Under What Circumstances Can a Contract Be Legally Rescinded or Terminated in Japan, and What Must Be Proven?

The ability to rescind or terminate a contract (契約の解除 - keiyaku no kaijo) is a critical aspect of contract law, providing a pathway for parties to extricate themselves from agreements under specific circumstances. In Japan, the Civil Code, significantly amended effective April 1, 2020, lays down the primary grounds and procedures for such actions. Understanding these rules, including the essential facts (要件事実 - yokenjijitsu) that must be proven, is vital for any party involved in contractual relationships. "Kaijo" is a comprehensive term in Japanese that can encompass both "rescission" (typically implying unwinding from the beginning) and "termination" (often for future obligations).

I. The Concept of "Kaijo" (解除) in Japanese Contract Law (日本契約法における「解除」の概念)

"Kaijo" refers to the act by which one party, through a unilateral declaration of intent, brings a validly formed contract to an end, either retroactively or prospectively, due to specified legal grounds or contractually agreed conditions.

A. Meaning and Effect (意味と効果)

1. Restoration to Original State (原状回復義務 - Genjō Kaifuku Gimu): The primary effect of kaijo is generally retroactive, meaning the contract is treated as if it never existed. Both parties are then obliged to restore each other to the state they were in before the contract was concluded (Article 545(1) of the Civil Code)[cite: 215, 216, 217, 218]. This involves returning any money paid or property transferred. If money is to be returned, interest accrued from the time of receipt must also be paid (Article 545(2))[cite: 215, 216, 217, 218]. For services already rendered or use of property already enjoyed, adjustments may be made, often through claims akin to unjust enrichment.
2. Claim for Damages (損害賠償請求 - Songai Baishō Seikyū): The exercise of a right to kaijo does not preclude a claim for damages (Article 545(4) of the Civil Code)[cite: 215, 216, 217, 218]. A party who has suffered loss due to the other party's breach leading to rescission can still claim compensation.

B. The Act of Rescission (解除の行為)

Kaijo is effected by a declaration of intent (意思表示 - ishi hyōji) made to the other party (Article 540(1) of the Civil Code)[cite: 50]. Once exercised, the right of kaijo cannot be revoked (Article 540(2))[cite: 50].

II. Statutory Rescission (法定解除 - Hōtei Kaijo) - Grounds and Proof

The Civil Code provides several grounds upon which a party can rescind a contract even if the contract itself does not explicitly grant such a right.

A. Rescission Due to Delay in Performance (履行遅滞 - Rikō Chitai)

If a party (the obligor) fails to perform its obligation by the due date, the other party (the obligee) can generally rescind the contract under Article 541 of the Civil Code[cite: 50, 70], provided the following essential facts are proven:

1. Existence of the Obligation and its Due Date: The specific contractual obligation and its due date have been established.
2. Failure to Perform by the Due Date: The obligor did not perform by the due date.
3. Demand for Performance (催告 - Saikoku): The obligee made a demand to the obligor to perform within a reasonably specified period.
4. Lapse of the Reasonable Period without Performance: The obligor failed to perform within that specified reasonable period.
5. Declaration of Rescission: The obligee declared their intent to rescind the contract to the obligor.

Counter-Performance Tender: If the obligee also has a concurrent obligation under the contract (e.g., payment in a sales contract when demanding delivery), they generally must have tendered their own performance when making the demand for the obligor's performance, unless the obligor is already in delay without such tender[cite: 51, 52, 78].

Exceptions to Requiring Demand (Saikoku): Article 541 allows rescission without prior demand in certain cases, such as if the non-performance within the specified period is clearly insufficient to achieve the contract's purpose, or if it's clear the obligor will not perform. Further, Article 542 lists situations where rescission without demand is possible more broadly (see below).

B. Rescission Due to Impossibility of Performance (履行不能 - Rikō Funō)

If performance of a principal obligation becomes impossible, the obligee can rescind the contract without needing to make a prior demand (Article 542(1)(i) of the Civil Code)[cite: 50, 61].

1. Essential Facts:
   • Existence of the contractual obligation.
   • The performance of all or part of that obligation has become impossible. This "impossibility" can include physical impossibility, legal impossibility, or even a type of practical impossibility where performance, while technically possible, would be extremely onerous and contrary to good faith.
   • Declaration of rescission.
     The Civil Code (Article 412-2(1)) clarifies that if performance of a contractual obligation becomes impossible due to reasons not attributable to the obligor, the obligor is relieved of the obligation to perform and cannot be sued for non-performance damages. Article 542 allows rescission regardless of whether the impossibility is attributable to the obligor or not. If impossibility is due to the obligee's fault, the obligee cannot rescind (Article 543)[cite: 52, 62].

The rules also cover scenarios such as unequivocal refusal to perform by the obligor (Article 542(1)(ii))[cite: 50], or when partial impossibility or partial refusal makes it impossible to achieve the contract's purpose (Article 542(1)(iii) and (iv))[cite: 50].

C. Rescission for Non-Conformity in Sales and Other Contracts (契約不適合 - Keiyaku Futekigō)

The amended Civil Code introduced a unified concept of "non-conformity with the terms of the contract" (契約の内容に適合しないこと - keiyaku no naiyō ni tekigō shinai koto) for defects in quality, quantity, or type of the subject matter, replacing the older, more fragmented rules on latent defects (kashi). This applies primarily to sales but also, by analogy, to other contracts like contracts for work.

If the subject matter delivered does not conform to the contract terms, the aggrieved party (e.g., a buyer) has several remedies, including demanding cure (repair or replacement - 追完請求 tsuikan seikyū), demanding a price reduction (代金減額請求 - daikin gengaku seikyū), claiming damages, and, under certain conditions, rescinding the contract (Article 564, applying Articles 541 and 542)[cite: 50, 55].

1. Essential Facts for Rescission due to Non-Conformity (typically after demanding cure):
   • A valid contract was concluded.
   • The subject matter was delivered.
   • The subject matter did not conform to the contract terms (regarding type, quality, or quantity) at the time of delivery.
   • The aggrieved party demanded cure (e.g., repair or replacement) from the other party within a reasonably specified period.
   • The other party failed to provide cure within that period.
   • The aggrieved party declared their intent to rescind.
     Rescission without first demanding cure is possible if cure is impossible, if the other party unequivocally refuses to cure, or if cure by a certain time was essential and that time has passed (Article 564 applying Article 542).

D. Key Considerations under the Amended Civil Code

1. General Non-Requirement of Fault (Attributability - 帰責事由 Kiseki Jiyū): A significant change in the amended Civil Code is that, for statutory rescission due to non-performance (delay, non-conformity, impossibility), the rescinding party generally does not need to prove that the non-performance was due to the fault or attributability of the non-performing party[cite: 50, 62]. This simplifies the burden for the rescinding party.
2. Preclusion of Rescission:
   • Rescinding Party's Fault: A party cannot rescind if the non-performance was due to causes attributable to themselves (Article 543 of the Civil Code)[cite: 52, 62].
   • Trivial Non-Performance (軽微な不履行 - Keibi na Furikō): If the non-performance is deemed "trivial" (keibi) in light of the contract and common commercial practices, rescission under Article 541 (for delay or non-conformity after demand for cure) is not permitted (proviso to Article 541)[cite: 50, 56]. The party opposing rescission would bear the burden of proving the triviality.

III. Agreed Rescission (約定解除 - Yakujō Kaijo) - Contractual Rights to Terminate

Parties are free to stipulate in their contract specific conditions under which one or both parties may rescind or terminate the agreement.

A. Earnest Money Rescission (手付解除 - Tetsuke Kaijo)

If a buyer has paid earnest money (tetsuke) to the seller, either party can rescind the contract under Article 557 of the Civil Code[cite: 64, 65, 74, 75]:

• The buyer can rescind by forfeiting the earnest money.
• The seller can rescind by refunding twice the amount of the earnest money.
  This right to rescind is available only as long as neither party has "commenced performance" (履行に着手 - rikō ni chakushu) of the contract[cite: 65, 66, 76]. "Commencement of performance" is interpreted by courts based on objective acts that demonstrate an intention to fulfill the main contractual obligations.

B. Specific Termination Clauses (解除特約 - Kaijo Tokuyaku)

Contracts often include clauses specifying events that trigger a right to terminate or rescind.

1. No-Notice Rescission Clauses (無催告解除特約 - Musaikoku Kaijo Tokuyaku): These clauses allow a party to rescind without prior demand for performance if certain breaches occur. While permissible, courts may scrutinize them, especially in ongoing contracts like leases. Such a rescission is often upheld only if the breach is material and destroys the "relationship of trust" (信頼関係 - shinrai kankei) between the parties[cite: 70, 73, 198]. The party relying on such a clause must prove its existence and the occurrence of the specified breach, and potentially facts demonstrating that the breach was sufficiently severe.
2. Automatic Termination Clauses (失権約款 / 当然解除特約 - Shikken Yakkan / Tōzen Kaijo Tokuyaku): These are clauses stating the contract will automatically terminate upon the occurrence of a certain event (e.g., a missed payment by a specific deadline) without any need for a declaration of rescission[cite: 70, 74]. Their validity and effect depend on the specific wording and context, and courts may interpret them narrowly to avoid unduly harsh outcomes.

IV. Rescission in Specific Contract Types (Illustrative Examples) (特定契約類型における解除)

The general principles of kaijo apply broadly, but their application can be nuanced depending on the contract type.

A. Sales Contracts (売買契約)

As discussed, rescission can occur due to delay in delivery/payment, non-conformity of goods, impossibility, or via earnest money provisions[cite: 50, 51, 52, 55, 56, 61, 64, 65, 66, 70, 73, 74, 75, 76, 78]. The buyer's remedies for non-conforming goods (cure, price reduction, damages, rescission) provide a structured approach.

B. Lease Agreements (賃貸借契約)

In leases, rescission is common for:

• Non-payment of Rent (賃料不払): Typically requires demand and a reasonable period for payment, unless a valid no-notice clause applies and the non-payment constitutes a serious breach of trust[cite: 197, 198].
• Breach of Specific Covenants: For example, if a lessee of land for building ownership breaches a covenant prohibiting unauthorized alterations or rebuilding (増改築禁止特約 - zōkaichiku kinshi tokuyaku), the lessor may rescind[cite: 199, 200, 201]. Here, the lessee might defend by proving the alteration was not so severe as to destroy the relationship of trust with the lessor (Supreme Court, April 21, 1966)[cite: 199, 200]. The "relationship of trust" doctrine is particularly important in ongoing contracts like leases.

V. Defenses Against a Claim of Rescission (解除の主張に対する抗弁)

A party facing a claim of rescission (or a lawsuit based on an alleged rescission) may raise several defenses:

• Challenging the Alleged Grounds: Arguing that the alleged non-performance did not occur, was not due, performance was not impossible, or the goods did conform.
• Proving Triviality of Non-Performance: If rescission is sought under Article 541, arguing that the non-performance was trivial and does not justify rescission.
• Asserting Rescinding Party's Own Fault: Arguing that the non-performance was due to causes attributable to the party attempting to rescind (Article 543).
• Performance Made After Demand: If demand was required, showing that performance was tendered or made within the reasonable period specified.
• Waiver or Estoppel: Arguing the rescinding party waived their right to rescind or is estopped from asserting it due to their conduct.
• Invalidity of Contractual Rescission Clause: Challenging the validity or applicability of an agreed rescission clause.

VI. Conclusion: Navigating Contract Rescission in Japan (結論)

The right to rescind or terminate a contract is a critical remedy in Japanese law, governed by a detailed set of rules in the Civil Code and shaped by extensive case law. Whether relying on statutory grounds like delay, impossibility, or non-conformity, or on contractually agreed conditions, parties must be prepared to prove the specific essential facts supporting their right to kaijo. The amendments to the Civil Code have, in some respects, streamlined the requirements (e.g., regarding fault for statutory rescission) but have also introduced new considerations like the "trivial non-performance" exception. A clear understanding of these principles is essential for managing contractual relationships and resolving disputes effectively in Japan.