Who Bears the Risk if Property is Damaged Before Delivery in a Japanese Sales Contract? Understanding "Kiken Futan"

In any sales transaction, particularly those involving the physical delivery of goods, there's an inherent risk that the goods might be damaged, lost, or destroyed before they reach the buyer. A critical legal question then arises: who bears this "risk of loss"? If the goods perish accidentally, must the buyer still pay the purchase price? Or does the seller bear the loss, being unable to claim payment? This allocation of risk is known in Japanese contract law as "kiken futan" (危険負担 – literally "risk bearing" or "passing of risk").

The rules governing kiken futan in Japan underwent significant changes with the 2020 amendments to the Civil Code. These reforms aimed to simplify and clarify a previously complex area of law. This article explores the current Japanese legal framework for determining who bears the risk when the subject matter of a bilateral contract (like a sales contract) is lost or damaged before performance is completed.

1. Understanding "Kiken Futan" (Passing of Risk) in Japanese Bilateral Contracts

Kiken futan primarily addresses the "counter-performance risk" (対価危険 - taika kiken). This concerns whether a party (e.g., a buyer) is still obligated to render their counter-performance (e.g., payment of the price) when the other party's (e.g., a seller's) corresponding performance (e.g., delivery of goods) has become impossible due to a cause not attributable to them.

The 2020 Civil Code reforms, effective April 1, 2020, largely streamlined this area by abolishing the old, often criticized, Articles 534 and 535, which had different rules depending on whether the contract involved specific or non-specific goods and had led to interpretations sometimes seen as placing undue risk on the buyer (creditor-bears-risk principle or saikensha-shugi in certain cases). The new framework, primarily centered around Article 536, provides a more cohesive approach.

2. The General Rule under New Article 536, Paragraph 1 – When Neither Party is at Fault

The cornerstone of the new risk allocation rules is Article 536, paragraph 1 of the Civil Code. It states:
"Except as otherwise provided for in the preceding two Articles [which deal with defenses of simultaneous performance and specific rules for certain contracts not relevant here], if performance of an obligation becomes impossible due to a cause that is not attributable to either party, the obligor may not demand performance of the counter-obligation."

Let's break this down in the context of a sales contract where goods are accidentally destroyed before delivery:

• "Performance of an obligation becomes impossible": This refers to the seller's obligation to deliver the specific goods becoming impossible (e.g., the unique painting sold is destroyed by an accidental fire). The conditions for "impossibility" (履行不能 - rikō funō) are further detailed in Article 412-2.
• "Due to a cause that is not attributable to either party": This means the impossibility is not the fault of the seller (debtor of the delivery obligation) nor the buyer (creditor of the delivery obligation). It's an accidental event, like a natural disaster or an unavoidable accident caused by a third party.
• "The obligor may not demand performance of the counter-obligation": In our sales example, the "obligor" here refers to the party whose performance has not become impossible, i.e., the buyer, with respect to their obligation to pay the price. However, Article 536 is framed from the perspective of the party whose performance did become impossible (the seller of the goods). Thus, the seller (obligor of the now-impossible delivery) cannot demand the counter-performance (payment of the price) from the buyer.

Effectively, this means that if the seller's obligation to deliver goods becomes impossible due to no fault of either party before the core aspects of delivery that would transfer risk are completed, the seller generally bears the risk. They cannot claim the purchase price from the buyer. The buyer, in turn, can refuse to pay.

3. When the Creditor (Recipient of the Impossible Performance) Bears the Risk (Article 536, Paragraph 2)

The general rule in Article 536, paragraph 1, is reversed if the impossibility is attributable to the "creditor" (債権者 - saikensha). In a sales contract, regarding the seller's delivery obligation, the buyer is the creditor. Article 536, paragraph 2 states:
"If performance of an obligation becomes impossible due to a cause attributable to the obligee [creditor], the obligor [debtor of the impossible performance] shall not lose the right to demand performance of the counter-obligation. In such cases, if the obligor has gained any benefit by being excused from his/her own obligation, he/she must return such benefit to the obligee."

This means:

• Impossibility Due to Creditor's (Buyer's) Fault: If the seller's delivery of goods becomes impossible because of something the buyer did or failed to do (e.g., the buyer provided faulty specifications for custom-made goods, leading to their destruction during manufacturing, or the buyer's actions directly caused the damage to the goods while still in the seller's preparatory phase), then the buyer cannot refuse to pay the price. The risk falls on the buyer whose fault caused the impossibility.
• Impossibility During Creditor's (Buyer's) Delay in Acceptance (買主の受領遅滞 - kainushi no juryō chitai):
  A particularly important scenario is when the seller is ready to deliver, but the buyer is in delay in accepting the goods. Article 413-2, paragraph 2 of the Civil Code states that if performance becomes impossible during the creditor's delay in acceptance, and such impossibility is due to a cause not attributable to either party (i.e., accidental loss after the buyer should have taken delivery), the impossibility is deemed to be attributable to the creditor (the buyer).
  Consequently, under Article 536, paragraph 2, the buyer who was in delay of acceptance must still pay the purchase price if the goods are accidentally destroyed. The PDF's third scenario, where a buyer fails to pick up goods as agreed and they are subsequently destroyed by an accidental fire at the seller's premises while the buyer is in delay, illustrates this: the buyer would still have to pay.

4. Impossibility Due to the Debtor's (Seller's) Fault

If the seller's performance (delivery of goods) becomes impossible due to a cause attributable to the seller themselves (e.g., the seller negligently destroys the goods before delivery), this is not primarily an issue of kiken futan under Article 536. Instead, it's a straightforward case of default by the seller (債務不履行 - saimu furikō). The consequences are:

• The buyer cannot demand specific performance of the now-impossible delivery (Article 412-2, paragraph 1).
• The buyer can claim damages for non-performance from the seller (Article 415, paragraph 1, and paragraph 2, item (i) for damages in lieu of performance – 填補賠償, tenpo baishō).
• The buyer can terminate the contract (契約の解除 - keiyaku no kaijo) without prior demand (Article 542, paragraph 1, item (i)).

If the buyer claims damages without terminating, their obligation to pay the price technically remains (subject to potential set-off). If the buyer terminates the contract, their obligation to pay the price is extinguished, and they can still claim damages for losses suffered due to the non-performance (Article 545, paragraph 4).

5. Relationship with Termination of Contract (Keiyaku no Kaijo)

When a seller's performance becomes impossible, the buyer often has a choice of remedies. As mentioned, the 2020 Civil Code reforms, through Article 542, allow a party to terminate a contract without prior demand if the whole (or a key part) of the other party's performance has become impossible. Importantly, for this right of termination due to impossibility, the impossibility does not need to be due to the seller's fault.

So, if goods are accidentally destroyed before delivery (Scenario 2, where neither party is at fault):

• The buyer can refuse to pay the price under Article 536, paragraph 1.
• Alternatively, the buyer can terminate the contract under Article 542, paragraph 1, item (i).

What's the practical difference?

• Refusing payment under Article 536, paragraph 1, effectively means the buyer doesn't have to pay for something they won't receive. The contract might technically remain in existence, but the price obligation is suspended or rendered unenforceable.
• Terminating the contract under Article 542 formally ends the entire contractual relationship. This also extinguishes the buyer's obligation to pay the price and triggers restitutionary obligations if any part of the price was already paid (Article 545).

The choice often depends on whether the buyer simply wants to avoid payment or wishes to formally and completely unwind the contractual relationship.

6. Specific Goods Sales and the Point of Risk Transfer (Article 567)

While Article 536 provides general rules for bilateral contracts, the chapter on Sales in the Civil Code contains a more specific provision regarding the risk of loss or damage for specific goods sold. Article 567, paragraph 1 (introduced in the 2020 reforms) states:
"If specific goods sold are lost or damaged after they were delivered to the buyer, due to a cause not attributable to the seller, the buyer may not refuse to pay the price, nor terminate the contract, on grounds of such loss or damage, unless the loss or damage was due to the seller's failure to conform to the contract."

This article clarifies the point of risk transfer for delivered specific goods:

• If specific goods are delivered, and then lost or damaged accidentally (not due to seller's fault or a pre-existing non-conformity), the risk has passed to the buyer. The buyer must pay.
• This implies that before delivery of specific goods, the risk of accidental loss generally remains with the seller, aligning with the outcome under Article 536, paragraph 1 (where the buyer can refuse payment).

Thus, delivery (引渡し - hikiwatashi) becomes a key practical point for the transfer of risk in sales of specific goods. The exact moment and manner of "delivery" can, of course, be defined by the contract (e.g., through Incoterms in international sales, or specific clauses in domestic contracts).

For non-specific goods (種類物 - shuruibutsu), the seller's obligation is to procure and deliver goods of that kind. The risk of loss of some such goods in the seller's stock doesn't usually excuse the seller, as they can source them elsewhere. Risk typically passes to the buyer for non-specific goods when they are "specified" or "identified" (特定 - tokutei) for the contract and made available for delivery in such a way that the seller has done all that is necessary on their part. Subsequent accidental loss would then be governed by the principles of Article 536 and Article 413-2 (if applicable due to buyer's delay in acceptance).

Conclusion: Clarity under the Reformed Civil Code

The 2020 amendments to the Japanese Civil Code have significantly clarified and somewhat shifted the rules on "kiken futan" or the passing of risk. The general principle now more clearly leans towards the seller (as the debtor of the delivery obligation) bearing the risk of accidental loss or damage to goods before their performance is essentially completed (evidenced by the buyer's ability to refuse payment under Article 536, paragraph 1). However, this shifts to the buyer if the impossibility is due to the buyer's fault or occurs during the buyer's delay in accepting a proper tender of delivery.

For businesses engaged in sales contracts in Japan, it is vital to understand these default rules. Parties are, of course, free to stipulate different risk allocation terms in their contracts. However, in the absence of such specific agreements, the Civil Code's framework will apply, determining who bears the financial consequences when unforeseen events lead to the loss or damage of the subject matter of the contract before performance is finalized.