Understanding "Continuing Guarantee" (Ne-Hosho) in Japan: What Are the Risks and Special Rules for Individuals?

In many ongoing business relationships, such as continuous supply agreements, credit lines, or commercial leases, obligations arise not as a single, fixed debt, but as a series of future or fluctuating liabilities. To secure these types of indefinite obligations, Japanese law utilizes a specific form of guarantee known as a "Continuing Guarantee" or "Ne-Hosho" (根保証). While useful for creditors, Ne-Hosho can pose significant risks for guarantors, particularly individuals, due to the potentially open-ended nature of the liability. Recognizing these risks, the Japanese Civil Code (Article 465-2 et seq.) provides special protective rules, especially for individual continuing guarantors.

What is a "Continuing Guarantee" (Ne-Hosho)?

A Ne-Hosho is a type of guarantee agreement where the guarantor undertakes to secure a range of unspecified future obligations that may arise between a principal debtor and a creditor from a certain continuous course of dealings or a specific type of transaction, up to an agreed scope or for an agreed period.

Common Examples of Obligations Secured by Ne-Hosho:

• Debts arising from an ongoing current account (toza kashikoshi keiyaku) or overdraft facility.
• Obligations under a continuous supply agreement (e.g., guaranteeing payment for all future purchases by the debtor from the creditor).
• All obligations arising under a lease agreement (covering future rent, damages for breach, restoration costs, etc.).
• Obligations of an employee to their employer concerning potential damages caused during employment (mi-moto hosho 身元保証 – suretyship for employees, which has its own specific act but shares characteristics with Ne-Hosho).

Distinction from a "Specific Guarantee" (Tokutei Hosho 特定保証):
This differs fundamentally from a specific guarantee, which covers a single, identified pre-existing debt or a specific future debt that is clearly defined at the time of the guarantee (e.g., guaranteeing a particular loan of ¥5 million). A Ne-Hosho, by contrast, covers a "root" or "base" relationship from which multiple, initially unspecified, debts are expected to spring.

The Inherent Risks of Ne-Hosho for Guarantors

The primary risk associated with a Ne-Hosho for the guarantor is the uncertainty and potential accumulation of liability:

• Unspecified Future Debts: At the time of signing, the guarantor often does not know the exact number or total amount of future debts that will fall under the guarantee.
• Escalating Liability: If the principal debtor's transactions increase or their financial situation deteriorates, the guaranteed amount can grow significantly over time, potentially far exceeding what the guarantor initially envisioned.

These risks are particularly acute for individual guarantors who may lack the commercial sophistication or bargaining power of corporate entities.

Special Protections for Individual Guarantors in Ne-Hosho Contracts (Japanese Civil Code Arts. 465-2 to 465-5)

To mitigate these risks, the Japanese Civil Code, following reforms effective from April 1, 2005, introduced special protective rules specifically for individual continuing guarantors (kojin ne-hosho keiyakusha 個人根保証契約者). These rules generally do not apply if the guarantor is a corporation (unless the underlying debts being guaranteed include "loan, etc. debts," as explained below).

1. Mandatory Requirement of a "Maximum Limit" (Kyokudo-gaku – Art. 465-2)

This is the most crucial protection for individual continuing guarantors.

• The Rule: A Ne-Hosho contract is absolutely void (muko 無効) if:
  • (a) The range of principal obligations it secures includes "loan, etc. debts" (kashikin-to saimu 金銭の貸渡し又は手形の割引を受けることによって負担する債務 – meaning obligations arising from the borrowing of money or the discounting of bills/notes), regardless of whether the guarantor is an individual or a corporation; OR
  • (b) The guarantor is an individual (even if the underlying debts are not "loan, etc. debts," e.g., an individual guaranteeing a business lease),
  • ...UNLESS the contract clearly specifies a definite maximum monetary amount (kyokudo-gaku 極度額) for which the guarantor will be liable.
• Form of the Maximum Limit: This kyokudo-gaku must be a specific sum of money (e.g., "up to a maximum of Ten Million Yen"). Vague terms like "all debts arising" or formulas that don't result in a clear monetary cap are insufficient.
• Rationale: This requirement ensures that an individual guarantor is explicitly aware, from the outset, of the absolute upper ceiling of their potential liability, preventing them from being exposed to unforeseen and limitless obligations.

Failure to stipulate this maximum limit in a qualifying personal Ne-Hosho contract renders the entire guarantee agreement void from the beginning.

2. Determination of the Principal Obligation (Ganpon Kakutei – Arts. 465-3, 465-4)

The "floating" nature of a Ne-Hosho (covering unspecified future debts) does not continue indefinitely for individual guarantors. At a certain point, the specific amount of the principal debt covered by the guarantee becomes "determined" or "fixed" (ganpon kakutei 元本確定).

• Effect of Principal Determination: Once the principal is determined:
  • The Ne-Hosho will only cover the principal debts that existed under the scope of the guarantee up to the moment of determination.
  • It will also cover any interest, penalties, and damages for non-performance that accrue on that determined principal thereafter.
  • Crucially, the Ne-Hosho will not cover any new principal debts arising from new transactions entered into between the principal debtor and the creditor after the principal has been determined.
    This "fixing" of the principal prevents the individual guarantor's liability from continuing to expand indefinitely into the future.
• Events Triggering Automatic Determination of Principal for Personal Ne-Hosho (Art. 465-4, Para. 1):
  The principal obligation covered by a personal Ne-Hosho contract becomes automatically determined upon the occurrence of any of the following events:
  1. The creditor initiates compulsory execution by attaching assets of the principal debtor or the individual guarantor.
  2. The principal debtor or the individual guarantor becomes subject to bankruptcy proceedings (hasan tetsuzuki kaishi no kettei), civil rehabilitation proceedings (minji saisei tetsuzuki kaishi no kettei), or similar formal insolvency proceedings.
  3. The principal debtor or the individual guarantor dies.
• Determination by Agreed Date or Statutory Default (Art. 465-3):
  • Parties to a personal Ne-Hosho contract can agree on a specific "principal determination date" (ganpon kakutei kijitsu 元本確定期日) in their contract.
  • Statutory Cap on Duration: If no such date is agreed upon, or if the agreed-upon date is set for more than five years from the date of the Ne-Hosho contract, the principal determination date is deemed to be three years from the date of the contract (Art. 465-3, Para. 1 and 2). (A shorter default of three years applies if the guarantee specifically covers the discounting of commercial paper or similar negotiable instruments, and the agreed date is more than three years or not set – Art. 465-3, Para. 3).
    This provision ensures that even if no specific determination event occurs, the "floating" period of a personal Ne-Hosho has a default maximum duration, after which the principal is fixed.

3. Guarantor's (and Principal Debtor's) Right to Demand Determination and Terminate (Art. 465-5)

Under certain specific circumstances, an individual guarantor of a personal Ne-Hosho (and in some instances, the principal debtor) has the right to unilaterally demand the determination of the principal. This effectively terminates the guarantee's coverage for any future debts that might arise after such demand.
This right can be exercised, for example:

• If a principal determination date was agreed upon, but that date has passed, or even before it, if circumstances prescribed in the statute arise (e.g., the creditor makes a demand for payment from the guarantor, or a petition for compulsory execution or bankruptcy is filed against the principal debtor or guarantor).
• If no principal determination date was agreed, the guarantor can generally demand determination after three years have passed from the conclusion of the Ne-Hosho contract (or one year for guarantees of bill discounting).
• If the guarantor or principal debtor dies, their heirs can also demand determination if it hasn't occurred automatically.

This right provides an important "exit mechanism" or a way to cap liability for individual guarantors who find themselves exposed to an ongoing or escalating risk under a Ne-Hosho.

Scope of Guarantee After Principal Determination

As noted, once the principal is determined, the personal Ne-Hosho covers:

1. The fixed principal amount of debts existing at the time of determination.
2. Any interest, penalties, and damages for non-performance that subsequently accrue on that fixed principal amount.
   It does not cover new principal debts arising from fresh transactions after determination.

Continuing Guarantees by Corporations

It is important to note that these special protections designed for individual guarantors—specifically the mandatory maximum limit (unless the debt is a "loan, etc. debt"), the statutory default determination dates, and the broader rights to demand determination under Article 465-5—generally do not apply if the guarantor is a corporation. Corporations are presumed to have greater commercial sophistication and ability to assess and manage the risks of Ne-Hosho. However, if a corporation provides a Ne-Hosho for "loan, etc. debts" of a principal debtor, the requirement of a maximum limit (Art. 465-2) does apply to that corporate guarantor as well.

Conclusion

The "Continuing Guarantee" (Ne-Hosho) is a prevalent tool in Japanese commercial practice for securing ongoing or fluctuating obligations. While it offers convenience and security to creditors, it inherently carries substantial risks for guarantors due to the potential for undefined and escalating liability. Recognizing this, especially for individuals, the Japanese Civil Code (Articles 465-2 to 465-5) has established crucial safeguards. These include the absolute requirement of a specified maximum limit (kyokudo-gaku) for individual Ne-Hosho contracts (and all Ne-Hosho for loan-type debts), and clear rules for the determination of the principal (ganpon kakutei), which fixes the scope of the guarantor's liability. Anyone in Japan considering becoming an individual continuing guarantor, or relying on such a guarantee, must be thoroughly aware of these specific protective provisions to understand the true extent and limitations of the undertaking.