Date of Judgment: October 19, 1993
Case Name: Claim for Surrender of Building, etc.
Court: Supreme Court of Japan, Third Petty Bench

Introduction

Construction projects often involve a chain of contractors and sub-contractors. This complexity can lead to significant legal challenges when a party in the middle of the chain, typically the main contractor, becomes insolvent. A crucial question that then arises is: who owns the partially completed work, especially if the sub-contractor who performed the labor and supplied materials remains unpaid? A Japanese Supreme Court decision from October 19, 1993, provided important guidance on how ownership of work-in-progress is determined in such situations, particularly when the main contract contains specific clauses about ownership upon termination.

A Building Project Unravels: The Factual Background

The dispute stemmed from a construction project that encountered financial distress:

1. The Parties and Initial Contracts:
   • Y: The customer who owned a plot of land and wanted a building constructed on it.
   • Company A: A construction company engaged by Y as the main contractor to build the structure for a price of ¥35 million (the "Main Contract").
   • X: Another construction company.
2. The Main Contract's Ownership Clause: The Main Contract between Y (customer) and Company A (main contractor) included a specific provision: if Y terminated the contract while construction was ongoing, ownership of the work-in-progress (the "partially completed structure") would belong to Y.
3. The Unauthorized Sub-Contract: Company A, the main contractor, subsequently sub-contracted the entire construction project to X for a price of ¥29 million (the "Sub-Contract"). Critically, Company A did this without obtaining Y's consent, and Y was initially unaware of X's involvement. The Sub-Contract between Company A and X did not contain any explicit agreement regarding who would own the completed building or any work-in-progress. X proceeded to supply materials and carry out the construction work.
4. Main Contractor's Bankruptcy and Contract Termination:
   • When X had completed approximately 26% of the total construction (this partially completed structure is referred to as "the Framework"), Company A (the main contractor) became insolvent and filed for bankruptcy.
   • Upon learning of Company A's bankruptcy and the existence of the sub-contract with X, Y (the customer) terminated the Main Contract with Company A.
   • As a result, X (the sub-contractor) ceased all further work on the project.
5. Payments and Completion:
   • By the time of Company A's bankruptcy, Y had already paid Company A approximately 56% of the total Main Contract price, corresponding to the progress of the work.
   • However, Company A had made no payments whatsoever to X under the Sub-Contract.
   • Following the termination of the Main Contract and X's stoppage of work, Y hired a different construction company (Company B) to complete the building using the Framework X had built. Y subsequently registered ownership of the fully completed building in Y's name.
6. X's Lawsuit and Lower Court Rulings:
   • X (the unpaid sub-contractor) sued Y (the customer). X primarily claimed that ownership of the completed building (or at least the Framework) belonged to X and demanded that Y surrender the building. Alternatively, X argued that by Y completing the building using X's Framework, X had lost its ownership of the Framework and was therefore entitled to monetary compensation from Y for its value (based on principles of accession or unjust enrichment).
   • The first instance court ruled in favor of Y, dismissing all of X's claims. It found that ownership of the Framework belonged to Y.
   • The High Court, on appeal, reversed this. It found that ownership of the Framework had belonged to X (the sub-contractor, as the material supplier) and thus granted X's alternative claim for monetary compensation from Y for the value of the Framework.

Y appealed this High Court decision to the Supreme Court, specifically challenging the finding that X had ever owned the Framework.

The Supreme Court's Decision

On October 19, 1993, the Supreme Court overturned the High Court's decision. It ruled that ownership of the Framework had vested in Y (the customer) upon the termination of the Main Contract with Company A. Consequently, X's claim for compensation (which was predicated on X having owned and then lost the Framework) was dismissed.

Core Reasoning of the Supreme Court:

1. Primacy of the Main Contract's Ownership Clause: The Supreme Court started with the general principle that if a building construction contract between a customer and a main contractor includes a clause stating that ownership of any work-in-progress will vest in the customer if the contract is terminated mid-way, then this clause is effective. If the main contract is indeed terminated under such circumstances, ownership of the partially completed structure generally passes to the customer as per the agreement.
2. Impact on the Sub-Contractor: This principle applies, the Court held, even if a sub-contractor (who was hired by the main contractor, often for the entirety of the work) actually constructed that work-in-progress and supplied the materials for it. The sub-contractor is generally bound by the terms of the Main Contract regarding ownership disposition upon termination.
3. The "Special Circumstances" Exception: The Court did acknowledge an exception: the above rule (customer takes ownership based on the main contract clause) applies unless there are "special circumstances." A key example of such special circumstances would be a separate, distinct agreement between the customer and the sub-contractor that addresses ownership differently.
4. Rationale – The Sub-Contractor as a "Performance Assistant": The Supreme Court provided a crucial rationale for why the sub-contractor is generally bound by the main contract's terms in relation to the customer:
   • A sub-contract for building construction, especially one covering the whole project, inherently relies on the existence and terms of the Main Contract between the customer and the main contractor. The sub-contract's purpose is essentially to fulfill the main contractor's obligations under that Main Contract.
   • Therefore, in its relationship with the customer, the sub-contractor is positioned more as a "performance assistant" (履行補助者 - rikō hojosha) for the main contractor, rather than as an entirely independent party with distinct rights against the customer.
   • As such, the sub-contractor is generally not in a position to assert ownership rights or other legal claims concerning the construction work against the customer that would be different from, or superior to, those that the main contractor itself could have asserted.
5. Application to the Facts of the Case:
   • The Main Contract between Y (customer) and Company A (main contractor) clearly stipulated that Y would own any work-in-progress if the contract was terminated.
   • This Main Contract was validly terminated by Y after Company A's bankruptcy.
   • X was a sub-contractor engaged by Company A – notably, without Y's knowledge or consent for this blanket sub-contracting arrangement.
   • Y had already paid a significant portion of the Main Contract price to Company A (an amount exceeding the value of the Framework built by X).
   • There was no evidence of any "special circumstances," such as a direct agreement between Y and X, that would grant X ownership rights contrary to the Main Contract.
   • Given these factors, the Supreme Court concluded that ownership of the Framework passed to Y at the moment the Main Contract was terminated, in accordance with the explicit terms of that contract. The High Court had erred in finding that X owned the Framework.

A supplementary opinion by Justice Kabe Tsuneo further emphasized that any claim to ownership of work-in-progress by a contractor or sub-contractor (based on supplying materials) is often viewed in Japanese law as a "technical means" primarily intended to secure their claim for payment. This "ownership" is inherently weak against the actual landowner if the contractor lacks the right to maintain the structure on that land. Justice Kabe also stressed that a sub-contractor's primary channel for seeking payment is through the main contractor who hired them, not directly from the customer, especially when the customer has already fulfilled their payment obligations to the main contractor. The sub-contract is likened to a "baby turtle riding on the parent turtle's back"; its fate concerning the customer is intrinsically linked to the main contract.

Unpacking the Ownership Rules in Construction: Further Context

This 1993 Supreme Court decision fits into a broader, evolving body of Japanese law concerning ownership in construction projects.

Traditional Ownership Rules (No Sub-Contractor or Simple Scenarios):

• "Material Supplier Criterion" (材料提供者基準 - zairyō teikyōsha kijun): Historically, Japanese courts often held that ownership of a newly constructed object (like a building) vested in the party who supplied all or the principal part of the materials. In building contracts, this was often the contractor. Ownership would then typically transfer to the customer upon completion and delivery of the building.
• Exceptions Favoring the Customer: Even under this traditional view, courts recognized exceptions where ownership would vest directly in the customer:
  • If there was an express agreement to that effect.
  • If there was an "implied agreement," often inferred when the customer had already paid all or a substantial portion of the contract price.
• The "Customer Ownership Theory" (注文者帰属説 - chūmonsha kizoku setsu): A strong and increasingly influential academic view in Japan posits that ownership of a building constructed on a customer's land should, by default, vest originally in the customer. This is partly because the contractor typically has no independent right to use the land itself, making contractor ownership somewhat anomalous.

The 1993 Judgment's Impact on Sub-Contractor Scenarios:

The 1993 Supreme Court ruling provided significant clarity for situations involving sub-contractors, especially where the main contract contains an ownership clause favoring the customer:

• It establishes that such a clause in the main contract can indeed determine ownership of work-in-progress, effectively binding the sub-contractor who performed the work, even if they supplied the materials.
• The "performance assistant" rationale is key. It frames the sub-contractor's role relative to the customer as being subordinate to, and channeled through, the main contractor.
• This decision effectively prioritizes the customer (who had contracted for and paid substantial sums to the main contractor) over the unpaid sub-contractor, particularly when the sub-contractor's recourse is primarily against the (now insolvent) main contractor. It places the risk of the main contractor's insolvency more squarely on the sub-contractor in these specific circumstances.

Scope and Outlook

• Unauthorized Sub-Contracting: While the sub-contract in this case was unauthorized, the judgment's core reasoning (primacy of main contract clause, sub-contractor as performance assistant) appears broader. The unauthorized nature likely just strengthened the argument against finding "special circumstances" that might favor the sub-contractor.
• Alignment with "Customer Ownership Theory": By diminishing the independent basis of a sub-contractor's ownership claim (derived from material supply) in deference to the main contract's terms and the customer's position, this ruling can be seen as moving closer to the principles underlying the "Customer Ownership Theory," at least in complex, multi-party construction scenarios.

Conclusion

The Supreme Court's 1993 decision offers vital guidance for a common and often distressing situation in the construction industry: the insolvency of a main contractor. It clarifies that specific clauses in a main construction contract regarding the ownership of work-in-progress upon termination can be decisive, generally prevailing over a sub-contractor's claim based merely on having supplied materials and labor. The ruling underscores the hierarchical nature of main contracts and sub-contracts, positioning the sub-contractor primarily as an aide to the main contractor in fulfilling obligations to the customer. This places a strong emphasis on sub-contractors needing to secure their payment through their direct contractual relationship with the main contractor, as their ability to assert independent ownership claims against the ultimate customer, especially one who has fulfilled payments to the main contractor, is significantly limited by the terms agreed between the customer and the main contractor.