When is a Corporation Liable for Torts Committed by its Representatives in Japan?

Juridical persons, such as corporations and associations, are fundamental actors in modern economies. While they are recognized as distinct legal entities, they can only act through individuals – their directors, officers, and other representatives. A critical question that arises is: when these representatives commit a tort (an unlawful act causing harm) while performing their roles, to what extent is the juridical person itself legally responsible for the damages caused to third parties? Japanese law provides a specific framework for attributing tort liability to juridical persons for the actions of their representatives, balancing the protection of victims with the principles of corporate responsibility.

Foundations of a Juridical Person's Tort Liability in Japan

Under Japanese law, a juridical person can be held liable for torts in a few distinct ways:

1. Direct Liability for its Own "Systemic" Acts: In some instances, a juridical person might be considered directly liable for harm that results from its overall operations, policies, or systemic failures, rather than the isolated act of a single individual. An example could be widespread environmental pollution caused by a factory's established processes. Such cases are typically addressed under the general principles of tort law (Article 709 of the Civil Code).
2. Vicarious Liability as an Employer (Civil Code Article 715): Like any employer, a juridical person can be held vicariously liable for torts committed by its employees (including representatives who are also employees) in the course of their employment, unless the employer can prove they exercised due care in supervising the employee and that the damage would have occurred even with due care (a defense rarely successful in practice).
3. Specific Statutory Liability for Torts by Representatives: This is the primary focus here. Beyond general employer liability, specific statutes governing various types of juridical persons explicitly establish a distinct basis for holding the entity liable for torts committed by its designated "representatives." Key examples include:
   • Companies Act (Article 350): For stock companies (kabushiki kaisha) and other company types, this article makes the company liable for damages caused to a third party by its directors, accounting advisors, company auditors, executive officers, or accounting auditors in the course of performing their duties. Similar provisions exist for employees acting in connection with the company's business.
   • General Incorporated Associations and Foundations Act (Article 78): This applies to general incorporated associations (ippan shadan hōjin) and, through Article 197, to general incorporated foundations (ippan zaidan hōjin), making them liable for damages caused by their directors, auditors, or other representatives in the course of their duties.
   • NPO Act (Article 8): This provision applies Article 78 of the General Incorporated Associations and Foundations Act mutatis mutandis to specified non-profit organizations.

The rationale behind this specific statutory liability for representatives' torts is that the juridical person benefits from the activities undertaken by its representatives, which expand its operational sphere. This expansion inherently creates a risk of harm to third parties. Therefore, it is considered fair and socially desirable for the entity to bear responsibility for damages that arise from such representative actions when connected to its affairs. It is a form of risk allocation where the entity that reaps the rewards of its representatives' work also shoulders the associated tortious liabilities. It is also important to note that the victim's own contributory negligence can be taken into account to reduce the juridical person's liability (Civil Code Article 722, Paragraph 2; see Supreme Court, June 21, 1966).

Key Requirements for a Juridical Person's Liability for a Representative's Tort

For a juridical person to be held liable under provisions like Article 350 of the Companies Act or Article 78 of the General Incorporated Associations and Foundations Act, several conditions must typically be met:

1. The Wrongful Act Must Be Committed by a Designated "Representative"

The tortfeasor must be a person who holds a position qualifying them as a "representative" (daihyōsha - 代表者) of the juridical person under the relevant statute. This typically includes:

• Directors (torishimariyaku - 取締役 for companies; riji - 理事 for associations/foundations)
• Corporate Auditors (kansayaku - 監査役 for companies; kanji - 監事 for associations/foundations)
• Executive Officers (shikkōyaku - 執行役 for certain companies)
• Accounting Advisors (kaikei san'yo - 会計参与) and Accounting Auditors (kaikei kansa-nin - 会計監査人) for companies.

Acts by ordinary employees who do not hold such representative status are primarily governed by the general employer's liability rules under Article 715 of the Civil Code, although the practical outcomes often converge as noted earlier.

2. The Damage Must Be Caused "In the Course of Performing Duties" (Shokumu o Okonau ni Tsuite - 職務を行うについて)

This is a crucial and often heavily litigated requirement. It does not mean that the tortious act itself must have been a formally authorized or legitimate part of the representative's duties. Instead, Japanese courts apply the "objective appearance theory" (gaikei riron - 外形理論).

Under this theory, the act is considered to be "in the course of performing duties" if, when viewed externally and objectively, it appears to be within the scope of, or closely connected to, the representative's official duties and the juridical person's business activities (Daishin'in judgment, February 27, 1940; Supreme Court, July 14, 1975, Minshu Vol. 29, No. 6, p. 1012).

The representative's subjective intent – for example, whether they were acting to benefit the company, for personal gain, or even with malice – is not the decisive factor. If the act has the outward semblance of being related to their official functions, the juridical person can be held liable. This theory prioritizes the protection of third parties who interact with representatives and reasonably perceive them to be acting in their official capacity.

• Transactional Torts: In cases where the tort occurs within the context of a business transaction (e.g., a representative committing fraud to induce a third party into a contract allegedly on behalf of the company), this requirement is often met if the representative was ostensibly acting in their capacity as a company official to conduct company business.
• Factual Torts: For torts that are not directly part of a transaction (e.g., a company director negligently causing a physical injury while on company premises or using company equipment in a way related to their duties), the connection to their duties must still be apparent. For instance, if a warehouse manager (a representative) improperly releases goods (a factual act causing loss to a secured creditor), this is generally seen as within the scope of their duties because handling and releasing goods is a core function, even if done improperly in a specific instance.

The underlying idea is that the juridical person creates the risk by placing the representative in a position where they can perform such acts and appear to be acting for the entity.

3. The Representative's Act Must Fulfill the General Requirements of a Tort

The act committed by the representative must itself satisfy the elements of a tort under Article 709 of the Civil Code. This means:

• There was an intentional or negligent act by the representative.
• This act infringed upon a right or legally protected interest of the third party.
• The third party suffered damage as a result.
• There was a causal link between the representative's act and the damage.
• The representative's act was illegal (unlawful).

If the representative's conduct does not meet these basic tort requirements, neither the representative nor, consequently, the juridical person will be liable under these specific statutory provisions.

4. Special Consideration for "Transactional Torts": The Third Party's Knowledge or Gross Negligence

In the context of "transactional torts" – where the representative's tortious act is embedded within a business transaction with the third party (e.g., a director makes fraudulent misrepresentations to induce a third party to enter into a contract with the company) – there is an important limitation.

If the third party knew that the representative's act was outside the proper scope of their duties (e.g., it was clearly for the representative's personal benefit and not for the company, or was an act the representative had no authority to perform for the company) or was grossly negligent in not knowing this, the juridical person may not be held liable for the representative's tort (Supreme Court, July 14, 1975).

This rule prevents a third party who is complicit in or clearly should have been aware of the representative's misconduct from unfairly shifting the loss to the juridical person. The protection afforded by provisions like Companies Act Article 350 is generally for innocent third parties.

Interaction with Other Legal Doctrines in Transactional Torts

When a representative's act is both unauthorized (beyond their actual authority) and tortious, the third party may have multiple potential legal avenues:

• Apparent Agency: The third party might argue that the juridical person is bound by the contract or transaction itself under the principles of apparent agency (e.g., Civil Code Article 110), if the conditions for apparent agency are met.
• Juridical Person's Tort Liability: The third party might also or alternatively pursue a tort claim for damages against the juridical person (e.g., under Companies Act Article 350).

The prevailing legal view in Japan allows the injured third party to choose which claim to pursue. The objectives can differ: apparent agency aims to uphold the transaction as if it were authorized (leading to performance or contractual damages), while a tort claim aims to compensate for the harm caused by the wrongful act. The third party is not necessarily forced to choose one to the exclusion of the other if both sets of requirements are met, though they cannot obtain double recovery for the same loss.

The Personal Liability of the Wrongdoing Representative

It is a fundamental principle that even if the juridical person is held liable for a tort committed by its representative, the individual representative who actually committed the wrongful act remains personally liable to the injured third party under general tort law (Article 709) (Supreme Court, February 28, 1974, Hanrei Jihō No. 735, p. 97).

The third party can typically choose to sue the juridical person, the individual representative, or both. If both are found liable for the same damage, their liability is often joint and several (rentai saimu - 連帯債務), meaning the third party can claim the full amount of damages from either party (though they cannot recover more than their total loss).

Directors' and Officers' Special Statutory Liability to Third Parties

Beyond general tort liability, many Japanese statutes governing specific types of juridical persons, most notably the Companies Act (Article 429, Paragraph 1), impose a distinct form of liability on directors and other officers (yakuin - 役員) towards third parties. This liability arises if the officer caused damage to a third party due to their bad faith (akui) or gross negligence (jūdai na kashitsu) in the performance of their duties to the juridical person itself.

This is a significant provision because it can extend liability to officers even if their conduct was not a direct tort against the third party. For instance:

• If directors' gross mismanagement leads to the company's insolvency, causing foreseeable financial loss to creditors (who are third parties).
• If a company, on the brink of collapse due to directors' misconduct, incurs new debts it cannot repay or purchases goods without the means to pay.
• If other officers fail in their supervisory duties, allowing a representative to engage in harmful conduct.

This special statutory liability (often referred to as "D&O liability to third parties") reflects a policy of holding corporate leadership accountable for the broader impact of their stewardship and ensuring a measure of protection for those who rely on the proper functioning of the juridical person. The Supreme Court (judgment of November 26, 1969, Minshu Vol. 23, No. 11, p. 2150) has acknowledged the purpose of such provisions in protecting third parties, given the significant societal role of companies and the reliance placed on director conduct.

Practical Implications

• For Juridical Persons: The legal framework underscores the importance of robust internal controls, diligent supervision of representatives, clear delineation of duties, and fostering an ethical corporate culture to minimize the risk of tortious conduct by those acting on its behalf. Adequate liability insurance is also a critical component of risk management.
• For Third Parties: While Japanese law provides avenues for holding juridical persons accountable for the wrongful acts of their representatives, it remains prudent for third parties to document interactions thoroughly, be reasonably aware of the general scope of a representative's role (especially in significant or unusual transactions), and exercise caution if "red flags" or suspicious circumstances arise.

Conclusion: Corporate Accountability for Representative Actions

Japanese law clearly establishes that juridical persons can be held liable for torts committed by their representatives when those acts are performed "in the course of performing duties." The "objective appearance theory" provides a relatively broad basis for this liability, generally prioritizing the protection of third parties who interact with individuals appearing to act in an official corporate capacity. This corporate liability exists alongside, and does not extinguish, the personal liability of the individual representative who committed the wrongful act. Furthermore, special statutory provisions imposing liability on directors and officers for damages to third parties caused by serious dereliction of their duties add another layer of accountability. This comprehensive legal framework aims to ensure that those harmed by wrongful conduct connected to a juridical person's operations have appropriate avenues for redress, while also encouraging responsible governance within these entities.