Was Your Company Deceived or Coerced into a Contract in Japan? Understanding Fraud and Duress

Japanese Attorney at Law - Bengoshi L.L.

30 May 2025 • 9 min read

The integrity of any agreement hinges on the voluntary and informed consent of the parties involved. However, situations arise where consent is tainted by deception or extracted under intimidation. Japanese civil law, under Article 96 of the Civil Code, provides remedies for parties whose manifestations of intention (such as entering into a contract) were induced by fraud (sagi - 詐欺) or duress (kyōhaku - 強迫). Understanding these doctrines is crucial for businesses operating in Japan, as they can lead to the cancellation of seemingly valid legal acts. This article explores the concepts of fraud and duress, the requirements for invoking them, their legal consequences, and the protections afforded to third parties.

Fraud, in the context of Japanese contract law, involves an intentional act of deception by one party (or a third party under certain conditions) that causes another party to fall into error (a mistaken belief) and, as a result of that error, to make a manifestation of intention (e.g., to conclude a contract) that they would not otherwise have made.

Defining Actionable Fraud

For a manifestation of intention to be cancellable on grounds of fraud, several key elements must be established:

Two-tiered Intent of the Fraudster: The party committing the fraud must have a dual intent:
- The intent to deceive the other party, thereby causing them to form a mistaken belief.
- The intent to induce the deceived party to make a specific manifestation of intention (e.g., to enter into the contract in question) because of that mistaken belief. A general intent to deceive is not enough; it must be linked to the specific legal act. (Based on Daishin'in judgment, September 6, 1917, Minroku Vol. 23, p. 1319).
An Illegal Act of Deception (Kimō Kōi - 欺罔行為): There must be an act of deception. This most commonly involves an active misrepresentation of a material fact (e.g., falsely stating the specifications of a product or the financial health of a business). However, deception can also occur through misleading silence or omission, particularly where there is a legal or good-faith duty to disclose pertinent information. For an act of deception (or misleading omission) to be actionable as fraud, it must also be illegal (ihōsei - 違法性). This means the deceptive conduct must transgress socially acceptable norms of fair dealing and business practice. Mere "puffery" or exaggerated sales talk may not meet this threshold, but deliberate falsehoods concerning important facts usually will. The assessment of illegality often considers the nature of the transaction, the relative positions and knowledge of the parties, and the overall context.
Error Induced by Deception: The victim of the fraud must have actually been led into a mistaken belief or understanding as a direct result of the deceptive act. If the victim was not actually deceived, or if their decision was based on other factors independent of the alleged deception, this element would not be met.
Manifestation of Intention Induced by Error: There must be a causal link between the error (the mistaken belief induced by the deception) and the victim's decision to make the manifestation of intention. They must have entered into the contract or made the legal declaration because they were laboring under that specific mistake.

Who Committed the Fraud? Implications for Cancellation

The ability to cancel for fraud depends on who perpetrated the deceptive act:

Fraud by the Other Contracting Party (Article 96, Paragraph 1): If the fraud was committed by the direct counterparty to the manifestation of intention (e.g., the seller in a sales contract deceives the buyer), the deceived party can cancel their manifestation of intention.
Fraud by a Third Party (Article 96, Paragraph 2): If the fraud was committed by a third party (i.e., someone not directly a party to the resulting contract between the declarant and the other party), the deceived declarant can cancel their manifestation of intention only if the other party to the contract (the recipient of the declaration) knew of the third party's fraud, or was negligent in not knowing of it, at the time the manifestation of intention was made.
- The rationale here is to balance the protection of the deceived declarant with the protection of an innocent contractual counterparty. If the counterparty was unaware of and not at fault for not knowing about the third party's fraud, their reliance on the manifestation of intention is generally protected. The 2020 revision of the Civil Code explicitly added the "negligent in not knowing" (or "could have known") standard for the counterparty, aligning the statute with pre-existing scholarly opinion that simple lack of knowledge by an otherwise careless counterparty should not always preclude the victim's right to cancel.

Effect of Cancellation for Fraud

If the requirements for cancellation due to fraud are met, and the deceived party exercises their right to cancel, the manifestation of intention (and consequently, any contract formed on its basis) is rendered void retroactively (sokyūteki mukō - 遡及的無効) (Article 121 of the Civil Code). This means it is treated as if it never had any legal effect from the beginning. Any performances already made under the contract (e.g., payments made, goods delivered) must generally be returned under principles of unjust enrichment.

Protecting Subsequent Third Parties (Article 96, Paragraph 3 - Revised)

A crucial limitation on the right to cancel for fraud concerns innocent third parties who may have subsequently acquired interests. The revised Article 96, Paragraph 3 of the Civil Code states: "The rescission [cancellation] of a manifestation of intention made on the grounds of fraud pursuant to the provisions of the preceding two paragraphs may not be asserted against a third party who is in good faith and without negligence."

"Third Party": This refers to a person who, before the cancellation is effected, has acquired a new, independent legal interest based on the (fraudulently induced but initially valid-appearing) transaction. For example, if A is defrauded into selling property to B, and B then sells that property to C (the third party) before A cancels the A-B contract, C could be such a third party. (Supreme Court, September 26, 1974, Minshu Vol. 28, No. 6, p. 1213).
"Good Faith and Without Negligence" (Zen'i de katsu Mukashitsu - 善意でかつ過失がない): This is a significant requirement under the revised code. The third party must not only have been unaware of the original fraud (good faith) at the time they acquired their interest, but they must also have not been negligent in being unaware of it. This sets a higher standard for third-party protection in fraud cases compared to, for example, fictitious manifestations (Article 94, Paragraph 2, which generally only requires good faith for the third party). The rationale for this stricter standard for third parties in fraud cases is often linked to the fact that the original declarant (the victim of fraud) is less culpable than a party who actively participates in creating a fiction.
Timing: The protection generally applies to third parties who acquired their interests before the victim of fraud effectively cancelled the original transaction. If a third party acquires an interest after cancellation, different legal principles (often related to competing claims to property and the effect of registration under Article 177) typically come into play.

Duress (Kyōhaku): When Coercion Overwhelms Free Will

Duress involves a situation where one party is induced to make a manifestation of intention not by deception, but through unlawful intimidation or threats that instill fear or a sense of compulsion.

Defining Actionable Duress

For a manifestation of intention to be cancellable on grounds of duress, the following elements must be met:

Two-tiered Intent of the Coercer: The party exercising duress must have:
- The intent to cause fear (or a state of compulsion or strong pressure) in the other party.
- The intent to thereby induce the other party to make a specific manifestation of intention (e.g., to sign a contract, transfer property) because of that fear or compulsion. (Based on Daishin'in judgment, November 21, 1936, Minshu Vol. 15, p. 2072).
An Illegal Act of Coercion (Kyōhaku Kōi - 強迫行為): There must be an act of coercion that is illegal. This involves:
- A threat or act of intimidation: The coercer must indicate some harm or evil (e.g., to life, body, liberty, property, or reputation of the victim or someone close to them).
- Illegality (Ihōsei - 違法性): The coercive act itself, or the purpose for which it is used, must be unlawful. Even threatening to exercise a legitimate right (like filing a lawsuit or reporting a crime) can constitute illegal duress if the threat is made for an improper purpose (e.g., to extort an unrelated benefit) or if the means used are grossly disproportionate or socially unacceptable. The overall context, including the nature of the threat, the vulnerability of the victim, and the objective pursued by the coercer, is considered in assessing illegality.
Fear (Ifu - 畏怖) Induced by Coercion: The victim must have actually experienced fear, or a state of being so compelled or pressured that their free will was overcome, as a result of the coercive act. The test is generally subjective to the victim; if this particular person was genuinely put in fear by the act, this element may be met, even if a more robust individual might not have been.
Manifestation of Intention Induced by Fear: There must be a causal link between the fear (or compulsion) and the victim's decision to make the manifestation of intention. They must have made the declaration because they were under the influence of that fear.

Effect of Cancellation for Duress and Stronger Protection for Victims

A manifestation of intention made under duress is cancellable by the victim (Article 96, Paragraph 1). Upon cancellation, it becomes void retroactively (Article 121). Japanese law provides significantly stronger protection to victims of duress compared to victims of fraud, especially concerning third parties:

Third-Party Duress: If the duress was committed by a third party (i.e., not the direct contractual counterparty), the victim can cancel their manifestation of intention even if the contractual counterparty was unaware of the third party's duress. This is a key difference from third-party fraud, where the counterparty's knowledge or negligence regarding the fraud is relevant. The law prioritizes the victim's compromised free will over the innocent counterparty's reliance in duress situations.
Assertability Against All Third Parties: Most importantly, the cancellation of a manifestation of intention due to duress can be asserted even against a third party who is in good faith and without negligence. Article 96, Paragraph 3 (which protects good faith/non-negligent third parties in fraud cases) does not apply to duress. (Based on Daishin'in judgment, December 13, 1906, Keiroku Vol. 12, p. 1360).
- Rationale for Enhanced Protection: The victim of duress is seen as having acted without genuine consent due to the unlawful pressure, and their culpability for the situation is considered minimal or non-existent. Therefore, their right to nullify the coerced act is paramount, even if it affects an innocent third party who subsequently acquired an interest. The law places a higher value on protecting freedom from coercion than on protecting transactional security when that security is built upon a foundation of duress.

Extreme Duress Leading to Absolute Voidness

It's also recognized that if duress is so extreme that it entirely overwhelms the declarant's capacity to form any will at all (e.g., where a person's hand is physically forced to sign a document, or they are acting under threats of immediate, severe violence leaving no room for deliberation), the resulting "manifestation" might not even be considered a product of their will. In such exceptional cases, the act may be deemed absolutely void from the outset due to a complete lack of intention, rather than merely being cancellable. (Supreme Court, July 1, 1958, Minshu Vol. 12, No. 11, p. 1601).

Practical Considerations and Burden of Proof

In both fraud and duress cases, the burden of proof generally rests on the party seeking to cancel the manifestation of intention (i.e., the victim). They must establish all the requisite elements for fraud or duress, including the other party's (or third party's) illicit conduct, the subjective state of mind (intent, fear), and the causal links.

Proving these elements, especially subjective ones like intent, knowledge of falsity (for fraud), or the experience of fear and its influence (for duress), can be evidentially challenging. Courts will examine all surrounding circumstances, the credibility of testimony, documentary evidence, and the objective reasonableness of the parties' conduct to make these determinations.

It is also important to note that the right to cancel a manifestation of intention due to fraud or duress is itself subject to time limitations under Article 126 of the Civil Code. Generally, the right to cancel must be exercised within five years from the time when ratification becomes possible (e.g., when the fraud is discovered, or when the duress ceases) or within twenty years from the time of the act itself, whichever is earlier.

Article 96 of the Japanese Civil Code provides essential safeguards for the integrity of consent in legal transactions. By allowing victims of fraud or duress to cancel manifestations of intention made under such improper influence, the law seeks to ensure that legal obligations are based on genuine, voluntary assent.

The distinctions in the rules, particularly concerning the involvement of third parties and the level of protection afforded to subsequent acquirers, reflect careful policy choices. Victims of duress receive more extensive protection, including the ability to reclaim property even from innocent third parties, underscoring the law's strong condemnation of coercive tactics. Victims of fraud, while also entitled to cancel, may find their rights limited when innocent third parties (in good faith and without negligence) have subsequently relied on the transaction. For businesses and legal professionals, a clear understanding of these principles is paramount for assessing contractual risks, ensuring fair dealing, and navigating disputes where the validity of consent is called into question.

Fraud (Sagi): When Deception Vitiates Consent