Understanding Guarantee Obligations (Hosho Saimu) in Japan: What are the Guarantor's Fundamental Rights and Duties?

Guarantee obligations, or Hosho Saimu (保証債務) as they are known in Japan, are a cornerstone of personal security in Japanese commercial and private transactions. When a party (the guarantor) undertakes to be responsible for the debt of another (the principal debtor) should the latter default, a specific set of rights and duties arises. Understanding these fundamentals, including the strict formation requirements and the characteristic nature of a guarantor's liability, is crucial for anyone acting as a guarantor or relying on a guarantee under Japanese law.

What is a Guarantee Obligation (Hosho Saimu) in Japan?

A guarantee obligation, as defined by Article 446, Paragraph 1 of the Japanese Civil Code, is an obligation undertaken by a guarantor (hoshonin 保証人) to a creditor. The guarantor promises to perform the obligation of the principal debtor (shu-saimusha 主債務者) if the principal debtor fails to do so.

Purpose: The primary purpose of a guarantee is to secure the creditor's claim. It provides the creditor with an additional party to look to for satisfaction of the debt, thereby reducing the creditor's risk of loss if the principal debtor defaults. It is a form of "personal security" (jinteki tanpo 人的担保), as opposed to real security like a mortgage.

Formation of a Guarantee Contract

A guarantee obligation arises from a guarantee contract. Key aspects of its formation include:

1. Agreement between Creditor and Guarantor: The guarantee contract is fundamentally an agreement between the creditor and the guarantor. While the principal debtor is the subject of the guarantee, they are not necessarily a direct party to the formation of the guarantee contract itself (though their underlying debt to the creditor is the basis of the guarantee).
2. Crucial Formality: Requirement of Writing (Art. 446, Paras. 2 & 3):
   This is a strict and vital requirement under Japanese law. A guarantee contract is void (muko 無効) if it is not made in writing or recorded by an electromagnetic record (e.g., a properly executed electronic document).
   • Rationale: This formality serves several purposes:
     • It aims to prevent individuals from entering into guarantee obligations rashly or without fully understanding the serious commitment they are undertaking.
     • It ensures clarity regarding the terms of the guarantee and the identity of the guarantor.
     • It provides clear evidence of the guarantee obligation.
       Failure to comply with this written (or electromagnetic record) requirement renders the guarantee entirely unenforceable from the outset.

Fundamental Characteristics of a Guarantee Obligation

A guarantee obligation under Japanese law has several defining characteristics that shape the guarantor's rights and duties:

1. Accessory Nature (Fujusei 付従性): Tied to the Principal Debt

The guarantee obligation is fundamentally accessory to the principal obligation owed by the debtor. This means it depends on, and is tied to, the principal debt in several ways:

• Existence and Validity (Art. 447, Para. 1): The guarantee obligation cannot exist independently of a valid principal obligation. If the principal debt is void (e.g., due to illegality), never came into existence, or is extinguished (e.g., by full payment by the principal debtor or by prescription), the guarantee obligation also automatically ceases to exist or is void.
• Scope (Art. 448): The guarantor's obligation cannot be heavier or more extensive in its object or terms than the principal obligation. If a guarantee contract purports to impose a greater burden on the guarantor (e.g., a higher interest rate or a larger principal amount than the main debt), the guarantor's liability is automatically reduced to match the scope and terms of the principal obligation.
• Transfer: If the principal claim (the creditor's right against the principal debtor) is validly assigned to a new creditor, the benefit of the guarantee generally transfers with it to the new creditor, due to its accessory nature.
• Guarantor's Right to Assert the Principal Debtor's Defenses (Art. 457, Para. 1): Because the guarantee is tied to the principal debt, the guarantor can assert against the creditor any defense that the principal debtor could have asserted against the creditor. This includes, for example:
  • The invalidity or non-existence of the principal debt.
  • The fact that the principal debt has already been paid or otherwise extinguished (e.g., by set-off exercised by the principal debtor, or by prescription).
  • The principal debtor's right to concurrent performance if the underlying contract is bilateral.

2. Subsidiary/Supplementary Nature (Hojusei 補充性): The Guarantor as a "Backup" (for Simple Guarantees)

For a "simple" or "ordinary" guarantee (i.e., not a joint and several guarantee, discussed below), the guarantor's obligation is generally subsidiary or supplementary to that of the principal debtor. This means the creditor should ideally seek performance from the principal debtor first, before turning to the guarantor. This principle of subsidiarity gives rise to two important specific defenses for the simple guarantor:

• (a) Defense of Notice (Saikoku no Kobenken 催告の抗弁権 – Art. 452):
  When a creditor makes a demand for performance directly on a simple guarantor, the guarantor can demand that the creditor first make a demand for performance against the principal debtor. If the guarantor invokes this defense, the creditor must typically pursue the principal debtor before they can re-assert their claim against the guarantor (unless pursuing the principal debtor would clearly be futile).
  • Exceptions: This defense is not available if:
    1. The principal debtor has been adjudicated bankrupt.
    2. The principal debtor's whereabouts are unknown.
• (b) Defense of Prior Execution / Search (Kensaku no Kobenken 検索の抗弁権 – Art. 453):
  Even if the creditor has made a demand on (or even obtained a judgment against) the principal debtor, if the creditor then attempts to enforce the debt against the simple guarantor, the guarantor can invoke the defense of prior execution. To do so, the guarantor must prove:
  1. That the principal debtor has sufficient assets to satisfy the obligation; AND
  2. That execution against those assets would be easy.
     If the guarantor successfully proves these points (which involves identifying specific assets and demonstrating their executability), they can demand that the creditor first levy execution against the principal debtor's assets before seeking payment from the guarantor.
• Crucial Exception to Subsidiarity: Joint and Several Guarantees (Rentai Hosho 連帯保証):
  It is extremely common in Japanese practice for guarantees, especially in commercial contexts, to be structured as "joint and several guarantees" (rentai hosho). If a guarantor undertakes liability "jointly and severally" with the principal debtor (or if the guarantee is simply termed a "joint and several guarantee"), then under Article 454 of the Civil Code, the defenses of notice (Art. 452) and prior execution (Art. 453) are NOT available to the guarantor.
  In such a case, the creditor can demand performance directly from the joint and several guarantor immediately upon the principal debtor's default (or even without proving default, depending on the terms), without first having to pursue the principal debtor or their assets. This makes the joint and several guarantor's position much more onerous and provides significantly stronger security for the creditor.

Scope of the Guarantee Obligation (Art. 447)

Unless the guarantee contract specifically limits its scope, a guarantee obligation covers not only the principal amount of the debt but also:

• Accrued interest on the principal debt.
• Any penalties or liquidated damages related to the principal debt.
• Damages for non-performance of the principal debt (e.g., default interest payable by the principal debtor).
• All other charges that are incidental to the principal debt (e.g., certain contractually agreed collection costs if these are part of the principal debtor's obligation).

The guarantor's liability can thus extend significantly beyond just the original principal sum.

Guarantee for a Rescindable Principal Obligation (Art. 450)

A special rule applies if a guarantor provides a guarantee for a principal obligation that is subject to rescission (e.g., because the principal debtor was a minor and lacked full legal capacity, or the principal debtor's contract was induced by fraud or duress attributable to the creditor).

• If the guarantor, at the time of concluding the guarantee contract, knew of the grounds for rescission affecting the principal obligation, and the principal obligation is subsequently rescinded, the guarantor is presumed to have independently assumed an obligation identical in content to what the principal obligation would have been had it been valid and not rescinded.
  This prevents a guarantor who knowingly guaranteed a vulnerable or potentially unenforceable debt from easily escaping their own liability if the principal debt is later undone due to a pre-existing ground for rescission known to the guarantor.

Guarantor's Right to Set-Off (Art. 457, Paras. 2 & 3)

A guarantor also has rights concerning set-off (sosai 相殺):

• Using the Principal Debtor's Set-Off Right (Art. 457, Para. 2): If the principal debtor has a claim against the creditor which could be set off against the principal debt, the guarantor can refuse to perform their guarantee obligation to the creditor to the extent that the principal debtor would have been discharged by exercising this set-off right. The guarantor is essentially asserting the principal debtor's set-off defensively.
• Using the Guarantor's Own Claim for Set-Off (Art. 457, Para. 3): A guarantor can, of course, use any debt owed by the creditor directly to the guarantor themselves to set off against their own guarantee obligation owed to that creditor.

Conclusion

Guarantee obligations under Japanese law are powerful tools for securing claims, but they come with a specific set of characteristics and formalities. The accessory nature ties the guarantee's fate to the principal debt, allowing the guarantor to raise the debtor's defenses. For simple guarantees, the subsidiary nature provides the important defenses of notice and prior execution, requiring the creditor to pursue the principal debtor first. However, the widespread use of joint and several guarantees effectively negates these subsidiarity defenses, making the guarantor's liability more immediate and direct. The absolute requirement for a written or electromagnetically recorded contract highlights the seriousness with which Japanese law views the undertaking of a guarantee, aiming to protect individuals from inadvertently shouldering significant financial burdens. Any party entering into a guarantee arrangement in Japan, whether as creditor or guarantor, must be acutely aware of these fundamental principles.