What Are the Key Rules for Public Procurement and Administrative Contracts in Japan, and How Is Discretion Controlled?

Japanese Attorney at Law - Bengoshi L.L.

• 7 min read

Public procurement and administrative contracts represent a significant sphere of economic activity where governmental entities engage with private businesses to acquire goods, services, and public works. In Japan, this domain is governed by a framework of laws and regulations designed to uphold principles of fairness, transparency, and economic efficiency. For businesses, both domestic and international, understanding the key rules that shape these contractual relationships and the mechanisms for controlling administrative discretion is paramount for successful participation and for ensuring a level playing field. This article explores the foundational principles of public contracting in Japan and examines how judicial oversight addresses the exercise of discretion by contracting authorities.

Foundational Principles of Public Contracting in Japan

The legal framework for public contracts in Japan primarily revolves around the Accounts Act (Act No. 35 of 1947) for national government contracts and the Local Autonomy Act (Act No. 67 of 1947, hereinafter "LAA") for contracts entered into by local public entities (prefectures, municipalities, etc.). These statutes, along with their implementing ordinances and regulations, establish the procedural and substantive rules for how public bodies engage in procurement.

Several core principles underpin the Japanese public contracting system, aimed at ensuring the integrity and effectiveness of public spending:

  1. Fairness and Equal Opportunity: A primary objective is to provide all qualified and willing businesses with an equitable opportunity to compete for public contracts. This principle seeks to prevent favoritism and ensure that a wide range of suppliers can participate.
  2. Transparency: Procurement processes should be open and accessible, with information about tender opportunities, selection criteria, and contract awards made publicly available to the extent possible. Transparency helps to build public trust and allows for scrutiny of contracting decisions.
  3. Economic Efficiency (Price Advantage): Public entities are expected to secure the best possible value for taxpayer money. This often translates to a preference for methods that yield the most advantageous terms, particularly concerning price, while also considering quality and suitability.
  4. Competition: The system generally promotes competition among potential suppliers as the primary means to achieve fairness and economic efficiency.

Contract Award Procedures: A Hierarchy of Methods

The LAA, for instance, outlines a hierarchy of methods for concluding contracts, with a clear preference for those that maximize competition. Article 234, Paragraph 1 of the LAA stipulates that contracts for purchase, lease, undertaking, or other purposes shall be concluded by means of general competitive bidding, nominated competitive bidding, or discretionary (negotiated) contracts. However, Paragraph 2 of the same article clarifies that nominated competitive bidding and discretionary contracts are exceptional methods, permissible only in specific cases prescribed by government ordinance.

1. General Competitive Bidding (Ippan Kyōsō Nyūsatsu)

This is the default and most favored method for public procurement in Japan. It involves publicly announcing the tender and inviting all qualified businesses to submit bids. The contract is typically awarded to the bidder who meets the specified requirements and offers the most advantageous terms, usually the lowest price. This method is considered to best embody the principles of fairness, equal opportunity, and economic efficiency.

2. Nominated Competitive Bidding (Shimei Kyōsō Nyūsatsu)

Nominated (or selective) competitive bidding is an exception to the general rule. Under this procedure, the contracting authority invites only those businesses it has specifically designated as qualified and capable to submit bids. The Local Autonomy Act Enforcement Order (LAEO) details the circumstances under which this method can be employed (e.g., when the nature or purpose of the contract does not suit general competitive bidding, or when only a limited number of enterprises can perform the contract). While it narrows the field of competition, the selection of nominated bidders is itself subject to principles of fairness and must not be exercised arbitrarily. The exercise of discretion in nominating, or failing to nominate, bidders has been a subject of judicial review, as will be discussed later.

3. Discretionary Contracts (Zuii Keiyaku) / Negotiated Contracts

Discretionary contracts, also known as negotiated contracts, represent the most significant departure from the principle of open competition. This method allows a public entity to select a contract partner without a competitive bidding process. Due to the inherent risks of opacity and potential favoritism, the LAA and its Enforcement Order strictly limit the use of discretionary contracts to specific, enumerated circumstances.

LAEO Article 167-2, Paragraph 1, lists various situations where discretionary contracts are permissible. These include, among others:

  • Contracts of small value.
  • Contracts where the nature or purpose is unsuited to competitive bidding.
  • Emergency situations requiring immediate procurement.
  • Contracts for unique goods or services available from only one supplier.
  • Contracts related to research and development.

The interpretation of these exceptions, particularly what constitutes a contract "whose nature or purpose is not suitable for competitive bidding," has been a key issue in legal disputes.

Judicial Scrutiny of Administrative Discretion in Contracting

While administrative organs possess a degree
of discretion in choosing contract methods (within statutory limits) and selecting contracting partners, this discretion is not unfettered. Japanese courts have, in several instances, reviewed the exercise of such discretion to ensure it aligns with legal principles and the objectives of the procurement framework.

Discretionary Contracts: The Fukue City Precedent

The Fukue City Waste Disposal Plant Construction Work Case (Supreme Court, March 20, 1987) provides crucial insight into the judicial interpretation of the scope for discretionary contracts. Fukue City had entered into a discretionary contract for the construction of a waste disposal facility, relying on the provision in LAEO Article 167-2, Paragraph 1, Item 1, which permits such contracts when "the nature or purpose of the contract is not suitable for competitive bidding."

The Supreme Court, in its ruling, clarified that this provision is not limited to situations where competitive bidding is physically impossible or extremely difficult. It also encompasses scenarios where, although competitive bidding might technically be feasible, selecting a specific party with demonstrable and particular resources, creditworthiness, technology, or experience is deemed more appropriate for achieving the ultimate objective of the contract. In such cases, even if it means a slight sacrifice in price advantage, a discretionary contract can be justified if it ultimately leads to the enhancement of the local public entity's interests.

However, the Court emphasized that the decision to use a discretionary contract under this rationale rests on the "reasonable discretion of the contracting official". This discretion must be exercised in light of the overall purpose of Article 234 of the LAA and its implementing ordinances, which aim to secure fairness and economic advantage in public contracting. The judgment implies that the contracting authority must be able to provide a rational basis for its determination that a discretionary contract, rather than competitive bidding, better serves the public interest in a particular instance.

Interestingly, a related Supreme Court decision on May 19, 1987, concerning the private law validity of an illegally concluded discretionary contract, held that such a contract is not automatically void. It would only be invalidated under private law if "special circumstances are found where not treating the contract as void would nullify the legislative intent of the provisions restricting the conclusion of discretionary contracts". This demonstrates a judicial tendency to balance procedural legality with the stability of contractual relationships, unless the illegality fundamentally undermines the procurement system's objectives.

Nominated Competitive Bidding: The Mima Village Case

The control of discretion also extends to the process of nominated competitive bidding, particularly the selection (or non-selection) of bidders. The Mima Village Case (Supreme Court, October 26, 2006) dealt with a construction company that was allegedly systematically excluded from being nominated for public works projects in a village, primarily because its main office was located outside the village.

The Supreme Court stated that the LAA and related laws aim to secure principles such as equal opportunity, fairness, transparency, and economic efficiency in public works contracts. It found that if the village authorities, based on operational standards that themselves might conflict with the spirit of the law, consistently failed to nominate the plaintiff company for any projects solely on the grounds of its non-local status, without due consideration of other relevant factors (such as capability or past performance), such a practice could be deemed "extremely unreasonable and markedly lacking in validity from a societal perspective". Such action could constitute a deviation from or an abuse of the discretionary power vested in the nominating authority.

The Court underscored that while local authorities have discretion in designating bidders, this discretion must be exercised rationally and in a manner consistent with the underlying objectives of the public procurement system. Blanket exclusion based on arbitrary or overly restrictive criteria, without individual assessment of a bidder's qualifications for specific projects, can be challenged as an abuse of discretion.

Key Considerations for Businesses Venturing into Japanese Public Contracts

For businesses, particularly foreign enterprises looking to participate in the Japanese public procurement market, several considerations emerge from this legal landscape:

  1. Understanding the Hierarchy: Recognize that general competitive bidding is the standard. Nominated bidding and discretionary contracts are exceptions requiring specific justification.
  2. Pre-Qualification: For nominated competitive bidding, understanding and meeting the relevant pre-qualification criteria set by the contracting authority is essential.
  3. Rationale for Non-Competitive Methods: If a discretionary contract is proposed or encountered, be aware that the contracting authority should have a solid, legally permissible justification for eschewing competition.
  4. Transparency and Information: While not detailed in the specific case excerpts provided, general principles of administrative law and often specific procurement guidelines call for transparency. Businesses should actively seek information on tender opportunities, selection processes, and award criteria.
  5. Challenging Decisions:
    • Direct Challenge Limitations: Decisions like non-nomination for a bid are often not considered "administrative dispositions" (shobun) directly amenable to revocation lawsuits.
    • Damages Claims: As seen in the Mima Village case, if an illegal or abusive exercise of discretion (e.g., unfair exclusion) results in demonstrable losses, a state compensation lawsuit might be a viable, albeit potentially challenging, avenue.
    • Residents' Suits: The Fukue City case was initiated as a residents' suit under the LAA, allowing citizens to challenge the legality of local government financial actions, including allegedly improper contract awards, by seeking damages for the local government from the responsible officials. This highlights a unique accountability mechanism in Japan.

Expanding the Lens: Other Forms of Administrative Contracts

While public procurement for goods and works is a major component, "administrative contracts" in Japan can encompass a broader range of agreements. For instance, contracts related to the provision of public utilities, such as water supply, also involve public entities and are subject to specific legal frameworks. Cases like the Shime Town Water Supply Refusal case (Supreme Court, January 21, 1999) and the Takane Town Villa Area case (Supreme Court, July 14, 2006) delve into the obligations of municipal water suppliers and the limits on their ability to refuse service or impose discriminatory charges, underscoring that even in these service-delivery contracts, public law principles apply.

Furthermore, local governments sometimes enter into agreements with private entities for specific public policy objectives, such as pollution prevention. The Fukuma Town Pollution Prevention Agreement case (Supreme Court, July 10, 2009) affirmed the contractual nature and legal enforceability of such agreements, allowing a municipality to seek a court order to stop a waste disposal operator from using a site beyond an agreed-upon deadline. These examples illustrate the diverse ways in which contractual mechanisms are utilized in Japanese public administration, often intertwined with regulatory goals.

Conclusion

Japan's framework for public procurement and administrative contracts is built on a foundation of promoting competition, fairness, and economic efficiency, with general competitive bidding as the cornerstone. However, the system recognizes the need for flexibility, allowing for nominated competitive bidding and discretionary contracts under specific, legally defined circumstances. The exercise of administrative discretion in these exceptional methods is not absolute; it is subject to judicial review, which scrutinizes decisions for rationality, adherence to statutory objectives, and prevention of abuse.

Cases like Fukue City and Mima Village demonstrate the courts' willingness to examine the substance of contracting decisions and the processes behind them, ensuring that discretion is wielded in a manner consistent with the public interest and the principles of a fair and transparent procurement system. For businesses aspiring to engage with the Japanese public sector, a thorough understanding of these rules, the permissible scope of administrative discretion, and the available avenues for redress is indispensable.