Transferring a Whole Contract in Japan: How Does the "Transfer of Contractual Status" (Keiyakujo no Chii no Iten) Work?

Japanese Attorney at Law - Bengoshi L.L.

• 6 min read

In the lifecycle of a business, situations often arise where a company needs to transfer not just an isolated right (like a receivable) or a specific obligation, but its entire position under an ongoing contract to another party. This could occur during a business sale, corporate restructuring, or when a party simply wishes to exit a long-term agreement. Japanese law provides a mechanism for this comprehensive transfer, known as "Keiyakujo no Chii no Iten" (契約上の地位の移転 – Transfer of Contractual Status), which was formally codified in Article 539-2 of the Japanese Civil Code by the 2017 reforms, building upon existing case law and legal theory.

What is "Transfer of Contractual Status"?

A transfer of contractual status occurs when one of the original contracting parties (the "transferor" or yuzuriwatashi-nin 譲渡人) transfers their entire set of rights and obligations under a specific contract to a third party (the "transferee" or yuzuriuke-nin 譲受人). The transferee effectively steps completely into the transferor's shoes, assuming all aspects of their contractual position.

This mechanism is particularly useful for ongoing, bilateral contracts where both parties have continuing rights and obligations, such as:

  • Lease agreements (e.g., transferring a tenant's or landlord's position).
  • Long-term supply or service agreements.
  • Partnership agreements.
  • Franchise agreements.

Distinction from Other Mechanisms

It's crucial to differentiate the transfer of contractual status from other related legal concepts:

  1. Assignment of Claims (Saiken Joto 債権譲渡): This involves the transfer of only the rights (claims) held by a creditor to an assignee. The assignor's obligations under the contract are not transferred.
  2. Assumption of Obligations (Saimu Hikiuke 債務引受): This involves a third party taking over only the obligations (debts) of an original obligor. The original obligor's rights are not typically transferred with the obligations in this manner.
  3. Novation (Kokai 更改): Novation extinguishes the original contract entirely and creates a brand new contract in its place, which may involve different parties or different core terms.

In contrast, a transfer of contractual status does not create a new contract. Instead, the existing contract itself, with its established terms, history, and the bundle of rights and obligations, is passed from the transferor to the transferee.

The cornerstone of a valid transfer of contractual status under Japanese law is the consent of the other original contracting party (referred to as the "remaining party" or zanson-tojisha 残存当事者 – the party whose counterparty is changing).

Formation Methods:
A transfer of contractual status can be effected through one of two primary methods:

  • (a) A Tripartite Agreement: An agreement entered into simultaneously by all three parties involved: the transferor, the transferee, and the remaining original contracting party. This is often the clearest and most straightforward method.
  • (b) An Agreement Between the Transferor and Transferee, with Subsequent Consent from the Remaining Party: The transferor and the transferee can first agree between themselves to transfer the contractual status. However, this transfer only becomes legally effective when the remaining original contracting party subsequently gives their consent.

Rationale for Requiring the Remaining Party's Consent:
The requirement for the remaining party's consent is fundamental. A contract creates a personal legal relationship, and the remaining party entered into that relationship relying on the specific identity, creditworthiness, reputation, skills, and performance capabilities of the original transferor. Allowing the transferor to unilaterally substitute their counterparty could significantly prejudice the remaining party's interests and expectations. The law therefore protects the remaining party's right to choose with whom they are contractually bound.

Form and Timing of Consent:
The Civil Code does not mandate a specific form for the remaining party's consent. It can be:

  • Express: Explicitly stated, either orally or (preferably) in writing.
  • Implied: Inferred from the remaining party's conduct, provided that conduct clearly and unequivocally indicates their acceptance of the transferee as the new counterparty. Courts are generally cautious in finding implied consent and would look for substantial evidence.
  • Timing: Consent can be given before, at the same time as, or after the agreement between the transferor and transferee.

For clarity, evidentiary purposes, and to avoid future disputes, obtaining explicit written consent from the remaining party is always highly advisable.

Effects of a Valid Transfer of Contractual Status

Once a transfer of contractual status is validly effected (including the necessary consent), it has several significant legal consequences:

  1. Comprehensive Transfer of All Rights and Obligations:
    • The transferee steps into the transferor's position and acquires all of the transferor's rights under the contract. This includes claims for payment or performance from the remaining party, rights to use property (e.g., under a lease), and any formative rights (keiseiken 形成権) such as the right to rescind or terminate the contract under its terms.
    • Simultaneously, the transferee assumes all of the transferor's obligations under the contract. This includes duties to make payments, perform services, deliver goods, or adhere to any contractual restrictions or undertakings.
  2. Discharge of the Transferor:
    The original transferor is generally discharged from all rights and obligations under the contract from the effective date of the transfer. They effectively exit the contractual relationship, and the remaining party can no longer look to them for performance or assert claims against them arising from the contract (unless otherwise agreed, e.g., if the transferor provides a guarantee for the transferee's performance).
  3. Continuity of Defenses (Art. 539-2, Para. 3, applying Art. 472-3 by analogy):
    The principle of continuity generally applies to defenses:
    • The transferee can usually assert against the remaining original party any defenses related to the contract that the original transferor could have asserted (e.g., if the remaining party had previously breached their obligations).
    • Conversely, the remaining original party can generally assert against the new transferee any defenses they had against the original transferor that relate to the contract (e.g., claims of misrepresentation or invalidity of the original contract).

Impact on Security Interests and Guarantees (Art. 539-2, Para. 2)

This is a particularly important and often complex area, with rules that largely mirror those for a discharging assumption of debt (as detailed in Article 472-2, which Article 539-2, Paragraph 2 cross-references for certain aspects).

  • Security Provided by the Transferor or by a Third Party for the Transferor's Obligations:
    • General Rule: Extinguishment. If the transferor (the party exiting the contract) had provided security (e.g., a mortgage on their property) for their own obligations under the contract, or if a third party had provided security (e.g., a pledge or guarantee) for the transferor's obligations, these security interests or guarantees are generally extinguished upon the transfer of the transferor's contractual status.
    • Exception – Continuation with Consent: These forms of security or guarantees can continue to secure the obligations (now owed by the transferee) only if the original creator of the security (i.e., the transferor themselves or the third-party provider) expressly consents to their continuation for the benefit of the obligations now assumed by the transferee. This consent must be clear and indicate an intention to secure the debt/performance as it is now owed by the new party.
  • Security Provided by the Remaining Original Party for Obligations Owed to Them by the Transferor:
    The situation is different if the remaining original party (whose counterparty is changing) had provided security to ensure the transferor's performance to them (e.g., if a landlord, the remaining party, held a security deposit from the tenant, the transferor). Or, if the remaining party holds a guarantee for the transferor's performance. When the transferor's status (including their obligations to the remaining party) is transferred to the transferee:
    • Legal commentary suggests that if the security was given by the remaining party for an obligation owed to them by the transferor (which now becomes an obligation owed by the transferee to the remaining party), the security may continue because the identity of the secured party (the remaining party) has not changed. However, the terms of the specific security agreement would need careful review, and re-confirmation with the new party (transferee) is advisable. The essential point is that the remaining party’s existing security for performance owed to them is not automatically lost simply because their obligor changes, provided the security can appropriately attach to the transferee.
  • Guarantees for the Transferor's Obligations: As with other third-party security, guarantees specifically covering the transferor's performance are generally extinguished unless the guarantor explicitly consents to extend their guarantee to cover the performance of the new party, the transferee.

Given these consequences, parties involved in a transfer of contractual status must pay close attention to existing security arrangements and obtain necessary consents if they wish for them to continue.

Transferee's Right to Request Information (Art. 539-2, Para. 2, applying Art. 472(4) by analogy)

To enable the transferee to make an informed decision before fully committing, the law provides a right to information. If the transfer of contractual status is effected by an agreement between the transferor and the transferee, and is subject to the subsequent consent of the remaining original party, the transferee has the right, before the remaining party's consent is given (and thus before the transfer becomes fully effective), to demand that the remaining party provide relevant information about the contractual relationship.
This can include information regarding:

  • The current status of performance by both original parties.
  • Any existing claims, defenses, or disputes related to the contract.
  • Other material facts that could affect the contractual position the transferee is about to assume.

This right helps ensure transparency and allows the transferee to better assess the risks and benefits of stepping into the contract.

Conclusion

The "Transfer of Contractual Status" under Article 539-2 of the Japanese Civil Code provides a comprehensive and legally recognized method for one party to an ongoing contract to be completely substituted by a new party. This mechanism is vital for various business reorganizations and strategic transactions. However, its successful implementation hinges on obtaining the crucial consent of the remaining original contracting party. Furthermore, all parties must carefully consider the significant implications of such a transfer, particularly regarding the comprehensive transfer of all rights and obligations, the complete discharge of the transferor, and the rules governing the continuation or extinguishment of any associated security interests and guarantees. Due diligence and clear agreements are paramount to ensure a smooth and legally sound transfer of contractual positions in Japan.