The Defense of Set-Off (Sōsai no Kōben) in Japanese Civil Procedure: Why Does It Receive Special Treatment and How Does It Affect Res Judicata?

The substantive legal concept of set-off—whereby mutual debts between parties can extinguish each other up to the amount of the smaller debt—is a familiar one in many legal systems. In Japanese civil procedure, when a defendant raises a "defense of set-off" (sōsai no kōben - 相殺の抗弁) against a plaintiff's claim, it triggers a series of unique procedural rules and consequences that distinguish it significantly from other types of defenses. This special treatment primarily revolves around the scope of res judicata (既判力 - Kihanryoku), the mandatory order of its examination by the court, its interplay with the prohibition of lis pendens, and its implications during appellate review. Understanding these peculiarities is crucial for any party involved in litigation where set-off is, or could be, a factor.

The Unique Res Judicata Effect: Article 114, Paragraph 2 of the Code of Civil Procedure (CCP)

The most defining characteristic of the defense of set-off in Japanese procedure is the exceptional way res judicata applies to it. The general rule, under Article 114, Paragraph 1 of the CCP, is that Kihanryoku (the binding, preclusive effect of a final judgment) attaches only to the determination made in the main text (operative part) of the judgment (主文中の判断 - shubun-chū no handan) concerning the subject matter of litigation (soshōbutsu - 訴訟物). Findings of fact or legal interpretations contained within the reasoning of the judgment (判決理由中の判断 - hanketsu riyū-chū no handan) typically do not acquire Kihanryoku.

However, Article 114, Paragraph 2 CCP carves out a critical exception for the defense of set-off:

"A finding on the existence or non-existence of a claim asserted for the purpose of set-off shall have the effect of res judicata with regard to the amount for which the set-off is asserted to be effective."

This means that when a court adjudicates a defense of set-off, its finding within the reasoning of the judgment regarding the validity and amount of the defendant's claim used for the set-off (this claim is often called the "active claim" or jidō saiken - 自動債権) acquires Kihanryoku up to the amount that was actually offset against the plaintiff's primary claim (shukyu saiken - 主張債権, also known as the "passive claim" or judō saiken - 受働債権).

Rationale for this Exception: This special extension of Kihanryoku to a finding within the judgment's reasoning serves vital purposes:

1. Preventing Re-litigation of the Jidō Saiken: Without this rule, a defendant whose set-off defense was rejected because their jidō saiken was found non-existent could potentially re-sue the plaintiff on that same jidō saiken in a separate action. Conversely, if the set-off succeeded and the plaintiff's claim was dismissed, the plaintiff might try to argue in a later proceeding that their original shukyu saiken never actually existed (to undo the effect of the set-off and "revive" the defendant's jidō saiken for other purposes). Article 114(2) aims to prevent such duplicative litigation and inconsistent outcomes by giving finality to the court's determination on the jidō saiken used in the set-off.
2. Ensuring Definitive Resolution: It ensures that the adjudication of the set-off provides a more definitive resolution of the parties' mutual obligations concerning the amounts actually offset.

Scope of Res Judicata under Article 114(2):

• It covers the "existence or non-existence" (sonpi - 存否) of the jidō saiken, not merely its "formation or non-formation" (seihi - 成否). This means the finding is conclusive not only on whether the claim (e.g., a contract giving rise to the jidō saiken) was validly formed, but also on whether it existed at the time of set-off (i.e., it hadn't been extinguished by other means like prior payment, discharge, or statute of limitations).
• The Kihanryoku applies to the jidō saiken only up to "the amount for which the set-off is asserted to be effective" (相殺をもって対抗した額 - sōsai o motte taikō shita gaku). The prevailing interpretation of this phrase is that it refers to the amount of the plaintiff's shukyu saiken that the defendant actually sought to extinguish through the set-off (which is, logically, the lesser of the two claims if they are unequal, or the full amount if they are equal up to the extent of the shukyu saiken found to exist).
  • Example: Plaintiff (P) sues Defendant (D) for a ¥4 million loan (shukyu saiken). D asserts a ¥5 million sales credit (jidō saiken) against P and claims set-off. The court finds P's loan claim valid for ¥3.5 million, and D's sales credit also valid for ¥3.5 million, leading to a full set-off and dismissal of P's claim.
    • Under Article 114(1), Kihanryoku attaches to the finding that P's ¥3.5 million loan claim was extinguished (and the remaining ¥0.5 million of the original ¥4 million claim was non-existent).
    • Under Article 114(2), Kihanryoku attaches to the finding that ¥3.5 million of D's sales credit (jidō saiken) existed and was extinguished by the set-off.
    • The remaining ¥1.5 million of D's asserted ¥5 million sales credit (i.e., the portion not used for the set-off because the plaintiff's valid claim was only ¥3.5 million) is, according to the prevailing view, not covered by the Kihanryoku of Article 114(2). D would generally be free to sue P for this remaining ¥1.5 million in a separate action, and that claim would not be barred by the res judicata of the first judgment's finding on the set-off.
  • A minority scholarly view argues that if the court, in assessing the set-off, comprehensively examines the entire asserted jidō saiken and finds it to be, for instance, non-existent or only partially existent, then the Kihanryoku of non-existence should extend to the entire portion examined and found wanting, even if that exceeds the amount actually offset. However, the prevailing view limits the Art. 114(2) Kihanryoku more strictly to the amount effectively countervailed.

Mandatory Order of Examination (Shinri Junjo no Kyōsei - 審理順序の強制)

The special res judicata effect of a set-off defense leads to another unique procedural feature: a mandatory order for its examination by the court.

For most other defenses (e.g., payment, discharge, statute of limitations), the court generally has discretion. It can examine the easiest or most dispositive defense first. If that defense is upheld and leads to the dismissal of the plaintiff's claim, the court might not need to fully adjudicate the plaintiff's primary claim or other asserted defenses. The findings on such ordinary defenses are typically part of the judgment's reasoning and do not acquire Kihanryoku.

The defense of set-off is different. The court must first examine the plaintiff's primary claim (shukyu saiken). Only if this primary claim is found to exist (in whole or in part) can the court then legitimately proceed to examine the defendant's jidō saiken asserted for set-off. It cannot, for example, conclude that since the defendant's jidō saiken clearly exists and exceeds the plaintiff's claim, the plaintiff's claim is dismissed by set-off, without first definitively establishing the existence and amount of that primary claim.

Reasons for this Mandatory Order:

1. Accurate Res Judicata on the Primary Claim: To ensure that the Kihanryoku attaching to the plaintiff's primary claim under Article 114(1) is correctly determined (i.e., whether it exists and for what amount, or if it's extinguished by set-off versus being non-existent for other reasons).
2. Preventing Unnecessary Adjudication of the Jidō Saiken: If the plaintiff's primary claim is found to be non-existent from the outset (e.g., the loan was never made), then there is nothing against which to set off. In such a case, the defendant's jidō saiken should not be "consumed" by a set-off that wasn't needed, nor should its existence or non-existence be adjudicated with the force of Kihanryoku under Article 114(2). The defendant should be free to assert their jidō saiken in full in a separate proceeding if desired.

This mandatory order applies due to the inherent nature of set-off and its res judicata consequences, even if the defendant does not explicitly plead the set-off as "preliminary" or "contingent" (yobi-teki - 予備的) upon the plaintiff's claim being found valid. (Such "preliminary" pleading is often done to avoid an implied admission—a seigen-tsuki jihaku - 制限付自白 or qualified admission—of the plaintiff's primary claim while simultaneously arguing set-off).

The Security Function of Set-Off and its Interaction with Lis Pendens (Article 142 CCP)

In substantive law, set-off serves several functions: simplifying transactions (easy settlement), ensuring fairness (preventing one party from having to pay in full when they are also owed money by the other, especially if the other is insolvent), and, significantly, a security function (sōsai no tanpoteki kinō - 相殺の担保的機能). This security function means that a party holding a mutual claim can effectively ensure its "collection" by offsetting it against their own debt, giving them a form of de facto priority, much like a secured creditor. The Supreme Court has acknowledged this important function in a procedural context (e.g., Supreme Court, June 30, 1998, Minshu Vol. 52, No. 4, p. 1225).

This security aspect becomes particularly relevant when considering the interaction between a set-off defense and the prohibition of lis pendens under Article 142 CCP, which bars the duplicate institution of actions. Since a defense of set-off is not formally an "action," Article 142 does not directly apply. However, complexities arise if the jidō saiken (the claim used for set-off) is also the subject of a separate, pending lawsuit initiated by the defendant (as plaintiff in that separate suit) against the current plaintiff, or if a party, after raising a set-off defense using a jidō saiken, then files a new, separate lawsuit based on that same jidō saiken.

The Supreme Court (e.g., December 17, 1991, Minshu Vol. 45, No. 9, p. 1435) has held that the underlying rationale of Article 142—to avoid redundant judicial examination and the risk of conflicting res judicata—can apply analogously when a party asserts a jidō saiken for set-off that is already the subject of their own pending separate action against the current plaintiff. This means the set-off defense might be disallowed in such a case.

This analogous application is, however, a subject of academic debate:

• Arguments Against Analogous Application: Critics point out that due to the mandatory order of examination, the jidō saiken might not actually be examined in the set-off case (if the plaintiff's primary claim fails). To deprive a party of the valuable security function of set-off for what is only a "risk of a risk" of conflicting judgments (which might not materialize) is seen as potentially too harsh. They suggest that procedural tools like consolidation of actions or careful judicial coordination might be better ways to manage the overlap.
• Arguments For Analogous Application: Proponents emphasize that Article 142's purpose is precisely to nip the "risk" of conflicting adjudications and wasteful proceedings in the bud.
• Scholarly views also differ based on which was filed first—the separate suit on the jidō saiken or the set-off defense using that jidō saiken—and other specific procedural postures, attempting to balance the security function of set-off against the concerns addressed by Article 142.

More recent Supreme Court jurisprudence has also explored intricate scenarios, such as a party asserting its own counterclaim as the basis for a set-off defense against the main claim within the same lawsuit (Supreme Court, April 14, 2006, Minshu Vol. 60, No. 4, p. 1497). In that case, the Court allowed the set-off defense, effectively "interpreting" the counterclaim as having been filed preliminarily for set-off purposes to navigate around potential lis pendens-like issues within a single complex proceeding. Conversely, lower courts have been more restrictive when a plaintiff attempts to use their main claim as a basis for a set-off defense against a defendant's counterclaim in the same action, often disallowing it on the grounds that it would improperly seek two judgments with res judicata on the same primary claim.

Set-Off Defenses and Appeals

The special res judicata effect of Article 114(2) also has significant implications for appellate review.

Interest to Appeal (Jōso no Rieki - 上訴の利益)

Normally, a party who "wins" (i.e., achieves the overall outcome they sought, such as dismissal of the opponent's claim) has no "interest to appeal" or "standing to appeal" (fufuku no rieki - 不服の利益) the judgment. However, if a defendant "wins" because their set-off defense was upheld, they might still be adversely affected by the res judicata generated under Article 114(2) concerning their jidō saiken (which is now deemed extinguished up to the amount offset).

• Example: P's claim against D is dismissed solely because D's set-off defense (using D's jidō saiken against P) was successful. D has "won." However, the judgment now carries res judicata that D's jidō saiken is extinguished to the extent it was used in the set-off. If D believes that P's primary claim should have been dismissed on other grounds (e.g., P's claim never existed in the first place), D has an interest in appealing the judgment. A successful appeal on this point would mean P's claim is dismissed without resorting to the set-off, thereby preserving D's jidō saiken intact and free from the preclusive effect of Article 114(2).
• The prevailing academic view in Japan (the "New Substantive Incongruity Theory" - Shin Jittai-teki Fufuku Setsu - 新実体的不服説) supports recognizing an interest to appeal in such situations. It looks at whether confirming the judgment as is would cause the appellant an unavoidable future disadvantage due to its legal effects, including res judicata. The older "Formal Incongruity Theory" (Keishiki-teki Fufuku Setsu - 形式的不服説), which simply compared the party's prayer with the main text of the judgment, had to treat this as an "exception" to find an interest to appeal for the "winning" defendant.

If such a defendant successfully appeals and demonstrates that the plaintiff's primary claim was independently non-existent, the appellate court will typically reverse the first instance judgment and issue its own judgment dismissing the plaintiff's claim on those other grounds. This new appellate judgment will then only carry res judicata under Article 114(1) regarding the non-existence of the plaintiff's primary claim; it will not generate res judicata under Article 114(2) regarding the defendant's jidō saiken, as the set-off defense would no longer be the basis for the dismissal.

Set-Off and the Prohibition of Disadvantageous Change on Appeal

The Principle of Prohibition of Disadvantageous Change (Furieki Henkō Kinshi no Gensoku - 不利益変更禁止の原則) states that an appellant cannot be placed in a worse position as a result of their own appeal unless the appellee also appeals or files a cross-appeal seeking a modification unfavorable to the appellant. This principle interacts complexly with set-off defenses.

• Example Scenario:
  1. First Instance: Plaintiff P's claim against Defendant D is dismissed because D’s set-off defense (using D's jidō saiken against P) is upheld. This judgment implies P's shukyu saiken existed but was offset, and D's jidō saiken also existed and was offset (both findings having res judicata implications).
  2. P alone appeals, seeking to have their claim upheld (i.e., arguing the set-off was improper). D does not appeal or cross-appeal.
  3. Appellate Court finds: (a) D's jidō saiken (used for set-off) was actually non-existent, BUT (b) P's primary shukyu saiken was also non-existent from the very beginning (for reasons unrelated to the set-off).
• The Dilemma: If the appellate court simply rules according to its findings (that P's primary claim was non-existent), it would dismiss P's claim. However, this outcome, while seemingly the same (claim dismissed), is different in its res judicata implications for P compared to the first instance judgment. The first instance judgment, by upholding the set-off, established with res judicata (under Art. 114(2)) that D's jidō saiken was valid and then extinguished by set-off. If the appellate court now says P's claim fails because it never existed, the issue of D's jidō saiken might not be definitively adjudicated with res judicata in the same way (or at all, if the set-off is not reached). For P (the appellant), losing the potential res judicata effect against D's jidō saiken could be seen as a "disadvantageous change."
• Prevailing Supreme Court Approach (e.g., Supreme Court, September 4, 1986): In such specific and complex circumstances, to avoid a disadvantageous change to the appellant (P), the appellate court should simply dismiss P's appeal. This upholds the first instance judgment's outcome (P's claim is dismissed) and its specific res judicata effects (including the one on D's jidō saiken due to the set-off). The reasoning is that P appealed the dismissal of their primary claim, and within the scope of that appeal, both the primary claim and the set-off defense are subject to review. If the ultimate outcome (dismissal of P's claim) remains unchanged for reasons found by the appellate court, but altering the basis of that dismissal would disadvantage the appellant regarding res judicata effects, the original judgment is maintained via dismissal of the appeal.

Conclusion

The defense of set-off stands apart in Japanese civil procedure due to the exceptional grant of res judicata to findings on the claim used for set-off (the jidō saiken), even though such findings are part of the judgment's reasoning. This unique feature underpins the mandatory order of examination, differentiates set-off from other defenses, and creates intricate challenges in situations involving lis pendens and appellate review, particularly concerning the interest to appeal and the prohibition of disadvantageous change. For legal practitioners, a nuanced appreciation of these special rules is indispensable when either raising a set-off defense or responding to one in the context of Japanese litigation, as they can profoundly affect the strategic conduct of the case and the ultimate preclusive effect of the judgment.