Settling Lawsuits in Japan: What's the Difference Between In-Court (Saiban-jō no Wakai) and Out-of-Court Settlements?

Settlement is a common and often preferred method for resolving civil disputes, allowing parties to reach a mutually agreeable outcome without the time, expense, and uncertainty of a full trial and judgment. In Japan, as in many other jurisdictions, parties can settle their disputes either privately, outside the formal court process, or within the framework of ongoing litigation with the court's involvement. While both aim to end a dispute, there are significant differences in their nature, legal effects, and the mechanisms for challenging them. This article explores these distinctions, with a particular emphasis on the characteristics and potent consequences of an "in-court settlement" (saiban-jō no wakai - 裁判上の和解).

Out-of-Court Settlement (Saibangai no Wakai - 裁判外の和解)

An out-of-court settlement is essentially a private contract between the disputing parties. It is governed by the provisions of the Japanese Civil Code, particularly Article 695, which defines a settlement contract as one where parties agree to terminate a dispute between them by making mutual concessions.

Key Characteristics and Effects:

  1. Contractual Nature: Being a contract, its formation, validity, and interpretation are subject to general contract law principles. It requires an offer, acceptance, and consideration (in the form of mutual concessions).
  2. Binding Force: Once validly concluded, an out-of-court settlement is contractually binding on the parties. If one party breaches the terms of the settlement agreement (e.g., fails to make an agreed payment), the other party's remedy is typically to file a new lawsuit to enforce the settlement agreement itself as a contract.
  3. Definitive Effect (Kakuteikō - 確定効): Article 696 of the Civil Code imparts a "definitive effect" to settlement contracts concerning the matters disputed. It states that if it is subsequently confirmed that one of the parties did not actually possess the right they purported to dispose of through the settlement, or that the right disposed of by the other party did not truly exist, then such right is nevertheless deemed to have been transferred to the relevant party or to have ceased to exist by virtue of the settlement agreement. In essence, the settlement redefines the legal relationship between the parties regarding the disputed points, and they cannot later revert to their pre-settlement legal positions concerning those specific matters by arguing about the original merits of the dispute.
  4. Challenging an Out-of-Court Settlement: Like any contract, an out-of-court settlement can be challenged on standard grounds for contractual invalidity or voidability. These may include:
    • Lack of legal capacity of one or more parties.
    • Defects in consent, such as fraud, duress, or a fundamental mistake (though Civil Code Article 696 places some limitations on challenging a settlement based on a mistake concerning the very points that were in dispute and intended to be resolved by the settlement, unless the mistake pertained to a matter not in dispute or a prerequisite assumed by both parties for the settlement).
    • Violation of public policy or mandatory legal provisions.
  5. Enforcement: Crucially, an out-of-court settlement agreement, in itself, is not directly enforceable through compulsory execution measures (e.g., seizure of assets by a court bailiff). If a party fails to comply with its terms, the aggrieved party must typically initiate a new lawsuit based on the settlement contract, obtain a judgment, and only then can they pursue compulsory execution based on that judgment.

In-Court Settlement (Saiban-jō no Wakai)

An in-court settlement occurs when parties to a pending lawsuit reach an agreement to resolve their dispute, and this agreement is formalized within the court proceedings. While parties can, of course, reach a private settlement agreement even while a lawsuit is pending and then jointly withdraw the suit, the specific procedural device of an "in-court settlement" (soshō-jō no wakai - 訴訟上の和解) has distinct and more powerful legal consequences. (Note: Japanese law also provides for a "pre-litigation settlement" or "summary settlement" - uttae teiki mae no wakai - under CCP Article 275, which can be pursued before a summary court and results in a court record with similar effects to an in-court settlement made during pending litigation. However, our primary focus here is on settlements reached within an ongoing lawsuit).

Formation and Formalization:
An in-court settlement is typically reached with the active involvement or encouragement of the presiding judge, who has a duty to attempt to facilitate settlement at any stage of the proceedings (CCP Art. 89 – this judicial encouragement is known as wakai kanshi - 和解勧試). Once the parties agree on the terms, these terms are formally entered into the court record (chōsho - 調書). It is this entry into the court record that gives the in-court settlement its special legal status under CCP Article 267.

Legal Effects of an In-Court Settlement (CCP Art. 267):
Article 267 of the CCP is pivotal. It states that when a settlement (or a waiver or acknowledgment of a claim) is entered in the court record, "such entry shall have the same effect as a final and binding judgment" (kakutei hanketsu to dōitsu no kōryoku - 確定判決と同一の効力). This phrase "same effect as a final and binding judgment" is interpreted to confer several significant legal consequences:

  1. Litigation Termination Effect (Soshō Shūryō Kō - 訴訟終了効): Upon the valid formation of an in-court settlement and its proper recording, the pending lawsuit is automatically and definitively terminated. No separate judgment of dismissal or order of discontinuance is required. The settlement itself concludes the action.
  2. Executory Force (Shikkōryoku - 執行力): This is a major distinction from out-of-court settlements. If the terms of an in-court settlement include an obligation for one party to perform a specific act (most commonly, to pay a sum of money, but it can also involve delivery of property, etc.), the court record incorporating the settlement terms itself serves as a "title of obligation" (saimu meigi - 債務名義). This means it is directly enforceable through compulsory execution procedures by a court execution officer, just as if it were a final monetary judgment (see Civil Execution Act Art. 22(vii)). There is no need to file a new lawsuit to enforce the settlement.
  3. Res Judicata (Kihanryoku - 既判力): This is the most debated and theoretically complex effect. Does an in-court settlement, by virtue of having the "same effect as a final and binding judgment," also possess the same res judicata effect, precluding re-litigation of the settled matters?
    • Arguments for Full Res Judicata: Proponents point to the clear language of CCP Article 267. They argue that an in-court settlement definitively resolves the disputed claims that were the subject of the litigation, and it functions as a "judgment substitute" (hanketsu daiyōbutsu). Therefore, it should carry the same preclusive force as a judgment on the merits.
    • Arguments Against Full Res Judicata (or for a more limited effect): Critics argue that res judicata is fundamentally a consequence of an authoritative judicial determination made by a court after a full adversarial process, based on the application of law to proven facts. A settlement, by contrast, is essentially a private agreement, albeit one recorded by the court. To attach full, unassailable res judicata to a purely consensual agreement might be seen as inconsistent with its nature. Furthermore, if a settlement covers matters beyond the scope of the original pleadings (which is permissible and common), defining the precise "subject matter" (soshōbutsu) to which res judicata would attach can become problematic. It's also argued that if the underlying agreement itself is fundamentally flawed (e.g., due to lack of true consent), the settlement shouldn't have the same robust preclusive effect as a judgment.
    • The Prevailing "Limited Res Judicata" Approach (Seigen-teki Kihanryoku Setsu - 制限的既判力説): The dominant view in both case law and academic commentary appears to be a compromise. Most accept that an in-court settlement does have res judicata effect with respect to the matters it purports to resolve. However, because its foundation is the agreement of the parties, if that underlying agreement is vitiated by a fundamental defect that would render a private contract void or voidable (such as fraud, duress, a critical mistake affecting the very basis of the settlement, or lack of capacity), then the res judicata effect of the settlement might not prevent a party from challenging the validity of the settlement itself on those grounds.
      The Supreme Court has affirmed that an in-court settlement has effects similar to a judgment (e.g., decision of March 5, 1958, Minshū Vol. 12, No. 3, p. 381), while also permitting challenges to such settlements based on contractual defects like mistake (e.g., decision of June 14, 1958, Minshū Vol. 12, No. 9, p. 1492). This approach essentially treats the settlement as having res judicata effect, but allows this effect to be pierced if the underlying contractual consensus was fundamentally flawed.

Challenging an In-Court Settlement: Grounds and Procedures

The illustrative Case ① in Chapter 4-17 of the reference material touches upon this. Party Y, after agreeing to an in-court settlement that confirmed a usufructuary lease (shiyō taishaku) for a parcel of land, later regrets the decision. Y feels that the judge's explanation during the settlement discussions regarding the potential duration of such a lease (particularly concerning its continuation after Y's death) was misleading or incomplete, and that Y was mistaken about the true legal implications (e.g., inability to rebuild, vulnerability if the landowner X sells the land).

Grounds for Challenge:
If the "limited res judicata" approach is taken, Y might attempt to challenge the in-court settlement by arguing that the underlying settlement agreement was defective due to:

  • Mistake (Sakugo - 錯誤, Civil Code Art. 95): Y would need to argue that there was a mistake concerning a fundamental element or prerequisite of the settlement, perhaps one induced by incomplete or misleading information provided during the settlement process. This is a high bar, as ordinary misunderstandings of legal consequences or a simple change of mind are generally insufficient. The mistake usually needs to pertain to an essential aspect of the agreement that formed the basis of the consent.
  • Fraud (Sagi - 詐欺) or Duress (Kyōhaku - 強迫): If Y could prove that consent to the settlement was obtained through fraudulent misrepresentation or unlawful duress by the other party (X), this would be a ground to invalidate the underlying agreement. (These are not strongly suggested by the facts of Case ①).
  • Lack of Capacity, Violation of Public Policy, etc.

It is much more difficult to challenge an in-court settlement than an out-of-court one. If full, judgment-like res judicata were applied without qualification, challenges would be confined to grounds analogous to those for a retrial (saishin) of a final judgment, which are extremely narrow (e.g., proof that the settlement was procured by a criminal act of the other party, or certain grave procedural irregularities in its formation).

Procedural Methods for Challenging an In-Court Settlement:
The procedural avenues for raising such challenges have also been a subject of debate:

  1. Motion in the Original Court to Set Aside and Reopen Proceedings (Zokkō Kijitsu Shitei no Mōshitate - 続行期日指定の申立て): Some older case law permitted a party to file a motion in the same court that recorded the settlement, asking it to set aside the settlement due to a fundamental flaw and to designate a date to resume the original, terminated lawsuit. If the court found the settlement invalid, the original suit would be revived. This method has the advantage of allowing the judge who was involved in the settlement (and thus familiar with its context) to assess the alleged defect.
  2. Separate Lawsuit to Declare the Settlement Invalid (Wakai Mukō Kakunin no Uttae - 和解無効確認の訴え): A party can file a new, independent lawsuit seeking a declaratory judgment that the in-court settlement is null and void due to the alleged defect.
  3. Claim Objection Suit (Seikyū Igi no Uttae - 請求異議の訴え): If the in-court settlement includes an enforceable obligation (e.g., a duty to pay money) and the other party attempts to levy execution based on the settlement record, the party alleging a defect in the settlement can file a claim objection suit (under Civil Execution Act Art. 35). In this suit, they would argue that the settlement (which serves as the "title of obligation") is invalid and therefore its enforcement should not be permitted.

Japanese case law has historically shown some flexibility, permitting challenges through various procedural routes depending on the circumstances. Academic opinion remains somewhat divided, with some scholars advocating for a primary or exclusive method, while others favor allowing the challenging party a degree of choice, considering factors such as whether the settlement only concerned the original subject matter of the lawsuit or extended to other unrelated issues, and whether the rights of third parties are implicated.

Effect of an In-Court Settlement on Third Parties

The illustrative Case ② in Chapter 4-17 raises the question of how an in-court settlement affects third parties. In that scenario, X (landowner) and Y (building owner on X's land) reach an in-court settlement whereby Y agrees to remove the building and vacate X's land by a specified date. Subsequently, Y, in breach of this settlement, leases the building to Z, who then occupies it. X wishes to evict Z.

Does the X-Y in-court settlement, having the "same effect as a final and binding judgment," extend its binding force to Z?

  • If the settlement is treated as having res judicata effect, then one would look to CCP Article 115, which governs the subjective scope of res judicata.
  • Z was not a party to the X-Y settlement. Z's right to occupy (the lease from Y) was acquired after the X-Y settlement was recorded (which is analogous to the res judicata reference time of a judgment).
  • Under CCP Article 115(1)(iii), res judicata extends to "a person who became a successor to a party after the conclusion of oral arguments." If Z's leasehold right concerning the building (and thus the right to occupy X's land via that building) is seen as a succession to Y's (now extinguished or limited by the settlement) right of possession after the "judgment" (settlement) against Y, then Z might be bound.
  • The ability to extend the effects of an in-court settlement to successors like Z is often cited by proponents of recognizing res judicata for such settlements. They argue that this is a significant practical advantage, offering greater finality and enforceability than a purely private out-of-court agreement, which generally would not bind a third party like Z who was not privy to that contract.
  • If Z is bound, Z cannot generally re-assert defenses against X that Y was (or would have been) precluded from raising due to the settlement. However, Z might still be able to raise defenses that are personal and unique to Z (e.g., if X had separately and independently consented to Z's lease, a fact not present in the scenario).

The Court's Role in Facilitating In-Court Settlements

Judges in Japan often take an active and encouraging role in facilitating settlements between litigating parties (this is the wakai kanshi under CCP Art. 89). This judicial involvement is sometimes seen as a justification for according in-court settlements a legal status stronger than that of purely private agreements. However, as illustrated by the concerns of party Y in Case ①, the nature and extent of the judge's explanations or suggestions during the settlement process can themselves become a point of contention if a party later feels they were misled, unduly pressured, or did not fully understand the implications of the terms agreed upon. This underscores the delicate balance that judges must maintain between actively promoting dispute resolution and ensuring the voluntariness, fairness, and informed nature of the parties' consent to any settlement.

Conclusion

In Japanese civil procedure, both out-of-court and in-court settlements provide avenues for resolving disputes without proceeding to a full trial and judgment. Out-of-court settlements are essentially private contracts, governed by general contract law, offering flexibility but requiring a new lawsuit for enforcement if breached. In-court settlements, on the other hand, are formalized within the judicial process and carry significantly more potent legal effects, most notably automatic termination of the lawsuit and direct enforceability equivalent to a final judgment.

The extent to which in-court settlements possess the full preclusive force of res judicata, particularly in terms of barring subsequent challenges based on alleged defects in the underlying consensual agreement, remains a subject of nuanced legal debate. The prevailing approach appears to be a "limited res judicata," which acknowledges a strong binding effect but allows for challenges if fundamental flaws in consent (such as mistake, fraud, or duress) can be established. The potential for extending the effects of an in-court settlement to third parties, such as successors in interest, is also a key consideration that distinguishes it from purely private agreements and contributes to the ongoing discussion about its precise legal character within the Japanese system. Parties considering an in-court settlement should be acutely aware of its powerful and generally conclusive nature, as well as the limited grounds upon which it can typically be challenged once entered into the court record.