What is "Novation" (Kōkai), "Release" (Menjo), and "Merger" (Kondō) as Ways to Extinguish Claims in Japan?

While performance (Bensai) is the most common way an obligation is discharged, Japanese law recognizes several other mechanisms by which a contractual claim (債権 - saiken) can be extinguished without the debtor rendering the originally agreed-upon performance. Among these are Novation (更改 - Kōkai), Release or Remission of Debt (免除 - Menjo), and Merger or Confusion (混同 - Kondō). Understanding these concepts is crucial for businesses and legal professionals as they offer alternative pathways to resolve, restructure, or terminate contractual obligations.

1. Novation (更改 - Kōkai): Replacing an Old Obligation with a New One

Novation, governed by Articles 513 to 518 of the Japanese Civil Code, is a contractual agreement between the relevant parties to extinguish an existing obligation (the "old obligation" - 旧債務 - kyū-saimu) by simultaneously creating a new obligation (the "new obligation" - 新債務 - shin-saimu) that differs from the old one in its essential elements.

Nature and Purpose of Novation

• A Contractual Act: Novation is itself a contract. Its essence lies in the mutual intention of the parties to substitute a new debt for an old one. This dual nature—extinguishing the old while creating the new—was recognized even by the pre-war Great Court of Cassation (judgment of September 30, 1942, Minshu Vol. 21, p. 871).
• Distinction from Mere Modification: It's more than just a simple amendment or modification of the terms of an existing contract. A novation involves a fundamental change that effectively replaces the original obligation entirely. The intent to novate, rather than merely modify, must be clear.
• Purpose: Parties might opt for novation to significantly alter the nature of their relationship, to simplify complex existing obligations, or to incorporate new parties into the core of the obligation.

Types of Novation

Article 513, Paragraph 1 implies that novation occurs by "changing the essential elements of an obligation." This can manifest in several ways:

1. Change in the Object or Content of Performance (給付内容の変更 - Kyūfu Naiyō no Henkō):
   The subject matter of the obligation itself is altered. For example, an obligation to repay a monetary loan might be novated into an obligation to deliver a specific piece of property, or an obligation to provide a particular service could be replaced by an obligation to pay a sum of money. (Illustrative, based on genericized CASE 444: A debt arising from a loan of money is extinguished and replaced by an obligation to sell and deliver specified goods to the lender).
2. Change of Debtor (債務者の変更 - Saimusha no Henkō) (Article 514):
   The original debtor is released from the obligation, and a new debtor takes their place. This requires an agreement between the creditor and the new debtor, and typically also involves the consent of the original debtor for their release. This form of novation is distinct from a mere "assumption of obligation" (saimu hikiuke), where the original debtor might remain jointly liable. In a novation by change of debtor, the original debtor's liability is completely extinguished and replaced by the new debtor's new obligation.
3. Change of Creditor (債権者の変更 - Saikensha no Henkō) (Article 515):
   The original creditor is replaced by a new creditor. This requires a tripartite agreement among the original creditor, the new creditor, and the debtor. This differs from an "assignment of claim" (saiken jōto) because novation creates an entirely new obligation owed by the debtor to the new creditor, while assignment merely transfers an existing obligation.

Requirements for a Valid Novation

For a novation to be effective, several conditions must be met:

• Existence of a Valid Old Obligation: There must be a pre-existing, valid obligation to be extinguished. If the old obligation was void from the beginning or is subsequently annulled (e.g., due to lack of capacity, mistake, or fraud affecting its formation), the novation intended to replace it may also be ineffective or void (Article 517).
• Agreement to Novate: The relevant parties (creditor and debtor for a change in performance; creditor, old debtor, and new debtor for a change of debtor; creditor, new creditor, and debtor for a change of creditor) must clearly agree not just to alter terms, but to extinguish the old obligation and create a new one in its stead.
• Creation of a Valid New Obligation: A new, valid obligation must be established.
• Essential Difference: The new obligation must differ from the old one in an "essential element" (e.g., the nature of the performance, the identity of the debtor or creditor). A minor modification would not constitute novation.

Effects of Novation

• Extinction of the Old Obligation: The primary effect is the complete extinguishment of the original debt.
• Extinction of Accessory Rights (Article 518): With the old obligation gone, any rights accessory to it, such as pledges, mortgages, or guarantees, are also extinguished. This is a significant consequence. However, Article 518, Paragraph 1 allows parties (including any third-party provider of security, whose consent would be needed) to agree to transfer such security interests from the old obligation to the newly created one. If a pledge or mortgage is to be transferred to secure the new obligation, the consent of the pledgor or mortgagor is required. If a guarantee is to secure the new obligation, the guarantor's consent is necessary (Article 518, Paragraph 2).
• Creation of the New Obligation: The new obligation comes into existence with its own distinct terms and conditions. Defenses that were available against the old obligation generally cannot be raised against the new one, as it is considered a fresh contractual undertaking.

2. Release / Remission of Debt (免除 - Menjo): Forgiving the Obligation

Release, or remission of debt, governed by Article 519 of the Civil Code, is another way an obligation can be extinguished without performance.

Definition and Nature

• Unilateral Act by Creditor (Article 519(1)): A release is effected by a unilateral declaration of intent made by the creditor to the debtor, expressing the creditor's intention to relinquish their claim and thereby extinguish the debtor's obligation. The debtor's consent is generally not required for the release to be effective, as it is typically beneficial to them. (Though a debtor could, in theory, refuse such a benefit if they had a particular reason to insist on performing, but this is uncommon).
• Release by Agreement (免除契約 - Menjo Keiyaku): While Article 519 focuses on the unilateral act, a release can also be achieved through a mutual agreement between the creditor and the debtor (a "release contract"), where both parties agree that the debt is forgiven. (Illustrative, based on genericized CASE 445: A lender explicitly agrees with the borrower to waive the remaining balance of a loan).

Requirements for a Valid Release

• Existence of a Valid Claim: The creditor must have an existing, valid claim to release.
• Creditor's Clear Intent to Release: The creditor's intention to forgive the debt must be clear and unequivocal. A mere failure to demand payment or prolonged inaction, while it might eventually lead to the claim becoming time-barred by prescription, does not in itself constitute a release.
• Creditor's Authority to Dispose of the Claim: The creditor must have the legal capacity and authority to dispose of the claim.

Effects of Release

• Extinction of the Claim: The primary effect is the extinguishment of the debt, freeing the debtor from their obligation.
• Extinction of Accessory Rights: Due to the principle of accessory nature (付従性 - fujūsei), the release of the principal obligation generally also leads to the extinguishment of any guarantees or security interests that were tied to that specific debt.
• Impact on Co-Obligors or Guarantors: The effect of a release on other parties involved in the obligation can be complex:
  • Guarantors: Releasing the principal debtor from the primary obligation will typically also release any guarantors of that debt.
  • Joint and Several Obligors: If one of several joint and several obligors is released, the effect on the liability of the remaining co-obligors is governed by specific rules (e.g., Article 440 of the Civil Code, which was revised concerning the "absolute effect" of certain events). The extent to which a release of one affects others can depend on whether the release is considered to have an "absolute" effect (benefiting all) or only a "relative" effect (benefiting only the released party).

3. Merger / Confusion (混同 - Kondō): Claim and Obligation in One Person

Merger, or "confusion" as it's sometimes termed in civil law systems, is governed by Article 520 of the Civil Code. It occurs when a claim (a right) and its corresponding obligation (a duty) become vested in the same legal person or entity.

Definition and Rationale

• Vesting in the Same Person (Article 520(1)): When the capacities of creditor and debtor for the same obligation unite in one individual or entity, the claim is automatically extinguished by operation of law.
• Rationale: The underlying logic is that a person cannot meaningfully be their own creditor and debtor for the same obligation. The duality necessary for an obligatory relationship ceases to exist, and the obligation loses its practical purpose.

Examples of Merger

• A debtor inherits the entire estate of their creditor, thereby inheriting the creditor's claim against themselves. (Illustrative, based on genericized CASE 446).
• A creditor company and a debtor company merge to become a single corporate entity.
• A tenant (lessee) purchases the property they are leasing from the landlord (lessor); the obligation to pay rent to oneself (as the new owner) is extinguished by merger.

Requirements for Merger

• An existing claim and its corresponding obligation must be identifiable.
• The right (the claim) and the duty (the obligation) must come to reside in the same legal person and in the same capacity. For example, if a person is a trustee holding a claim against themselves in their personal capacity, a merger might not occur if the trust and personal capacities are kept distinct.

Effects of Merger

• Extinction of the Claim: The principal obligation is extinguished.
• Extinction of Accessory Rights: Generally, the extinction of the principal claim by merger also results in the extinguishment of any accessory rights, such as guarantees or security interests related to it.

Exception: Protection of Third-Party Rights (Article 520(1) Proviso)

A critical exception exists to protect the rights of third parties. If the claim that would otherwise be extinguished by merger was itself the subject of a right held by a third party, the merger does not extinguish the claim to the extent necessary to protect that third party's interest.

• The most common example is when the original creditor had pledged their claim against the debtor to a third party as security for a loan from that third party. If, subsequently, the original creditor and the debtor merge (e.g., the creditor entity acquires the debtor entity, or an individual debtor inherits from the individual creditor), the claim is not extinguished if the pledge to the third party is still active. The third-party pledgee must still be able to enforce their pledge against what was formerly the debtor's obligation, even though it now technically resides within the same merged entity. The Supreme Court of Japan affirmed this principle in a judgment on December 23, 1964 (Minshu Vol. 18, No. 10, p. 2219). (Illustrative, based on genericized CASE 447).

Temporary Merger

If the underlying cause of the merger subsequently ceases to exist (e.g., an inheritance that led to the merger is later invalidated by a successful will contest), the extinguished claim and obligation are generally considered to be revived.

Conclusion: Alternative Paths to Resolving Obligations

Novation, release, and merger represent important legal mechanisms under Japanese law for extinguishing contractual claims outside the standard route of direct performance by the debtor.

• Novation (Kōkai) allows parties to replace an old debt with an entirely new one, fundamentally altering their obligations by mutual agreement.
• Release (Menjo) empowers a creditor to unilaterally forgive a debt or to agree with the debtor on its discharge without performance.
• Merger (Kondō) automatically extinguishes an obligation when the roles of creditor and debtor for that same obligation unite in a single legal person.

Each of these methods has distinct requirements and legal effects, particularly concerning accessory rights like security interests. For businesses and legal practitioners, understanding these alternatives to performance can provide valuable tools for restructuring debts, settling disputes, or navigating changes in the relationships between contracting parties in Japan. They offer flexibility but also require careful attention to their specific conditions to ensure their intended legal consequences are achieved.