Paragraph 2 of the Civil Code unequivocally states that an individual revolving guarantee agreement is ineffective (効力を生じない, kōryoku o shōjinai) unless a maximum amount for which the guarantor is liable (the kyokudogaku) is stipulated. This applies to all types of individual revolving guarantees, whether for loans, lease obligations, trade payables, or other continuous dealings.
• Writing Requirement: This maximum amount must be stipulated in writing (or by an equivalent electromagnetic record) within the guarantee agreement itself (Article 465-2, Paragraph 3, which applies Article 446, Paragraphs 2 and 3 – the general formality rules for guarantees – mutatis mutandis).
• Nature of the Kyokudogaku: The stipulated kyokudogaku is a "claim-based maximum amount" (債権極度額, saiken kyokudogaku). As per Article 465-2, Paragraph 1, this means the maximum amount covers the aggregate of:
  • The principal of the main debts that arise.
  • Interest on those principal debts.
  • Any default charges or penalties.
  • Damages for non-performance.
  • All other charges accessory to the principal debts.
  • It also includes any agreed-upon penalties or damages specifically related to the guarantee obligation itself.
    This is comprehensive and is not merely a limit on the principal amount of the underlying transactions that can be covered.
• Purpose: This mandatory cap is designed to prevent individual guarantors from facing unforeseen and potentially limitless liability that could escalate dramatically due to accumulated interest, penalties, and further transactions by the principal debtor. It ensures the guarantor knows the absolute ceiling of their potential exposure from the outset.
• Prohibition of "Blanket" Revolving Guarantees for Individuals: The requirement for both a defined scope of principal obligations and a stipulated maximum amount effectively prohibits truly open-ended, unlimited, or "blanket" revolving guarantees (包括根保証, hōkatsu ne-hoshō) when the guarantor is an individual.

Mandatory Protection 2: Determination of the Principal (元本確定, Gankin Kakutei)

To further limit the indefinite continuation of an individual guarantor's exposure, Japanese law provides for mechanisms that "determine" or "fix" the principal amount (gankin) covered by the revolving guarantee. Once the principal is determined, the revolving guarantee ceases to cover new principal obligations arising from subsequent transactions. It will only continue to cover:

1. The principal obligations that were already in existence at the time of determination and fell within the scope of the guarantee.
2. Any interest, default charges, or damages accruing on those determined principal obligations (all within the overall kyokudogaku).

This "fixing" of the principal is crucial for eventually capping the guarantor's liability to a concrete set of obligations.

A. Statutory Principal Determination Events (Applicable to ALL Individual Revolving Guarantees)

Article 465-4, Paragraph 1 of the Civil Code specifies certain events that automatically trigger the determination of the principal for any individual revolving guarantee:

1. Execution Against Guarantor's Assets: When the creditor files a petition for compulsory execution (e.g., seizure of assets) or for the exercise of a security interest against the guarantor's property to satisfy a monetary claim, provided that the execution or security enforcement procedure has actually commenced. This signifies a serious attempt by the creditor to realize on the guarantee.
2. Guarantor's Bankruptcy: When the guarantor receives a court ruling for the commencement of bankruptcy proceedings.
3. Death of Principal Debtor or Guarantor: When either the principal debtor or the guarantor dies. The rationale for including the principal debtor's death is that an individual guarantor typically intends to guarantee the debts of a specific person, not necessarily those incurred by their estate or successors.

Parties can agree on other principal determination events, but such agreements cannot override these statutory triggers in a way that disadvantages the guarantor (these are generally considered one-sided mandatory rules for guarantor protection).

B. Stricter Rules for Principal Determination in Individual Revolving Loan Guarantees

For the sub-category of individual revolving loan guarantees (where the guaranteed debts include loans or discounted bills), the Civil Code imposes even more stringent rules concerning the timing of principal determination, reflecting heightened concern for guarantor protection in purely financial debt scenarios.

1. Stipulated Principal Determination Date (元本確定期日, Gankin Kakutei Kijitsu) - Article 465-3:

• Maximum 5-Year Horizon if Date is Set: If the parties to an individual revolving loan guarantee agreement stipulate a specific date for the determination of the principal, that date must be within five years from the date the guarantee agreement was concluded. If they set a date beyond this five-year period, the determination date is statutorily deemed to be five years from the agreement date (Article 465-3, Paragraph 1).
• Writing Requirement for Date (with exceptions): The stipulation of this determination date must itself be in writing (or an electronic record) to be effective, unless the agreed date is within three years of the contract, or if it's a change to an earlier date that is still within three years from the date of change (Article 465-3, Paragraph 4).
• Default 3-Year Horizon if No Date is Set: If an individual revolving loan guarantee agreement does not stipulate a principal determination date, the date is statutorily deemed to be three years from the date the guarantee agreement was concluded (Article 465-3, Paragraph 2).
• Restrictions on Changing the Date: While the principal determination date can be changed by agreement, any such change cannot set the new date beyond five years from the date the change is made. An important exception exists: if the change is made within two months before the currently set determination date, the new date can be extended up to five years from that original determination date (Article 465-3, Paragraph 3). This complex rule aims to prevent indefinite extensions or "rolling over" of the guarantee period by repeated last-minute changes, thereby ensuring an eventual cap. Automatic renewal clauses for the determination date are generally considered ineffective under this regime.

2. Additional Statutory Principal Determination Events for Individual Revolving Loan Guarantees (Article 465-4, Paragraph 2):

In addition to the general determination events listed in Article 465-4, Paragraph 1 (execution against guarantor, guarantor's bankruptcy, death of debtor or guarantor), the principal of an individual revolving loan guarantee is also determined upon the occurrence of the following events related to the principal debtor:

1. Execution Against Principal Debtor's Assets: When the creditor files a petition for compulsory execution or for the exercise of a security interest against the principal debtor's property to satisfy a monetary claim, provided that the procedure has commenced.
2. Principal Debtor's Bankruptcy: When the principal debtor receives a court ruling for the commencement of bankruptcy proceedings.

Rationale for Limiting Debtor-Focused Triggers to Loan Guarantees:
The reason why these principal debtor-focused triggers (execution or bankruptcy) are restricted to loan-type revolving guarantees, and not applied to all individual revolving guarantees (like those for lease payments or ongoing supply contracts), is practical. In non-loan scenarios, even if the principal debtor (e.g., a tenant or a buyer in a continuous supply contract) faces financial distress or execution, the creditor (e.g., landlord or supplier) might still be contractually obligated to continue their performance (e.g., providing the leased premises or supplying goods). Forcing the guarantee's principal to be determined solely due to the debtor's financial issues in such cases could leave the creditor without guarantee coverage for newly arising obligations under the still-active main contract. This might be inequitable if the creditor cannot easily cease their own performance. For loan guarantees, however, the creditor usually has more discretion in extending further credit once the principal debtor's financial situation deteriorates significantly.

Impact of Principal Determination

Once the principal is determined, either by a pre-set date or by a statutory event:

• The revolving guarantee ceases to cover any new principal obligations arising from transactions entered into after the determination.
• The guarantor remains liable for all principal obligations that arose up to the point of determination and fell within the scope and maximum amount of the guarantee, plus any interest, damages, and other accessory charges related to those determined principal obligations, all within the overall kyokudogaku.

This mechanism ensures that an individual guarantor’s liability, while potentially covering a series of transactions, does not remain open-ended indefinitely.

Conclusion

Japanese law provides a robust set of protections for individuals who act as revolving guarantors, recognizing the inherent risks of such open-ended commitments. The mandatory stipulation of a clear maximum amount of liability (kyokudogaku) in writing is the most universal safeguard. For individual revolving guarantees concerning loans and discounted bills, stricter rules on the duration before the principal must be determined (typically within 3 to 5 years) and additional events that trigger this determination (such as the principal debtor's bankruptcy or execution against their assets) offer further layers of protection. These provisions aim to strike a balance between facilitating necessary commercial credit and preventing individuals from being subjected to unforeseen, excessive, or indefinitely accumulating guarantee obligations.