Terminating Agency or Service Agreements in Japan: The "Right of Arbitrary Termination" (Nin'i Kaijo) and Its Consequences

In Japan, agreements for agency, professional services, or the general entrustment of affairs often fall under the legal category of inin (委任 – mandate) or jun-inin (準委任 – quasi-mandate). A defining characteristic of these contracts is their foundation on a deep personal relationship of trust and confidence (shinnin kankei – 信頼関係) between the principal (ininsha – 委任者), who entrusts the affairs, and the mandatary (junin – 受任者), who undertakes them. Reflecting this highly personal nature, Japanese law, specifically Article 651 of the Civil Code, grants both parties a uniquely broad power: the right of "arbitrary termination" (nin'i kaijo – 任意解除). This article explores the scope of this right, the conditions attached to its exercise, particularly the obligation to compensate for damages, and how Japanese courts have navigated its application, especially in complex situations where the mandate also serves the mandatary's own interests.

I. The General Principle: Arbitrary Termination (Nin'i Kaijo) of Mandate Agreements (Civil Code Article 651)

A. The Right to Terminate at Will (Article 651, Paragraph 1)

Article 651, Paragraph 1 of the Japanese Civil Code starkly provides: "A mandate may be terminated by either party at any time." This establishes a fundamental principle for mandate agreements: either the principal or the mandatary can unilaterally end the contractual relationship whenever they choose, even after the performance of the entrusted affairs has commenced.

Several key aspects define this right:

• Unilateral Act: The termination is effected by a simple declaration of intent from one party to the other; the consent of the counterparty is not required.
• No Specific Reason Needed: Unlike termination for breach in many other contract types, arbitrary termination under Article 651 does not require the terminating party to show fault or a specific contractual ground for ending the agreement.
• Rationale – The Personal Relationship of Trust: The underlying justification for this broad termination right is the deeply personal nature of the mandate. These agreements are predicated on mutual trust and confidence. If this trust erodes, or if one party simply wishes to discontinue the relationship for their own reasons, the law deems it inappropriate to force the parties to remain bound. This distinguishes mandate from contracts like sales, where termination is typically linked to breach or specific triggering events, and from employment contracts where an employer's right to terminate is heavily restricted by labor laws. While principals in ukeoi (contract for work) also have a broad right to terminate before completion (Article 641), they are explicitly required to compensate for all damages, including expected profit, whereas the damage compensation under mandate termination has its own nuances.

B. The Balancing Factor: Obligation to Compensate for Damages (Article 651, Paragraph 2)

This seemingly absolute right to terminate at will is not without a crucial balancing mechanism. Article 651, Paragraph 2 introduces a significant condition: "If a party terminates a mandate at a time that is unfavorable to the other party, that party shall compensate for any damages thereby caused to the other party; provided, however, that this shall not apply if there was an unavoidable reason for such termination."

This paragraph establishes two important points:

1. Compensation for Unfavorable Timing: If the termination, though permissible, occurs at a time or under circumstances that are disadvantageous or prejudicial to the other party, the terminating party incurs an obligation to compensate for the resulting damages.
2. Exception for "Unavoidable Reason" (Yamu o Enai Jiyū – やむを得ない事由): This duty to compensate is excused if the terminating party had an "unavoidable reason" for ending the mandate at that particular time. What constitutes an "unavoidable reason" is a matter of interpretation based on the specific facts, but it generally implies circumstances beyond the reasonable control of the terminating party or situations where continuing the mandate would be extremely difficult or unjust. Examples might include the serious illness or incapacity of the mandatary, significant unethical behavior by the principal that destroys the trust relationship, or a fundamental change in external circumstances that makes the original purpose of the mandate entirely unachievable or irrelevant for the principal.

C. Scope and Nature of Damages under Article 651, Paragraph 2

The precise scope of "damages" compensable under this provision has been a subject of legal interpretation.

• Damages from "Unfavorable Timing": The traditional and still prevailing interpretation tends to limit these damages to those specifically and directly caused by the inopportune timing of the termination, rather than all losses flowing from the non-completion of the entire mandate as originally envisaged. This might include, for example:
  • Wasted expenses incurred by the non-terminating party in direct preparation for imminent tasks that are now cancelled due to the sudden termination.
  • Costs associated with urgently finding an alternative service provider or client.
  • Losses from perishable actions or opportunities that could not be salvaged due to the abruptness of the termination.
• Expectation Damages (Lost Profits): A key point of discussion is whether these damages can include the mandatary's lost expected remuneration or profits from the uncompleted portion of an onerous mandate. The argument against routinely including full expectation damages is that both parties enter a mandate aware of the inherent right of arbitrary termination under Article 651(1); thus, the continuation of the mandate and the earning of full remuneration were never absolutely guaranteed. Compensation is more for the disruption caused by an ill-timed termination than for the loss of the entire contractual benefit.
• No-Fault Basis (for compensation): If termination occurs at an unfavorable time and there's no unavoidable reason, the liability to compensate for damages under Article 651(2) arises regardless of whether the terminating party was otherwise "at fault" in a blameworthy sense. The liability stems from the act of terminating at a prejudicial juncture.

II. The Evolution of Limitations: Mandates "For the Benefit of the Mandatary"

While Article 651 appears to grant an unrestricted right of arbitrary termination, Japanese case law, over several decades, developed important interpretations and limitations, particularly in situations where the mandate was deemed to have been established not only for the principal's interest but also for a distinct interest or benefit of the mandatary (juninsha no rieki no tame ni mo nasareta inin).

A. The Initial Restriction on Principal's Termination Right

Early Supreme Court (Daishin'in – Great Court of Cassation, the predecessor to the current Supreme Court) precedents established a significant restriction. If a mandate agreement was found to serve not merely the principal's objectives but also a specific, independent interest of the mandatary, the principal could not arbitrarily terminate the mandate under Article 651(1). A leading example is the Daishin'in judgment of April 24, 1920 (Minroku Vol. 26, p. 562).

• Rationale: The reasoning was that Article 651's provision for arbitrary termination is predicated on the mandate being based primarily on the personal trust relationship and serving the principal's interests. If the mandatary also had a distinct, recognized interest in the continuation of the mandate (e.g., where the mandate was a means for the mandatary to secure repayment of a debt owed to them by the principal by collecting funds on the principal's behalf), allowing the principal to unilaterally terminate could unfairly prejudice this vested interest of the mandatary.

B. The "Exception to the Exception": Termination for Unavoidable Reasons

This restriction was itself subject to an exception. Later case law clarified that even if a mandate was for the benefit of the mandatary, the principal could still terminate it if there were "unavoidable reasons" (yamu o enai jiyū). Such reasons typically involved serious misconduct, gross negligence, or a fundamental breach of trust by the mandatary, making the continuation of the relationship untenable for the principal (e.g., Supreme Court judgment, December 17, 1965, Saibansho Jihō (Minji) No. 81, p. 561; Supreme Court judgment, September 20, 1968, Hanrei Jihō No. 536, p. 51, involving mismanagement by a mandatary entrusted with business operations). This acknowledged that the trust element, even in such mixed-interest mandates, could not be entirely disregarded.

C. Narrowing the Scope of "Mandatary's Benefit"

Over time, the courts began to interpret the concept of what constituted a "benefit of the mandatary" (sufficient to restrict the principal's termination right) more narrowly. A crucial clarification was that the mere fact that a mandatary receives remuneration for their services under an onerous mandate does not, by itself, make the mandate one "for the benefit of the mandatary" in the special sense that would preclude the principal's right of arbitrary termination under Article 651 (Supreme Court judgment, September 20, 1968, cited above).
Subsequently, it was held that even a regular income stream derived from a professional service contract, such as a retainer agreement with a tax advisor, did not qualify as the type of special "benefit" that would restrict the principal's termination right (Supreme Court judgment, September 20, 1983, Hanrei Jihō No. 1100, p. 55). The courts were moving towards recognizing that ordinary contractual benefits like payment were part of the expected exchange, not a separate "interest" justifying a limitation on termination.

D. The Substantive Shift: The Supreme Court Judgment of January 19, 1981

A landmark Supreme Court judgment on January 19, 1981 (Minshū Vol. 35, No. 1, p. 1) signaled a significant, arguably substantive, shift in interpretation, moving closer to a more literal and broader application of Article 651, even in cases involving some identifiable benefit to the mandatary.
The Court reasoned that:

• Even if a mandate serves the mandatary's interest in addition to the principal's, the fundamental basis of a mandate remains the mutual trust relationship.
• To force a principal to continue a mandate against their will (unless they have clearly and explicitly waived their right to terminate) would undermine the very essence of this trust-based contract and could prejudice the principal's own interests.
• Therefore, the principal generally retains the right to terminate under Article 651.
• If the mandatary suffers undue prejudice because the mandate also served their specific interest (beyond mere remuneration), their protection lies not in an absolute bar on termination, but rather in receiving appropriate compensation for damages as provided for under Article 651, Paragraph 2.

This judgment is widely interpreted as having largely restored the broad applicability of the principal's right to arbitrary termination, with the mandatary's financial interest in such cases primarily addressed through the mechanism of monetary compensation for termination at an unfavorable time, rather than by negating the termination right itself (unless the right to terminate was clearly and unequivocally waived by the principal).

III. Other Grounds for Termination of Mandate Agreements

Beyond the arbitrary termination right under Article 651, mandate agreements can terminate for a variety of other reasons recognized by law:

1. Completion of the Entrusted Affairs: The mandate naturally concludes when the specific tasks or juridical acts it was created for have been fully performed.
2. Impossibility of Performance: If it becomes objectively impossible to carry out the entrusted affairs.
3. Expiry of a Fixed Term: If the mandate was established for a specific duration, it terminates upon the expiry of that term.
4. Occurrence of a Resolutory Condition: If the contract included a specific condition, the occurrence of which was agreed to terminate the mandate.
5. Termination for Breach of Contract: A material breach of duty by either the principal (e.g., failure to provide necessary information or funds) or the mandatary (e.g., gross negligence, breach of loyalty) can give the other party the right to terminate the mandate for cause, in accordance with general contract principles (e.g., Civil Code Articles 541 et seq.).
6. Death or Bankruptcy of Either Party; Commencement of Guardianship for the Mandatary (Civil Code Article 653): Due to its highly personal and trust-based nature, a mandate agreement automatically terminates upon:
   • The death of either the principal or the mandatary.
   • The commencement of bankruptcy proceedings for either the principal or the mandatary.
   • The mandatary becoming subject to an order for the commencement of guardianship (which restricts their legal capacity).
   • Exceptions: It's important to note that Article 653 is not absolutely mandatory in all circumstances. Parties can, by clear agreement, provide for the continuation of the mandate despite these events. Furthermore, specific laws may provide for the continuation of certain types of mandates (e.g., for litigation proxies in ongoing court cases). The Supreme Court has also recognized that a mandate intended to cover post-death affairs (like funeral arrangements or payments to caregivers after the principal's death, as in the judgment of September 22, 1992, Kin'yū Hōmu Jijō No. 1358, p. 55) may implicitly include an agreement that it will not terminate upon the principal's death, if such an intention is clear from the nature and purpose of the entrustment.

IV. Effects of Termination

The termination of a mandate agreement has several legal effects:

• Prospective Effect (Civil Code Article 652, applying Article 620 by analogy): When a mandate contract is terminated, whether arbitrarily under Article 651 or for other reasons such as breach, the termination generally has only prospective effect. This means it brings an end to the future obligations of the parties under the mandate but does not retroactively nullify acts that were already duly performed by the mandatary in accordance with the mandate before its termination. This principle was affirmed by the Supreme Court (e.g., judgment of March 4, 1982, Hanrei Jihō No. 1042, p. 87, confirming Article 652's applicability to arbitrary termination).
• Mandatary's Post-Termination Duties (Civil Code Article 654): Even after the termination of the mandate, if urgent circumstances exist, the mandatary (or their heirs or legal representative, if applicable) has a duty to take necessary emergency measures (ōkyū shochi no gimu – 応急措置の義務) to protect the interests of the principal until the principal (or their heirs or legal representative) can assume management of the affairs. This ensures that the principal is not left in a vulnerable position due to an abrupt cessation of management.
• Notification of Termination Cause (Civil Code Article 655): A ground for the termination of a mandate (other than a termination effected by a declaration of intent made directly to the other party, like an arbitrary termination notice) cannot be asserted against the other party if that party was unaware of the existence of such ground and was not at fault for being unaware of it. This provision protects a party from being unknowingly prejudiced by a termination event they had no notice of.

V. Conclusion

The right of arbitrary termination (nin'i kaijo) under Article 651 of the Japanese Civil Code is a defining and somewhat unique feature of mandate (inin) and quasi-mandate (jun-inin) agreements, underscoring the paramount importance of the personal trust relationship that forms their basis. While this provides significant flexibility for either the principal or the mandatary to end the relationship at any time, it is critically balanced by the obligation to compensate the other party for damages if the termination occurs at a time that is unfavorable to them and without an unavoidable justification.

Japanese courts have played a significant role in shaping the application of this right, particularly in nuanced situations where the mandate was also intended to serve an interest of the mandatary. The modern trend, particularly following the influential Supreme Court judgment of 1981, leans towards upholding the broad right of arbitrary termination, with the mandatary's specific interests in such cases being protected primarily through the mechanism of damages for unfavorable termination, rather than by an absolute prohibition on ending the mandate. For businesses and individuals engaging in agency, professional service, or other entrusted affairs agreements in Japan, a clear understanding of these termination rules, including the conditions for and consequences of arbitrary termination, is essential for managing these critical relationships effectively.