Japanese Law [3 ed.] 9780199232185

Citation preview

JA PA N E SE L AW

Japanese Law Third edition H I ROSH I ODA Sir Ernest Satow Professor of Japanese Law University of London (University College) Professor of College d’Europe (Brugge) Attorney at Law Member of the ICC Court of International Arbitration (Paris)

1

3

Great Clarendon Street, Oxford OX2 6DP Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Th ailand Turkey Ukraine Vietnam Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc., New York © Hiroshi Oda, 2009 The moral rights of the author have been asserted Crown copyright material is reproduced under Class Licence Number C01P0000148 with the permission of OPSI and the Queen’s Printer for Scotland Database right Oxford University Press (maker) First published 2009 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer British Library Cataloguing in Publication Data Data available Library of Congress Cataloging in Publication Data Data available Typeset by Newgen Imaging Systems (P) Ltd., Chennai, India Printed in Great Britain on acid-free paper by Antony Rowe, Chippenham, Wiltshire ISBN 978–0–19–923218–5 1 3 5 7 9 10 8 6 4 2

Foreword Almost a decade has passed since the publication of the second edition of this book. After the ‘lost decade’ following the collapse of the ‘bubble economy’ in 1990, Japan has gone through a major reform—deregulation or ‘regulatory reform’. Accordingly, major changes took place in almost every area of law. Just to mention a few, there was a large-scale ‘Justice System Reform’ which encompassed various changes in the court system, the introduction of lay assessors in the criminal procedure, a new law school system, etc. Company law, which was embodied in the Commercial Code, was completely overhauled under a different concept and became a separate law—the Company Law of 2005. Securities and Exchange Law was replaced by the Financial Instruments and Exchange Law in 2006. Even the Civil Code, which had remained more or less unchanged (except for family and succession) since the late nineteenth century, has gone through significant changes. Certainly there are many positive results coming out of these reforms, but also there have been some doubtful changes. The outcome of the reforms of the past decade is yet to be assessed. I have made efforts to cover most of these changes in this volume. In fact, chapters on company law and securities law had to be completely rewritten and the remaining chapters also had to be substantially revised. Originally, it was not intended that a third edition of Japanese Law should be published. Instead, the publication of Japanese Commercial Law was envisaged. However, there was a strong demand for a comprehensive book on Japanese law, so the format of the first two editions had to be followed and thus the present volume covers all essential areas of Japanese law. Nevertheless, there is a shift of emphasis in the third edition—the book focuses more on commercial and business law. For example, the chapter on company law has almost doubled in length. The fact that the volume covers a wide range of subjects does not mean that it is merely a summary or outline of the Japanese legal system. Ever since the first edition, I have always endeavoured to present the state of Japanese law in the way it actually functions, by focusing on latest cases and discussions on current issues in each area. Although Japanese law is based upon codified law, the role of case law in Japan (and in the Civil law jurisdictions in general) is much larger than that envisaged by people educated in the common law jurisdictions. My intention has always been to ‘let the cases speak for themselves’. I would like to thank all my friends and colleagues in academia and practice, past and present, in the UK, Europe, and Japan, for their warm understanding and support for my research activities. I am indebted to the former Head of Department of the Faculty of Laws of University College London, Professor

xii

Foreword

Jeffrey Jowell QC, and the current Head of Department, Dame Professor Hazel Genn, for their support of the Japanese Law Chair and their understanding. I am grateful to Professor Klaus Hopt, Professor Jürgen Basedow, and Dr Harald Baum of the Max-Planck Institute for Foreign and International Private Law for allowing me to spend several months every year doing research in the Institute. My special thanks goes to people at Herbert Smith where I work as a consultant, namely Mr David Gold, the senior partner, and Mr Richard Fleck CBE, the Global Practice Partner, for giving me an opportunity to gain some insight into the practice while writing this book. I am also grateful to Mr Kenji Kawamura, visiting fellow at the Faculty of Laws of University College London, for commenting on my chapters on company law and securities law. I would also like to thank the present and current editors of the Oxford University Press, namely Bethan Cousins, and Chris Champion, for their patience and support. Last, but not least, as ever, I am grateful to my wife Midori for her unfailing support in researching and writing this book in London, Tokyo, and Hamburg. This book is dedicated to Professor Ichiro Kato, who passed away in November 2008 at the age of 86. Professor Kato, who was formerly the President of the University of Tokyo and Dean of the Law Faculty, was not my mentor in a strict sense (he specialized in tort law), but was a great supporter of the Japanese Law Chair at University College London. He was the managing partner of the Kato, Nishida and Hasegawa Law Office, where I had the privilege of working, before moving to the Nagashima, Ohno and Tsunematsu Law Office. He is remembered by us not only for his sharp mind and enormous academic achievements, but also for his warm and caring character. Hiroshi Oda London March 2009

Abbreviations ADR BIS CIETAC FIB FIEL FSMA FTC HHI IMF IPO JASDAQ JCAA LLC LLP LPS METI MSCB MTF NASDAQ NBS OECD PCT PTS R&I ROE SCAP SEC SEL SII Talks TDNET TOB TOMAC TOPIX TRIPs TSE UNCITRAL WTO

alternative dispute resolution Bank of International Settlement China International Economic and Trade Arbitration Commission Financial instruments business Financial Instruments and Exchange Law Financial Services and Markets Act 2000 (UK) Fair Trade Commission Herfindale Hirschman Index International Monetary Fund initial public offering Japan Association of Securites Dealers Automated Quotation Japan Commercial Arbitration Association limited liability companies (US type) limited liability partnerships lender processing services Ministry of Trade, Economy, and Industry moving strike convertible bonds multiple trading facilities National Association of Securities Dealers Automated Quotations Nippon Broadcasting System Inc. Organisation for Economic Cooperation and Development Patent Co-operation Treaty private trading system Rating and Investment Information return on equity Supreme Commander of the Allied Powers Securities and Exchange Commission (US) Securities and Exchange Law (replaced by FIEL) Structural Impediments Initiatives Talks Timely Disclosure Network takeover bids Tokyo Maritime Arbitration Commission Tokyo Stock Price Index Trade Related Aspects of Intellectual Property Rights, Agreement on Tokyo Stock Exchange United Nations Commission on Trade Law World Trade Organization

Table of Cases S U PR E M E C OU RT Judgment of the Supreme Court, 12 March 1948 (Keishū 2-3-191) . . . . . . . . . . . . . . . . . . . . . 106 Judgment of the Supreme Court, 20 September 1948 (Keishū 23-12-1625) . . . . . . . . . . . . . . . . 90 Judgment of the Supreme Court, 6 February 1951 (Minshū 5-3-36) . . . . . . . . . . . . . . . . . . . . 154 Judgment of the Supreme Court, 8 October 1952 (Minshū 6-9-783) . . . . . . . . . . . . . . . . . . . . . 55 Judgment of the Supreme Court, 13 March 1953 (Keishū 11-3-997; Lady Chatterley’s Lover case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Judgment of the Supreme Court, 18 December 1953 (Minshū 7-12-1446) . . . . . . . . . . . . . . . . 142 Judgment of the Supreme Court, 18 December 1953 (Minshū 7-12-1515) . . . . . . . . . . . . . . . . 164 Judgment of the Supreme Court, 26 November 1954 (Minshū 8-11-2087) . . . . . . . . . . . . . . . 130 Judgment of the Supreme Court, 26 March 1955 (Minshū 11-3-543). . . . . . . . . . . . . . . . . . . . 196 Judgment of the Supreme Court, 7 October 1955 (Minshū 9-11-1616) . . . . . . . . . . . . . . . . . . . 128 Judgment of the Supreme Court, 22 November 1955 (Minshū 9-12-1739; Dai-Nippon Bōseki case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389 Judgment of the Supreme Court, 4 July 1956 (Minshū 10-7-785) . . . . . . . . . . . . . . . . . . . . . . . 141 Judgment of the Supreme Court, 31 January 1957 (Minshū 11-1-170) . . . . . . . . . . . . . . . . . . . 189 Judgment of the Supreme Court, 7 February 1957 (Minshū 11-2-227) . . . . . . . . . . . . . . . . . . . 132 Judgment of the Supreme Court, 16 July 1957 (Minshū 11-7-1254) . . . . . . . . . . . . . . . . . . . . . 194 Judgment of the Supreme Court, 1 May 1958 (Keishū 12-7-1272) . . . . . . . . . . . . . . . . . . . . . . . 39 Judgment of the Supreme Court, 28 May 1958 (Keishū 12-8-1694; Uhoro Coal Mine case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403, 433 Judgment of the Supreme Court, 15 October 1958 (Keishū 12-14-3305) . . . . . . . . . . . . . . . . . . 50 Judgment of the Supreme Court, 17 September 1959 (Minshū 13-11-1412) . . . . . . . . . . . . . . . 137 Judgment of the Supreme Court, 26 November 1959 (Minshū 13-12-1573) . . . . . . . . . . . . . . . . 52 Judgment of the Supreme Court, 12 December 1959 (Keishū 13-13-3225; Sunagawa case) . . . . 33 Judgment of the Supreme Court, 18 March 1960 (Minshū 14-4-483) . . . . . . . . . . . . . . . . . . . 128 Judgment of the Supreme Court, 21 April 1960 (Minshū 14-6-930) . . . . . . . . . . . . . . . . . . . . 137 Judgment of the Supreme Court, 20 July 1960 (Keishū 14-9-1243; Tokyo Metropolitan Public Security Regulation case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91, 94 Judgment of the Supreme Court, 21 October 1960 (Minshū 14-12-2661) . . . . . . . . . . . . . . . . 134 Judgment of the Supreme Court, 16 February 1961 (Minshū 15-2-244) . . . . . . . . . . . . . . . . . . 183 Judgment of the Supreme Court, 28 April 1961 (Minshū 15-4-1105) . . . . . . . . . . . . . . . . . . . . 142 Judgment of the Supreme Court, 26 May 1961 (Minshū 5-5-1440) . . . . . . . . . . . . . . . . . . . . . 120 Judgment of the Supreme Court, 15 December 1961 (Minshū 15-11-2852) . . . . . . . . . . . . . . . 160 Judgment of the Supreme Court, 2 May 1962 (Keishū 16-5-4959) . . . . . . . . . . . . . . . . . . . . . . 107 Judgment of the Supreme Court, 18 May 1962 (Minshū 16-5-1108; Ōhira Silk Reeling case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 Judgment of the Supreme Court, 28 November 1962 (Keishū 16-11-1593) . . . . . . . . . . . . . 34, 105 Judgment of the Supreme Court, 18 December 1962 (Minshū 16-12-2422) . . . . . . . . . . . . . . . 411 Judgment of the Supreme Court, 18 January 1963 (Minshū 17-1-25) . . . . . . . . . . . . . . . . . . . . 128 Judgment of the Supreme Court, 24 June 1964 (Minshū 18-5-854) . . . . . . . . . . . . . . . . . .190, 192 Judgment of the Supreme Court, 28 July 1964 (Minshū 18-6-1220 . . . . . . . . . . . . . . . . . . . . . 120 Judgment of the Supreme Court, 9 March 1965 (Minshū 19-2-233) . . . . . . . . . . . . . . . . . . . . . 119 Judgment of the Supreme Court, 30 June 1965 (Minshū 19-4-1143) . . . . . . . . . . . . . . . . . . . . 147

xvi

Table of Cases

Judgment of the Supreme Court, 10 September 1965 (Minshū 19-6-1512) . . . . . . . . . . . . . . . . 131 Judgment of the Supreme Court, 3 December 1965 (Minshū 19-9-2090). . . . . . . . . . . . . . . . . 139 Judgment of the Supreme Court, 14 April 1966 (Minshū 20-4-649) . . . . . . . . . . . . . . . . . . . . 160 Judgment of the Supreme Court, 22 April 1966 (Minshū 20-4-752) . . . . . . . . . . . . . . . . . . . . 134 Judgment of the Supreme Court, 26 April 1966 (Minshū 20-4-849) . . . . . . . . . . . . . . . . . . . . 126 Judgment of the Supreme Court, 4 October 1966 (Minshū 20-8-1565) . . . . . . . . . . . . . . . . . . 149 Judgment of the Supreme Court, 26 October 1966 (Keishū 20-8-901; Zentei-Chūyū case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 92, 109, 385 Judgment of the Supreme Court, 24 May 1967 (Minshū 21-5-1043; Asahi case) . . . . . . . . . . . . 90 Judgment of the Supreme Court, 1 November 1967 (Minshū 21-9-2249). . . . . . . . . . . . . . .43, 191 Judgment of the Supreme Court, 2 November 1967 (Minshū 21-9-2278). . . . . . . . . . . . . . . . . 194 Judgment of the Supreme Court, 2 August 1968 (Minshū 22-8-1571) . . . . . . . . . . . . . . . . . . . 168 Judgment of the Supreme Court, 27 August 1968 (Minshū 22-8-1404) . . . . . . . . . . . . . . . . . . 190 Judgment of the Supreme Court, 24 September 1968 (Hanji 539-40) . . . . . . . . . . . . . . . . . . . 182 Judgment of the Supreme Court, 13 November 1968 (Minshū 22-12-2526) . . . . . . . . . . . . . . . . 8 Judgment of the Supreme Court, 15 November 1968 (Minshū 22-12-2614) . . . . . . . . . . . . . . . 192 Judgment of the Supreme Court, 25 December 1968 (Minshū 22-13-3459; Shūhoku Bus case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388 Judgment of the Supreme Court, 16 January 1969 (Minshū 23-1-18) . . . . . . . . . . . . . . . . . . . . 168 Judgment of the Supreme Court, 17 February 1969 (Minshū 23-2-511) . . . . . . . . . . . . . . . . . . 126 Judgment of the Supreme Court, 2 April 1969 (Keishū 23-5-685; Zenshihō Sendai case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402 Judgment of the Supreme Court, 25 June 1969 (Keishū 23-7-975; Evening Wakayama Jiji case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Judgment of the Supreme Court, 15 October, 1969 (Keishū 23-10-1239; Prosperity of Vice case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Decision of the Supreme Court, 26 November 1969 (Keishū 24-6-280; Hakata Station case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Judgment of the Supreme Court, 24 December 1969 (Keishū 23-12-1625; Kyoto Zengakuren case). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Judgment of the Supreme Court, 11 June 1970 (Minshū 24-6-516) . . . . . . . . . . . . . . . . . . . . . 420 Judgment of the Supreme Court, 24 June 1970 (Minshū 24-6-587) . . . . . . . . . . . . . . . . . . . . . 149 Judgment of the Supreme Court, 24 June 1970 (Minshū 24-6-625; Yawata Steel case) . . . . . . . 125 Judgment of the Supreme Court, 16 July 1970 (Minshū 24-7-909) . . . . . . . . . . . . . . . . . . . . . . 163 Judgment of the Supreme Court, 24 July 1970 (Minshū 24-7-1116) . . . . . . . . . . . . . . . . . . . . . 168 Judgment of the Supreme Court, 28 July 1970 (Minshū 24-7-1220; Yokohama Rubber case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393 Judgment of the Supreme Court, 22 September 1970 (Minshū 24-10-1424) . . . . . . . . . . . . . . 130 Judgment of the Supreme Court, 13 October 1970 (Hanji 614-46) . . . . . . . . . . . . . . . . . . . . . 146 Judgment of the Supreme Court, 20 January 1971 (Minshū 25-1-1) . . . . . . . . . . . . . . . . . . . . . . 40 Judgment of the Supreme Court, 18 March 1971 (Minshū 25-2-183) . . . . . . . . . . . . . . . . . . . . 247 Judgment of the Supreme Court, 25 March 1971 (Minshū 25-2-208) . . . . . . . . . . . . . . . . . . . 179 Judgment of the Supreme Court, 23 April 1971 (Minshū 25-3-351) . . . . . . . . . . . . . . . . . . . . . 195 Judgment of the Supreme Court, 3 June 1971 (Minshū 25-4-455) . . . . . . . . . . . . . . . . . . . . . . 134 Judgment of the Supreme Court, 16 December 1971 (Minshū 25-9-1472) . . . . . . . . . . . . . . . . 139 Judgment of the Supreme Court, 27 June 1972 (Minshū 26-5-1067) . . . . . . . . . . . . . . . . . . . . 121 Judgment of the Supreme Court, 22 November 1972 (Keishū 26-9-544; Kawasaki Minshō case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Judgment of the Supreme Court, 4 April 1973 (Keishū 27-3-265; Patricide case) . . . . . . . . . 33, 99 Judgment of the Supreme Court, 25 April 1973 (Keishū 27-3-418; Kokurō Kurume Station case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403

Table of Cases

xvii

Judgment of the Supreme Court, 25 April 1973 (Keishū 27-4-547; Zen-nōrin keishokuhō case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 385 Judgment of the Supreme Court, 7 June 1973 (Minshū 27-6-681) . . . . . . . . . . . . . . . . . . . . . . 142 Judgment of the Supreme Court, 9 October 1973 (Minshū 27-9-1129) . . . . . . . . . . . . . . . . . . 125 Judgment of the Supreme Court, 26 October 1973 (Minshū 27-9-1240) . . . . . . . . . . . . . . . . . 119 Judgment of the Supreme Court, 12 December 1973 (Minshū 27-11-1536; Mitsubishi Plastics case). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101, 389 Judgment of the Supreme Court, 15 March 1974 (Minshū 28-2-265) . . . . . . . . . . . . . . . . . . . . 393 Judgment of the Supreme Court, 22 March 1974 (Minshū 28-2-347) . . . . . . . . . . . . . . . . . . . 185 Judgment of the Supreme Court, 25 April 1974 (Minshū 28-3-447) . . . . . . . . . . . . . . . . . . . . 189 Judgment of the Supreme Court, 10 July 1974 (Minshū 28-5-872). . . . . . . . . . . . . . . . . . . . . . 190 Judgment of the Supreme Court, 26 September 1974 (Keishū 28-6-329) . . . . . . . . . . . . . . 34, 101 Judgment of the Supreme Court, 6 November 1974 (Keishū 28-9-393; Sarufutsu case) . . . . 40, 92 Judgment of the Supreme Court, 17 December 1974 (Minshū 28-10-2040) . . . . . . . . . . . . . . . 192 Judgment of the Supreme Court, 25 February 1975 (Minshū 29-2-143) . . . . . . . . . . . . . . . . . . 139 Judgment of the Supreme Court, 25 April 1975 (Minshū 29-4-456; Nihon Shokuen Seizō case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395 Judgment of the Supreme Court, 25 April 1975 (Minshū 29-4-481; Marushima Suimon case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403 Judgment of the Supreme Court, 30 April 1975 (Minshū 29-4-572) . . . . . . . . . . . . . . . . . 33, 108 Judgment of the Supreme Court, 10 September 1975 (Keishū 25-8-489; Tokushima Security Regulation case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26, 51, 93 Judgment of the Supreme Court, 24 October 1975 (Minshū 29-9-1417) . . . . . . . . . . . . . .187, 422 Judgment of the Supreme Court, 28 November 1975 (Minshū 29-10-1592) . . . . . . . . . . . . . . . 357 Judgment of the Supreme Court, 26 January 1976 (Shōmu-geppō 22-2-578) . . . . . . . . . . . . . . . 42 Judgment of the Supreme Court, 14 April 1976 (Minshū 30-3-223) . . . . . . . . . . . . . . . . . . 33, 102 Judgment of the Supreme Court, 30 April 1976 (Keishū 30-3-452) . . . . . . . . . . . . . . . . . . . . . 431 Judgment of the Supreme Court, 25 May 1976 (Minshū 30-4-554) . . . . . . . . . . . . . . . . . . . . . 120 Judgment of the Supreme Court, 30 September 1976 (Minshū 30-8-816) . . . . . . . . . . . . .183, 184 Judgment of the Supreme Court, 31 January 1977 (Saikōsai-saibanshū 120-23; Kōchi Broadcasting Co. case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395 Judgment of the Supreme Court, 20 June 1977 (Minshū 31-4-449; Gifu Credit Bank case). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128, 351 Judgment of the Supreme Court, 13 July 1977 (Minshū 31-4-533; Tsu Jichinsai case) . . . . . . . 104 Decision of the Supreme Court, 9 August 1977 (Keishū 31-5-821; Sayama case) . . . . . . . . . . . 438 Judgment of the Supreme Court, 13 December 1977 (Minshū 31-7-974; Meguro Telegram and Telephone Office case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393 Judgment of the Supreme Court, 20 April 1978 (Minshū 32-3-616) . . . . . . . . . . . . . . . . . . . . 454 Decision of the Supreme Court, 31 May 1978 (Keishū 32-3-457; Divulgence of Ministry of Foreign Affairs Secret case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Judgment of the Supreme Court, 4 October 1978 (Minshū 32-7-1223; McLean case) . . . . 88, 445 Judgment of the Supreme Court, 20 August 1979 (Minshū 24-9-1268) . . . . . . . . . . . . . . . . . . 195 Judgment of the Supreme Court, 13 November 1979 (Hanji 952-49) . . . . . . . . . . . . . . . . . . . 184 Judgment of the Supreme Court, 28 March 1980 (Minshū 34-3-244) . . . . . . . . . . . . . . . . . . . 374 Judgment of the Supreme Court, 16 June 1980 (Hanji 978-112) . . . . . . . . . . . . . . . . . . . . . . . 247 Judgment of the Supreme Court, 4 July 1980 (Minshū 34-5-570) . . . . . . . . . . . . . . . . . . . . . . 365 Judgment of the Supreme Court, 16 July 1980 (Minshū 39-5-989). . . . . . . . . . . . . . . . . . . . . . . 48 Judgment of the Supreme Court, 28 November 1980 (Keishū 34-6-433; Yojō-han Fusumano Shitabari case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Judgment of the Supreme Court, 24 March 1981 (Minshū 35-2-300; Nissan Motors case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101, 389

xviii

Table of Cases

Judgment of the Supreme Court, 16 April 1981 (Keishū 35-3-84; Monthly Pen case) . . . . . . . . . 98 Judgment of the Supreme Court, 8 September 1981 (Hanji 1019-73) . . . . . . . . . . . . . . . . . . . . 160 Judgment of the Supreme Court, 16 October 1981 (Minshū 35-7-1224; Malaysian Airlines case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459 Judgment of the Supreme Court, 8 April 1982 (Minshū 26-4-594) . . . . . . . . . . . . . . . . . . . . . . 96 Judgment of the Supreme Court, 8 March 1983 (Keishū 37-2-15). . . . . . . . . . . . . . . . . . . . . . . . 96 Judgment of the Supreme Court, 27 April 1983 (Minshū 37-3-345) . . . . . . . . . . . . . . . . . . . . . . 35 Judgment of the Supreme Court, 16 September 1983 (Rōhan 415-16; Daihatsu-Kōgyō case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392 Judgment of the Supreme Court, 1 November 1983 (Hanji 1100-151; Meiji Dairly case) . . . . . 392 Judgment of the Supreme Court, 7 November 1983 (Minshū 37-9-1243). . . . . . . . . . . . . . . . . 102 Judgment of the Supreme Court, 26 January 1984 (Minshū 38-2-53; Daitō Suigai case) . . . . . 196 Judgment of the Supreme Court, 24 February 1984 (Keishū 38-4-1287; Oil (Price) Cartel case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344 Judgment of the Supreme Court, 10 April 1984 (Minshū 38-6-557) . . . . . . . . . . . . . . . . . . . . 139 Judgment of the Supreme Court, 22 April 1984 (Minshū 41-3-408; Forestry Law case) . . . . . . 108 Judgment of the Supreme Court, 20 July 1984 (Minshū 38-8-105) . . . . . . . . . . . . . . . . . . . . . 458 Judgment of the Supreme Court, 18 September 1984 (Hanji No. 1137) . . . . . . . . . . . . . . . . . . 154 Judgment of the Supreme Court, 12 December 1984 (Minshū 38-12-1308). . . . . . . . . . . . . . . . 97 Judgment of the Supreme Court, 26 March 1985 (Minshū 39-2-124) . . . . . . . . . . . . . . . . . . . 184 Judgment of the Supreme Court, 17 July 1985 (Minshū 39-5-1100) . . . . . . . . . . . . . . . . . . .35, 103 Judgment of the Supreme Court, 23 October 1985 (Keishū 39-6-413) . . . . . . . . . . . . . . . . . . . . 50 Judgment of the Supreme Court, 11 June 1986 (Minshū 40-4-872; Hoppō Journal case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89, 91, 97, 414 Judgment of the Supreme Court, 14 July 1986 (Rōhan 477-6; Tōa Paint case) . . . . . . . . . . . . . 397 Judgment of the Supreme Court, 4 September 1986 (Hanji 1215-47) . . . . . . . . . . . . . . . . . . . 128 Judgment of the Supreme Court, 23 October 1986 (Rōhan 484-7; Osaka Prefectural Committee for Education case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 Judgment of the Supreme Court, 22 April 1987 (Minshū 41-3-408) . . . . . . . . . . . . . . . . . . . . . 33 Judgment of the Supreme Court, 2 July 1987 (Minshū vol. 41, No. 5) . . . . . . . . . . . . . . . . . . . 362 Judgment of the Supreme Court, 22 September 1987 (Keishū 41-6-255; Daitō Tessen case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436 Judgment of the Supreme Court, 2 March 1989 (Hanji 1363–68; Shiomi case) . . . . . . . . . .89, 110 Judgment of the Supreme Court, 8 December 1989 (Minshū 43-11-1259; Tsuruoka Paraffin Oil case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362, 422 Judgment of the Supreme Court, 20 July 1990 (Minshū 44-5-876) . . . . . . . . . . . . . . . . . . . . . 121 Judgment of the Supreme Court, 10 May 1991 (Minshū 45-5-919; Asai case). . . . . . . . . . . . . . 438 Judgment of the Supreme Court, 1 July 1992 (Minshū 46-5-437; Narita Shinpō case) . . . . . . . 106 Judgment of the Supreme Court, 15 December 1992, (Minshū 46-9-2829) . . . . . . . . . . . . . . . 108 Judgment of the Supreme Court, 16 February 1993 (Minshū 47-3-1687; Minomo Chūkokuhi case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Decision of the Supreme Court, 20 July 1994 (Hanji 1507-51; Kyōdō-Shiryō case) . . . . . . . . . 316 Judgment of the Supreme Court, 22 February 1995 (Keishū 49-2-1; Rockheed Marubeni Route case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431 Decision of the Supreme Court, 17 July 1995 (Minshū 49-7-1789) . . . . . . . . . . . . . . . . . . . . . . 101 Judgment of the Supreme Court, 5 December 1995 (Hanji 1563-81) . . . . . . . . . . . . . . . . . . . . 101 Judgment of the Supreme Court, 15 December 1995 (Keishū 49-10-842) . . . . . . . . . . . . . .89, 110 Judgment of the Supreme Court, 2 April 1997 (Minshū 51-4-1637; Ehime Tamagushi-ryō case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Judgment of the Supreme Court, 1 July 1997 (NBL No. 621; BBS case) . . . . . . . . . . . . . . . . . 353 Judgment of the Supreme Court, 11 July 1997 (Minshū 51-6-2573) . . . . . . . . . . . . . . . . . . . . . 463

Table of Cases

xix

Judgment of the Supreme Court, 2 September 1998 (Minshū 52-6-1373) . . . . . . . . . . . . . . . . 103 Judgment of the Supreme Court, 16 February 1999 ( Jurist, 1999. vol. 1154) . . . . . . . . . . . . . . 320 Judgment of the Supreme Court, 10 June 1999 (Keishū 53-5-415) . . . . . . . . . . . . . . . . . . . . . . 320 Judgment of the Supreme Court, 13 February 2002 (Minshū 56-2-331) . . . . . . . . . . . . . . . . . 318 Judgment of the Supreme Court, 11 September 2002 (Minshū 56-7-1439) . . . . . . . . . . . . . . . . 34 Judgment of the Supreme Court, 22 April 2003 (Minshū 57-4-477) . . . . . . . . . . . . . . . . . . . . 370 Judgment of the Supreme Court, 12 September 2003 (Minshū 57-8-973) . . . . . . . . . . . . . . . . . 89 Judgment of the Supreme Court, 14 January 2004 (Minshū 58-1-56) . . . . . . . . . . . . . . . . . . . 103 Judgment of the Supreme Court, 13 January 2005 (Minshū 60-1-1). . . . . . . . . . . . . . . . . . . . . . 43 Judgment of the Supreme Court, 26 January 2005 (Minshū 59-1-128) . . . . . . . . . . . . . . . . . . . 88 Judgment of the Supreme Court, 14 July 2005 (Minshū 59-6-1323) . . . . . . . . . . . . . . . . . . . . 313 Judgment of the Supreme Court, 16 September 2005 (Hanji 1912-8) . . . . . . . . . . . . . . . . . . . 155 Judgment of the Supreme Court, 7 February 2006 (Minshū 60-2-480) . . . . . . . . . . . . . . . . . . 178 Judgment of the Supreme Court, 23 February 2006 (Minshū vol. 60, No. 2) . . . . . . . . . . . . . . 134 Judgment of the Supreme Court, 12 June 2006 (Hanji No. 1941) . . . . . . . . . . . . . . . . . . . . . . 154 Judgment of the Supreme Court, 21 July 2006 (Minshū 60-6-2542) . . . . . . . . . . . . . . . . . . . . 461 Decision of the Supreme Court, 3 October 2006 (Minshū vol. 60, No. 8) . . . . . . . . . . . . . . . . . 98 Judgment of the Supreme Court, 2 February 2007 (Minshū vol. 61, No. 1) . . . . . . . . . . . . . . . 128 Judgment of the Supreme Court, 6 February 2007 (Minshū 61-1-122) . . . . . . . . . . . . . . . . . . . 120 Judgment of the Supreme Court, 27 February 2007 (Hanji No. 1964) . . . . . . . . . . . . . . . . . . 154 Judgment of the Supreme Court, 6 July 2007 (Minshū 61-5-1769) . . . . . . . . . . . . . . . . . . . . . . 183 Decision of the Supreme Court, 7 August 2007 (Minshū 61-5-2215) . . . . . . . . . . . . . . . . . . . . 267 Judgment of the Supreme Court, 18 September 2007 (Minshū 61-6-601; Hiroshima Bōsō-zoku Jōrei case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Judgment of the Supreme Court, 4 June 2008 (Hanta 1267-92) . . . . . . . . . . . . . . . . . . . . . . . . . 34 S U PR E M E T R I BU N A L PR EWA R PR E DE C E S S OR TO T H E S U PR E M E C OU RT  Judgment of the Supreme Tribunal, 21 May 1903 (Keiroku 9-14-874) . . . . . . . . . . . . . . . . . . . 431 Judgment of the Supreme Tribunal, 5 February 1906 (Minroku 12-136) . . . . . . . . . . . . . . . . . 145 Judgment of the Supreme Tribunal, 15 December 1908 (Minroku 14-1276) . . . . . . . . . . . . . . 168 Judgment of the Supreme Tribunal, 6 July 1910 (Minroku 16-537) . . . . . . . . . . . . . . . . . . . . . 144 Judgment of the Supreme Tribunal, 19 December 1912 (Minroku 18-1087) . . . . . . . . . . . . . . 141 Judgment of the Supreme Tribunal, 4 July 1914 (Keiroku 20-1360; Tochūken Kumoemon case). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 Judgment of the Supreme Tribunal, 22 December 1916 (Minroku 22-2474; Osaka Alkali case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 Judgment of the Supreme Tribunal, 30 April 1917 (Minroku 23-715). . . . . . . . . . . . . . . . . . . . 184 Judgment of the Supreme Tribunal, 22 November 1922 (Minroku 27-1978) . . . . . . . . . . . . . . 138 Judgment of the Supreme Tribunal, 28 November 1925 (Minshū 4-670; Daigaku-yu case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 Judgment of the Supreme Tribunal, 22 May 1926 (Minshū 5-386; Fukimaru case) . . . . . 142, 190 Judgment of the Supreme Tribunal, 13 October 1926 (Minshū 5-785) . . . . . . . . . . . . . . . . . . . 194 Judgment of the Supreme Tribunal, 18 October 1926 (Hyōron 16). . . . . . . . . . . . . . . . . . . . . . . 52 Decision of the Supreme Tribunal, 28 December 1928 (Minshū 7-1128) . . . . . . . . . . . . . . . . . 461 Judgment of the Supreme Tribunal, 5 April 1929 (Minshū 8-373) . . . . . . . . . . . . . . . . . . . . . . 142 Judgment of the Supreme Tribunal, 16 December 1929 (Minshū 8-12-944) . . . . . . . . . . . . . . 145 Judgment of the Supreme Tribunal, 12 March 1935 (Minshū 14-482) . . . . . . . . . . . . . . . . . . . 144 Judgment of the Supreme Tribunal, 5 October 1935 (Minshū 14-1965; Unazuki hotspring case). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

xx

Table of Cases

Judgment of the Supreme Tribunal, 30 September 1942 (Minshū 21-911) . . . . . . . . . . . . . . . . 167 Judgment of the Supreme Tribunal, 6 December 1944 (Minshū 23-19-613) . . . . . . . . . . . . . . 153

J U D G M E N T S OF H IGH C OU RT S Judgment of the Tokyo High Court, 19 September 1951 (Kōmin 4-14-497) . . . . . . . . . . . . . . 342 Decision of the Tokyo High Court, 18 March 1957 (Gyōshū 8-3-443; Kitaguni News case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347 Judgment of the Takamatsu High Court, 31 March 1963 (KōKeishū 19-2-136) . . . . . . . . . . . . 432 Judgment of the Tokyo High Court, 17 October 1967 (Gyōsai-Reishū 18-10-1307) . . . . . . . . . 366 Judgment of the Nagoya High Court, 29 March 1971 (Hanji No. 634) . . . . . . . . . . . . . . . . . . 156 Judgment of the Nagoya High Court, 10 April 1971 (Rōmin 22-2-453) . . . . . . . . . . . . . . . . . . 385 Decision of the Tokyo High Court, 30 April 1975 (KōMinshū 28-2-174) . . . . . . . . . . . . . . . . . 348 Decision of the Tokyo High Court, 19 March 1979 (KōMinshū 32-9/12-1391) . . . . . . . . . . . . 416 Judgment of Tokyo High Court, 29 October 1979 (Rōmin 30-5-1002; Tōyō Sanso case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 Judgment of the Tokyo High Court, 26 September 1980 (Hanji 983-22) . . . . . . . . . . . . . . . . 330 Judgment of the Tokyo High Court, 26 September 1980 (KōKeishū 33-5-359; Oil (Production Adjustment) Cartel case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343, 344 Judgment of the Sendai High Court, Akita Division, 26 March 1985 (Hanji 1147-19) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422 Judgment of the Tokyo High Court, 20 July 1988 (Hanji 1305-52) . . . . . . . . . . . . . . . . . . . . . 316 Judgment of the Tokyo High Court, 14 September 1994 (Hanji 1507-43; Shiseidō case) . . . . . 350 Judgment of the Tokyo High Court, 25 September 1995 (Hanta 906-136) . . . . . . . . . . . . . . . 341 Judgment of the Tokyo High Court, 26 September 1995 (Hanji 1549-11; Nomura Securities case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348 Judgment of the Sapporo High Court, 2 March 2006 (Hanji 1946-128) . . . . . . . . . . . . . . . . . 249 Judgment of the Fukuoka High Court, 19 June 2007 (Hanta No. 1265) . . . . . . . . . . . . . . . 8, 156 J U D G M E N T S OF DI S T R IC T C OU RT S Judgment of the Kōbe District Court, 20 July 1956 (Rōmin 7-4-838; Bōki Seizō case). . . . . . . 389 Judgment of the Wakayama District Court, 14 March 1959 (Rōmin 10-2-127; Wakayama Pile Orimino case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 Judgment of the Tokyo District Court, 9 August 1959 (KaMinshū 11-8-1647) . . . . . . . . . . . . 461 Judgment of the Tokyo District Court, 28 September 1964 (KaMinshū 15-9-2317). . . . . . . . . . 87 Judgment of the Tokyo District Court, 26 April 1965 (Hanji 408-14) . . . . . . . . . . . . . . . . . . . 455 Judgment of the Kyoto District Court, 27 May 1965 (KaMinshū 16-5-923) . . . . . . . . . . .410, 456 Judgment of the Tokyo District Court, 20 December 1966 (Rōmin 17-6-1407; Sumitomo Cement case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101, 389 Judgment of the Tokyo District Court, 7 June 1967 (KaMinshū 18-5/6-607) . . . . . . . . . . . . . 197 Judgment of the Tsu District Court, Yokkaichi Division, 24 July 1967 (Hanji 672-30; Yokkaiachi Pollution case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 Judgment of the Tokyo District Court, 9 August 1967 (RōMinshū 18-4-872) . . . . . . . . . . . . . 455 Judgment of the Tokyo District Court, 1 July 1969 (Rōmin 20-4-715; Tōkyū Kikan Kōgyō case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390 Judgment of the Tokyo District Court, 19 July 1969 (Rōmin 20-4-813; Katsuragawa Seishi Seisakusho case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 Judgment of the Tokyo District Court, 17 July 1970 (Hanji 604-29) . . . . . . . . . . . . . . . . . . . . . 96

Table of Cases

xxi

Judgment of the Nara District Court, 23 October 1970 (KaMinshū 21-9/10-1369) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 Judgment of the Toyama District Court, 30 June 1971 (KaMinshū 22-5/6-1) . . . . . . . . . . . . . 187 Judgment of the Osaka District Court, 10 December 1971 (Rōmin 22-6-1163; Mistui Shipbuilding case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389 Decision of the Tokyo District Court, 23 July 1976 (Hanji No. 820; Nihon Television Broadcasting Co. case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 Judgment of the Osaka District Court, 22 December 1977 (Hanta 361-127). . . . . . . . . . . . . . 460 Judgment of the Okayama District Court, 31 July 1979 (Rōhan 326-44; Sumitomo Heavy Industries case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395 Judgment of the Tokyo District Court, 27 February 1981 (Hanji 1010-85) . . . . . . . . . . . . . . . 458 Judgment of the Tokyo District Court, 30 March 1981 (Hanji 1363-68) . . . . . . . . . . . . . . . . . 443 Judgment of the Niigata District Court, 29 September 1971 (Hanji 642-96; Niigata Minamata case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .183, 187 Judgment of the Fukuoka District Court, Kokura Division, 29 March 1982 (Hanji 1037-14; Kanemi Yushō case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 Judgment of the Tokyo District Court, 27 March 1984 (Hanji 1113-26) . . . . . . . . . . . . . . . . . 459 Judgment of the Osaka Appellate Court, 19 April 1984 (KōKeishū 37-1-98; Kōbe Matsuri case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439 Decision of the Tokyo District Court, 28 September 1984 (Hanta 534-246; Pacman case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373 Judgment of the Tokyo High Court, 24 December 1984 (Hanji No. 1144) . . . . . . . . . . . . . . . 156 Judgment of the Tokyo District Court, 20 June 1986 (Hanji 1196-87) . . . . . . . . . . . . . . . . . . 460 Judgment of the Tokyo High Court, 25 August 1986 (Hanji 1208-66) . . . . . . . . . . . . . . . . . . 109 Judgment of the Kanazawa District Court, 27 November 1987 (Hanji 1268-143; Kitahama Doboku-Saiseki case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 Judgment of the Osaka District Court, 30 November 1987 (Hanji 1269-147) . . . . . . . . . . . . . 397 Interim Judgment of the Tokyo District Court, 30 May 1989 (Hanji 1348-91) . . . . . . . . . . . . 460 Judgment of the Tokyo District Court, 29 March 1991 (Hanji 1424-84) . . . . . . . . . . . . . . . . . 458 Judgment of the Yokohama District Court, 31 October 1991 (Hanji 1418-113) . . . . . . . . . . . . 458 Judgment of the Tokyo District Court, 28 January 1992 (Hanji 1437-122) . . . . . . . . . . . . . . . 453 Judgment of the Tokyo District Court, 4 February 1994 (Hanta, 841-271) . . . . . . . . . . . . . . . 313 Judgment of the Tokyo District Court, 18 July 1994 (Hanji 1474-25; Shiseidō case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350 Judgment of the Tokyo District Court, 3 October 1994 (Shiryō-ban Shōji-Hōmu 128-166; Japan Unysis case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316 Judgment of the Matsue District Court, 8 November 1994 (Hanji 1549-109) . . . . . . . . . . . . . 455 Judgment of the Nagano District Court, Ueda Division, 15 March 1996 (Hanta 905-276; Marukō Alarm case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 Judgment of the Fukuoka District Court, Kokura Division, 26 March 1996 (Rōhan 703-80; Nippon Steel Corporation case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398 Judgment of the Osaka District Court, 18 March 1998 (Hanji 1658-180) . . . . . . . . . . . . . . . . 245 Judgment of the Tokyo District Court, 5 February 1999 (Hanta No. 1073) . . . . . . . . . . . . . . . 157 Judgment of the Tokyo District Court, 28 August 2000 (Hanji, No. 1737) . . . . . . . . . . . . . . . . . 8 Decision of the Tokyo District Court, 28 June 2007 (Shōji Hōmu No. 1805) . . . . . . . . . . . . . . 267 Judgment of the Tokyo District Court, 20 September 2007 (Hanji 1985-140) . . . . . . . . . 278, 290

A DJ U DIC AT IONS OF O T H E R C OU RT S Adjudication of Nagoya Family Court, 2 March 1974 (Kagetsu 26-8-94) . . . . . . . . . . . . . . . . 458

xxii

Table of Cases DE C I S IONS OF O T H E R C OU RT S

Decision of the Osaka High Court, 12 July 1973 (KaMinshū 24-5/8-455) . . . . . . . . . . . . . . . . 421 Decision of the Fukuoka Appellate Court, 13 July 1977 (KōMinshū 30-3-175; Fukuoka Sumon case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415 Decision of the Sapporo High Court, 30 September 1987 (Hanji, No. 1258). . . . . . . . . . . . . . . . 8 F TC DE C I S IONS Hearing Decision of the FTC, 30 August, 1949 (Shinketsushū 1-62; Yuasa Woods case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 Hearing Decision of the FTC, 4 April 1952 (Shinketushū 4-1; Noda Soya Sauce case) . . . . . . . 343 Recommendation Decision of the FTC, 6 November 1953 (Shinketsushū 5-61; Industrial Bank of Japan case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 Recommendation Decision of the FTC, 10 December 1955 (Shinketsushū 7-99; Second Taishō Pharmaceutical case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347 Hearing Decision of the FTC, 28 July 1956 (Shinketsushū 8-12; Snow Brand Dairy case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333, 334 Recommendation Decision of the FTC, 30 January 1957 (Shinketsushū 8-51; Nihon Musical Instrument Manufacturing case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336 Recommendation Decision of the FTC, 17 October 1957 (Shinketsushū 9-11) . . . . . . . . . . . . . 346 Hearing Decision of the FTC, 19 April 1967 (Shinketsushū 14-64; Marugame Grocery case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347 Recommendation Decision of the FTC, 7 November 1966 (Shinketsushū 12-146; Nihon Suisan case). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349 Recommendation Decision of the FTC, 12 January 1970 (Shinketsushū 16-134; Amano Pharmaceutical case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357 Recommendation Decision of the FTC, 18 September 1972 (Shinketsushū 19-87; Tōyō Seikan case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333 Recommendation Decision of the FTC, 27 December 1972 (Shinketsushū 19-140) . . . . . . . . . 357 Recommendation Decision of the FTC, 27 December 1972 (Shinketsushu 19-124; International Rayon Cartel case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 Recommendation Decision of the FTC, 20 February 1976 (Shinketsushū 22-127; France Bed case). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349 Consent Decision of the FTC, 24 November 1977 (Shinketsushū 24-50) . . . . . . . . . . . . . . . . . 348 Recommendation Decision of the FTC, 2 February 1980 (Shinketsushū 26-85; Tokyo Linoleum case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347 Decision of the FTC to terminate the proceedings, 26 October 1981 (Shinketsushū 28-79) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358 Consent Decision of the FTC, 17 June 1982 (Shinketsushū 29-31; Mitsukoshi Department Store case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 Recommendation Decision of the FTC, 31 March 1983 (Shinketsushū 29-104; Soda Ash Import Cartel case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 Recommendation Decision of the FTC, 8 January 1992 (Shinketsushū 38-150; Strech Film cartel case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342 Hearing Decision of the FTC, 28 July, 1994 (Shinketsushū 41-46; Mitsubishi Building Technoservice case) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 Consent decision of the FTC, 30 November 1995 (Shinketsushū 42-97; Shiseidō case) . . . . . . 350 Recommendation Decision of the FTC, 22 March 1996 (Shinketsushū 42-195). . . . . . . . . . . . 352

Table of Legislation J A PA N

Constitution Constitution (1946) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 16, 17, 21, 22, 26–32, 35, 36, 38–40, 41, 43, 49, 50, 52, 54, 55, 57, 59, 60, 67, 87– 92, 97– 99, 102, 103, 105, 109, 119, 141, 169, 197, 201, 202, 383– 385, 389, 399, 402, 430, 436, 437, 441–442, 444–445

Codes Civil Code . . . . . . . . . . . . . . . . . 3, 6,8, 20, 27, 42, 43, 51, 101, 113–127, 131, 134–138, 140, 141, 144–150, 153, 155, 158, 162, 164–166, 169, 170–178, 180, 183–185, 188, 189, 191–193, 195, 196, 199, 201, 202, 205, 210, 211, 217, 220– 224, 248, 288, 306, 370, 381, 384, 388, 389, 393, 394, 411, 412, 447, 456, 461 Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . .21, 23, 27, 37, 51, 113, 114, 115, 117, 118, 123, 128, 131–134, 143, 150, 153, 159, 175, 217, 218, 220–222, 230, 241, 254, 257, 263, 272, 278, 282, 283, 306, 320, 323 Criminal Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 18, 21, 27, 33, 34, 37, 51, 88, 95, 97, 100, 201, 402, 426, 427, 428, 430–436 Code of Civil Procedure . . . . . . . . . . . . . . . . . . . 18, 21, 24, 27, 30, 56, 59, 63, 66, 68, 70, 71, 125, 409–411, 414–421, 423, 425, 458–462 Code of Criminal Procedure . . . . . . . . . . . . . . . . . .21, 27, 44, 52, 56, 65, 106, 436, 437, 439, 441

Law on Access to Information Held by Administrative Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Acquisition of Land for Public Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107, 169 Adjustment of Labour Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Administrative Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27, 30, 42, 56, 405 Administrative Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30, 46, 47, 48 Agricultural Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 169 Aliens’ Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109, 110, 445 Anti–Monopoly Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21—25, 27, 47, 52, 58, 128, 129, 295, 327–332, 334–336, 339–345, 347–352, 354–356, 358–362, 377, 412, 426 Application of Law (Horei) (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 452 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 56, 68, 69 Architectural Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121, 154 Attorneys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54, 78–79, 82–84 Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 296, 301, 302, 303 Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285, 286, 288 Book–Entry Transfer of Corporate Bonds and other Securities . . . . . . . . . . . . . . . . . . . . . . . . 238 Cabinet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 35, 36, 39 Certification of Public Interest Associations and Foundations . . . . . . . . . . . . . . . . . . . . . . . . . 124 City Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 Civil Composition (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 Civil Conciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

xxiv

Table of Legislation

Civil Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27, 140, 423 Civil Interim Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27, 413 Civil Rehabilitation (Minji–Saisei–Ho) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285, 288, 290 Civil Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Commodities Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .301, 302, 303, 306 Company Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 24, 27, 113, 117, 123, 217, 218, 222–228, 234, 236, 239, 241–244, 247, 248, 253, 255, 257–263, 272–274, 278–281, 283, 426, 447 Compensation by the State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .122, 127, 195 Compensation for Loss caused by Nuclear Damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116, 181 Compensation for Losses arising from Car Accidents. . . . . . . . . . . . . . . . . . . . . . . . . 116, 181, 195 Compensation for Losses caused by Pollution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116, 181 Consumer Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117, 153, 162 Contracts of Security by Provisional Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166, 178 Copyright . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27, 364, 371, 373–375 Corporate Reorganisation (Kaisga Kosei Ho) . . . . . . . . . . . . . . . . . . . . . . . . . . .285, 288, 289, 290 Courts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 54, 55, 63, 74, 75, 412 Criminal Procedure with the Participation of Lay Assessors. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Custody and Transfer of Share Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 Customs Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Customs Tariff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364, 379, 380 Divided Ownership of Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 Door–to–Door Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 Elderly Persons Employment Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398 Elimination and Prevention of Involvement in Bid Rigging etc. . . . . . . . . . . . . . . . . . . . . . . . 344 Emergency Measures for the Restoration of the Functioning of the Financial System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 Employment Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384 Equal Opportunities in Employment for Men and Women . . . . . . . . . . . . . . . . . . . 382, 389, 390 Establishment of the Financial Services Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326 Exceptions to the Civil Code on Means of Publicity concerning Assignment of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Export–Import Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 Financial Futures Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .297, 305 Financial Instruments and Exchange Law . . . . . . . . . . . . . . . . . . . .25, 27, 39, 299–307, 309–315, 318, 321–322, 412, 426 Financial Instruments Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .161, 298, 303 Fishery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 Foreign Exchange and Foreign Trade Law . . . . . . . . . . . . . . . . . . . . . . . 22, 39, 127, 294, 448, 449 Forestry Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 107 Fundamental Law on Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Futures Trade in Overseas Commodity Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 General Associations and Foundations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124, 126 General Rules Regarding the Application of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51, 453 Government Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27, 122 Government Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39, 108, 428 Habeas Corpus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Hypothec of Factories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116, 166, 174, 176 Hypothec over Automobiles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

Table of Legislation

xxv

Immigration Control and the Recognition of Refugees . . . . . . . . . . . . . . . . . . . . . . . . . . 445, 446 Impeachment of Judges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Instalment Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 Insurance Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301, 302, 303 Intellectual Property, Basic Law on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363–364 Intermediate Juridical Persons (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Investment Advisory Business (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 Job Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382 Judicial Scriveners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 81 Juveniles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63, 433 Labour Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 21, 24, 27, 383, 386, 388, 393, 394, 398 Labour Relations Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382, 404 Labour Relations in Designated Independent Administrative Juridical Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382 Labour Relations in Public Corporations (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382 Labour Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 21, 27, 52, 382, 383, 386–390, 392, 394 Large Retail Stores (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Layout of Semi–conductor Circuits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372 Lease of Land and Houses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19, 116, 152, 169, 172, 173 Libel Act (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Limitation of Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Limited Liability Companies (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 Limited Liability Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 Local Self–Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49, 50 Maintenance of Public Security (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 20, 87, 381 Measures for Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382, 384 Minimum Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390 Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 Misdemeanours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426 Mortgage Securities Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304 National General Mobilisation (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 Nationality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34, 102, 109, 443 Ordinance on Public Meetings (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Part–Time Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 Patent Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 364, 365–371, 373, 375, 421, 422 Penalising Hijacking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426 Pharmaceutical Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 108 Planning Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Postal Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Prevention of Capital Flight (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448 Prevention of Delay in Payment for Subcontracted Work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345 Prevention of Subversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94, 426 Prevention of Unjust Acts by Members of Gangster Organisations . . . . . . . . . . . . . . . . . . . . . 436 Private Schools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Proceedings on Personal Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62, 209 Product Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117, 160, 181, 199 Prohibition of Unlawful Access to Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426 Promotion of the Justice System Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Prosecution Review Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440 Protection of Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116, 173 Protection of Computer Information on Individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

xxvi

Table of Legislation

Public Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 109 Public Prosecutor’s Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54, 77, 78 Public Security and Police Law (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19, 381 Publication Ordinance (Repealed). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Punishing Orgaised Crimes and Regulation of Proceeds from Crimes. . . . . . . . . . . . . . . . . . . 436 Recognition and Assistance for Foreign Insolvency Proceedings . . . . . . . . . . . . . . . . . . . . . . . 285 Registration of Immovables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 Registration of Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 Regulating the Commodity Investment Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 Regulation of Credit and Loan Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 Regulation of Stalking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426 Regulations on Newspapers (Repealed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Religious Organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Restriction of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Rights of Foreigners on Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 Road Traffic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51, 107 Secured Bond Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272 Securities and Exchange (replaced by Financial Instruments and Exchange Law) . . . . . . . . . . . . . . . . . . . . . . . 21, 23, 25, 266, 279, 293, 295,297, 299–301, 303–306, 309, 311–315, 317–319, 321 Securitisation of Assets through Special Purpose Companies . . . . . . . . . . . . . . . . . . . . . . . . . 306 Security over Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .174, 176 Seeds and Plants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 Special Measures against Terrorism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Special Measures on the Audit of Large Companies Limited by Shares . . . . . . . . . . .218, 220, 221 Special Measures on the Handling of Legal Business by Foreign Attorneys . . . . . . . . . . . . . . . . 70 Special Rules to the Civil Code concerning Electronic Consumer Contracts and Electronic Notes of Acceptance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Specific Joint Businesses on Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303, 307 Statute on Judicial Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Succession of Employment Contracts in splitting of companies . . . . . . . . . . . . . . . . . . . . . . . . 269 Suretyship for Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 Tax Attorneys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Trade Marks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27, 364, 376 Trade Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27, 188, 382, 384, 386, 398–402, 404, 405 Trading in Financial Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294 Trees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 Trust Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125, 306, 307 Unfair Competition, against . . . . . . . . . . . . . . . . . . . . . . . . . . . 345, 364, 376, 377, 422, 428, 435 Unit Trusts and Investment Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306, 307 Unjust Premiums, Advertisements and Labelling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348 Utility Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 Welfare of Working Women . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390 Workers Dispatch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382

Introduction 1. Japanese Law Viewed from Abroad The study of comparative law has attracted academics in Europe and the United States since the last century. In 1869, the Société de Legislation Comparée was founded in France. Although the primary focus was usually on the comparison of laws within Europe, or the comparison between the Anglo-American system and the Civil Law system, legal systems outside the Common Law and Civil Law system were not entirely ignored. Attempts were made by some pioneer comparativists to include laws outside Europe, including Japanese law, in their field of research.¹ There has been a long tradition of the study of Chinese law in France and Holland, but Japanese law failed to attract much attention from European and American specialists of law in the pre-Second World War era. This did not mean that the Japanese legal system had no links with either Europe or the United States in this period. In the course of modernisation, which began in the mid-nineteenth century, Japan relied heavily on advisers invited from Europe in enacting laws and developing its system of legal education. Japanese scholars were sent to Europe to study law and returned with extensive knowledge, mainly of the Civil Law system. The relationship remained basically unilateral; the Japanese kept learning from European countries and there was a constant flow of knowledge of European law into Japan, but there were only a few people in Europe or the United States who were interested in disseminating knowledge of Japanese law in the West. Otto Rudolff, a German legal adviser to Japan, was an exception. He translated the Codes of the Tokugawa Shogunate in 1889. Works by J. H. Wigmore on the law of the same period and by de Becker on the Commercial Code of Japan can be considered major contributions in the dissemination of knowledge about Japanese law.² Also some Japanese lawyers, namely Naojiro Sugiyama and Kōtaro Tanaka, took part in various international activities in the field of comparative law. After the end of the Second World War, the scope of the study of comparative law expanded significantly in three directions. First, Eastern European countries came under the control of the Soviet Union and China shifted to socialism. Thus, the socialist legal system came to carry more weight than it did in the pre-war ¹ T. Gorai, ‘Influence du Code Civil français sur le Japon’, in Le Code Civil: Livre du Centenaire (Paris, 1904), pp. 783–784. ² J. E. de Becker, Commentary on the Commercial Code of Japan (Yokohama, 1913).

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

2

Introduction

period. The Cold War made the study of socialist law indispensable to the formulation of policy towards the Eastern bloc. Secondly, the abolition of colonial rule in Third World countries led to the emergence of various legal systems which are copies of neither the Civil Law system nor the Common Law system. These legal systems needed serious research. Thirdly, the Allied occupation of Japan necessitated a comprehensive study of Japanese political and legal institutions. This was enhanced later by the emergence of Japan as an economic super-power in the 1980s. The increasingly powerful Japanese economy resulted in a growing interest not only in commercial law, but also in the cultural and historical background of the Japanese legal system. The United States was probably the first country where systematic studies in Japanese law developed. Already during the war the United States, in anticipation of victory, had been promoting Japanese studies in order to formulate its occupation policy. The study of legal institutions was one of the primary topics of Japanese studies. Under the Allied occupation, American legal advisers worked together with Japanese lawyers to reshape the Japanese legal system. The knowledge which they accumulated during this period has further developed the study of Japanese law in the United States. With this background and the close economic links with Japan, it is not surprising that the study of Japanese law first developed in the United States rather than in Europe. One of the earliest accomplishments was Law in Japan: The Legal Order in a Changing Society, edited by Arthur von Mehren, which resulted from a joint project of Japanese and American lawyers in 1963. Interest in Japanese law also developed in Germany in the 1970s. Reflecting the strong historical ties with Japan from the previous century, Japanese law studies began in Hamburg and Freiburg. A series of Japanese law books ( Japanisches Recht) written mainly by Japanese lawyers and translated into German were published in Freiburg. A biannual periodical Zeitschrift für japaniesches Recht is published by the German-Japanese Lawyers’ Association in conjunction with the Max-Planck Institute for Foreign and International Private Law in Hamburg. It should be added that, in Australia, developing commercial ties with Japan have led to the introduction of Japanese law courses in several universities. On the Japanese side, lawyers have become increasingly aware of the necessity of enhancing the understanding of Japanese law in foreign countries. In 1967, Japanese lawyers and American specialists in Japanese law began jointly publishing an annual, Law in Japan. Furthermore, books written in foreign languages by Japanese academics in their respective fields of speciality started to appear in the 1970s.³ A major achievement in this respect was the ten-volume series Doing

³ For instance, Z. Kitagawa, Rezeption und Fortbildung des europäischen Zivilrechts in Japan (Frankfurt/M, 1970).

Introduction

3

Business in Japan (loose-leaf) published in the 1980s which still continues to be updated.⁴ In 1950, two books on comparative law were published in France. At that time, there was still very little information on Japanese law available in any foreign language. In the Traité de droit comparé by P. Arminjon, B. Nolde, and M. Wolf, the influence of German law on Japan was emphasised and Japanese law was characterised as German law in the Far East.⁵ This is probably because the draft German Bürgerliches Gesetzbuch (hereinafter ‘BGB’) served as the basis for the Japanese Civil Code. The view that Japanese law is part of the Romano-Germanic family had already been expressed in the early twentieth century by Nobushige Hozumi, who was a Professor of Civil Law at the University of Tokyo. He divided major legal systems into seven groups: Chinese, Hindu, Mohammedan, Roman, Germanic, Slavonic, and English law. Referring to the Civil Code, he pointed out that Japanese law had shifted from the family of Chinese law to the family of Roman law: ‘. . . the new Japanese Civil Code stands in a filial relation to the European systems, and with the introduction of Western Civilization, the Japanese civil law passed from the Chinese Family to the European Family of law’.⁶ In contrast, Traité centenaire de droit civil comparé by René David, stressed the affinity of Japanese Law with Chinese law.⁷ David later elaborated on this topic in the Major Legal Systems in the World Today.⁸ Here, the connection of Japanese law with the Romano-Germanic family of legal systems is acknowledged, but the book still deals with Japanese law as one of the ‘Laws of the Far East’, together with Chinese law, under the heading ‘Religious and Traditional Law’. The common feature of the ‘Laws of the Far East’, according to David and Brierley, is that laws in this part of the world are formally connected to either the Romano-Germanic family or to the family of socialist law. But they proceed to point out that: The reception of Western ideas and institutions, decreed by their rulers, has not wholly eliminated those traditional ideas which were considered as morality and the social order. For a long time yet modern law may very well remain a mere ‘veneer’, behind which the traditional ways of acting, thinking and living will be perpetuated.⁹

This pattern of thought was followed in more recent works by K. H. Ebert as well as K. Zweigert and H. Kötz. Ebert categorised Japanese and Chinese Law as Far

⁴ Z. Kitagawa (ed.), Doing Business in Japan (New York, 1980). ⁵ P. Alminjon, B. Nolde, and M. Wolff, Traité de droit comparé (Paris, 1950), Tome II, pp. 427–428. ⁶ N. Hozumi, Lectures on the New Japanese Civil Code as Materials for the Study of Comparative Jurisprudence (Tokyo, 1904), p. 19. ⁷ R. David, Traité centenaire de droit civil comparé (Paris, 1950), pp. 388–389. ⁸ R. David and J. E. C. Brierley, Major Legal Systems in the World Today (London, 1968), pp. 20, 450–460. ⁹ Ibid.

4

Introduction

Eastern Law, but failed to produce any persuasive argument to support this.¹⁰ Zweigert and Kötz also classified Japanese law as part of the ‘Far Eastern Legal Family’, together with Chinese law, and found the reliance on extra-judicial methods of settling disputes to be a salient feature of this group. In their view, positive law imported from foreign countries has not fully taken root in Japan and China. Instead of recourse to the courts, people resort to informal procedures of dispute settlement, characteristic of Confucianism, which discourages the settlement of conflicts in public.¹¹ Presumably these authors based their views on the work of Professors T. Kawashima and Y. Noda. In an article published in 1963, Professor Kawashima pointed out as follows: Traditionally, the Japanese people prefer extrajudicial, informal means of settling a controversy. Litigation presupposes and admits the existence of disputes and leads to a decision which makes clear who is right or wrong in accordance with standards that are independent of the will of the disputants. . . . There is a strong expectation that a dispute should not and will not arise; even when one does occur, it is to be solved by mutual understanding. . . . Because of the resulting disorganisation of traditional social groups, resort to litigation has been condemned as morally wrong, subversive and rebellious.¹²

Professor Noda went even further in his book, Introduction to Japanese Law: Japanese generally conceive of law as an instrument of constraint that the State uses when it wishes to impose its will. Law is thus synonymous with pain or penalty. To an honourable Japanese the law is something that is undesirable, even detestable, something to keep as far away as possible. To never use the law, or be involved with the law, is the normal hope of honourable people. To take someone to court to guarantee the protection of one’s own interests, or to be mentioned in court, even in a civil matter, is a shameful thing; and the idea of shame . . . will be the keystone to the system of Japanese civilisation.¹³

Whether this notion of the ‘non-litigiousness of the Japanese’ is a myth or not has been a focus of contention for some years. Serious doubts have been raised about the validity of this notion.¹⁴ In the second edition of Zweigert and Kötz’s book, the tone has slightly changed: . . . it is clear that until well into the twentieth century these imported statutes had very little practical effect on Japanese legal life. . . . But it would be wrong to overemphasise the

¹⁰ K. H. Ebert, Rechtsvergleichung: Einführung in die Grundlagen (Bern, 1978), S. 112–118. ¹¹ K. Zweigert and H. Kötz, Einführung in die Rechtsvergleichung auf dem Gebiet des Privatrechts, erste Auflage, Bd. 1, Tübingen 1971, S. 431–434. Translated into English by T. Weir, An Introduction to Comparative Law, vol. 1, (Oxford, 1977), pp. 362–365. ¹² T. Kawashima, ‘Dispute resolution in Contemporary Japan’, in A. von Mehren, (ed.), Law in Japan (Ann Arbor, 1963), pp. 43–45. ¹³ Y. Noda, Introduction to Japanese Law (Tokyo, 1976), pp. 159–160. ¹⁴ J. O. Haley, ‘The Myth of the Reluctant Litigant’, Journal of Japanese Law, Vol. 4, pp. 576–578.

Introduction

5

Japanese preference for resolving disputes uncontentiously. Many people familiar with Japan believe it to be a myth that the Japanese are reluctant to litigate.¹⁵

In the third edition, however, although the above-cited part remains, there is a more substantial reference to the way ‘the Japanese tenaciously cling to their old practices despite all changes in the circumstances of life’. The book proceeds to present some ‘examples’ of disputes being resolved by ‘internal procedures’, which seem to be rather exaggerated.¹⁶ However, according to a recent survey of the users of civil procedure, 80 per cent of the respondents replied that the reason for hesitating to engage in litigation was time and cost.¹⁷ On the other hand, David’s view on Japanese law, largely shared by Zweigert and Kötz, regardless of its inappropriateness, deserves attention since it seems to represent a notion common to foreign observers. His view is essentially that firstly, Japanese law has been influenced by various foreign legal systems, mainly Romano-Germanic and American. Secondly, due to the persistence of traditional morals and values these ‘imported’ modern legal systems did not fully succeed in taking root in Japanese society. Therefore, thirdly, ‘the question is still very much open whether behind this facade of westernization, Japan really has undergone any kind of significant transformation and whether it has accepted the idea of justice and law as understood in the West’.¹⁸ It is natural in a way to imagine frictions arising between imported foreign laws on one hand and traditional morals and values on the other. However, in Japan, in the period of modernisation, foreign law was imported and accepted fairly smoothly without any significant resistance. The gap between modern codes based upon foreign law and social reality in Japan has not been as wide as is believed by foreign observers. In every legal system, there is a discrepancy between the law in books and the law in action. This applies to Japanese law as well, but the assumption that this gap is wider in Japan than in other countries simply because foreign law was introduced to a ‘traditional’ society cannot be substantiated. In order to clarify this matter, it is necessary to examine the way in which Japan has imported and digested foreign law in the modern period. ¹⁵ K. Zweigert and H. Kötz, Einführung in die Rechtsvergleichung auf dem Gebeit des Privatrechts, zweite Auflage, Tübingen 1984, S. 416–419. Translated into English by T. Weir, An Introduction to Comparative Law, 2nd edn (Oxford, 1988), pp. 370–372. ¹⁶ Zweigert and Kötz, ibid., dritte Auflage (Tübingen, 1996), S. 294–296. Translated into English by T. Weir, An Introduction to Comparative Law, 3rd edn (Oxford, 1998), pp. 300–302. Incidentally, the first edition of the present book seems to have been misquoted in Zweigert and Kötz’s third edition. The reference to the Centre for the Settlement of Traffic Accident Disputes was not meant to demonstrate the traditional attitude of the Japanese in avoiding litigation and resorting to ‘internal procedures’. The present author has made it clear in the book that since court practice is highly standardised in this area, parties agree to have the dispute settled in a quicker and less expensive way. It is also made clear that attorneys do get involved in the activity of the Centre. ¹⁷ ‘2006 nen Minji-soshō Riyōsha-Chōsa no Bunseki (Analysis of the Survey of the Users of the Civil Procedure: 2006)’, Jurist, No.1348, p. 198. ¹⁸ David and Brierley, supra, p. 456.

6

Introduction

Foreign law was received into Japan in three different stages. The first stage was in the seventh and eighth centuries when Japan imported the Chinese political and legal system. The second and third stages are of particular significance, since these two stages have direct bearing on contemporary Japanese law. The second stage was in the process of industrialisation after the overthrow of the Tokugawa Shogunate in the late nineteenth century and the early twentieth century. During this period of modernisation European law, namely the French and German codes, were imported into Japan and served as a model for the major Japanese codes. The third stage began after the Second World War and continued during the period of the Allied Occupation. The Constitution was heavily influenced by the US Constitution and some laws were amended or replaced by laws modelled on US law. Nevertheless, the nature of Japanese law as part of the Civil Law system did not really change. Unlike some countries under colonial rule, the reception of foreign law in Japan occurred without any substantial resistance. Although modernisation began in response to both pressure from foreign countries to open up and the desire of Japan to renegotiate unequal treaties, the need for modernisation itself was never doubted. The government’s slogan of emulating and surpassing Western powers was shared by most political leaders and largely supported by ordinary people. Therefore, psychological barriers to the reception of foreign law were minimised, making the implementation of laws modelled on foreign laws easier than in countries where foreign law was imposed from above by colonial rulers. In the absence of commitment to a specific country, the Japanese legislature seldom carboncopied foreign legislation in its entirety without considering its adaptability to Japanese society. At the very beginning of the modernisation there were attempts to translate French Codes and implement them directly, but these attempts were quickly abandoned and a more prudent approach prevailed. The reception of foreign law in Japan was selective, i.e. it was introduced only insofar as it met specific social demands at the time. It is often pointed out, for instance, that the present Civil Code is primarily influenced by German law, yet it is neither a replica of the draft German BGB nor even primarily influenced by the German Code. In fact, in the process of preparation, French law, German law, and English law were all studied, and the Code incorporated the parts considered to be most suitable, regardless of the source. One of the authors of the Code later stated that legislative materials were collected from all over the civilised world and that the Code was ‘a fruit of comparative jurisprudence’.¹⁹ The legislature in the period of modernisation did not fail to take into account the existing customs and conventions in Japan, especially commercial practice. Naturally, some traditional customs and conventions needed to be abandoned for the sake of modernisation, but justifiable practices were preserved under the ¹⁹ N. Hozumi, supra, pp. 21–22.

Introduction

7

new regime. In order to meet specific conditions in Japan, foreign law was often modified, sometimes to the extent that its origin became difficult to identify. This careful consideration of social reality existing in Japan minimised the friction between the new laws and established social practice. Although modern Japanese law has been substantially influenced by foreign law, particularly German and French law, Japan has not taken over foreign legal institutions without considering their adaptability and suitability to Japan. Foreign law was carefully examined in light of the existing social reality of Japan, and only that which met the specific requirements of the day was accepted, often with substantial modification. This cautious approach still did not eliminate the possibility of discrepancy between law and reality. In such cases, it was not uncommon that a different practice which was not always compatible with the law emerged. This can be seen, for instance, in the area of atypical real securities, where a body of case law which was different from the statutory law developed. However, once established, these practices were endorsed by the court, if not by the legislature, and became fully compatible with the law. In this way, Japan has been fairly successful in assimilating foreign laws and transplanting them on different soil. The gap that initially existed between the ‘imported’ laws and social reality has been filled in one way or another, and statutory laws are duly implemented and generally enforced. Therefore an overemphasis on the disparity between law and practice is often misleading and results in ‘mystification’ of Japanese Law. It should be added that in the past two decades, in the process of the ‘regulatory reform’, the above prudent approach seems to have given way to the need for urgent reform. An example is the successive amendments to Japanese company law, which culminated in the enactment of the 2005 Company Law. In this process, some components of the US system were transplanted into Japan, arguably without sufficient infrastructure. This is demonstrated in the takeover law, where various defensive measures were made available without necessary rules to regulate their use.

2. Anti-Positivism in Japanese Law If any uniqueness is to be found in Japanese law, it is not in the approach to dispute settlement, but rather in the marked anti-positivist approach in the application of law. To be sure, this may not be unique only to Japanese law, but may be shared to a certain extent in the Civil Law countries. Judges in Japan are fairly active in creating law, and may even go further than the judges in the Anglo-American jurisdictions in some respects. In cases where there seems to be no alternative way to achieve an equitable solution, the court may even deviate from the wording of statutory law rather than adhering to the literal interpretation of the statutes.

8

Introduction

For instance, in cases involving loans, there is an explicit statutory provision to the effect that the interest exceeding the limit set by the law which the debtor has paid voluntarily is not subject to reimbursement. However, when the debtor paid interest above this limit and later claimed reimbursement, the Supreme Court ruled that the excess amount should be regarded as repayment of the principal sum, and if the principal and the statutory interest have been fully repaid, the excess amount should be returned to the debtor.²⁰ One foreign observer characterised the role of the court in this respect as ‘judicial activism’.²¹ Another example in the area of civil law is the termination of a continuous contract. In Japan, a majority of contracts between companies are of a longterm nature. Usually, the contracts are for a one-year period, but are automatically renewable, unless either party objects one month in advance. Theoretically, whether to renew the contract or not is left to the parties. However, for example, in cases of distributorship arrangements, the court denies the right of the manufacturer to refuse renewal of a long continuous contract under some circumstances, unless there is a breach of mutual trust and a justifiable ground to refuse renewal.²² In the area of labour law, according to the Civil Code, the employer is entitled to terminate an employment contract without a fi xed period at any time. The termination takes effect in two weeks (Art. 627). The Labour Standards Law extended this period to one month. However, the doctrine of unfair dismissal has developed by case law. Termination of the contract by the employer is not allowed as an abuse of rights, if a reasonable ground does not objectively exist, or if the dismissal is not compatible with socially accepted common sense.²³ This doctrine was later incorporated in the Labour Standards Law, and then, recently, in the newly enacted Labour Contract Law (Art. 16). In family law, although there is no specific restriction in the Code on the person who is entitled to initiate divorce proceedings, the court has long maintained that the spouse who is responsible for the collapse of the marriage is not entitled to initiate the proceedings despite the absence of any statutory basis. General clauses contained in the Codes, such as the public order and good morals clause and the provision on good faith and fair dealing often serve as the

²⁰ Judgment of the Supreme Court, 13 November 1968, Minshū 22-12-2526. See Hironaka, ‘Wagatsuma Minpō-gaku to Minpō no Hanseitei-hō-teki Kaishaku (Prof. Wagatsuma’s Theory and Anti-Literary Interpretation of the Civil Code)’, Jurist 1996 vol. 1096, pp. 74–83. ²¹ A. M. Pardieck, ‘Japan and Moneylenders—Activist Courts and Substantive Justice’, Pacific Rim Law and Policy Journal, vol. 17, No. 3, p. 532. ²² For example, judgment of the Tokyo District Court, 28 August 2000, Hanji, No. 1737, p. 41. Decision of the Sapporo High Court, 30 September 1987, Hanji, No. 1258, p. 76. The latest judgment is of the Fukuoka High Court, 19 June 2007, Hanta No. 1265, p. 253. ²³ K. Sugeno, Shin Koyō-Shakai no Hō (New: Law of the Working Society), Supplemented Edition, Tokyo 2004, pp. 64–66.

Introduction

9

basis of such law creation.²⁴ The extensive use of these general clauses is a feature which Japanese law shares with German and French law. Naturally, one may ask whether such reliance on general clauses does not affect the stability of the law. In many areas where general clauses are utilised, a body of case law has been accumulated and a set of criteria is largely available. After all, these general clauses are designed to serve as a channel to reflect the values commonly shared by the public. The fact that judges in Japan are ‘career’ judges, and that as a result court practice is fairly standardised, may further reduce any concern about legal stability. It should be added that, in general, legal training in Japan is against positivist thinking like that of the Pandektenists. Legal positivism was widely supported in the pre-war period in Japan, but even then there was some opposition to it. The German Freirechtslehre in pursuit of lebendes Recht, as opposed to positivistic interpretation of law, had a significant influence in Japan before the war. This was reinforced after the war by the introduction of sociology of law from the United States. At present, it is generally accepted that the interpretation of law should not be limited to literal or logical interpretations; teleological and sociological interpretation is equally important. Presumably influenced by the American jurisprudence of realism, there is an influential view which generally acknowledges that judges make value judgments in resolving specific cases. Judges identify the interests involved in the dispute and make a decision as to which interest should be protected more than others by weighing conflicting interests. In this process various factors are considered, including the intention of the legislature, and the intended goal of the statute. It is understood that the final decision of choosing the most appropriate alternative is a value judgment on the part of the judge, who substantiates or rationalises the conclusion by applying a suitable norm for the purpose.²⁵ Whether this view reflects the true state of affairs may be arguable, but Japanese judges certainly seem to adopt a more liberal and flexible attitude towards statutory interpretation than their counterparts in the Anglo-American jurisdictions.

²⁴ T. Uchida, Keiyaku no Jidai: Nihon Shakai to Keiyaku-hō (The Era of Contracts: Japanese Society and the Contract Law) (Tokyo, 2000), p. 84. See also H. Tanaka, The Japanese Legal System (Tokyo, 1974). ²⁵ E. Hoshino, ‘Minpō niokeru Rieki Kōryō-ron Minpō Ronshū, (Treatise on Civil Law), Vol. 8 (Tokyo 1996), pp. 203 –213.

1 The History of Modern Japanese Law 1. The Period of Modernisation Foreign law was received into Japan in three different stages. The first stage was in the seventh and eighth centuries, when Japan imported the Chinese political and legal system. The second stage occurred between the overthrow of the Tokugawa Shogunate in the mid-nineteenth century and the early twentieth century, when the industrialisation of the country was accomplished. In this period of modernisation, European law—namely the French and German codes—was imported into Japan and served as a model for the major Japanese codes. The third stage began after the Second World War and continued during the period of the Allied occupation. During this stage, some laws were amended or replaced on the basis of US law. Nevertheless, the strong influence of the Civil Law system remains today. The second and third stages are of particular significance, since these two stages have direct bearing on contemporary Japanese law. The modernision process in Japan started with the fall of the Tokugawa Shogunate, which ruled the country for two and a half centuries.¹ In 1867 the Emperor declared that imperial rule should be restored. A new government was first formed on the model of the archaic dajōkan system, which dates back to the eighth century. When major reforms took place after the fall of the Shogunate, the existing social and economic system in Japan was fairly well developed and certainly ready for further development. For instance, a money-based economy had developed to such an extent that large mercantile and money-lending capital enjoyed dominant power in the economy. This enabled the introduction of the modern banking system under the new government. Another example is the ownership of land. Despite lacking the modern concept of land ownership, some rights of land-holding had developed before the modernisation, and land was traded

¹ For the history of Japanese law in English, see R. Ishii, A History of Political Institutions in Japan (Tokyo, 1980). For the history after 1868, see W. Röhl (ed.), History of Law in Japan since 1868 (Leiden, 2005).

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

14

The Basis of the System

extensively under the Tokugawa Shōguns’ rule. This made it possible to introduce a modern system of land ownership smoothly.² Despite their initial chauvinism, the ruling elites quickly realised that a knowledge of foreign civilisations and use of the advanced technology that had developed in the West were indispensable to the modernisation of Japan. Modernisation was considered to be an urgent task if Japan was not to be colonised like many other Asian countries. Therefore, after a brief return to the ancient dajōkan system, the new government turned to European countries for a model. While in the Charter of Oath of the new regime in 1868, the Emperor had proclaimed that public opinion should be consulted, this had merely meant that territorial lords should be consulted in decision-making. However, inspired by the parliamentary systems in Europe and strengthened by disillusionment and discontent with the autocratic system of the new government, a movement to establish a publicly elected parliament gained wide support in the 1870s. Different trends were discernible in this movement—the Popular Rights Movement ( jiyū-minken-undō). Inspired by Locke, Mill, Rousseau, and Bentham, a charter of one of the earlier organisations declared that all Japanese were equally endowed with rights to life, liberty, property, livelihood, and the pursuit of happiness—rights that ‘no man can take away’.³ The movement had wide support; at one stage, 303 societies emerged in the provinces around Tokyo, at least 120 in the north-eastern region, and approximately 200 in western and south-western Japan.⁴ This eventually led to the Emperor’s proclamation in 1881 that a national diet (parliament) would be established, and a constitutional monarchy created by 1890. In the meantime, the government became more autocratic in the early 1880s. Already in the mid-1870s, the government had enacted the Libel Act and the Regulations on Newspapers in order to limit the freedom of speech, attempting to keep dissatisfied people under control. A major rebellion by former samurais in Satsuma in 1877 certainly influenced the course of events. It was, in a way, impossible to implement unpopular economic measures and at the same time to grant political freedom to the people.⁵ The Ordinance on Public Meetings, which significantly restricted such meetings, was enacted in 1880. Further restrictions on public meetings were introduced in 1890, coinciding with the opening of the Imperial Diet.

² In general, see C. Nakane et al. (eds), Tokugawa Japan: The Social and Economic Antecedents of Modern Japan (Tokyo, 1990). ³ M .B. Jansen (ed.), The Emergence of Meiji Japan (Cambridge, 1995), p. 241. ⁴ Ibid. p. 243. See also D. Irokawa, Kindai Kokka no Shupppatsu (The Emergence of the Modern State), Revised edition (Tokyo, 2006), pp. 126–159. ⁵ J. Banno, Taikei Nihon no Rekishi (Compendium of the Japanese History), vol. 13 (Tokyo, 1996), pp. 78–79.

The History of Modern Japanese Law

15

After the Emperor’s proclamation of the intention to introduce constitutional democracy in 1881, the popular rights movement more or less lost its momentum. Moderate factions developed into political parties, while some factions ended up in outright rebellion caused by the serious economic difficulties experienced by people in rural areas. Such rebellions were quickly suppressed by the government.⁶ In 1889, preceding the opening of the Imperial Diet, the first Constitution of Japan was ‘granted’ to the subjects by the Emperor. The enactment of a Constitution was a development related to the establishment of the Imperial Diet. Already in the 1840s the Dutch Constitution had been translated into Japanese, followed by a translation of the French Constitution in 1873. Some Japanese therefore had a vague idea about the role of a constitution. The Senate had drafted a constitution commissioned by the Emperor in 1876, but this was considered to be unsuitable for Japan and was abandoned. It was the intention of the government to proclaim the divine origin of the Imperial Family and the sovereignty of the Emperor, but the draft had been unsatisfactory from this point of view. When the Popular Rights Movement was at its height, various private drafts of the constitution, primarily of a British parliamentary type, appeared. However, Tomomi Iwakura, who was a councillor at that time, considered it more appropriate to enact the constitution on the initiative of the Emperor. In 1882, Hirobumi Itoh, later to become the first Prime Minister, was sent to Europe to study the constitutions of European countries. Germany was chosen as the primary place of research. Itoh consulted F. J. Stahl in Berlin and Rudolf von Gneist in Vienna, both of whom represented the conservatives among German and Austrian scholars. Germany was intentionally selected as a model, because it was a relatively backward country at that time in Europe, but had just been unified and its situation was considered to resemble Japan’s. In Germany, the Kaiser of the German Empire apparently had strong power and authority, while the British and French constitutions were regarded as being too liberal and democratic. In contrast to the private drafts, which were proposed by the supporters of the Popular Rights Movement, there was a view which supported an Emperorcentred, semi-religious political system. Thus, Eifu Motoda’s draft constitution provided for the divine character of the Imperial Family, as well as its perpetuity as the sovereign of Japan. It was a clear proclamation of Emperor-centred absolutism. Itoh prepared a draft constitution with the assistance of a German adviser, Hermann Roesler, after his return from Europe. Roesler defended a constitutional system that was more conservative than the Prussian Constitution of 1850, by eliminating even the limited democratic institutions that had been imported into Germany from England via France and Belgium. The Japanese members ⁶ K. Nakamura, The Formation of Modern Japan: As Viewed from Legal History (Tokyo, 1962), pp. 48–56.

16

The Basis of the System

who participated in the drafting process went even further. One point of disagreement was the status of the Emperor. Roesler refused to give the Emperor a religious status, at least in the Constitution, while the Japanese side intended to provide for the eternity of the Emperor’s rule. On the other hand, Roesler defended universal suffrage for the Lower House.⁷ There was a firm belief on the part of the Japanese participants that the power of the Emperor should be left as free as possible from any control exercisable by the Diet. The Imperial Family was to be left outside the realm of the Constitution. To this end, rules concerning the succession of the Emperor and other matters regarding the Imperial household were left outside the Constitution, and a separate Act on the Imperial household (kōshitu tenpan) was adopted. This Act was not even promulgated, ostensibly because it was a private Act of the Imperial household. The draft constitution was discussed in the Privy Council, rather than in the Senate. People were not informed of its contents until the day of promulgation. The Constitution began by proclaiming the sanctity and inviolability of the Emperor and the perpetuity of his rule. Accordingly, the legend that an ancestor of the Emperor had founded the nation around 2600 BC, which was never been substantiated historically, gained official endorsement. The Emperor was the sovereign who ruled the country in accordance with the provisions of the Constitution. However, a wide range of matters was left to the prerogative of the Emperor. The Imperial Diet was there merely to assist and support the Emperor. Laws were enacted by the Diet but needed imperial approval. The Emperor also had broad power to issue imperial edicts. It should be added that only 1.1 per cent of the populace even had a vote in this Diet, and with limited power. Cabinet ministers were appointed by the Emperor, while the Diet had no say in the selection. Ministers were responsible to the Emperor, not to the Diet. Later it became constitutional practice that the power of the Emperor as the supreme commander of the armed forces remained outside the control of the Diet and the Cabinet. The Constitution had a limited list of the ‘rights and duties of subjects’. These included freedom of residence, rights not to be arrested and detained without a legal basis, freedom of correspondence, freedom of religion, and freedom of association and expression. However, these rights and freedoms were guaranteed only within the framework of statutory laws, i.e. the legislature was free to enact laws that restricted those rights and freedoms. Indeed, the Publication Ordinance, which was enacted in 1893, accommodated a system of strict censorship. Freedom of association was also severely restricted by later legislation. Freedom of religion presupposed the supremacy of Shintoism. ⁷ The history of this constitution is given in T. Fukase, ‘Meiji kenpō Seitei o meguru Hō-shisō (Legal Thoughts concerning the enactment of the Meiji Constitution)’, in Y. Noda and J. Aomi (eds), Gendai Nihon Hō-shisōshi (History of Modern Japanese Legal Thoughts) (Tokyo, 1979), pp. 164–214.

The History of Modern Japanese Law

17

Supporters of Emperor-centred nationalism were not fully satisfied with the relatively secular nature of the Constitution. They favoured an even more religious and ethical constitution. In order to appease them, the Imperial Rescript of Education was promulgated by the Emperor before the enactment of the Constitution. The Rescript was a mixture of revived Confucianism and Shintoism targeted against westernisation. It proclaimed that loyalty to the Emperor, the Confucian obligation of filial piety, and obedience were the essence and virtue of the nation. Subjects were to offer themselves courageously to the State—which was identified with the Emperor—should any emergency arise.⁸ This was intended to be the fundamental ethical code of the nation, and indeed served as such until the end of the Second World War. It should be noted that the combination of Shintoism and the Emperor’s rule with elements of Confucianism had not always been the norm before the restoration of the Emperor’s rule in 1867. There were instances where former emperors retired to a Buddhist temple, and some emperors were enthroned in a Buddhist manner. In fact, Shintoism and Buddhism were not necessarily strictly demarcated. There was a school of thought maintaining that the supreme goddess of Shintoism was a reborn Buddha, and another school of thought reversing this order—Buddha was the reborn goddess. The government formed after the fall of the Tokugawa Shogunate adopted a policy of favouring Shintoism in order to strengthen the authority of the Emperor. Shintoism, which had largely been a spontaneous religion of the people, emanating from ancestor worship, was thus transformed into a State religion.⁹ The enactment of the Constitution, together with the introduction of the cabinet system and the opening of the Imperial Diet, marked the consolidation of the new regime. With the establishment of the new regime, the government was in urgent need of a systematised legal system to replace the obsolete feudal law. Laws of the previous period were unsystematic and mostly differed from one domain to another. In order to consolidate the rule of the Emperor, a powerful and highly centralised political system was required. Codified law was to play a significant role to support such a system. There was another reason to develop a modern system of law. The Shogunate had no choice but to sign unequal treaties with foreign countries at the end of its reign. These treaties had imposed unfavourable terms on Japan, such as judicial immunity for foreigners, primarily because the Japanese legal system was thought to be insufficiently developed to be applied to them. Japanese rulers considered it necessary to modernise the legal system in order to convince foreign countries that there was no problem in acknowledging Japanese jurisdiction over foreigners in Japan.

⁸ R. Storry, A History of Modern Japan, revised edition (Harmondsworth, 1982), p. 119. ⁹ A. Yoshie, Shinbatsu-Shūgō (Syncletism of Shintoism and Buddhism) (Tokyo, 1996), p. 192.

18

The Basis of the System

The Emperor’s government initially looked towards Chinese law for a model. The first criminal code—shinritsu-kōryō—of 1870 was primarily based upon the ritsuryō codes of the seventh century, as well as the laws of Ming and Ching China. However, the ritsuryō and Chinese codes proved to be obsolete and unsuitable for a nation aspiring to achieve equal status with European countries in its economic and military strength. It was only natural that political leaders turned to Europe for a better model. In fact, despite its long isolationist policy, some European political and legal ideas were already known to the Japanese under the Tokugawa Shogunate through the Dutch. For instance, the idea of natural law was imported into Japan from Holland in the early nineteenth century. However, it was French rather than Dutch law which first influenced Japanese law. France was considered to have the most developed codified legal system at the time when the Emperor’s government started looking for a model in the 1870s. The first Minister of Justice, Shinpei Etoh, was particularly in favour of French law, and had French codes translated into Japanese. Two advisers from France, George Boussquet and Gustave Boissonnade, helped the Japanese to understand the French system. The first Criminal Code, enacted in 1880, was primarily based upon the French Code, though with some influence from the Belgian and Italian codes. The earlier judicial system, including the system of practising attorneys, closely reflected the French system. The first Code of Criminal Instruction, enacted in 1880, was also a replica of the French Code. This period of French influence did not last long. There was a gradual shift towards German law in the 1880s. The fall of Etoh was not the only cause of this shift: it was the difference between the political systems of these countries that really mattered. In light of the Popular Rights Movement, which demanded the introduction of a democratic parliamentary system, the government presumably developed some reservations about the French system. The German constitutional monarchy suited Japanese requirements, since the Kaiser was relatively free from parliamentary control. Moreover, Germany was in the process of enacting its own codes and therefore had the most recent codified laws. The adoption of the Constitution based on the German system was the final move away from French and towards German law. First came the Code of Civil Procedure of 1890, which followed the German and Austrian model. The Commercial Code was drafted with the assistance of a German adviser and was promulgated in the same year. However, together with the Civil Code, which was based upon the Code Civil, the Commercial Code was caught in a fierce controversy and it took another decade for the Code to take effect. The German influence was not limited to newly enacted laws. Some earlier laws of French origin were replaced by new laws of German origin. Thus, the Law on Court Organisation of 1890 partly replaced the Code of Criminal Instruction. The Criminal Code was replaced by a new Code in 1907.

The History of Modern Japanese Law

19

The history of the Civil Code is much more complicated and is dealt with in a separate chapter below. It is sufficient to mention here that the original Code was prepared by a French adviser, Gustave Boissonade, and was promulgated in 1890, but was abandoned in the face of strong opposition. A new Code, based primarily on the Pandekten system, was finally enacted in 1896–1898. The enactment of the major codes was completed in the 1890s. In the meantime, legal education had developed rapidly. The Ministry of Justice founded a school of law in 1871. French law was primarily taught there, while in Kaisei School, which dated back to the Tokugawa period, lectures on English law were given. These schools merged and became the Law Faculty of the University of Tokyo. Private schools of law were founded in the same period. Lectures were initially given in foreign languages, since it had been difficult to translate legal concepts of European origin into Japanese. It was only in the 1890s that it became possible to give lectures in Japanese.¹⁰ In the late nineteenth century Japan embarked on a rapid industrialisation process under the slogan ‘enrich the country and strengthen the army’. The development of the economy created a considerable gap between the wealthy industrialists on one hand and deprived peasants and urban workers on the other. Instances of social unrest amongst poor peasants and the urbanised poor began to increase in the late nineteenth century. The government took legislative measures to control such unrest and also to put workers’ and peasants’ movements under control. First, in order to protect the rights of those in weaker social positions, laws such as the Law on the Lease of Land and the Law on the Lease of Houses were enacted in 1922. Secondly, a conciliation procedure was introduced for settling disputes concerning arable land tenancy and labour. It was hoped that the introduction of conciliation would mitigate social friction. At the same time, laws aimed at controlling political and labour movements were enacted. The Public Security and Police Law of 1900 proved to be effective in controlling labour movements. This was replaced by the Law on the Maintenance of Public Security in 1925. Those who organised or knowingly participated in an organisation that purported to change the State constitution or to deny private property were to be penalised by a maximum of ten years’ imprisonment. The Law was amended in 1928: those who created organisations which purported to change the fundamental structure of the nation, and leaders of such organisations, could now be sentenced to death. In terms of internal politics, there were some developments in favour of strengthening democracy in the 1910s. Some political parties developed and there was a spell of party cabinets—a cabinet supported by a political party within the Diet. Voting rights for men were introduced (women had to wait until the end of ¹⁰ University of Tokyo, Tokyo-Daigaku Hyakunen-shi (Centenary of the University of Tokyo) (Tokyo, 1984).

20

The Basis of the System

the Second World War). However, party cabinets proved to be powerless in the face of growing interference by the military. The Diet gradually turned itself into a ceremonial body supporting the invasion of China, and eventually the Second World War. After the start of the war between China and Japan in 1932, the remains of embryonic democracy in Japan were removed. Japan withdrew from the League of Nations in 1933. Two successive rebellions by army officials, the second of which involved battalions of the army, finally led to the demise of civilian rule in 1936. An official creed of the Emperor as a sacred entity—a descendant of the sun goddess demanding selfless devotion of people—was promoted. Deviance from the official ideology was not tolerated. Freedom of thought and expression were severely restricted by the Law on the Maintenance of Public Security, which was amended to make the punishment even more severe. This imperial totalitarian regime lasted until the eventual defeat of the country in 1945.

2. Post-War Reforms The third stage of the reception of foreign law took place after the Second World War. The War ended with the acceptance of the Potsdam Declaration in 1945. Japan was placed under the control of the Supreme Commander of the Allied Powers (SCAP). The occupation took the form of indirect military rule, i.e. the Japanese government was allowed to function under supervision by the SCAP. The Occupational Forces were overwhelmingly American, and reforms were therefore carried out under a strong American influence. Demilitarisation and democratisation were the fi rst steps taken by the Allied Forces. The armed forces were dismantled, and suspected war criminals prosecuted. Those responsible for promoting the War were expelled from their positions. The Law on the Maintenance of Public Security was abolished and political prisoners were released. It was proclaimed that Shintoism was to be separated from the State. The Allied Forces recommended five major reforms in 1945: equality of men and women, encouragement of trade unions, liberalisation and democratisation of education, liberation from autocratic rule, and democratisation of the economy. This was followed by a directive on agrarian reform. As for gender equality, part of the Civil Code that dealt with family law and succession underwent a total revision. Women were given the vote for the first time in the election of 1946. Concerning labour law, three major labour laws, which enhanced the rights of the workers, were promulgated. The educational system also underwent a significant change. Education in Shintoism and Confucian ethics was abolished. The Fundamental Law on Education was enacted in 1947 and emphasised peace, justice, and respect for individuals. Democratisation of the economy was realised by the dissolution of business conglomerates (zaibatsu), which had dominated

The History of Modern Japanese Law

21

the economy. The Anti-Monopoly Law (competition law) was enacted in 1947 in order to prevent monopolisation and to maintain fair competition. These measures signified a radical change of the then existing political, economic, and social system and almost amounted to a revolution. Civilian experts and advisers who accompanied the military from the United States played a significant role in shaping these reform policies. These reform measures were embodied in the Constitution enacted in 1946. This Constitution, which remains in effect today, has introduced significant changes in the political and social system of Japan. First, it was proclaimed that sovereignty rested with the people and not the Emperor. The Diet elected by universal election became the supreme body of State power instead of the advisory body it had been. The Emperor became a ‘symbol of the state and the unity of people’ and was deprived of any political power. Secondly, the Constitution provided for the renunciation of war as a sovereign right of a nation and the use of force or threat as means of settling international disputes. After the dissolution of its armed forces in 1945, Japan did not maintain any military force for some years. Thirdly, the new Constitution incorporated a Bill of Rights, which was far more extensive than that of the previous constitution, and safeguarded in a more secure way; judicial review was introduced in order to guarantee these rights. The Constitution and most of the other laws enacted during the occupation had been strongly influenced by US law. For instance, the three major labour laws, the Code of Criminal Procedure, the Securities and Exchange Law, and the Anti-Monopoly Law were all strongly inspired by US law. This was only natural, since legal advisers to the SCAP were primarily Americans; some of them were keen ‘New Dealers’. On the other hand, most of the major codes dating back to the pre-war period remained intact. The Criminal Code, the Code of Civil Procedure, and the Commercial Code were left without any significant amendment. The Civil Code also remained in force, except Parts four and five on family law and succession respectively. As early as 1948 there was a shift in occupation policy, caused by the increasing tension between the United States and the Eastern Bloc. Policies such as disarmament, encouragement of the trade union movement, and dissolution of business conglomerates were thought to have gone too far. With the outbreak of the Korean War and the development of the Cold War, government policy shifted from disarmament to rearmament. The Police Auxiliary Force was founded, and later developed into the Self Defence Force. Today the Japanese Self Defence Force is reputed to be one of the most powerful armed forces in Asia. In 1951 Japan signed the Peace Treaty with the Allied Nations which took effect the following year, and marked the end of the occupation. At the same time the US–Japan Security Treaty with its bilateral duty of defence was signed. The first US–Japanese Security Treaty was signed in 1951; it has been renewed up to the present day.

22

The Basis of the System

The policy of ‘rectifying the excess’ of the initial reforms continued to a certain extent after the end of the occupation. For instance, the Anti-Monopoly Law of 1947 was substantially amended in 1953, ‘in order to adapt it to the situation in Japan’. This is not to say that the ‘pre-war system’ was restored after the end of the occupation. After all, most Japanese were not reluctant to accept measures adopted on the initiative of the Allied Forces. On the contrary, people who had suffered under the police State before 1945 actually welcomed these measures. Radical changes introduced by the Allied Forces were successfully put into practice without overt resistance from the general public. Political and social values promoted by the SCAP were embedded firmly in the minds of most Japanese and are considered to be almost unchangeable. This has probably worked against various attempts to bring substantial changes to the achievements of the post-war reforms. Proposals to amend the Constitution (which was ostensibly imposed by the Americans) have never really gained popular support. There has been not a single amendment to the Constitution so far. However, since the mid-1990s, there are views that the Constitution, after four decades, should be amended, particularly in order to let Japan play a larger role in international peace-keeping operations.

3. Contemporary Reforms Almost half a century after the post-war law reform, which was the last major reform since the nineteenth century, significant changes started to take place in the 1990s. In the 1960s, Japan experienced high economic growth largely supported by the government industrial policies. The total amendment of the Foreign Exchange and Foreign Trade Control Law, which took effect in 1980 (renamed the Foreign Exchange and Foreign Trade Law in 1997) liberalised foreign exchange control and laid the basis for the internationalisation of the economy. In the second half of the 1980s, as the internationalisation of Japanese economy progressed, the economy entered the ‘bubble period’ when the prices of shares and real property tripled. However, the ‘bubble’ burst in 1990, and the economy has been slow to recover since then. The increasing internationalisation of the economy made it impossible for Japan to continue its rather insulated system. Japan came under pressure to change its long-standing system and approximate it to international standards. A good example was competition law. As the Japanese economy enjoyed high growth, companies gained significant positions in the world economy, and trade friction with other countries intensified. Already in the 1970s, there were disputes over the export of textiles, cars, and steel, which resulted in voluntary export restraints on the part of Japan. The export of semi-conductors also became an

The History of Modern Japanese Law

23

issue, and successive agreements were signed with the United States under the leverage of unilateral sanctions provided by the US Trade Act. As those sector by sector approaches turned out to be unsuccessful from the viewpoint of the United States, the adequacy of the entire economic system in Japan came to be targeted. The criticism was that Japan was gaining competitive edge by resorting to unfair trade practices and cartels. The view of the United States was that the structure of the Japanese system as a whole should be addressed and changed if necessary. Based upon such ideas, the Structural Impediments Initiatives Talks (hereafter SII Talks) between the United States and Japan started in 1989. The final report of the Talks covered a wide range of topics which encompassed competition, shareholders’ rights, public procurement, deregulation, and patent procedure. The Talks resulted in amendments to various laws.¹¹ The reforms that took place as a result of the SII Talks were extensive. The Anti-Monopoly Law, which had not been particularly actively applied, was amended and its implementation was substantially reinforced. The company law, at that time accommodated in the Commercial Code, was amended in order to strengthen the rights of minority shareholders. The patent procedure was streamlined and made speedier. The Securities and Exchange Law has been amended, not only as a result of the SII Talks, but due to the necessity of approximating it more closely to the international standard in areas such as the regulation of insider trading and disclosure. One of the issues covered by the SII Talks was deregulation. The Japanese economy was a highly regulated economy with the government keeping firm control over the companies via its power of granting licences and permissions. It was not at all a fair or transparent system. This was criticised by the United States and the European Union for effectively inhibiting new entry into the market and reducing competition, thus enabling Japanese companies to defend their market from foreign competitors.¹² It was not only foreign criticism that led the government to initiate a further reform. In the aftermath of the collapse of the ‘bubble’ economy, companies were struggling to survive by going into new areas of business, but were facing serious hurdles because of excessive regulation. In many areas, entry was simply impossible. Regulations, that once protected them from new entrants in the market, were now working against them. Therefore, the move for deregulation gained support within Japan. In 1994, the Administrative Reform Committee was founded by the government. There was a sub-committee on deregulation within this organisation. The ¹¹ Nichibei-Kōzō-Kyōgi Saishū-Hōkoku (Final Report of the US-Japan Structural Impediments Initiatives Talk) (Tokyo, 1990). ¹² See, for instance, Proceedings of the Second Seminar of European Union/Japan Competition Policy (Brussels, 1995), p. 37. A dialogue between Japan and EU on the regulatory reform has been continuing since 1994: .

24

The Basis of the System

next year, the first Deregulation Promotion Programme was endorsed by the government.¹³ One of the most highly regulated areas was the financial industry. The necessity of deregulating the financial sector had been felt for some years. The segregation and compartmentalisation of the industry, including the segregation of the banking and securities businesses, had once served to protect the industry from competition, but later became a ‘yoke’ restricting the development of business. A minor reform was implemented in 1993, but it was only in 1997 that a fully-fledged reform programme, which was dubbed as the ‘Financial Big Bang’, following the Big Bang in the UK, was launched. The idea was to make the Japanese financial market fair, transparent, and global. The measures have continued to be implemented since then, although the timing was not the best in light of the serious financial crisis beginning in 1998. The paternalistic and detailed prior regulations were to be replaced by post-de facto regulation based upon self-accountability. As a result of the reform, the hitherto highly segmented and regulated banking system has been dismantled. Deregulation, or regulatory reform, is not only about removing regulations. It is also aimed at increased fairness and transparency, as well as the building of infrastructure that ensures fairness and transparency. In 2001, the government launched a Three Year Programme of Regulatory Reform. In the area of law, the Programme listed the realisation of a justice system which would be more accessible to the general public. The review of the Civil and Commercial Codes was also on the list. This was followed by the creation of the Office for the Promotion of the Justice System Reform in the same year (for detail, see Chapter 3). This Justice System Reform was a far-reaching reform, extending beyond the judiciary. New procedures, such as the Labour Dispute Adjudication Procedure, were introduced. Procedures involving intellectual property rights were streamlined and the Intellectual Property High Court was founded in order to speed up the process and to get more experts involved. Since then, a significant number of Codes and Laws have been newly enacted or substantially amended. Just to mention a few, the Civil Code was amended several times to accommodate new categories of juridical persons. Company law, which was previously accommodated in the Commercial Code, was made into a new separate law—the Companies Law of 2005. The Anti-Monopoly Law was again amended, and the holding company system, which was totally prohibited by the post-War reform, was liberalised. The Code of Civil Procedure, which was totally amended in 1996 nearly a century after its enactment, was further amended. The Arbitration Law was newly enacted. Labour legislation has undergone significant changes, and a new law—the Labour Contract Law—was ¹³ See J. Nakagawa et al. (eds), Kiseikanwa no Seiji-Keizaigaku (Political Economy of Deregulation) (Tokyo, 2000). For the history of the regulatory reform .

The History of Modern Japanese Law

25

enacted in 2007. Intellectual property legislation has also been amended, particularly by increasing the penalties and making the remedies effective. The Securities and Exchange Law was replaced by a new law—Financial Instruments and Exchange Law—in 2006. Not all of the law amendments in the 2000s can be directly associated with the regulatory reform. The insolvency system was substantially reformed from the late 1990s. The Anti-Monopoly Law was amended again in 2007, not necessarily as part of the regulatory reform, but in order to align it with other countries in combating cartels and other breaches. Japan has also ratified treaties such as the Treaty for the Abolition of Gender Discrimination and the Treaty on the Status of Refugees, which duly resulted in the amendment of relevant laws in recent years. With the sheer scale of the changes which took place, the past two decades may be characterised as another period of major law reform, after the period of modernisation and the post-war reform.

2 The Sources of Law 1. The Rule of Law The rule of law is the fundamental principle underlying the present Constitution. The previous Constitution, enacted in 1889 (hereinafter referred to as the 1889 Constitution), incorporated the principle of Rechtsstaat, which corresponded to the concept of formelle Rechtsstaat in contrast to materielle Rechtsstaat in Germany. State power was to be exercised within the framework of statutory laws enacted by the Emperor with the ‘participation’ of the Imperial Diet. The Emperor was to rule the nation in accordance with the provisions of the Constitution (Art. 4). However, this principle was undermined by the power of the Emperor to issue imperial edicts in order to maintain public security or to cope with natural disasters (Art. 8, para. 1). It also stipulated that the Constitution did not prevent the Emperor from exercising his power during a war or state of emergency (Art. 31). Fundamental rights of citizens were guaranteed by the Constitution only within the limits established by statutory laws. Constitutional review did not exist, and judicial control over the administration was allowed only in limited cases when specified by law. In contrast, the present Constitution, which was enacted in 1946, is regarded as the Supreme Law of the nation. It provides that no law, ordinance, imperial edict, or other act of the government against the Constitution is to have legal effect (Art. 97). Fundamental rights guaranteed by the Constitution are regarded as inviolable even by way of legislation. In order to safeguard the supremacy of the Constitution, the courts are now empowered to review the constitutionality and legality of laws and ordinances as well as administrative decisions. The present Constitution explicitly guarantees due process of law. It provides that no person shall be deprived of life or liberty, nor shall any other criminal penalty be imposed, except in accordance with the procedure established by law (Art. 31). This provision was modelled on the Fourteenth Amendment of the US Constitution, which deals primarily with procedural due process. However, unlike its US counterpart, the Japanese provision is interpreted by the courts to cover substantive as well as procedural due process (see Chapter 5).¹ ¹ Judgment of the Supreme Court, 10 September 1975, Minshū 29-8-489; Tokushima Public Security Regulation case.

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

The Sources of Law

27

Japanese law is primarily based on codified laws. Unlike the Anglo-American system, statute law plays the primary role. However, this does not mean that case law or other sources of law are not significant. On the contrary, case law represents a significant part of Japanese law. Major statutes which set out the basic legal framework in a certain area are denoted as codes. There are six major Codes: the Constitution, the Civil Code, the Criminal Code, the Commercial Code, the Code of Criminal Procedure, and the Code of Civil Procedure. Apart from the Constitution, the Code of Criminal Procedure, and the Code of Civil Procedure, the other codes were enacted in the late nineteenth or early twentieth century. Parts of the Civil Code concerning family and inheritance were totally amended after the Second World War. The Code has undergone a series of changes since the early 2000s, and now an amendment to the part of the Code concerning the law of obligations is being contemplated. The Commercial Code has also undergone a number of amendments since its enactment. In 2005, the company law part of the Commercial Code was separated and the Companies Law was enacted. The Civil Enforcement Law in 1979 and the Law on Civil Interim Measures in 1989 replaced part of the Code of Civil Procedure which, in turn, was totally amended in 1996 and took effect in 1998. In addition to these Codes, individual laws deal with more specific matters. For instance, while there is no administrative code, various individual laws such as the Cabinet Law, the Law on Administrative Litigation, the Law on Compensation by the State, City Planning Law, and other laws comprise administrative law.² Labour law is composed of the Labour Standards Law, the Trade Union Law, the Law on the Adjustment of Labour Relations, and the newly enacted Labour Contract Law. There are various individual laws such as the Banking Law, the Financial Instruments and Exchange Law, the Anti-Monopoly Law (competition law), the Patent Law, Copyright Law, Trademark Law, etc. They have the same legal status as the Codes, but cover more specific fields. The Constitution is the ‘Supreme Law of the nation’ followed by statutory laws enacted by the Diet (Parliament); then cabinet orders; then ministerial ordinances. As a rule, provisions of specialised laws take precedence over the provisions of a more general law if there is a conflict. Thus, when provisions of the Civil Code and the Commercial Code both apply, the latter takes priority. In addition to the laws and ordinances enacted by the central government, local authorities are empowered to enact local regulations within the limit of the law. A database of laws and ordinances in force is maintained by the Ministry of Internal Affairs and Communication. As of 5 September 2008, there were 1,788 laws, 1,928 cabinet orders and the pre-War imperial decrees, and 3,591 ministerial ² For an outline of Japanese administrative law in English, see K. Tsuji (ed.), Public Administration in Japan (Tokyo, 1984). See also K. Uga, ‘Development of the Concepts of Transparency and Accountability in Japanese Administrative Law’, in D. Foote (ed.), Law in Japan: A Turning Point (Tokyo, 2007), p. 276ff.

28

The Basis of the System

ordinances. The oldest law in force is the statute which prohibits duels, enacted in 1889.³

2. The Constitution (1) Historical background The present Constitution was adopted in 1946 and took effect the following year. In 1945, shortly before the end of the Second World War, the United States, the United Kingdom, and the Republic of China issued the Potsdam Declaration calling for Japan’s surrender and its subsequent demilitarisation and democratisation. The acceptance by the Japanese government of this declaration made a fundamental amendment of the 1889 Constitution inevitable. After the unconditional surrender, the Japanese government formed a committee to conduct research on possible amendments to the Constitution. The primary concern of this committee was to preserve the basic features of the 1889 Constitution, namely the status of the Emperor. Strengthening the protection of individual rights was given little attention. The committee eventually prepared a draft, which was essentially conservative, preserving the system under the 1889 Constitution as much as possible. The Supreme Commander of the Allied Powers (SCAP) and the US legal advisors found this draft unsatisfactory in light of the declared aims of demilitarisation and democratisation. Therefore the SCAP sent detailed guidelines of a new Constitution to the Japanese government, which developed another draft in accordance with the SCAP’s suggestions. This draft was submitted to the Imperial Diet pursuant to the procedure laid down in the 1889 Constitution, and was adopted in 1946. This Constitution remains in force to the present day without any amendment so far.⁴ Since the new Constitution was drafted on the initiative of the Allied Forces during the occupation, and was against the intention of the ruling élite at that time, some people believe that the Constitution was ‘imposed’ on Japan by the Allied Forces. They propose to amend the present Constitution and restore some features of the 1889 Constitution, including the removal of the renunciation of the war clause, formal recognition of the Self Defence Force, and the recognition of the Emperor’s status as the sovereign head of State. It is also argued that the present Constitution overemphasises the rights of individuals, while neglecting their duties towards the nation.⁵ ³ . ⁴ H. Tanaka, ‘The Conflict Between Two Legal Traditions in Making the Constitution of Japan’, in R. E. Ward and Y. Sakamoto (eds), Democratizing Japan: The Allied Occupation (Honolulu, 1987), pp. 107–126. ⁵ J. M. Maki, Japan’s Commission on the Constitution (Seattle, 1980), pp. 244–289.

The Sources of Law

29

Proposals like this surface from time to time, mostly from conservative quarters. The ruling Liberal Democratic Party has always maintained that an ‘original Japanese Constitution’ is necessary, but so far they have not been successful. Despite the strong influence of the Allied Forces on the drafting process of the Constitution under unusual circumstances, its basic principles, such as the renunciation of war, the inviolability of fundamental rights, and above all democracy, have been accepted by the great majority of the Japanese people. It should also be remembered that the lower house of the Imperial Diet, which discussed the draft constitution, approved it by an overwhelming majority.⁶ In recent years, proposals to amend the Constitution have emerged on slightly different grounds. Some people consider the present Constitution, particularly Article 9, which provides for the renunciation of war, to be too rigid in the light of the necessity of contributing to international peace-keeping operations. A new law on the cooperation with the UN peace-keeping operations was enacted within the framework of the Constitution in 1992,⁷ but some politicians are of the view that this is insufficient and that further commitment should be possible with a constitutional amendment. After the terrorist attack on the Word Trade Center Building in 2001, the Special Measures Law against Terrorism was enacted, followed by the Special Measures Law on Supporting Iraq. These laws enable the dispatch of the Self Defence Force overseas under certain circumstances which go beyond peace-keeping operations.⁸ Since the procedure for amending the Constitution is very rigid, it is unlikely that there will be a change in the near future, but there is a continuing debate on this issue. In the early 2000s, both houses set up a research committee for constitutional reform and came up with some proposals. So far, there is a consensus amongst the political parties only on the inclusion of new rights, such as the right to privacy and the right to environment. However, two major parties agree that Article 9, para. 2, which declares that Japan shall not maintain military power, should be removed or changed.⁹

(2) Fundamental principles underlying the Constitution There are three fundamental principles of the Constitution. First, sovereignty rests with the people, and not the Emperor, as it did under the previous Constitution. The Diet, the ‘Supreme Body of Legislation’, is composed of members who are elected representatives of the people. The Emperor, who was the sovereign before the end of the Second World War, now assumes the function of a ‘symbol’ of the nation and the unity of the people. The Emperor performs a limited range of ⁶ M. Itoh, Kenpō (Constitutional Law), 3rd edn (Tokyo, 1994), p. 172. ⁷ Law No. 79 of 1992. ⁸ K. Takahashi, Rikken-shugi to Nihonkoku-Kenpō (Constitutionalism and the Constitution of Japan) (Tokyo, 2006), pp. 56–57. ⁹ T. Nonaka et al. (eds), Kenpō (Constitutional Law), vol. 1, 4th edn (Tokyo, 2006), pp. 77–80.

The Basis of the System

30

acts upon the advice and approval of the Cabinet. These acts include the promulgation of amendments to the Constitution, laws, ordinances, and treaties; the convocation of the Diet; the dissolution of the Lower House; the attestation of the appointment of ministers and other officials; and the reception of foreign ambassadors. He also appoints the Prime Minister and the Chief Justice. The appointment is actually a formality. The Prime Minister and the Chief Justice are nominated by the Diet and the Cabinet respectively. Thus, the power of the Emperor is limited to ceremonial matters and the real decision-making power resides elsewhere. The second fundamental principle of the Constitution is pacifism and peaceful cooperation with foreign countries. The Constitution has a clause which renounces ‘war as a sovereign right of a nation’ and the ‘threat or use of force as a means of settling international disputes’. It is declared that ‘land, sea and air forces as well as other war potentials are not to be maintained’ (Art. 9). It is understood that the right of defence is not waived by this clause, but the opinion is divided as to whether the maintenance of the Self Defence Force is compatible with this clause or not. The government contends that the maintenance of a ‘minimum necessary force’ for defence is compatible with the Constitution. In reality, the Self Defence Force has developed into a powerful military force. As regards nuclear weapons, it is the official policy of the government not to develop them, not to allow them to be brought into the country, and not to keep them. The third fundamental principle of the present Constitution is the respect for fundamental human rights. There is an extensive bill of rights in the Constitution. Fundamental rights guaranteed by the Constitution are ‘conferred upon the people as eternal and inviolable rights’ (Art. 11). In order to safeguard these rights and freedoms, the courts are given a general power of constitutional review. Furthermore, actions of the executive branch are generally subject to judicial review insofar as they affect rights or freedoms of the people. In this context, the Law on the Courts provides that the courts are empowered to decide ‘all kinds of legal disputes’ (Art. 3, para. 1). Accordingly, the law on administrative litigation of 1948 provided for special rules to the Civil Procedure Code. This was replaced in 1962 by a new comprehensive Administrative Litigation Law.¹⁰ Administrative litigation is supplemented by the administrative complaints system.¹¹ As for controls over the decisionmaking process of administrative agencies, the Law on Administrative Procedure was enacted in 1993.¹² Also, a body of case law has developed in this area. For example, requirements of a hearing and notice in administrative procedure have been acknowledged by the court, despite the absence of a specific statute.

¹⁰ Law No. 139, 1962.

¹¹ Law No. 160, 1962.

¹² Law No. 88, 1993.

The Sources of Law

31

(3) The procedure for constitutional amendment The present Constitution has strict requirements for amending the Constitution. Any amendment must be proposed by the Diet with the support of a two-thirds majority of each house. A majority vote in a popular referendum is also needed (Art. 96). A new law regarding the amendment procedure of the Constitution was enacted in 2007 but has not taken effect yet.¹³ This Law covers the procedure of referendum. It is in reality very difficult to meet these requirements, and since the enactment in 1946 not a single amendment has been made. Whether the Constitution can be amended by a fait accompli instead of by the formal procedures laid down in the Constitution has been an issue of controversy for some time. This is usually discussed in relation to the status of the Self Defence Force. The military forces of Japan were dismantled after the Second World War. The Constitution explicitly renounced both war as a sovereign right of the nation and the threat or use of force as a means of settling international disputes. It also declared that Japan would never maintain military forces (Art. 9). The outbreak of the Korean War resulted in a change in US policy. The rearmament of Japan was considered to be indispensable as a barrier against Communism. Therefore, the then Police Auxiliary Forces were transformed into the Self Defence Force, which developed into a powerful military force in the following three decades. This development was not foreseen by the Constitution. The constitutionality of the Self Defence Force has been contested in the courts several times. Some lower court decisions have found it unconstitutional, but the Supreme Court has refrained from ruling on this issue, allowing the question to remain open. Some people argue that the shift in governmental practice and the accumulation of such facts may alter the Constitution without recourse to a formal amendment procedure. However, without the judgment of the Supreme Court on this matter, and in the absence of popular acceptance of the change, it is difficult to acknowledge such ‘transformation of the Constitution’ (Verfassungswandel) in line with the German theory from the pre-war period. A majority of specialists of constitutional law reject this theory, which was originally imported from Germany.¹⁴ It is generally agreed that there is a limit to the amendment of the Constitution. The Constitution itself declares in its preface that democracy is the ‘universal principle of mankind’ and forms the basis of the Constitution. One provision proclaims that the fundamental rights guaranteed by the Constitution are held ‘for all time inviolable’ (Art. 97). Whereas the German, Italian, and French Constitutions have a provision explicitly prohibiting amendments which contradict the principles underlying the Constitution, the Japanese Constitution has ¹³ Law No. 51, 2007. ¹⁴ Y. Higuchi and T. Fukase, Le constitutionalisme et ses problemes au Japan: une approche comparative (Paris, 1984), pp. 108–122.

32

The Basis of the System

no such provision. Despite the absence of an explicit provision, basic principles, such as the sovereignty of the people, pacifism, and respect for human rights are understood to be unchangeable even with constitutional amendment.¹⁵

(4) Separation of powers The separation of powers is a basic principle which underlies the political system embodied in the Constitution. The Diet is the supreme legislative body; executive power lies with the Cabinet; and judicial power belongs to the courts. These three powers are interrelated by checks and balances. The Constitution has adopted a system in which the Cabinet as a whole is jointly responsible to the Diet. The Diet nominates the Prime Minister from among its members. If the nominations of the two houses differ and the difference cannot be solved via a meeting of representatives of both houses, or if the upper house fails to make a decision within ten days after the Lower House, the decision of the latter prevails. Thus, in practice, the leader of the majority party of the Lower House is nominated as Prime Minister. Under the 1889 Constitution, the Prime Minister was primus inter pares. In contrast, the present Constitution provides that the Prime Minister is the ‘head’ of the Cabinet. The Prime Minister selects and dismisses his Cabinet ministers, a majority of whom must be members of the Diet. Ministers, including the Minister of Defence, must be civilians. The Lower House may pass a vote of no confidence in the Prime Minister by a simple majority. The Cabinet must resign, or alternatively the Prime Minister may dissolve the Lower House. After a general election, the Cabinet must resign. The Cabinet is empowered to and responsible for, inter alia, administering the law and conducting the affairs of the State, concluding treaties, administering foreign affairs, and preparing and presenting the budget. It also has the power to enact Cabinet orders.

(5) Constitutional and judicial review The supremacy of the Constitution is safeguarded by constitutional review. The system of constitutional review was introduced to Japan from the United States after the Second World War. In general, it has worked fairly well in post-war Japan. The scope of constitutional review has been an issue of debate. Some emphasise that there are issues whose constitutionality cannot be reviewed by the courts because of their political nature. The doctrines of ‘political questions’ in the United States or ‘actes de gouvernement’ in France are often cited as ¹⁵ N. Ashibe, Kenpō (Constitutional Law), 4th edn, supplemented by K. Takahashi (Tokyo, 2007), pp. 378–381.

The Sources of Law

33

examples. It is argued that since the courts cannot bear political responsibility, unlike the Cabinet or the Diet, they should forego reviewing sensitive political issues.¹⁶ It is generally agreed that there is a certain limit to the constitutional review, but opinion varies as to where it should be set. One school asserts that highly political issues such as the constitutionality of the Self Defence Force, or the US–Japan Security Treaty cannot be reviewed by the courts, since these political issues should be decided by a representative body, the Diet. Others argue that there can be cases where the intervention of the courts is necessary even on such issues, especially when fundamental rights are concerned. The Supreme Court has once refrained from ruling on the constitutionality of the US–Japan Security Treaty. In that case, defendants were prosecuted for trespassing on a US Air Force base. The defendants argued that the posting of the US forces in Japan on the basis of the Security Treaty was against the Constitution. The Supreme Court ruled that such a political issue was beyond the scope of constitutional review and should be left to the decision of the Cabinet, which has the power to conclude treaties, and the Diet, which has the power to ratify them. On the other hand, the Court noted in passing that there may be instances where the treaty in question was apparently unconstitutional. In such cases, constitutional review is possible.¹⁷ As of October 2008, there have been seven instances in which the Supreme Court has found a provision of law to be unconstitutional: (i) A provision of the Criminal Code which made homicide of a direct ascendant different from ordinary homicide, and punishable either by death or life imprisonment as a breach of the equal treatment provision.¹⁸ (ii) A provision of the Pharmaceutical Law which controlled the location of pharmacies as an unreasonable restriction on the right to choose one’s occupation.¹⁹ (iii) A provision in the Forestry Law which prohibited the claim for division of property by co-owners of a forest with a share of less than 50 per cent as a breach of property rights.²⁰ (iv) The demarcation of the boundaries of constituencies by the Public Election Law which resulted in a wide difference in the number of votes needed to win a seat as a breach of the equal treatment provision.²¹

¹⁶ Cited in N. Ashibe, ‘Shihō-Sekkyoku-Shugi to Shōkyoku-Shugi (Judicial Activism and Passivism)’, in Kenpō to Gikaisei (The Constitution and Parliamentalism) (Tokyo, 1976). ¹⁷ Judgment of the Supreme Court, 12 December 1959, Keishū 13-13-3225 (Sunagawa case). ¹⁸ Judgment of the Supreme Court, 4 April 1973, Keishū 27-3-265 (Patricide case). ¹⁹ Judgment of the Supreme Court, 30 April 1975, Minshū 29-4-572. ²⁰ Judgment of the Supreme Court, 22 April 1987, Minshū 41-3-408. ²¹ Judgment of the Supreme Court, 14 April 1976, Minshū 30-3-223 and 17 July 1985, Minshu vol. 39, No. 5, p. 1100.

The Basis of the System

34

(v) A provision of the Customs Law, which allowed confiscation of property not belonging to the offender without notice or hearing, as a breach of due process.²² (vi) A provision of the Postal Law which exempted the post office from liability in an inappropriate manner as a breach of the right to claim compensation from the government.²³ (vii) A provision of the Nationality Law which required that in order for the child of a Japanese father and a foreign mother to apply for Japanese nationality, legitimatisation by the father was not sufficient, and that the parents needed to be married as a breach of the equal treatment provision.²⁴ It should be noted that in cases concerning the allocation of seats and demarcation of constituency boundaries, the Supreme Court did not refrain from reviewing constitutionality, although the issue might be categorised as political. A judgment of the Supreme Court which finds a certain provision of a law to be unconstitutional does not automatically make that provision void. The provision is regarded as null and void only in relation to the specific case before the Court. When the Supreme Court finds a provision of a law to be unconstitutional, it publishes the judgment in the official gazette (kanpō) and sends the original to the Cabinet and the Diet for consideration. The Cabinet and the Diet are then expected to take appropriate action. However, such action does not always follow. In case (i) involving the homicide of a direct ascendant, the Cabinet and the Diet were slow to react although the Public Prosecutor’s Office decided not to enforce this provision. Some members of the ruling party claimed that the provision was needed to maintain respect for parents, ostensibly one of the highest virtues in Japan. It was only in 1994 that this provision was deleted from the Criminal Code. On the other hand, the Supreme Court seems to have changed its own stance on this matter. In a judgment in 1974, the Supreme Court found a provision which punishes assault resulting in the death of a direct ascendant more severely than the same offence against others to be constitutional.²⁵ As for the electoral boundaries issue, the Supreme Court did not invalidate the election, although it found the demarcation to be unconstitutional. The Court held that to invalidate the election as a whole would result in the disqualification of the members of the Diet and thus bring the Diet to a standstill. The Administrative Litigation Law provides for an option of declaring an administrative decision unlawful, while maintaining its effect in the public interest (Art. 31). Although this provision was not directly applicable since this was not

²² ²³ ²⁴ ²⁵

Judgment of the Supreme Court, 28 November 1962, Keishū 16-11-1593. Judgment of the Supreme Court, 11 September 2002, Minshū 56-7-1439. Judgment of the Supreme Court, 4 June 2008, Hanta, 1267–92. Judgment of the Supreme Court, 26 September 1974, Keishū 28-6-329.

The Sources of Law

35

a suit seeking the revocation of an administrative decision, the Supreme Court based its judgment on this provision. The Supreme Court had expected that the Diet would take the necessary action to rectify the inequality among different constituencies within a reasonable period. However, no action had been taken when a second case reached the Supreme Court. Noting the failure on the part of the government to take action, the Court nevertheless maintained that a reasonable period to rectify the inequalities had not expired.²⁶ However, in a third case involving the election of 1983, the Supreme Court acknowledged that the legislature had failed to rectify the inequality within a reasonable time and again found the demarcation of the boundaries to be unconstitutional.²⁷

3. Statutory Laws The present Constitution provides that the Diet is the supreme and the only law-making body of the State (Art. 41). This is in contrast to the 1889 Constitution in which the legislative power belonging to the Emperor and the Imperial Diet merely ‘assisted’ him in law-making. The Emperor was empowered to issue imperial edicts between the sessions of the Imperial Diet, which replaced the laws for the maintenance of public security. The scope of issues required to be regulated by statutory law, and not by administrative rules under the present Constitution has been discussed for some time. A theory which developed under the 1889 Constitution maintained that norms imposing duties or limiting the rights of citizens should take the form of statutes enacted by the Diet. The current Cabinet Law, which provides that Cabinet orders may not impose duties or restrict rights unless such a power is delegated by statute, is based upon this theory (Art. 11).²⁸ The underlying idea is that the executive power is basically free from restrictions, but should exceptionally be limited in cases involving the rights and freedoms of citizens. For instance, government subsidies do not necessarily need statutory sanction, but the levying of taxes does. Whether this theory is still valid and sufficient under the present Constitution is an issue of controversy. It is now pointed out that, since the Constitution is based upon the sovereignty of the people proclaimed in the supremacy of the Diet instead of the Emperor, the scope of issues which should be regulated by statute must be far broader than before. For example, financial subsidies paid to local government are not an imposition of duties nor a restriction of rights, but may affect the rights and interests of citizens in various ways. The pension system ²⁶ Judgment of the Supreme Court, 27 April 1983, Minshū 37-3-345. ²⁷ Judgment of the Supreme Court, 17 July 1985, Minshū 39-5-1100. ²⁸ Law No. 5, 1947.

36

The Basis of the System

and the unemployment benefit system are not intended to limit the rights of the citizens, but it is nevertheless desirable to regulate them by statute. In addition, issues previously considered to be internal matters of administration may have to be controlled by statute, insofar as they affect the rights of citizens. Therefore, new theories are gaining support which assert that legal norms which in one way or another concern the relationship between the citizens and the State should take statutory form.²⁹ The Diet is composed of the Lower House (House of Representatives) and the Upper House (House of Councillors). The constitutional position of the former is much stronger than the latter. Every person over 20 years of age may vote. The Lower House is composed of 480 members, of whom 300 are elected from the constituencies. In the constituency system for the Lower House each constituency elects one representative. The remaining 180 are elected by a proportional system. Each political party prepares a list of candidates and arranges them in order, and seats are allotted in proportion to the number of votes the party obtains. The Upper House has 242 members of whom 146 are elected from constituencies and 96 elected proportionally. The Constitution does not have an explicit provision empowering the Cabinet to submit a bill to the Diet, although there is such a provision in the Cabinet Law. In practice, a majority of bills are submitted to the Diet by the Cabinet. From 1947 to 1983, out of 6,225 bills submitted to the Diet, 67 per cent were submitted by the Cabinet while the rest were submitted by members of the Diet. Of the bills actually passed by the Diet, 85 per cent were submitted by the Cabinet. The high proportion of Cabinet-initiated bills is not unique to Japan. In the United Kingdom, 90 per cent of bills passed by Parliament are submitted by the Cabinet.³⁰ However, in recent years, the proportion of bills submitted by Diet members is on the increase, reflecting the changes in the political climate.³¹ For example, in the late 1990s and early 2000s, in the process of the reform of company law, on several occasions a parliamentary member’s bill was adopted. It was argued that the changing circumstances did not allow the law to be amended by the conventional process of involving the Legislative Advisory Council of the Ministry of Justice, which in the past would deliberate on the bill for some time before finalising it for the Cabinet. According to the statistics of the Cabinet Legislation Bureau, of the 136 laws that were promulgated in 2007, thirty-three were submitted to the Diet by ²⁹ For different views on this matter, see H. Shiono, Gyōsei-hō (Administrative Law), Part 1, 2nd edn (Tokyo, 1994), pp. 57–67. ³⁰ T. Fukase, ‘Nihon no Rippō-katei no tokushoku (Characteristics of the Legislative Process in Japan)’, Jurist, No. 805, 1984, p. 23. See also T. Uchida, ‘Nihon no hōrei no zentai-so ni tsuite (Overview of Legislation in Japan)’ in K. Matsuo et al. (eds), Rippō no Heiika (Simplification of Legislation) (Tokyo, 1997), pp. 37–38. ³¹ Uchida, ibid.

The Sources of Law

37

the members.³² Bills submitted to the Diet are usually drafted by the relevant ministry.³³ In complicated issues where the advice of specialists is necessary, cases where neutrality is required, or when the reform is of major significance, advisory committees are consulted. Advisory committees are usually attached to the ministries. Their task is to investigate issues in the ministry’s portfolio and make recommendations and proposals. The Advisory Committee on the Tax System, for example, is composed of 58 members selected by the Ministry of Finance. They include university professors, trade union representatives, industry representatives, and local governors and mayors. One of the peculiarities of the Japanese system is that interested parties are also made members of the committee, unlike the US system, where such interested parties are normally summoned as witnesses. Another peculiarity is that these committees invariably have ex-ministerial officials as members. Although members of the advisory committees are selected from various walks of life, three or four members who have close links with the ministry in charge tend to steer discussions in the direction favoured by the ministry. Actually, the draft report is often prepared by the ministry with the assistance of a working group composed of several experts and adopted by the plenary session with only minor revisions. Thus, the ministry’s influence in the decision-making process of the advisory committee can be overwhelming. Hence, these advisory committees are at times criticised for their lack of independence, which results in a mere rubber-stamping of decisions already finalised inside the ministries. On the other hand, it should be noted that these committees do ensure transparency in the decision-making process of the ministries, and the appropriateness of their abolition is questionable. When an enactment or amendment of a major code, such as the Commercial Code or the Criminal Code, is contemplated, the Legislative Advisory Council is consulted. This body, which is attached to the Ministry of Justice, is composed of prominent law professors, High Court judges, practising attorneys, the Prosecutor General, the Head of the Secretariat of the Supreme Court, and the Director of the Cabinet Legislation Bureau. It has subcommittees on criminal law, civil law, commercial law, conflict of laws, etc. A bill which has been prepared by a ministry is reviewed by the Cabinet legislation bureau. The Bureau and other interested ministries are usually consulted at an earlier stage as to the outline of the bill. The Bureau is staffed with ‘counsellors’ seconded from the court, the Public Prosecutor’s Office, or ministries.³⁴ After the review by the Cabinet Legislation Bureau, the ministry requests the Cabinet to consider the bill at a Cabinet meeting. What is peculiar is that the bill ³² . ³³ For the legislative process, see M. Nakamura and T. Tsunemoto, ‘The Legislative Process: Outline and Actors’, in Y.Higuchi (ed.), Five Decades of Constitutionalism in Japanese Society (Tokyo, 2001), pp. 197–219. ³⁴ Cabinet Legislation Bureau, ‘Legislative Review’, in Tsuji (ed.), supra, pp. 139–152.

38

The Basis of the System

is simultaneously sent to the ruling party, where it is normally examined by the Political Affairs Committee of the ruling Liberal Democratic Party. Key members of the ruling party as well as major opposition parties are informed of the contents of the bill and a consensus is sought. A bill approved by the Political Affairs Committee is then sent to the General Affairs Commission. For the most part, the approval of this latter committee is a prerequisite of any cabinet discussion on the bill. Thus, in the majority of cases, the bill has already been discussed and a compromise reached before it is submitted to the Diet. A bill can be submitted to either house but it is usually submitted to the Lower House and then referred to one of the standing committees. Only when the bill is of major significance is it first explained to the general assembly of the House. Since the sessions of the general assembly are not held very often, and because the time allocated for discussion is limited, standing committees play a major role in the Diet. At present, there are eighteen standing committees in the Lower House and sixteen in the Upper House. Both houses have the constitutional power to investigate legislation (Art. 62), and this power is primarily exercised by the standing committees. The committee system was introduced from the United States after the Second World War, but present practice is somewhat different from the US system. While discussions in general assembly are open to the public, standing committee sessions are usually closed. Only reporters and persons with special permission from the chairman are allowed to observe. After the debate and voting, the bill is sent to the general assembly, where it is discussed and voted upon. Discussion before the assembly is limited not only in time, but in effect. The consent of a minimum of 20 members is required in the Upper House in order to place a motion of amendment. When one of the houses passes a bill, it is then sent to the other house and discussed in the same manner. If the Lower House passes the bill but the Upper House does not agree, the former may overrule the latter by a two-thirds majority. If the Upper House does not approve a bill which has been referred by the Lower House within 60 days, the latter may regard the bill as having been vetoed by the former. A bill which the Diet has passed is signed by the relevant minister, together with the Prime Minister. The Emperor, on the advice and approval of the Cabinet, promulgates the law in the official gazette. The law usually designates the date on which it is to take effect, but if not it comes into force 20 days after promulgation. Laws which are applicable only to a specific and limited region require a special legislative procedure. After the Diet has passed such a bill, it must be approved by a majority vote at a referendum in the locality in which it is expected to be applied. This system was inspired by the laws of several states in the United States. These kinds of laws were occasionally enacted in the first decade after the promulgation of the Constitution, but since then this provision of the Constitution has been interpreted narrowly, and there has been no recent case of such a referendum.

The Sources of Law

39

4. Delegated Legislation Legislative power is often delegated to cabinet orders, ministerial ordinances, and other administrative rules. The Constitution empowers the Cabinet to issue orders, but only to ‘implement the provisions of the Constitution and the laws’ (Art. 73, para. 6). Since the same provision states that cabinet orders may not include criminal sanctions unless so delegated by the law, it is generally understood that the Constitution presupposes delegated legislation. In reality, it is impossible to regulate everything by primary legislation in a modern society. It is even preferable to leave, for example, matters which require technical expertise, matters which need to be adapted promptly to changing circumstances, or matters which presuppose political neutrality for delegated legislation. On the other hand, the delegation of legislative power is not unlimited. It is allowed only insofar as it does not undermine the supremacy of the Diet in lawmaking. The delegation of legislative power must be specific and concrete; giving carte blanche to the executive branch is not permitted. The Supreme Court has acknowledged this in principle, but in practice, it tends to allow a fairly broad delegation of power.³⁵ There are several kinds of delegated legislation, classified in accordance with the body which enacts them, including cabinet orders (seirei), ministerial ordinances, and ordinances of the Prime Minister’s Office (shōrei and naikakufu-rei). The Cabinet Law provides that cabinet orders may not contain provisions which impose duties or restrict rights unless so delegated by statute (Art. 11). Furthermore, the Law on the Organisation of State Administration provides that ministers may enact ministerial ordinances in order to implement laws and cabinet orders, and also where it is specifically delegated by statute or cabinet order (Art. 12, para. 1). Matters left to delegated legislation are fairly broad. For example, in the field of pollution controls, the emission standards are set by an order of the Cabinet Office.³⁶ The Foreign Exchange and Foreign Trade Law provides that a person who intends to export goods may be required to obtain a licence from the Minister of Trade, Economy and Industry as provided by the cabinet order. Goods and technology subject to export licence are listed in ministerial ordinances.³⁷ Also in the Financial Instruments and Exchange Law, various matters are left to ordinances. One of the most controversial issues in this respect was the constitutionality of Art. 102 of the Law on Government Employees.³⁸ This prohibits government employees from being involved in political activities, under threat of up to three ³⁵ ³⁶ ³⁷ ³⁸

Judgment of the Supreme Court, 1 May 1958, Keishū 12-7-1272. Law on Water Pollution Controls, Law No. 138, 1970, Art. 3, para. 1. Law No. 228, 1949, Art. 48, para. 1. Law No. 120, 1947.

40

The Basis of the System

years’ imprisonment. The definition of ‘political activities’ is not given in the Law, but is left to rules enacted by the Government Personnel Authority, one of the administrative commissions. The constitutionality of this provision is questionable because it involves fundamental rights of government employees, but nevertheless gives broad discretion to delegated legislation. The issue was contested in court when a post office employee was prosecuted under this provision for taking part in industrial action. The district court and the High Court acquitted the defendant on the grounds that imposing criminal sanctions for political activity was an unreasonable and excessive restriction on the actions of government employees. The High Court explicitly referred to the ‘less restrictive alternative’ test adopted by the US Supreme Court to reach this conclusion. However, the Supreme Court quashed the judgment of the High Court and found the provision constitutional.³⁹ The majority opinion held that the delegation of legislative power was sufficiently specific, and since it was possible to derive the purpose of the delegation and the scope and standards for its implementation from the given provision of the Law, the delegation of power was constitutional. There were four dissenting opinions which maintained that the Diet should first discuss the necessity of restricting political activities in detail, and only then decide the scope of restrictions. Most specialists in constitutional law view the broad and unlimited delegation of legislative power effected by this Law as unconstitutional.⁴⁰ The Supreme Court has not found delegation of legislative power to the Cabinet to be unconstitutional in most cases, except in a case where a cabinet order was found to breach the Law on Agricultural Land by unduly restricting the owner’s chance of selling the land.⁴¹

5. International Treaties The Constitution provides that international treaties as well as the established laws of nations should be faithfully observed (Art. 98, para. 2). It is the Cabinet which is empowered to conclude international treaties. A plenipotentiary signs a treaty and the Cabinet approves it with the attestation of the Emperor, but this is merely a formality. The approval of the Diet is required, normally in advance, but ex post facto approval is justified in cases of urgency or other extraordinary situations. When the opinions of the Houses differ, and the difference cannot be solved by a coordinating committee meeting, or when the Upper House does not take any action within thirty days after receiving the draft treaty, the decision of the Lower House is regarded as final (Arts 60, 61). ³⁹ Judgment of the Supreme Court, 6 November 1974, Keishū 28-9-393 (Sarufutsu case). ⁴⁰ Itoh, supra, p. 672. ⁴¹ Judgment of the Supreme Court, 20 January 1971, Minshū 25-1-1.

The Sources of Law

41

In an official opinion in 1974, the government listed the following categories as being within the scope of treaties required to be ratified by the Diet: (i) treaties concerning matters which fall within the competence of the Diet, such as treaties involving territorial issues, tax, commerce, and navigation; (ii) treaties which require special financial arrangements or obligations (such as a treaty to establish an international organisation for which financial contribution is needed, or a treaty of compensation for losses caused by war); and (iii) treaties of political significance which establish fundamental links with other countries.⁴² The majority of scholarly opinion maintains that the Diet may not alter a treaty when approving it. The conclusion of treaties is a power exclusive to the Cabinet, and the Diet may only approve or reject the treaty in toto. In order to implement an international treaty, it is necessary to incorporate it into the national legal system. In some countries, treaties must be transformed into national law by an enabling act of the legislature. In other countries, treaties are accepted without being so transformed. In principle, Japan has taken the second approach. Treaties are promulgated in the same way as statutory laws in the official gazette and do not have to be converted into national laws. Since treaties can be incorporated into the national legal system without transformation, the relationship between domestic law and international treaties must be determined. The Constitution provides that international treaties to which Japan is a party should be observed faithfully, and since the ratification by the Diet is needed, it is generally agreed that international treaties are superior to statutory laws. There are, however, diverse opinions as to the relationship between the Constitution and international treaties. The prevailing view is that the Constitution has priority over international treaties. The Cabinet’s power to conclude treaties and the Diet’s power to approve them derive from the Constitution. Therefore, it is logically impossible to justify the superiority of a treaty which is counter to the Constitution. This view is also supported by the fact that the procedure for amending the Constitution is much more difficult than that for concluding treaties. A problem may arise when the government concludes a treaty which is later found to be unconstitutional by the Supreme Court. From the viewpoint of international law, it is still valid. The government, however, must negotiate with the other parties to withdraw from or revoke the treaty. It should be added that Japan is a signatory to the Vienna Convention on the Law of Treaties. The Convention provides that a nation may not justify the non-fulfilment of obligations arising from treaties on the ground of its national law. The Constitution provides that the ‘established law of nations’ is to be faithfully observed (Art. 98, para. 2), which includes international custom. This provision was interpreted in a case where the extradition of a person to his home country ⁴² Opinion of the Government, 20 February 1974.

42

The Basis of the System

was contested. The Supreme Court ruled that the non-extradition of political offenders was yet to become an established international custom.⁴³

6. Judge-Made Law The Japanese legal system is primarily based on statutory laws. However, this does not mean that case law is insignificant. On the contrary, judgments, especially those of the Supreme Court, are respected and followed as one of the primary sources of law. New rules often emerge from case law and therefore the study of court judgments is an essential part of discussing legal problems. Judgments and decisions of the Supreme Court as well as the lower courts are studied and commented on by scholars and practising lawyers. These comments are regularly published in legal periodicals, and often influence the courts in their decision-making. Court judgments are published in court reports. Supreme Court judgments are selected by its Precedents Committee and published by the Supreme Court. There are also collections of selected appellate and lower court judgments. The courts have played a crucial role in the development of modern Japanese law. In some areas—such as human rights, real security rights, land and housing, tort, and labour law—statutory law has been extensively and significantly supplemented by precedent. Since the codes were somewhat general in character, the gaps had to be closed by court judgments. This is, for example, illustrated in tort law. The Civil Code has a general provision on tort liability (Art. 709) which was intentionally made general so that it could cover various kinds of situations emerging in the future. The concepts of negligence, causality, unlawfulness, etc. were not defined by the Code, but have developed from an accumulation of judgments, and consequently a substantial body of case law has emerged in this field. Similar developments have taken place in the field of administrative law. The Administrative Litigation Law, enacted in 1962, provided for an ‘objecting action’, aimed at having an administrative decision revoked or altered. The Law provided for four types of such litigation, but left room for other types of litigation to be developed through academic research and court judgments. For instance, the availability of litigation mandating the administration to take a certain measure (Verpflichtungsklage) is discussed in this respect. The court has also been instrumental in mitigating the effect of provisions of a law which, when literally and strictly applied, may result in unfairness. Thus, in labour law, the courts have developed a rule that the exercise of the employer’s right to dismiss an employee may be null and void if the dismissal lacks reasonable grounds and is socially unacceptable. This ‘doctrine of unfair dismissal’ and some other rules that developed from case law were incorporated in the Labour ⁴³ Judgment of the Supreme Court, 26 January 1976, Shōmu-geppō 22-2-578.

The Sources of Law

43

Contract Law. Similar developments have taken place to protect a lessee’s rights in land and housing. This is made possible by the courts resorting to general clauses such as ‘public order and good morals’, ‘good faith and fair dealing’, and ‘abuse of rights’ in the Civil Code (see Chapter 6). Sometimes judges deviate from the provisions of law in order to attain equitable results. The development of atypical real security rights serves as an example. Despite the provisions of the Civil Code, which prohibit the creation of real rights other than by law, and require the transfer of possession in order to effect security over movables, various kinds of atypical real securities have been developed in practice and upheld by the court (see Chapter 8). Also, in the field of consumer loans where creditors have charged extremely high interest, the Supreme Court has made efforts to control such high rates and reimburse excess interest to the debtor. The Law on the Restriction of Interest explicitly provided that excess interest voluntarily paid by the debtor could not be reimbursed. However, the Supreme Court ruled that although excess interest was not reimbursable, it could be counted as a repayment of the principal. In another case the Supreme Court ruled that when the excess amount paid reached the amount of the principal, there was no possibility of interest being generated, and therefore the excess payment should be returned to the debtor.⁴⁴ In 2006, the Supreme Court ruled in favour of the borrower in several cases, overruling the judgments of the lower court.⁴⁵ There are different views amongst specialists as to the status of court judgments as a source of law. There is no explicit provision in the law which directly provides for the status of judicial precedent in Japan. The Constitution provides that judges should fulfil their duties independently, and are bound only by law (Art. 76, para. 3). Some people feel that since this provision does not refer to court judgments, they should not be regarded as a source of law. However, the prevailing view is that court judgments are sources of law, but in a supplementary way. This is because precedents are not binding on the courts in the same way as statutory laws are binding on them. The doctrine of stare decisis has no explicit basis in Japanese law. Therefore the courts are theoretically free to render judgments against established precedent. Lower courts occasionally defy the precedents of the Supreme Court. For example, the Supreme Court in 1967 ruled that the right to compensation for non-pecuniary loss could be inherited without an express intention on the part of the deceased to claim compensation.⁴⁶ However, some lower courts, in accordance with the prevailing view of academics, still maintain that such a right cannot ⁴⁴ T. Hironaka, ‘Wagastuma minpō-gaku to han-seitei-hō-teki kaishaku (Civil Law Theories of Professor Wagatsuma and Anti-statutory Interpretation of the Civil Code)’, Part 3, Jurist No. 1096, 1996, pp. 74–83. A. M. Pardieck, ‘Japan and Moneylenders—Activist Courts and Substantive Justice’, Pacific Rim Law and Policy Journal, vol. 17, No. 3, p. 532. ⁴⁵ Judgment of the Supreme Court, 13 January 2005, Minshū 60-1-1. ⁴⁶ Judgment of the Supreme Court, 1 November 1967, Minshū 21-9-2249.

44

The Basis of the System

be inherited; instead, those heirs who had been dependent on the deceased should be allowed to claim damages in their own right. Sometimes, the accumulation of lower court judgments against the Supreme Court’s precedent has eventually led to a change of view by the latter. Generally, lower courts are closer to everyday life and more sensitive to changes in society than higher courts. They are thus likely to have good reason to deviate from inappropriate precedents of the Supreme Court. On the other hand, the Code of Criminal Procedure provides that deviation from precedents of the Supreme Court is a ground for appeal (Art. 405, para. 2). In civil procedure, certiorari is available in such cases (Art. 318, para. 1). Thus, lower courts must take the risk that their judgments will be quashed or reversed by the Supreme Court. Because of this possibility, the lower courts usually follow the precedents of the Supreme Court. This is often denoted as the de facto binding force of precedent.⁴⁷ Furthermore, Japanese judges are generally ‘career judges’. Judges are appointed for a fi xed term of 10 years, and renewal of the term is usual, although not guaranteed. The Supreme Court wields great power in promoting and transferring lower court judges Lower court judges may therefore be disinclined to rule against precedents of the Supreme Court. Some argue that despite the absence of the doctrine of stare decisis, lower courts are bound by precedents even more than in the countries where this doctrine exists, because of this career system. It should be noted that the scope of the de facto binding force of precedent is much broader in Japan. While the binding effect of precedent in Anglo-American jurisdictions is limited to the ratio decidendi, in Japan the demarcation between the ratio decidendi and obiter dicta is not necessarily strict. General explanations or guidelines given in Supreme Court judgments are often treated in practice as precedents and are cited in lower court judgments.⁴⁸ The binding force of judicial precedent, although it is not de lege, is explained mainly by the hierarchical system of the courts (i.e. judgments of the higher courts are superior to those of the lower courts), rather than by the need to treat similar cases in an equal fashion. A possible corollary of this view is that the Supreme Court itself is not necessarily bound by its precedents. The issue was raised when the Supreme Court failed to follow its own previous judgment concerning the constitutionality of the restriction of political activities imposed on government employees. The Supreme Court had ruled that the imposition of criminal sanctions on government employees for political activities was an excessive restriction of their basic rights, and therefore unconstitutional. However, eight years later the Supreme Court explicitly changed its position and found the imposition of ⁴⁷ T. Nakano (ed.), Hanrei no Yomikata (How to read Cases) (Tokyo, 1986), pp. 14–16. ⁴⁸ Ibid. pp. 142–147. See also Y. Higuchi, ‘Hanrei no kōsoku-ryoku kō (On the Binding Force of Precedent)’, in Higuchi and M. Shimizu (eds), Nihon-koku Kenpō no Riron (Theories of the Constitution of Japan) (Tokyo, 1987), p. 684.

The Sources of Law

45

criminal penalties in such cases to be constitutional.⁴⁹ There had been a change of justices since the previous judgment. This was not the first time the Supreme Court had declined to follow its own precedents, but this case was peculiar in that the decision was contrary to the prevailing view of lawyers. Furthermore, in that case a change of precedent was not needed to reach the same substantive conclusion. Nevertheless, a majority of eight justices rejected the approach taken in the previous judgment. Five dissenting justices stressed that in order to alter the interpretation of the Constitution and to change a precedent, the court should cautiously examine the necessity and reasonableness of the change, and argued that there was no need to change the precedent in this case.

7. Circulars (Tsūtatsu) Circulars (tsūtatsu) of ministries and other administrative agencies are categorised as administrative rules. Circulars are issued by ministers, directors of bureaux and departments, and other officials. They are addressed to the lower echelons of the administration and local government, and give guidelines for the interpretation of the law and the exercise of discretion on their part. Administrative rules are not regarded as a source of law because they do not address the public directly and are basically internal rules, but in practice they may have a significant effect. In every field of public administration—for instance taxation, finance, and urban development and planning—circulars play a crucial role. Although the law is fairly general, the discretion of lower echelons of the administration and local government is narrowly limited by circulars. While statute laws tend to be rather general (as, to a lesser extent, do cabinet orders and ministerial ordinances) circulars address details. Not uncommonly, a system or procedure, with no explicit legal basis, develops through circulars and becomes an established practice. Since circulars are internal rules or guidelines, breaches of a circular by officials cannot be contested in court and generally do not serve as a ground for citizens to claim damages. Even so, there are cases where circulars affect the rights and duties of citizens directly. Recently, in the field of finance and securities, circulars have been largely replaced by cabinet orders and ministerial ordinances, as well as self-regulatory measures, to enhance transparency in the administrative system.

⁴⁹ Judgment of the Supreme Court, 25 April 1973, Keishū 27-4-547: Zen-nōrin keishokuhō case. See also Judgment of the Supreme Court, 26 October 1966, Keishū 23-5-305: Zentei-chūyū case.

46

The Basis of the System

8. Administrative Guidance Administrative guidance from government agencies and local authorities plays a significant role in Japan, although it is not a source of law. Administrative guidance is an informal instrument of administrative agencies, usually addressed to private entities (corporations and individuals) and designed to influence and steer their behaviour in order to achieve a specific policy goal.⁵⁰ The Law on Administrative Procedure⁵¹ defines administrative guidance as follows. Recommendation, advice and other acts effected by an administrative agency within the scope of its competence addressed to a specific person requiring this person to take a certain action or to refrain from such an action in order to achieve a specific administrative goal and which does not fall within the category of administrative decision. (Art. 2, subpara. 6)

Administrative guidance takes various forms, such as a recommendation, encouragement, suggestions, or advice. It may appear in written form, but is often given orally. Sometimes officials merely drop a hint, which is taken up by the addressee. An example is the ‘Price-Keeping Operation’ by the Ministry of Finance at the time of the fall in share prices in the Tokyo Stock Exchange in the early 1990s. Institutional investors were asked questions by the Ministry of Finance which, by implication, meant that the Ministry did not want those investors to sell shares at that time. There was no written instruction, and it was not certain that administrative guidance had taken place. This kind of tacit communication is only possible when there is a close relationship between the ministry and addressee.⁵² Administrative guidance may also help to mitigate and reconcile conflicting interests, for example in planning law. While statutes provide for various restrictions on development in urban areas, these are not always sufficient, and so local government often establishes its own stricter guidelines. These guidelines are not formally binding, but those who apply for building permission are expected to comply with them. Since administrative guidance is not binding, it is generally understood that administrative guidance does not require a specific legal basis. As can be seen from the above-cited examples, ministries often effect administrative guidance based upon their respective general supervisory power over a particular industry. ⁵⁰ H. Shiono, ‘Administrative Guidance’, in K. Tsuji (ed.), supra, p. 204. ⁵¹ Law No. 88, 1993. ⁵² B. W. Semkow, ‘Japanese Banking Law: Current Deregulation and Liberalization of Domestic and External Financial Transactions’, Law and Policy in International Business, vol. 17, 1985, pp. 90–91. See also C. Milhaupt and G. Miller, ‘Cooperation. Conflict and Convergence in Japanese Finance; Evidence from the “Jūsen” Problem’, Law and Policy in International Business, 1997, No. 1, p. 1ff.

The Sources of Law

47

In some cases, restrictions not embodied in law are imposed by way of administrative guidance. An example is the Law on Large Retail Stores. This Law merely required that in order to open a large retail store, the then Minister of International Trade and Industry (delegated to local governors) should be notified. However, by way of administrative guidance from the Ministry, a list of areas where no large retail stores were allowed to be built was prepared and enforced. This practice was totally abolished after the Structural Impediments Initiatives Talks with the United States. Although administrative guidance is not binding in nature, it is often accompanied by the power of administrative agencies to grant licences, give permissions, or provide other benefits. For example, in 1964 the Ministry of International Trade and Industry encouraged steel companies to decrease production of crude steel by way of administrative guidance. One steel company refused to follow this suggestion, since the plan prepared by the Ministry seemed unfairly disadvantageous to them. In response, the Ministry decreased the allocation of oil to the company; the Ministry and the company later reached a compromise. In another case, a company planned to import oil cheaply. This did not coincide with the policy of the Ministry of International Trade and Industry at the time. The Ministry tried to discourage the company, but to no avail. It then sought the cooperation of the Ministry of Finance, which in turn put pressure on the bank which was to finance the transaction. Eventually the company had to abandon its plan.⁵³ In this respect, the Law on Administrative Procedure which was enacted in 1993 provides that the administrative agency that has the power to grant a licence or permission should not compel the counter-party to follow administrative guidance by unnecessarily indicating that it is entitled to exercise such power (Art. 34). The Supreme Court has ruled on the voluntary nature of administrative guidance on several occasions. One such ruling concerned the Anti-Monopoly Law (see Chapter 14). In a recent case the Supreme Court ruled on administrative guidance involving planning permission. In this case, the Tokyo Metropolitan Government withheld building permission for a block of flats until a dispute between the developer and neighbouring residents had been resolved. Although the Metropolitan Government attempted to arbitrate in the dispute by way of administrative guidance, the developer filed an official complaint. When permission was still withheld, the developer brought the case to court seeking damages for loss caused by the delay from the Metropolitan Government. The district court found the withholding of permission to be legal. However, the High Court overruled this judgment and the Supreme Court agreed. The Supreme Court acknowledged that it is lawful to delay the granting of building permission while an administrative agency tries to control development by way of ⁵³ F. Upham, ‘Privatized Regulation: Japanese Regulatory System in Comparative and International Perspectives’, Fordham International Law Journal, 1997.

48

The Basis of the System

administrative guidance. However, once the recipient of the guidance refuses to accept it, it is no longer legal to withhold permission.⁵⁴ This rule has been accommodated in the Law on Administrative Procedure (Art. 33). Administrative guidance has an advantage in that it enables administrative agencies to implement measures in a flexible way by seeking the consent and cooperation of the recipients. It is often justified because it is well suited to reacting promptly to changing circumstances, while legislative measures require time. Circumstances which necessitate action on the part of an administration may not persist for long enough to deserve legislative measures. Also, by utilising administrative guidance before taking formal action, it is possible to avoid unnecessary conflict and reach a flexible and agreeable solution. The prior consultation system for the notification of mergers to the Fair Trade Commission is an example. On the other hand, administrative guidance has its drawbacks. It often lacks procedural fairness and transparency. Since it is informal and often without statutory basis, there are problems concerning accountability. Unofficial ‘sanctions’ for non-compliance may infringe the rights and freedom of individuals and companies. Since it is not formally binding, it is difficult for individuals and companies to seek redress against wrongful administrative guidance. It is possible to seek damages if the administrative guidance is unlawful, but since it is not a formal administrative act, its validity cannot be contested in administrative litigation. The shortcomings of administrative guidance have long been recognised in Japan. The Law on Administrative Procedure of 1993 was a major step forward towards fairness and transparency.⁵⁵ The Law explicitly provides for the voluntary nature of administrative guidance and adds that disadvantage should not be inflicted even if the addressee fails to comply with the guidance (Art. 32). Those who effect administrative guidance are obliged to disclose the identity of the person responsible for the guidance to its addressee (Art. 35, para. 1). Where administrative guidance is given orally, the addressee is, in principle, entitled to ask for guidance in writing (Art. 35, para. 2). The securities scandals in 1991 (see Chapter 13) triggered a wave of criticism against administrative guidance. The lack of transparency created by excessive use of administrative guidance by the Ministry of Finance in regulating the securities business was considered to have contributed to the occurrence of such scandals. As a result, the Ministry made efforts to codify administrative guidance in cabinet orders and ministerial ordinances. There is also mounting criticism from foreign countries on the extensive use of administrative guidance, since such informal and untransparent means often work against foreign companies unfamiliar with the modus operandi of the Japanese market. ⁵⁴ Judgment of the Supreme Court, 16 July 1980, Minshū 39-5-989. ⁵⁵ Law No. 88, 1993.

The Sources of Law

49

Administrative guidance again became an issue when the failure of the Ministry of Finance in regulating and supervising the financial sector became evident in 1997. Some financial institutions failed to disclose accumulating losses and other problems, allegedly with the tacit endorsement of the Ministry, which resulted in the collapse of several banks and securities companies. In the Daiwa bank case, the Bank failed to report a substantial loss caused by a rogue trader in the US to the US authorities, allegedly after consulting the Ministry. The lack of transparency and accountability of the system was criticised. As part of the Big Bang (financial deregulation) that began in 1996, the method of supervising the financial sector has undergone a major change. Instead of detailed prior intervention from the authority by way of administrative guidance, the emphasis has shifted to post ante regulation. The scope of administrative guidance has been narrowed substantially within the financial sector (see Chapter 13). In general, with the progress of the regulatory reform in the 2000s, the scope of regulatory power of the ministries has been substantially reduced, and as a result, the role of administrative guidance in public administration has diminished.

9. Local Regulations Under the Constitution of 1889, political power was highly centralised and there was little room for the autonomy of local government. Governors, mayors, and other key officials of local authorities were all appointed by the central government. The Ministry of Internal Affairs exercised enormous power over local authorities, whose task was to implement the policy set by central government. The police was made part of this Ministry. After the Second World War, the democratisation of the local government system was part of the reforms. The Ministry of Internal Affairs was abolished and replaced by the Agency of Local Administration.⁵⁶ The police force was separated from this agency, unlike its predecessor. The current Constitution has a chapter on local self-administration and guarantees the autonomy of local government. Shortly after the Constitution was enacted, the Law on Local Self-Administration was enacted, providing for the organisation and powers of local governments.⁵⁷ This reform was aimed at the democratisation and decentralisation of local administration, following the models of the United States, but went only halfway, partly due to strong opposition from the Japanese government. While significant reforms, such as the introduction of public election for governors and mayors were made, some features of the pre-war system of local administration remain ⁵⁶ As a result of the administrative reform in the late 1990s, several ministries merged and became the Ministry of Internal Affairs and Communication. ⁵⁷ Law No. 67, 1947.

50

The Basis of the System

intact, or were later restored. The central government still exercises significant control, particularly through financial measures. As part of the post-war reforms, local government was given the right to enact local regulations. The Constitution provides that local authorities, including prefectures, cities, towns, and villages, may enact regulations within the scope of the law (Art. 94). The Law on Local Self-Administration provides that local authorities may enact regulations on matters listed in the Law within the framework of laws and ordinances (Art. 14, para. 1). These issues range from the maintenance of public order and public health, protection of the environment, and consumer protection to the promotion of industry and commerce. It is also possible to provide for criminal sanctions in local regulations: up to two years’ imprisonment or a fine of 1,000,000 yen (ibid., para. 3). The enactment of local regulations falls within the competence of the assembly of the local government, composed of members elected by the inhabitants. Local regulations are published by the local authorities. The relationship between the general law and local regulations is a much debated topic. The issue was first raised when a person was charged with a breach of local regulation which punished prostitution. Prostitution is not in itself a criminal offence in Japan. The defendant argued that the local regulation was contrary to the due process of law. However, the Supreme Court ruled that the wordings of the Law on Local Self-Administration enabling local regulations to provide for criminal sanctions were sufficiently clear and specific to justify such a delegation of power. The judgment also took into account that local regulations are enacted by representative bodies.⁵⁸ A similar issue came before the Supreme Court when a person was prosecuted for violating a local regulation punishing indecent behaviour towards minors. Among other issues, the constitutionality of providing for such ‘offences’ by local regulation was at issue. The Supreme Court cited the judgment discussed above and found this to be constitutional.⁵⁹ This problem came into focus again when pollution became a serious problem in the 1960s. Since the national government was slow to react to the increasingly serious problem of pollution, some local authorities, especially those in highly industrialised areas, enacted local regulations to cope with the problem, introducing stricter standards than those in the national anti-pollution law by their local regulations. Sometimes local regulations controlled a scope of activity wider than that of national laws. Whether regulations with higher standards and broader applicability were legal or not was a matter of debate. Previously, the prevailing view had been that local regulations could not cover issues which had already been regulated by national legislation. A corollary to this was that local regulations could not strengthen or broaden control at the national ⁵⁸ Judgment of the Supreme Court, 15 October 1958, Keishū 12-14-3305. ⁵⁹ Judgment of the Supreme Court, 23 October 1985, Keishū 39-6-413.

The Sources of Law

51

level. However, the development of local regulations on pollution control led to reconsideration of this theory. It is now asserted that when the law has established norms which are meant to be enforced throughout the country in a uniform fashion, i.e. when the law has established a maximum standard, local regulations may not regulate the same activity in a stricter or a broader way. On the other hand, when the law can be interpreted as having a minimum standard, local authorities may enact stricter regulations by taking into account local peculiarities.⁶⁰ In this sense, the above-mentioned judgments of the Supreme Court concerning prostitution and indecent behaviour are questionable, since in these cases the fact that the Criminal Code is silent on this matter seems to indicate the Diet’s intention to leave these acts outside the scope of criminal law. The Supreme Court acknowledged this view in its obiter dictum in favour of a local regulation. A case arose where the issue was the constitutionality of a public security regulation, which required participants in public demonstrations to observe traffic rules and provided for criminal sanctions for violations. Because this regulation conflicted with the Law on Road Traffic, the district court acquitted the defendant on the ground that the regulation overlapped with national law. The High Court upheld this judgment. However, the Supreme Court reversed the judgment, ruling that this was a case where the Diet had intended to set minimum standards, thus allowing further restrictions by local authorities.⁶¹

10. Customary Law As a general principle, the Law on the General Rules Regarding the Application of Laws provides that custom that is not contrary to public order nor good morals has an effect equivalent to law, provided that it is endorsed by a provision of law, or when there is no law on the issue (Art. 3).⁶² The Civil Code contains a provision which allows the application of custom when the parties so intended (Art. 92). The Commercial Code provides that where there is no applicable provision in the Code, commercial customary law should be applied, and only if there is no such customary law is the Civil Code to be applied (Art. 1). Since the earlier codes were based on foreign models, there was inevitably a gap between the law and social reality. Customary law, together with judgments, played an important role in filling this gap and adapting the codes to changing social conditions. Sometimes, commercial custom which was seemingly contrary to the mandatory provisions of law has developed and eventually been upheld by the courts. Atypical real security rights are an example. Furthermore, ⁶⁰ H. Shiono, supra, vol. 3 (Tokyo, 1995), pp. 134–141. ⁶¹ Judgment of the Supreme Court, 10 September 1975, Keishū 29-8-489: Tokushima Public Security Regulation case. ⁶² Law No. 70, 2006.

52

The Basis of the System

in commercial law, the practice of issuing blank bills of exchange has been developed. This is contrary to law, but has been accepted by the courts.⁶³

11. Scholarly Opinion Scholarly opinions are not regarded as a source of law and are rarely cited explicitly in judgments. However, this does not mean that scholarly opinions have no influence on judgments in court. Since the major codes were of foreign origin, in the early years, the courts had no expertise in interpreting the codes. Therefore, the assistance of scholars who were familiar with foreign law was indispensable. This process was repeated after the Second World War, when US law served as a model for various laws, such as the Labour Standard Law, the Code of Criminal Procedure, the Anti-Monopoly Law, and most importantly, the Constitution. The courts often accept the views of law professors. For instance, it had been established in tort law that when determining contributory negligence on the part of minors, only the act of the victim should be taken into account, even when parents have failed properly to supervise minors. The precedents of the Supreme Court were criticised by academics for years, and finally the Supreme Court ruled that negligence of other persons associated with the victim should also be taken into account.⁶⁴ Judges study scholarly opinions extensively before making a decision. At the Supreme Court, law clerks qualified as judges or assistant judges consult scholarly opinions when they assist the justices writing their opinions. Commentaries written by law clerks often refer to the opinions of law professors. There are informal study groups of judges, prosecutors, attorneys, and law professors who exchange views and study specific problems. ⁶³ Judgment of the Supreme Tribunal, 18 October 1926, Hyōron 16. ⁶⁴ Judgment of the Supreme Court, 26 November 1959, Minshū 13-12-1573.

3 The Administration of Justice 1. Historical Background Japan’s system of courts can be traced back to the reforms of the mid-nineteenth century. The Statute on Judicial Matters (shihō-shokumu-teisei) of 1872, the first legislative act concerning the judicial system, was strongly influenced by French law. This decree was replaced by the Code of Criminal Instruction of 1880, modelled on the French Code d’Instruction Criminelle. This Code provided for the organisation of courts dealing with criminal cases as well as the rules of criminal procedure. By the early 1880s, a network of courts was established. Civil and criminal cases started in the courts of first instance, moved on to High Courts, and finally to the Supreme Tribunal (taishinin); (the Supreme Tribunal) which was founded in 1875. However, the French system was found to be excessively complicated, and as early as 1886 preparation for a new law began as part of the legal reforms necessitated by the planned adoption of the 1989 Constitution. Since the Constitution itself was to be primarily based on the Prussian model, German advisers played a major part in redesigning the court system. The Law on Court Organisation, which replaced the Statute on Judicial Matters, was enacted in 1890.¹ According to this Law, district courts were to be the courts of first instance in ordinary cases, while ward courts were given jurisdiction for less significant cases. Appeals could be brought to the courts of appeal, and finally to the Supreme Tribunal. Under the Constitution of 1889, the independence of the court was guaranteed to a certain extent. Judges could not be removed unless sentenced for committing a crime, or dismissed by way of disciplinary proceedings. However, the courts had to render judgment in the name of the Emperor. The Ministry of Justice was in charge of the overall administration of the courts and even had the power to appoint judges. Furthermore, the Public Prosecutor’s Office was attached to the court at each level. Due to their close relationship with the Ministry of Justice, the status of public prosecutors was regarded as being higher than that of the judges. ¹ Law No. 6, 1890. K. Takayanagi, ‘A Century of Innovation’, in H. Tanaka (ed.), The Japanese Legal System (Tokyo, 1976), pp. 167–171. W. Röhl, ‘The Court of Law’ in Röhl (ed.), History of Law in Japan since 1868 (Leiden, 2005), pp. 711–769.

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

54

The Basis of the System

The jurisdiction of the courts was limited to civil and criminal cases under this Constitution. Administrative cases were handled by administrative courts, which were part of the administration. These courts were empowered to review only a limited category of cases.² After the Second World War, a large-scale law reform aimed at the democratisation of the judicial system took place on the initiative of the Allied Forces. The independence of the judiciary was explicitly guaranteed by the new Constitution, which was adopted in 1946. The courts were also given jurisdiction over administrative cases, similar to the US system. In 1947 the Law on Courts and the Law on the Public Prosecutor’s Office were adopted. The Public Prosecutor’s Office was separated from the courts and became an independent office at a level corresponding to that of the courts. Together with the Law on Attorneys enacted in 1949, these laws—which replaced the former Law on Court Organisation—are the basic legislation governing the present judicial system.³ The Constitution provides that judicial power is vested entirely in the Supreme Court and the lower courts established under the Constitution. There are five kinds of courts: the Supreme Court, High Courts, district courts, summary courts, and family courts. The Constitution prohibits the establishment of extraordinary tribunals (Art. 76, para. 2). The Constitution also provides that any organ or agency that forms part of the executive shall not be given ‘final judicial power’. On the other hand, this provision is understood not to prohibit the establishment of courts specialising in certain fields, such as tax or administrative courts within the ordinary court system. Along with the courts, there are administrative commissions which are vested with quasi-judicial as well as quasi-legislative power. They are organisation-wise part of the government, but enjoy independence in their operation such as the Government Personnel Authority, the National Public Security Commission, the Fair Trade Commission, the Labour Commission, and the Environmental Dispute Coordination Commission. They were founded in areas where political neutrality is particularly necessary, specialised expertise is required, or mitigation of conflicting interests is the main issue. Introduced to Japan as part of the postwar reforms, the commissions are modelled on the ‘self-regulating bodies’ in the United States. Decisions of these commissions are subject to judicial review. For instance, decisions of the Fair Trade Commission can be appealed to the Tokyo High Court. In such cases, the substantial evidence rule applies, i.e. the court is bound by the facts found by the commission, insofar as the facts are based on substantial evidence.

² H. Kaneko and M. Takeshita, Saibanhō (Judicial Process), 3rd edn (1994), pp. 49–50. ³ Laws No. 59, 60, 61, 1947 and No. 205, 1949.

The Administration of Justice

55

The scope of judicial power under the present Constitution is much broader than in the pre-war period, due to the addition of the power of constitutional review and the introduction of full judicial review. The Constitution provides that the Supreme Court may determine the constitutionality of any law, ordinance, or administrative decision (Art. 81). Until 1985, there were three cases in which the Supreme Court ruled a law unconstitutional. On various occasions since 1985, the Supreme Court has found the constituency system unconstitutional because of discrepancies in the value of votes. In the latest case, in 2008, the Supreme Court found a provision in the Nationality Law to be against equality and therefore, unconstitutional (see Chapter 2). Despite the silence of the Constitution on the power of constitutional review by the lower courts, it is acknowledged that they also have such power.⁴ In fact, in a number of cases the lower courts have found certain laws or acts to be unconstitutional. Constitutional and judicial review is possible only when it is necessary to render judgment on a specific case. Abstract normative control (abstrakte Normenkontrolle) without reference to a specific case, as exercised by the German Constitutional Court, does not exist in Japan. The limit of judicial power is discussed in relation to judicial review. The Law on Courts provides that courts, except in cases specifically provided by the Constitution, shall have jurisdiction over all kinds of legal disputes (Art. 3, para. 1). Thus, administrative cases fall within the jurisdiction of the court almost without exception. The court accepted around 4,000 administrative cases in 2006.⁵

2. The ‘Justice System Reform’ Since the post-war reform, for more than a half century, no significant change took place. As years went by, various problems such as delays in court procedure, the growing distance of the court from the general public, insufficient access to the justice system, etc. became obvious. It was felt that the system needed major reform. In 2001, the government embarked on a comprehensive reform of the justice system. This was intended to support the ‘administrative reform’ or the ‘structural reform’, which was launched in the mid-1990s with an ambitious goal of ‘converting the society to a posteriori-monitoring, redress society based upon clear-cut rules and self accountability’.⁶ The Law on the Promotion of Justice System Reform of 2001 set the aim of the reform as the development of a justice system that can achieve its purpose in ⁴ Judgment of the Supreme Court, 8 October 1952, Minshū 6-9-783. ⁵ . ⁶ .

56

The Basis of the System

a speedier, more appropriate and effective manner under fair and due process (Art. 2).⁷ The reform was not limited to the judicial system per se, but included the recruitment and training of lawyers, and legal education. In 2002, the government published the Programme for the Promotion of the Judicial Reform.⁸ The Programme included the following items: A. The Reform of the Civil Justice System a. speeding up of the civil procedure (targeting reduction of time by 50 per cent) and improvement of case management; b. reduction of the time needed for cases which require expert knowledge by making use of experts other than lawyers in the procedure; c. reform of the procedure involving intellectual property rights and labour cases; d. reform of the Family Court and the Summary Court; e. expansion and invigoration of the ADR system; f. reinforcement of judicial review of administration via the reform of the Administrative Litigation Law. B. Reform of the Criminal Justice System a. speeding up of the criminal procedure and improvement of case management; b. introduction of defence counsel for suspects (before indictment) supported by the public in the same manner as for defendants; c. review of the detention and interrogation procedure. C. Reform of the Supporting System a. increase in the number of lawyers; b. reform of legal education (introduction of the law school system); c. reform of the Bar Examination; d. reform of judicial training; e. reform of the recruitment and training of judges. D. Participation of the general public in the justice system a. introduction of lay participation in the criminal procedure. Between 2002 and 2006, a wide-ranging reform took place. Some new laws such as the Arbitration Law were enacted. Various existing laws were amended, including the Code of Civil Procedure and the Code of Criminal Procedure, the Administrative Litigation Law, and laws in the area of intellectual property. A major institutional change took place in the form of the creation of the Intellectual Property High Court. The law school system was introduced and the legal training system has undergone a major change. Lay participation in ⁷ Law No.119, 2001. ⁸ .

The Administration of Justice

57

the criminal justice system—saiban-in—or the lay assessor system is to start operation in 2009.⁹ These changes will be explained in the present book in the respective places. Looking at the reform in hindsight, it is only natural that a foreign observer asked the question, ‘Why so far and so fast?’.¹⁰ A variety of explanations is available, but it should be added that in the late 1990s, Japan had not only failed to recover from the aftermath of the burst of the economic bubble, but was experiencing a serious financial crisis. There was more or less a consensus among the general public that radical change in the system was needed. This popular support was essential in carrying out the reform. Since then, insofar as the general structural reform is concerned, there is a criticism that the reform has gone too far and too fast, creating a divide in society and ignoring economically deprived people. Part of the justice reform, such as the reform of legal education and the substantial increase in the number of lawyers, may have to be reviewed in the near future. The lay assessor system is yet to be tested.

3. The Court System The Constitution provides that the entire judicial power is vested in the Supreme Court and the lower courts established under the Constitution. Japan has a three-tiered court system. There are five types of courts: the Supreme Court, High Courts, district courts, summary courts, and family courts. In ordinary civil cases, the case is first handled by the district court. Two appeals are allowed against the original judgment. A party may appeal judgments of the district court to the High Court. If either party is not satisfied with the judgment of the High Court, appeal may be made to the Supreme Court. In minor criminal and civil cases, the summary court has jurisdiction. In such cases the first appeal in civil cases is made to the district court, and the second appeal is handled by the High Court.¹¹

(1) District Courts District courts are the primary courts of first instance. At present, there are 50 district courts, located in the centre of each prefecture. There are 910 judges and 9 An overview of this reform can be found in D. Foote, ‘Japanese Law at a Turning Point’, in Foote (ed.), Law in Japan; A Turning Point (Seattle, 2007), p. xix ff, ¹⁰ Foote, ibid., p. xxv. ¹¹ For the court system in general in English, see .

58

The Basis of the System

580 assistant judges working at this level.¹² District courts have original jurisdiction over ordinary civil and criminal cases. The district court also hears appeals against decisions and judgments of summary courts in civil cases. Large district courts, such as Tokyo and Osaka, have divisions within the court. For instance, the District Court of Tokyo has divisions specialising in administrative cases, traffic accident cases, intellectual property cases, bankruptcy cases, etc.

(2) High Courts High courts primarily handle appeals against judgments of the district and family courts. High courts are located in eight major cities, and are staffed with a total of 345 High Court judges.¹³ In criminal cases initiated in the summary court, appeals are made to the High Court, bypassing the district court. The High Court is a court of final instance for civil cases initiated at the summary court level and reviewed (appellate review) by the district court. In some cases, such as treason or a challenge to the validity of an election provided by the Public Election Law, the High Court has original jurisdiction. In addition, the High Court is empowered to review the decisions of quasi-judicial bodies, such as the Fair Trade Commission, the Patent Office, the High Maritime Board, etc. In such cases, and also in treason cases, five judges instead of the normal three hear the case. The Tokyo High Court has a special division which deals with cases involving the Anti-Monopoly Law. Concerning intellectual property cases, there is the Intellectual Property High Court, which is a special division of the Tokyo High Court (see below).

(3) The Supreme Court The Supreme Court is the highest court of Japan. It is composed of fifteen justices, including the Chief Justice. The Supreme Court sits either with a full bench or a petit bench with five justices. Each case is first assigned to the petit bench. The case must be transferred to a full bench where: (i) the appellant claims that the law, ordinance, order, or administrative decision is unconstitutional; (ii) the Supreme Court considers the law, regulation, order or administrative decision to be against the Constitution, regardless of any assertion by the appellant; or (iii) the Supreme Court’s decision goes against its own precedent. In the first case, if the Supreme Court had previously found the act to be constitutional, the case can be handled by the petit bench. Most cases are handled by the petit bench: the full bench hears only a handful of cases annually.

¹² Supreme Court of Japan, Justice in Japan (Tokyo, 2000), pp. 30–31. ¹³ Ibid.

The Administration of Justice

59

The Supreme Court is responsible for the standardisation of the interpretation and application of law. As a court of appeal, it reviews mainly High Court judgments. In addition, in cases involving the habeas corpus procedure, the Supreme Court, when it feels it is especially necessary, may itself decide the case, even if it is before the lower court.¹⁴ Normally, the petition is handled by the district court or the High Court. Incidentally, habeas corpus is seldom used in criminal procedure; it is usually applied in disputes about parental rights over a child or those compulsorily hospitalised in a psychiatric institution. The possibility of appeal to the Supreme Court is limited. The 1996 Code of Civil Procedure has introduced a major reform of the appeal system. The sole statutory ground for appeal to the Supreme Court is now an error of interpretation of the Constitution or other violations of the Constitution in the original instance court judgment (Art. 312, para. 1). On the other hand, a system akin to certiorari was introduced. The Supreme Court has discretion to accept appeals where the original judgment was counter to the precedents of the Supreme Court, or involved other significant matters concerning the interpretation of law (Art. 318, para.1). This was intended to alleviate the burden of the Supreme Court, but it is questionable whether this change would attain that goal. The case-load of the Japanese Supreme Court is not light. In 2007 the Supreme Court heard 4,814 civil and administrative cases. Most appeals to the Supreme Court are dismissed—2,115 cases were dismissed without a hearing. Only in three cases was the original judgment quashed.¹⁵ In criminal cases, out of 2,545 cases disposed of, 2,015 cases were dismissed and 518 cases were withdrawn by the appellants. There were only three cases where the original judgment was quashed.¹⁶ The Supreme Court is responsible for the administration of courts. It is empowered by the Constitution to make rules regarding the procedure and practice of courts, as well as matters relating to attorneys, the internal discipline of the lower courts, and court administration (Art. 77). Before the end of the Second World War the Ministry of Justice was responsible for court administration; this proved to be a serious threat to the independence of the courts. Therefore, US advisers who took part in preparing the present Constitution strengthened the independence of the judiciary by vesting the Supreme Court with the same rule-making power as courts in common law countries exercise. The Supreme Court has been fairly active in exercising its rule-making power. Some are minor in nature, but more important ones include the Rules on Criminal Procedure and Rules on Civil Procedure.¹⁷ ¹⁴ Law No. 199, 1948. ¹⁵ . ¹⁶ . ¹⁷ T. Hattori, ‘The Role of the Supreme Court of Japan in the Field of Judicial Administration’, 1984 60 Washington Law Review 69, pp. 83–85.

60

The Basis of the System

The Constitution provides that Supreme Court Justices are appointed by the Cabinet and attested by the Emperor (Art. 79, para. 1). The Chief Justice is appointed by the Emperor on the advice of the Prime Minister. The Law on Courts provides that justices should be selected from learned individuals who have received legal education, and should be not less than 40 years of age. At least ten out of fifteen justices are required to have over twenty years’ experience as either president of a High Court, judge, summary court judge, public prosecutor, or law professor (Art. 43). When the Supreme Court was founded in 1947, it was comprised of five professional judges, five practising attorneys, and five individuals from other professions, including law professors. The composition of the Court has changed significantly since then. As of August 2008, six justices were ‘career judges’ promoted from the lower courts, two were public prosecutors, four were attorneys, one was a law professor, and two were from the ministries. Of the six career judges, four had worked in the Secretariat of the Supreme Court. Judges who have been Secretary General of the Supreme Court have, without exception, later become Supreme Court justices. The Constitution introduced a system of referendum by which justices of the Supreme Court are reviewed after their appointment and every ten years afterwards (Art. 79, paras 2 and 3). The appointment itself takes effect immediately, but judges may be recalled by a national referendum, which takes place at the same time as the first general election after their appointment. This system of general referendum was introduced after the Second World War, influenced by the practices of some states in the United States. However, in fact, there has never been a case where a Supreme Court Justice was recalled. Some people criticise the referendum system on the ground that it has become mere routine. Despite this fact, the symbolic significance of this system as a form of democratic control over the Supreme Court cannot be denied.

(4) Intellectual Property High Court The Intellectual Property High Court was set up as a court specialising in intellectual property cases in 2005 in line with the Programme for the Promotion of Intellectual Property.¹⁸ This was inspired by the US Court of Appeals for the Federal Circuit, although it should be noted that the end result is rather different.¹⁹ Technically it is a division of the Tokyo High Court. The jurisdiction of the Intellectual Property High Court covers the following: • appeals against the decisions of the Patent Office on patent, utility model, design rights, and trade mark cases;

¹⁸ . ¹⁹ N. Nakayama, ‘Chiteki-Zaisan-Seido-Kaikaku no Keii to Kadai (The Process of Reform of the Intellectual Property System and its Tasks)’, Jurist, No. 1326, pp. 5–6.

The Administration of Justice

61

• appeals against the judgments of Tokyo and Osaka District Courts on patent, utility model, the right of layout-design of integrated circuits, and author’s right on programme works (infringement actions, injunction, claims for compensation). The jurisdiction of the district court has also undergone a major change. For cases involving patent, utility model, the right of layout-design of integrated circuits, and the author’s right on programme works, the Tokyo and Osaka District Courts have exclusive jurisdiction. There are specialised divisions with judges with expertise in both courts (four in Tokyo and two in Osaka). Appeals against judgments of both courts are heard by the Intellectual Property High Court. Concerning cases on trade marks, design rights, rights of the seed and plant grower, copyright (except for programme works), and trade secrets, this does not apply. Appeals against the judgment of the district court in these cases are heard by the respective High Courts, which have jurisdiction over the district court which heard the case. If this High Court is the Tokyo High Court, then the appeal is heard by the Intellectual Property High Court. The Court normally hears the case with three judges, but in cases involving important matters and where the providing of a unified opinion of the court in a short span of time is necessary, a grand panel comprising five judges hears the case. There have been some celebrated cases such as the Ichitaro case decided by the grand panel. A novelty of the Intellectual Property High Court is the system of technical advisers, who assist the court by providing explanations of technical knowledge in cases where such expertise is needed to clarify issues or to facilitate the proceedings. Technical advisors are appointed by the Supreme Court as part-time officials from amongst experts such as academics and researchers who have expertise in various fields of science. In 2007, the Court accepted 105 appeals against judgments of the district court and disposed of 88 cases. The appeal procedure took on average 7.6 months. This is much shorter than in 1997 at the Tokyo High Court, where on average, it took 18.5 months. Concerning appeals against the decisions of the Patent Office, the Court accepted 437 cases and disposed of 543 cases. The average time needed was 9.1 months, as compared to 18.6 months in 1997.²⁰ It should be added that also at first instance (district court) level, the length of time needed has been reduced in the last decade. While in 1996, the average length of the proceedings at the first instance court was 22.7 months, in 2006, it was 12.5 months.²¹

(5) Family Court The family court specialises in family affairs and juvenile delinquency. Family courts and their branches are located in the same places as district courts. There ²⁰ . ²¹ Supreme Court (ed.), Intellectual Property High Court (Tokyo, 2007), p. 18.

62

The Basis of the System

are about 200 judges and 150 assistant judges, plus 1,500 probation officers working in the family court.²² The family court is an innovation from the post-war reforms. The idea of establishing a court which specialises both in juvenile cases and family affairs came from the United States, where it was believed that stable family relations were a prerequisite for the healthy upbringing of juveniles and the prevention of delinquency. In 1947, family courts were established in Japan primarily on the initiative of US advisers.²³ In 2007, the family court heard 748,561 family cases and 200,591 juvenile cases.²⁴ The procedure in juvenile cases, as well as family affairs adjudication, is conducted in camera and is fairly informal. Matters such as the commencement and termination of guardianship and curatorship, declarations of disappearance, and correction of civil registers, which by their nature can only be determined by a decision of the court, are handled via the adjudication (shinpan—determination) procedure at the family court. Some cases, such as the distribution of matrimonial property resulting from divorce or matters concerning probate, are required to go through conciliation proceedings fi rst; these cases are adjudicated only when conciliation has failed. Family aff airs adjudication is handled by a single judge with the participation of family court councillors. In most cases, the decision can be appealed to the High Court. Family aff airs conciliation proceedings are handled by a conciliation committee which is composed of a judge and two family aff airs conciliation commissioners. Councillors and commissioners are parttime government officials selected from laymen with broad knowledge and experience. Previously, litigation involving the formation and the recognition of the existence of civil status, such as divorce and legitimisation, was handled by the district court. A new Law on the Proceedings on Personal Status was enacted in 2003, and these cases were made the jurisdiction of the family court. In divorce cases, when the parties did not reach agreement at the conciliation proceedings at the family court, the case used to be decided by the district court, but now the litigation is also heard by the family court. Other cases handled by the family court include cases of juvenile delinquency, i.e. by minors under the age of 20, and cases involving adults who have committed crimes against the welfare of juveniles. In addition, the family court is empowered to place under supervision juveniles who have not actually committed a crime but are likely to do so in the future. The law which provides for the ²² Justice in Japan, supra, p. 33. ²³ Supreme Court of Japan, Guide to the Family Court of Japan (Tokyo, 1991), pp. 5–7. ²⁴ ; .

The Administration of Justice

63

jurisdiction and procedure of juvenile cases is the Law on Juveniles of 1948.²⁵ All cases of juvenile delinquency are first brought to the family court. The court may transfer a case to the district court or the summary court provided that the juvenile is not younger than sixteen.

(6) Summary Courts Summary courts have jurisdiction over minor criminal and civil cases. There are currently 438 summary courts, with 806 summary court judges.²⁶ In civil cases, summary courts handle cases involving claims not exceeding 1,400,000 yen. In criminal cases, offences which may result in a fine and/or detention of up to 15 days fall within the jurisdiction of the summary courts. Summary courts are not empowered to impose more than three years’ imprisonment. If the judge finds it necessary to impose a longer sentence, he must transfer the case to the district court. Summary court judges are not always career judges, i.e. judges who have been appointed assistant judge and then promoted to a full judge. In addition to those who have passed the uniform State examination, those who have worked for a certain period in the court or the Public Prosecutor’s Office as a clerk can be appointed a summary court judge (Law on Courts, Art. 45, para. 1). The 1996 Code of Civil Procedure has introduced a system to deal with small claims. Cases involving less than 600,000 yen can be handled by a simplified procedure (Art. 368, para. 1). In principle, the court must complete the hearing on the same day. The parties are obliged to present claims and evidence on that day (Art. 370). Witnesses may give evidence without an oath (Art. 372, para. 1). The party may ask for the case to be transferred to the formal procedure, unless he pleaded in the first hearing, or when the hearing was completed (Art. 373, para. 1).

4. Lay Participation One of the unique features of the Japanese court system was that lay participation was very limited. Despite its foreign origin, the Japanese court system did not accommodate either a jury system or a system of lay assessors. There are some lay elements in the system, such as civil conciliation commissioners and family court councillors, and more recently in the labour adjudication procedure, labour adjudication commissioners are involved. However, these people are required to have certain knowledge and experience, and a majority of conciliation commissioners are attorneys. ²⁵ Law No. 168, 1948. ²⁶ Justice in Japan, supra, p. 36.

64

The Basis of the System

In fact, a jury system in criminal cases was introduced in Japan in 1923 and existed until 1943.²⁷ Early in the period of modernisation, there were proposals to introduce trial by jury. The first draft of the Code of Criminal Instruction prepared in the early period included provisions for jury trials, as did the original French Code. However, opponents of the jury trial argued that it was inappropriate to leave fact-finding to laymen. They also asserted that the jury would be too lenient and sometimes acquit those who were apparently guilty. The opponents prevailed and provisions concerning jury trial were deleted from the draft. In the early 1890s, discussions regarding the introduction of the jury trial resumed, and after a prolonged debate the Law on Jury Trial was enacted in 1923. This Law provided that in cases where imprisonment of over three years could be imposed the case could be tried by a jury, and in cases where capital punishment was possible jury trial was obligatory. However, there was a wide exception to this rule: treason, military crimes, and other serious crimes against the State were exempted from mandatory jury trial. In addition, the defendant was entitled to waive his right to be tried by a jury. Jury decision was by a simple majority, like the French jury. This was intended to avoid hung juries, which were said to be common in England. Although it was inspired by French and German law, the Japanese jury system had certain peculiarities. The verdict of the jury was not binding on the court and the judge was able to remand the case for retrial as many times as he wished, until the verdict conformed with his opinion. Although the defendant was not entitled to appeal against the verdict on factual grounds, the prosecution was able to do so. The Law was actually a compromise between the views of the government anxious to prevent too many unjustified acquittals and the proponents of the jury system. The democratic contents of the jury system were thus substantially watered down. As was to be expected, jury trial as provided by this Law did not gain popularity. In the first year, more than 100 cases were tried by jury. However, the waiver of jury trial by defendants increased, later reaching more than 90 per cent of eligible cases. Finally, in 1943, the law was suspended due to its cost and inefficiency. The failure of the Japanese jury is explained in various ways. First, it is often pointed out that the Japanese have a tendency to trust professional judges rather than their peers. Japanese judges are highly trusted by the people.²⁸ Modernisation in Japan was led by the government from above. In the process of modernisation in the late nineteenth century, the government played a significant role. Therefore, the government and officialdom were regarded as positive and progressive forces rather than necessary evils which require constant control by ²⁷ For the history of jury trial in Japan, especially its political background, see T. Mitani, Kindai Nihon no Shihōken to Seitō (Judicial Power and Political Parties in Modern Japan) (Tokyo, 1980). ²⁸ See J. O. Haley, ‘The Japanese Judiciary: Mainitaining Integrity, Autonomy and the Public Trust’, in D. Foote (ed.), Law in Japan: A Turning Point (Seattle, 2008), p. 99ff.

The Administration of Justice

65

the people. Common people had an inclination to defer to officialdom while distrusting their peers. Therefore, trial by peers was not as attractive as trial by a professional judge. Secondly, the fact that the verdict was not binding on the court, and that appeal was not allowed on factual grounds, discouraged defendants from jury trial. The Japanese jury system was never given a real chance of success because of its status as a mere consultative body.²⁹ After the Second World War, the Code of Criminal Procedure was replaced by a new code, heavily influenced by US law. The first draft of the Code on Criminal Procedure did include provisions for jury trial. However, there was strong opposition from Japanese members of the drafting committee, who cited the failure of the jury system before the Second World War. The Americans did not press hard because, as one of the Americans stated later, they did not feel it necessary to introduce the jury system, which was an institution historically rooted in very different soil.³⁰ The introduction of trial by jury or lay assessors in criminal cases has been proposed from time to time. There are various reasons for this. Some proponents of such a reform intend to enhance the ‘democratisation’ of the procedure and bring them closer to everyday reality. Others support trial by jury, since it may ‘vitalise’ the criminal trial, which relies heavily on written evidence obtained at the pre-trial stage. As part of the Justice System Reform, the system of lay assessors—saiban-in—is to be introduced from 2009. A panel of three judges and six lay assessors selected from among the general public is to hear criminal cases where the death of a person was caused by an intentional criminal act, the death penalty, life imprisonment, or imprisonment is applicable, or cases where a minimum one year’s imprisonment is available. The judges and lay assessors jointly decide upon guilt and if it is confirmed, on the sentence. The defendant is not allowed to waive the trial with the participation of lay assessors.³¹ The system is yet to be tested, but there are some concerns. A leading constitutional lawyer has pointed out that according to the new Law on Criminal Procedure with the Participation of Lay Assessors, in order to find the defendant guilty a majority of the panel—by taking into consideration the opinion of both judges and assessors—is needed. This means that at least one of the three judges needs to support the verdict, but on the other hand, even if two out of three judges are against the verdict, the defendant can still be found guilty. Article 32 of the Constitution provides for the right to be heard by the court. Whether such a panel can be regarded as a ‘court’ is questionable.³² ²⁹ M. Urabe, ‘A Study of Jury Trial in Japan’, in H. Tanaka (ed.), supra, pp. 483–491. ³⁰ M. Opler, Legal Reform in Occupied Japan (Princeton, 1980), pp. 145–147. ³¹ See . See K. Matsuo, ‘Keiji-Saiban to Kokumin-Sanka (Criminal Justice and the Participation of the People)’, Hōsō-Jihō vol. 60, No. 9, pp. 1–20. ³² K. Takahashi, Rikken-Shugi to Nihon-Koku Kenpo (Constitutionalism and the Constitution of Japan) (Tokyo, 2006), pp. 230–232.

66

The Basis of the System

5. Speeding up of the Court Proceedings The Japanese Court System used to be renowned for its lengthy delays. In civil cases in 1997, the average length of a trial was 11.9 months in the district court, 13.2 months in the High Court, and 3.1 months for summary court. Of the 2,839 civil cases disposed of by the Supreme Court, 220 cases had taken more than 10 years after the case was brought to the court to be completed.³³ In contested cases at the district court level, it takes on average 27.5 months until judgment is rendered.³⁴ In criminal cases, the average length of trial in the district and summary courts was 3.2 months and 2.3 months respectively in 1996. The process, from prosecution to final judgment, took on average 25.7 months.³⁵ The courts have endeavoured to speed up the procedure. One measure was the pleading-cum-compromise (benron ken wakai) in the civil procedure, developed out of practice, and later endorsed by the Supreme Court. In this procedure, parties meet in the judge’s chambers and efforts are made to identify the disputed matter and focus on the issues. At the same time, parties are encouraged to compromise, if appropriate. This procedure has been incorporated into the 1996 Code of Civil Procedure with some modifications. The time needed for the proceedings has been gradually reduced since the late 1990s, with the introduction of a better case management and ensuring the assistance of experts in complicated cases that require specialist knowledge. The reduction of time needed in the proceedings was one of the main goals of the Justice System Reform. This move was facilitated by streamlining the procedure in intellectual property cases and the establishment of the Intellectual Property High Court. According to a report by the Supreme Court in 2007, of the civil cases heard by the district court, 63.9 per cent were completed within six months, and in 16.4 per cent of cases, between six months and one year. The average length of first instance proceedings at the district court level was 7.8 months. In criminal cases, the average length was 3.1 months. However, if the defendant contested guilt, the average was 8.9 months.³⁶

6. Alternative Dispute Resolution There are various alternatives to litigation in Japan. The most widely used of these are conciliation proceedings in civil and family cases in district, summary, and ³³ Shihō-Tōkei-Nenpō, Civil Cases, supra, p. 190. ³⁴ Ibid. ³⁵ ‘Heisei 8 nen niokeru keiji-saiban no Gaikyō (An Overview of the State of Criminal Justice in 1996) Part 1’, Hosō-jihō, 1998, No. 2, pp. 40–46. ³⁶ ; .

The Administration of Justice

67

family courts. In civil disputes, parties may agree to initiate civil conciliation proceedings at the summary court or district court instead of filing a suit. Even after the suit has been filed, the court may transfer the case to conciliation proceedings if it is considered suitable. In 2007, 254,013 new cases were accepted for civil conciliation proceedings at the summary court level.³⁷ The Law on Civil Conciliation provides as the aim of conciliation the resolution of disputes through mutual concession of the parties, taking into account the ‘actual state of affairs and in conformity with reason’ (Art. 1). Conciliation proceedings are handled by a conciliation committee composed of a judge and two civil conciliation commissioners. Civil conciliation commissioners are part-time government employees appointed by the Supreme Court for a two-year term. They are selected from amongst people aged between 40 and 69 with ‘wide general knowledge’. They should either be qualified as attorneys, have knowledge useful in the resolution of civil disputes, or have sufficient skills and experience in social life. In family cases, conciliation is handled by a judge and two family court councillors, who are also part-time government employees. When the parties reach agreement in the conciliation proceedings, the documented agreement has the same effect as a court judgment. If the parties do not reach agreement, the judge may, after consulting the conciliation commissioners and considering relevant circumstances, make a recommendation for settling the dispute. If neither party files an objection to this recommendation it has the same effect as a successful conciliation. The raison d’ être of conciliation is usually explained in two ways. First, it enables the parties to avoid litigation, which can be expensive and timeconsuming. Secondly, in certain kinds of case it is preferable for the parties to reach agreement through concession without confrontation, particularly in disputes which presuppose a long-term relationship between the parties, such as family disputes or landlord–tenant relations. Apart from conciliation proceedings before the court, there are some informal means of dispute settlement out of court. These range from commercial arbitration to conciliation and mediation, as well as agreements reached by the parties through compromise (jidan). Disputes covered by these devices relate to pollution, consumer credit, traffic accidents, construction and building problems, intellectual property disputes, securities transactions, medical malpractice cases, and consumer protection. Generally, conciliation and mediation are preferred to arbitration, since the award of arbitration is binding on the parties, while in conciliation the parties can decide whether to accept the outcome or go to court. In some areas conciliation and mediation have come to be widely utilised. The most extensive network for alternative dispute settlement administered by ³⁷ .

The Basis of the System

68

central and local government is probably the National Consumer Affairs Centre and its local affiliates.³⁸ The Centre was established by a law passed in the 1970s and serves as the core institution for more than 300 local consumer centres set up by local governments. These centres provide, amongst other functions, counselling and advice to consumers. Matters handled by the centres range from product liability and consumer credit to pyramid sales and other deceptive sales methods. Another means of dispute settlement administered by the government is the Environmental Disputes Coordination Commission, which was set up in 1972. Dispute settlement by the Committee is more flexible than court proceedings in that, inter alia, the requirements for standing are not strict, and proceedings can be initiated at the stage where no actual damage has emerged.³⁹ There are also various private non-profit-making bodies which handle disputes. One example is the Centre for Settlement of Traffic Accident Disputes, which was established in 1978. Although the Centre is funded by the Association of Marine and Fire Insurance Companies, it operates independently of them. The Centre retains more than 100 attorneys on a part-time basis and these attorneys give advice and act as conciliators in disputes. The Centre gives advice and conducts conciliation from the viewpoint of how the court would have decided, had the case been brought before it.⁴⁰ As part of the Justice System Reform, the promotion of alternative dispute resolution was listed in the agenda. As a result, the Arbitration Law was newly enacted in 2003.⁴¹ The next year, the Law on the Promotion of the Use of Out of Court Dispute Resolution (‘ADR Law’) was enacted.⁴² This Law provides for the certification of organisations which handle such cases as a business by the Minister of Justice.

7. International Commercial Arbitration The previous Code of Civil Procedure had a set of rules on arbitration derived from the German Code of Civil Procedure of the late nineteenth century, but these rules were designed to deal with disputes between Japanese entities, and lacked provisions on international arbitration. Besides, the Code dealt with ad hoc, rather than institutional, arbitration. The new Code of Civil Procedure was enacted in 1996, but the section dealing with arbitration was left out as a separate law awaiting future amendments.

³⁸ ³⁹ ⁴⁰ ⁴¹

Japan Consumer Information Centre: . . . Law No. 138, 2003. ⁴² Law No. 151, 2004.

The Administration of Justice

69

One of the reasons why arbitration in Japan has long been unpopular, despite the existence of established arbitral institutions such as the Japan Commercial Arbitration Association (JCAA) and the Tokyo Maritime Arbitration Commission (TOMAC), may have been this rather obsolete arbitration law. At the time of the civil procedure reform, it was generally agreed that the arbitration law needed modernising too. Also, the lack of knowledge of arbitration, as well as difficulties in selecting appropriate arbitrators arising from linguistic and geographical factors, are often cited as the reason for the disuse of arbitration. The reform of arbitration law was eventually put on the agenda as part of the Justice System Reform in 2001. The development of the system for alternative dispute resolution (ADR) was envisaged as part of this reform, and it was recommended that arbitration law (including international commercial arbitration) be modernised. The common understanding amongst those who took part in preparing the new law was that it should be, as far as possible, in line with the United Nations Commission on International Trade Law (hereinafter, ‘UNCITRAL’) Model Law on International Commercial Arbitration. The new Law was enacted in 2003. While the UNCITRAL Model Law is designed for international commercial arbitration (although it does not exclude the possibility of accommodating domestic arbitration), the new law in Japan is applicable to both domestic and international arbitration. Under the new Law, unless otherwise provided by law, an arbitration agreement is valid only when the subject of the arbitration is a civil dispute that can be settled by the parties (Art. 13, para. 1). The key therefore is whether the dispute concerns a matter that is at the parties’ disposal. The basic rule regarding the role of the courts in arbitration is set out in the new law as follows (Art. 4): The courts are entitled to exercise their power in relation to arbitration proceedings only in cases provided by the present law.

This echoes the Model Law provision on the extent of court intervention. Pursuant to the above principle, the law provides for specific instances in which a court may become involved in arbitration: • • • • • • •

service of documents (Art. 12, para. 2); appointment of arbitrators (Art. 17, paras 2–4); challenge of arbitrators (Art. 19, para. 4); determination of Kompetenz-Kompetenz (Art. 23); examination of evidence (Art. 35, para. 1); setting aside of arbitral awards (Art. 44); enforcement of arbitral awards (Art. 46).

70

The Basis of the System

Arbitral tribunals are empowered to decide upon the existence or validity of the arbitration agreement (Art. 23, para. 1). Objections to the jurisdiction of the arbitral tribunal must be made before the initial pleadings are submitted, or, if the grounds for making such an objection emerge in the course of the proceedings, without delay, unless the tribunal acknowledges that there were justifiable reasons for the delay (Art. 23, para. 2). In cases where the arbitral tribunal rules that it has jurisdiction, the objecting party may challenge the ruling in court within 30 days of receiving it. Pending the court’s decision, the tribunal is entitled to proceed with the arbitration and render an award (Art. 23, para. 5). No appeal is available, however, in cases where the tribunal finds that it does not have jurisdiction, given that the effectiveness of forcing the tribunal to arbitrate is questionable. If an action is brought in court relating to a matter that is the subject of an arbitration agreement, the court must dismiss the action at the request of the defendant (Art. 14). Parties can be represented by attorneys, including foreign attorneys. The 1986 Special Measures Law on the Handling of Legal Business by Foreign Attorneys was amended in 1996 to allow such representation. Unless otherwise agreed by the parties, the arbitral tribunal is empowered to oblige either party to take any interim measures or measures of protection it considers necessary in respect of the subject matter of the dispute, if requested to do so by one of the parties (Art. 24). In such cases, appropriate security may be ordered. The scope of the measures available to the tribunal in this respect is unclear. This was due to the fact that at the time of enactment, UNCITRAL was still working on this matter. It was expected that if the UNCITRAL’s effort bore fruit, the Japanese Law would be amended. However, despite the amendment to the Model Law on this part being adopted, there is no move to amend the Japanese Law. Both arbitral tribunals and parties are entitled to apply to the courts for assistance in taking evidence by any means provided in the Code of Civil Procedure that the arbitral tribunal considers necessary (Art. 35). These include commissioning investigations, examining witnesses and experts, the examination of written evidence, and on-site inspections, unless the parties have agreed not to allow such applications. This provision, which is more detailed than that of the UNCITRAL Model Law, allows courts to examine evidence that the arbitral tribunals cannot. The underlying idea is that since arbitral awards are binding and final, parties should have equivalent opportunities for fact finding as are available to parties in civil proceedings. The former law contained a similar provision, but the scope of the means available to the courts was unclear. The new law is more specific and provides for the following: • entrustment of investigation (Code of Civil Procedure Art. 186); • questioning of witnesses (Arts 190–206);

The Administration of Justice • • • • •

71

expert examination (Arts 212–217); entrustment of expert examination (Art. 218); order for the submission of evidence (Arts 220–225, 227); entrustment of service of documents (Arts 226–227); inspection (Arts 232–233).

If the application for assistance is made by a party, the arbitral tribunal’s consent is required, so as to prevent parties from applying for the examination of unnecessary evidence or in other ways abusing the system. When courts examine evidence at the request of arbitral tribunals or parties in arbitration proceedings, the arbitrators are entitled to inspect documents and objects and, with the permission of the presiding judge, to question the witnesses and experts. Although administered by the judge, the procedure thereby allows the arbitrators to form their personal view in a direct manner. A party may apply to a court to set aside an arbitral award on the following grounds (Art. 44): a. the arbitration agreement is invalid due to the incapacity of the party; b. in accordance with the agreed law applicable to the arbitration agreement (or, in the absence of such law, Japanese law), the arbitration agreement is invalid for reasons other than incapacity; c. the party making the application did not receive notice as required by Japanese law (or, except for matters concerning public policy, alternative provisions agreed by the parties) in the process of appointing arbitrators or in the arbitral proceedings; d. the party making the application was unable to make a defence in the arbitral procedure; e. the award contains decisions on matters beyond the scope of the arbitration agreement or the submissions made in the course of the arbitration; f. the composition of the arbitral tribunal or the arbitral proceedings were contrary to Japanese law (or, except on matters concerning public policy, alternative provisions agreed by the parties); g. the claim for arbitration concerned matters that are not arbitrable under Japanese law; h. the content of the award is contrary to public policy or good morals in Japan. Recognition and enforcement can also be refused on the above grounds. As for the recognition and enforcement of foreign arbitral awards, Japan ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1961. There have been some cases where the enforcement of foreign arbitral awards was contested in court, and the courts have found those awards to be enforceable on the basis of the New York Convention, the

72

The Basis of the System

Geneva Convention, and various bilateral treaties. The enforcement of the China International Economy and Trade Arbitration Commission (CIETAC) award has been contested in court on several occasions. In one case, the Japanese party argued, inter alia, that CIETAC was part of the Economic and Trade Department of China and a fair outcome of the process could not be expected. The court found that the arguments put forward by the Japanese party did not fall within the grounds for refusal of enforcement as listed in the New York Convention, and that no unfairness could be inferred from the mere fact that CIETAC was a State-administered organisation. The court therefore allowed the enforcement of the award.⁴³

⁴³ Tokyo District Court, 27 January 1994, Hanta, 853–266.

4 The Legal Profession 1. The Hōsō Judges, public prosecutors, and attorneys form a distinct group of professions which is called the hōsō. The term originally came from China where it denoted those who administered the law.¹ Although it is often translated as ‘the legal profession’ in English, this may be misleading because the term legal profession usually presupposes a system where judges and public prosecutors come from the rank of attorneys and therefore have a common foundation. In contrast, Japanese judges are predominantly ‘career judges’, who join the court immediately after completing legal training. Public prosecutors are also recruited directly from the Legal Training and Research Institute. Thus, the mobility between different professions is not as high as in other jurisdictions. All members of the hōsō are required to pass the same uniform State examination and are trained in the Legal Research and Training Institute for one year. Regardless of their future profession, they go through the same training at the Institute. The Japanese judicial system originated from continental Europe, where there is a distinct line between judges and public prosecutors on the one hand and attorneys on the other. In Germany, public prosecutors are regarded as part of the judiciary together with the judges, although there is a State examination and common training with Rechtsanwalts. In France, judges and procureurs are both categorised as magistrats; there is neither a common examination nor training with the avocats. Japan initially adopted the French system but later introduced a common examination for all three professions and then, after the Second World War, a common training as well. Therefore, the current system is similar to the German system, except that public prosecutors are no longer considered to be part of the judiciary, as they were before the war. However, the tradition continues and judges and public prosecutors are seen as representing ‘authority’ or prerogative power, while attorneys often take pride in acting for citizens. In addition to the hōsō, whose number is limited (around 30,000), there are various types of professionals involved in the legal business. Apart from those ¹ A. Mikazuki, Hōgaku-Nyūmon (Introduction to Jurisprudence) (Tokyo, 1982), pp. 121–122.

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

74

The Basis of the System

in corporate legal departments, all must pass a special State examination and go through some training. These people perform functions often performed by attorneys in other countries.

2. Judges Judges of the High Courts, district courts, family courts, and summary courts are appointed by the Cabinet from a list prepared by the Supreme Court. The Supreme Court assigns a judge to a specific court. The fi xed number of judges as set in 2002 was 1,445 judges and 820 assistance judges (excluding summary court judges).² With the exception of summary court judges, most lower court judges are ‘career judges’. They begin their careers as assistant judges at a district court or a family court after training at the Legal Training and Research Institute. They must accumulate ten years’ experience as an assistant judge in order to become a full judge. Almost all judges of High Courts, district courts, and family courts start their careers in this way. High Court judges are promoted from among district court and family court judges. The Law on Courts provides that public prosecutors and attorneys can be appointed to the Bench. Law professors may also be appointed to judicial posts under certain conditions. The legislature apparently intended to allow some exchange of personnel between the three legal professions: judges, public prosecutors, and attorneys. However, while the exchange of personnel between the courts, on one hand, and the Ministry of Justice and the Public Prosecutor’s Office, on the other, is not exceptional, the appointment of judges from amongst attorneys is rare. The Japan Federation of Bar Associations has been proposing the appointment of judges from amongst attorneys for some time, and since 1988 the Supreme Court has started inviting attorneys to apply for the Bench. In the 1990s, less than five attorneys were appointed to the bench per year. However, in the process of the ‘Justice System Reform’, recruitment of judges from attorneys was promoted. As a result, the number is increasing. The term of appointment for judges is ten years. This term is renewable and judges are almost automatically reappointed. Most judges work in court until their retirement age of 65. For Supreme Court justices and summary court judges, the retirement age is 70. Although the renewal of the term has been almost automatic, the Supreme Court is of the opinion that it has the power to refuse renewal without providing reasons. In one case, a judge who refused to accept a transfer was not reappointed after the expiration of his term.

² .

The Legal Profession

75

Similar problems occur when an assistant judge is appointed as a judge after the expiration of a ten-year term. This had been almost automatic until the late 1960s when the Supreme Court started to block the promotion of some assistant judges. In one celebrated case, the Supreme Court rejected the application of an assistant judge to be appointed a full judge. The Supreme Court gave no reasons for the refusal. Because this assistant judge was a member of the Young Lawyers Association, an organisation denounced by the Supreme Court as being leftist, the Supreme Court was criticised for discrimination on political grounds. Although the Supreme Court has some degree of discretion in making appointments and reappointments, it was questionable whether it exercised its power properly in this case.³ The personnel administration department of the Supreme Court Secretariat has the power to transfer and promote judges. Judges are usually moved between large, medium, and small courts within their ten-year terms. On the other hand, some select individuals are seconded to the Supreme Court Secretariat and then return to the lower courts where they occupy key positions. At present, three out of fifteen Supreme Court justices have worked in the Secretariat at some stage in their career. As part of the ‘Justice System Reform’, the system of recruitment and promotion of judges has undergone significant changes. It was felt that the system needed transparency and objectivity. Particularly noteworthy is the establishment of the Consultative Committee on the Nomination of Lower Court Judges. This body was set up in 2003 with eleven members, of which six are selected from among judges, prosecutors, and attorneys, while five are appointed from outside the hōsō. It gives recommendations to the Supreme Court on the nomination of lower court judges. In response to the long-standing criticism that judges are disconnected from the ordinary way of life, assistant judges are now seconded to ministries, companies and other organisations to broaden their experience. They may spend two years in a law firm on secondment.⁴ The Constitution of 1889 did not explicitly provide for the independence of the court, but the present Constitution provides that all judges shall exercise their power independently in accordance with their conscience and bound only by the Constitution and laws (Art. 76, para. 3). As a corollary, the Constitution guarantees that judges are not to be dismissed unless they have been either impeached, or found by a court to be mentally or physically unfit (Art. 78). The Law on Courts further guarantees that judges are not to be transferred, suspended, or have their salaries reduced (Art. 48). The procedure for impeachment is provided by the Law on the Impeachment of Judges.⁵ The Impeachment Tribunal is attached to the Diet and is composed ³ H. Tanaka (ed.), The Japanese Legal System (Tokyo, 1976), pp. 558–562. ⁴ . ⁵ Law No. 137, 1947.

76

The Basis of the System

of fourteen members who are members of the Diet, seven from each House. The Tribunal exercises its power independently from the Diet, and is not bound by its decisions. There is a Diet Prosecution Committee which decides whether to bring a case to the Tribunal or not. The grounds for impeachment are serious breach or gross neglect of duties, and misconduct which affects the authority and credibility of the judge, irrespective of whether it took place in the course of his duty or not. Any person may file a complaint with the Prosecution Committee requesting the impeachment of a judge. The Tribunal may only dismiss or acquit the judge; other disciplinary measures fall solely within the competence of the Supreme Court and the High Courts. In order to dismiss a judge, the consent of two-thirds of the members of the Tribunal who took part in the proceedings is required. There are also disciplinary proceedings of judges which are handled by the court. The grounds for disciplinary action are breach or neglect of duties, and misconduct which undermines the dignity of judges.

3. Public Prosecutors The system of public prosecutors was first introduced to Japan in 1872, when the influence of French law was predominant. The primary task of the public prosecutor was to supervise judicial proceedings on behalf of the government, as with the French ministère public. However, the role of the Public Prosecutor’s Office soon shifted from that of a supervisory agency to that of a prosecuting agency. The Law of Court Organisation of 1890 created the Public Prosecutor’s Office as an agency of State prosecution.⁶ The Public Prosecutor’s Office was a highly centralised and hierarchical body. It was made part of the judiciary, together with the court. The Public Prosecutor’s Office at each level was attached to the court of the same level. Public prosecutors regarded themselves as equal to judges, or even higher, and were treated as such. Public prosecutors had, and still have, broad powers to prosecute offenders and investigate crimes. Since private prosecution was not allowed in Japan, public prosecutors monopolised the power to prosecute. They wielded a broad discretionary power to decide whether to prosecute an alleged offender. This included a power not to prosecute an offender even if the prosecutor is convinced of his guilt, taking into account the nature of the crime, the character of the offender, and various other factors. This discretionary power was not provided by law in the pre-war period, but developed from the practice of the prosecutors. Together with their broad power to issue warrants, the Public Prosecutor’s Office became a powerful body, not only in relation to the court, but also within the political system as a whole. This led to political bias and excess of power on the part of ⁶ Y. Noda, Introduction to Japanese Law (translated by A. Angelo) (Tokyo, 1976), pp. 135–136.

The Legal Profession

77

public prosecutors in the 1920s; in some cases they exercised their discretionary powers in favour of a political party.⁷ One of the major purposes of the post-war judicial reform was to curtail the power of the Public Prosecutor’s Office and to democratise its structure. However, this attempt at reform was only partially successful. The Public Prosecutor’s Office was separated from the court, but its highly centralised and hierarchical system remained intact. While the power to issue warrants was given exclusively to judges, the discretionary power of the prosecutors remained unhampered. An attempt to control this discretionary power by introducing a grand jury system met with strong resistance from the Japanese side at the drafting stage. The Prosecution Review Board, which was eventually established, has more limited powers than those of a US grand jury.⁸ However, as part of the ‘justice system reform’ the power of the Board has been strengthened (see Chapter 18). At present, the Law on the Public Prosecutor’s Office of 1947 is the basic law regulating the organisation and powers of public prosecutors.⁹ The Code of Criminal Procedure also has relevant provisions. The public prosecutor’s main functions are the investigation of crimes and the prosecution of offenders. In contrast to the pre-war system, warrants are issued by judges. At trial, the public prosecutor proceeds with the prosecution and requests the court to apply the appropriate law. Supervision of the execution of judgments also falls within the competence of the public prosecutor. In addition, a public prosecutor can act as the plaintiff or defendant, representing the public interest in civil cases. The Public Prosecutor’s Office retains a hierarchical structure and is headed by the Prosecutor-General. Public prosecutors are subordinate to their superior prosecutors and ultimately to the Prosecutor-General. The four levels of the Public Prosecutor’s Office are the Supreme Prosecutor’s Office, High Prosecutor’s Offices, District Prosecutor’s Offices, and Ward Prosecutor’s Offices. These levels correspond to the Supreme Court, High Courts, district courts, and summary courts respectively. The Minister of Justice is vested with supervisory power over the public prosecutors. The Minister may give general instructions as well as instructions on a specific case. In the latter case, he may only address the Prosecutor General and may not directly instruct the prosecutor who is in charge of the case. There are 2,578 positions for public prosecutors and assistant prosecutors. Anyone who has passed the uniform State examination and finished their training at the Legal Training and Research Institute can be appointed public prosecutor. Judges and assistant judges as well as law professors and associate professors are qualified to become public prosecutors under certain conditions.¹⁰ Most public 7 As for the history of the Public Prosecutor’s Office, see K. Matsuo, Keiji-shihō no Genri (Principles of Criminal Justice) (Tokyo, 1978), pp. 124–126. 8 M. Opler, Legal Reform in Occupied Japan (Princeton, 1988), pp. 104–106. 9 Law No. 61, 1947. ¹⁰ Law on the Public Prosecutors’ Office, Arts 15, 18, and 19.

78

The Basis of the System

prosecutors, however, are recruited directly from among graduates of the Legal Training and Research Institute. The Prosecutor General and his deputy and the President of the High Public Prosecutor’s Office are appointed by the Cabinet with the attestation of the Emperor. Other public prosecutors are appointed by the Minister of Justice. The Law on the Public Prosecutor’s Office guarantees that public prosecutors shall not be dismissed, suspended, or have their salaries reduced against their will, unless so provided by law (Art. 25).

4. Attorneys Until the mid-nineteenth century, professional attorneys were not known in Japan. The law of 1872 allowed the participation of representatives of parties in civil disputes for the first time. It was only in 1890, with the enactment of the Code of Criminal Instruction, that attorneys were allowed to participate in criminal trials as defence counsel. The first Law on Attorneys was enacted in 1893. Under this Law, attorneys had to register at the district court. Attorneys formed a local Bar, which was supervised by the chief prosecutor of the district court. Disciplinary action against attorneys was not taken by the Bar, but by the appellate courts. At this stage attorneys were treated differently from judges and public prosecutors, who were government officials. The Law on Attorneys of 1893 required prospective attorneys to pass an examination which was different from that for judges and public prosecutors. Judges and public prosecutors, as well as graduates of the law faculties of the imperial universities, were entitled to become attorneys without taking the examination. Training for attorneys was separate from that for judges and public prosecutors and was poorly organised. These circumstances, combined with the traditional respect for officialdom, created a negative image of attorneys as less prestigious than judges and public prosecutors.¹¹ In 1914 the special examination for attorneys was abolished, requiring prospective attorneys to take the same examination as judges and public prosecutors. However, the practical training for attorneys was kept separate from that of judges and public prosecutors until after the Second World War. As part of the post-war reforms, a new Law on Attorneys was enacted in 1949.¹² The Law abolished the supervision of attorneys by the Ministry of Justice, the courts, and the Public Prosecutor’s Office. The Bar was given full autonomy, ¹¹ Tanaka, supra, pp. 549–553. See also R. Brown, Legal Aspects of Doing Business in Japan (Chicago, 1983); R. M. Spaulding, Jr, Imperial Japan’s Higher Civil Service Examinations (Princeton, 1967), p. 77. ¹² Law No. 205, 1949.

The Legal Profession

79

including the power to admit its own members and to bring disciplinary actions against them. Those who have passed the uniform State examination and have finished one year of practical training qualify as attorneys. Attorneys are registered with local Bars which form the Japan Federation of Bar Associations (Nichibenren). Local Bars may refuse registration in certain cases where the applicant is likely to discredit the Bar or disturb the order of the Bar. Unsuccessful applicants may appeal to the Japan Federation of Bar Associations, and eventually to the Tokyo High Court. Attorneys are required to open their offices within the territory of the local Bar with which they are affiliated. Practices are small compared to that of US or UK law firms. However, in recent years, major law firms with a capability of advising on cross-border matters have emerged as a result of mergers and expansion.¹³ Unlike in the United States, it is uncommon for attorneys to work as staff members of a corporation, government agency, or local government. Only in the last decade have major corporations begun to retain in-house counsels. The Japan Federation of Bar Associations has an ethical code which was modelled on the American Bar Association Canons of Professional Ethics. Disciplinary action can be taken against members who violate the rules of the local Bar or the Japan Federation of Bar Associations, discredit or disturb the order of the Bar; or commit an act which undermines the dignity of the Bar. Any person may request the initiation of disciplinary proceedings against an attorney. The ethical committee of each Bar, composed of attorneys, investigates the case and decides whether disciplinary proceedings should be initiated. If the committee decides to proceed with the case, the case is sent to the disciplinary committee of the Bar. The disciplinary committee is composed of attorneys, judges, public prosecutors, and academics. The disciplinary measures which can be applied are a reprimand, suspension of business for up to two years, an order to leave the local Bar, or dismissal. The decision of the disciplinary committee can be appealed to the Japanese Federation of Bar Associations, whose decision can in turn be appealed to the Tokyo High Court (Arts 56–71). As of 2008, there are 25,012 attorneys in Japan compared to 16,749 in 1998. There has been a steady increase in recent years in the number of attorneys as a result of the policy to make attorneys more accessible to the general public. This number seems small when compared with the United States, and to a lesser extent, with European countries. However, it should be kept in mind that in Japan there are a number of para-legals who perform functions which are performed by attorneys in other countries. The number of these para-legals has substantially increased in recent years. ¹³ B. E. Aronson, ‘Elite Law Firm Mergers and Reputational Competition’, 40 Vanderbilt Transnational Law Journal, p. 763. Y. Nagashima and E. A. Zaloom, ‘The Rise of the Large Japanese Business Law Firm’, in D. Foote, Law in Japan, supra, p.136ff.

The Basis of the System

80

5. Para-Legals Together with attorneys, there are various professions which perform functions related to legal issues. Tax attorneys, patent attorneys, judicial scriveners, as well as in-house legal counsel perform functions which in some other countries are performed by attorneys.

(1) Tax attorneys A system of tax attorneys (zeirishi) was introduced in Japan as part of the postwar tax reform. The US tax system was thereby introduced and tax assessment by taxpayers replaced the previous system of tax assessment by government. Thus, the necessity for tax advisors increased, and in 1950 the Tax Attorneys Law was enacted.¹⁴ As of 2008, there are 70,517 tax attorneys and 1,621 tax attorneys’ firms registered.¹⁵ There is a special State examination for tax attorneys. Attorneys and accountants as well as certain categories of tax officials are exempted. The tax attorney’s main functions are the calculation of taxes and drafting of documents to be filed with the tax office on behalf of individuals and private businesses. Tax attorneys also submit claims on behalf of their clients for refunds and represent tax payers before tax tribunals.

(2) Patent attorneys Patent attorneys (benrishi) offer advice and draft documents on patent issues. They also appear in court and assist the client in patent and trademark cases. There is a State examination for patent attorneys, but those who have worked in patent offices as patent examiners for more than seven years are exempted from examination. Attorneys are ipso facto qualified as patent attorneys. As of 2008, there are 7,790 patent attorneys and 95 patent attorneys’ firms.¹⁶

(3) Judicial scriveners The profession of judicial scrivener is as old as that of the attorney. In fact, attorneys and judicial scriveners were not treated as separate professions in the nineteenth century. It was only in 1919 that a special law on judicial scriveners was enacted.¹⁷ The primary function of the judicial scrivener is the drafting of ¹⁴ ¹⁵ ¹⁶ ¹⁷

Law No. 237, 1951. . . Law No. 197, 1950.

The Legal Profession

81

legal documents and filing them with the courts, the Public Prosecutor’s Office, and legal bureaux on behalf of the client. They also represent clients in the registration of immovable property or companies, and in placing deposits in various proceedings. As of 2008, there are 19,255 judicial scriveners.¹⁸ As a rule, those who wish to become judicial scriveners are required to pass a special examination for scriveners. Until recently, the examination was prepared and administered by the Association of Judicial Scriveners, but in 1978 a State examination was introduced. Although this examination is substantially easier than the examination for judges, public prosecutors, and attorneys, the introduction of a State examination has increased the prestige of the profession. Judicial scriveners were not allowed to represent clients in court proceedings, nor to give legal advice to clients. This was within the exclusive competence of attorneys. In practice, however, judicial scriveners did give legal advice to their clients in the course of drafting documents. Especially in localities where there are not many attorneys, citizens relied on judicial scriveners for legal advice. In a way, judicial scriveners are regarded by the public as attorneys of inferior rank, but more easily accessible.¹⁹ As a result of the amendment to the Judicial Scriveners Law in 2002, those who are certified by the Minister of Justice are entitled to represent the client at the summary court.

(4) Corporate in-house counsel Major corporations in Japan invariably have a department or a section which handles legal matters. A survey of listed companies and other influential companies conducted in 2005 indicated that 62.4 per cent of the respondent companies had either a legal department or a legal section. The percentage has increased by 11.2 per cent from the 2000 survey.²⁰ The average number of staff is 6.7, but in companies with a capital of 100 billion yen or more, the average number of legal department staff was 25.6.²¹ 65.4 per cent of the staff are graduates of the law faculty, but the number of qualified attorneys among the staff is limited—53 in total in 32 companies.²² This is in contrast to legal departments in US companies, which are staffed primarily by attorneys. In Japan, attorneys are usually consulted when the issue is very complicated and likely to result in litigation. The primary functions of law departments are the reviewing of contracts; coordination with attorneys retained as legal advisers with respect to litigation; the ¹⁸ . ¹⁹ T. Tashiro, ‘Shihō-shoshi kara mita Bengoshi-gyōmu tono Kōsaku (The Crossing of Business between Judicial Scriveners and Attorneys seen from Judicial Scriveners)’, Jurist No. 842, pp. 76–77. ²⁰ Shōji-Hōmu ed., Kaisha-hōmu-bu; Jittai Chōsa no Bunseki-Hókoku (Corporate Legal Department: Analytical Report of the 9th Survey) (Tokyo, 2006), pp. 8–9. ²¹ Ibid., p. 10. ²² Ibid., p. 11.

82

The Basis of the System

giving of internal advice on commercial, anti-monopoly, and industrial property law etc.; and administration of matters concerning shares, including preparation for general meetings of shareholders.²³ In major projects and transactions, the legal department/section participates in 60.5 per cent of the respondents of the survey. However, in 70.5 per cent of the respondent companies, in matters relating to the suspension or alteration of projects and transactions, they can provide advice, but the final decision is made by the relevant business department.²⁴ With the increasing number of international transactions and disputes related to intellectual property, anti-monopoly law, and product liability—as well as the recent strengthening of the compliance system—the role of the legal department has gained significance.

6. Foreign Attorneys25 The Attorneys Law enacted in 1949 initially allowed lawyers who were qualified in foreign countries to practise in Japan. However, this open-door policy was short-lived. The Law was amended in 1955 to make Japanese nationality a prerequisite for practice in Japan. This eventually became a trade issue in the 1980s between Japan and the United States. Pressure to lift restrictions also came from the European Community. The process finally led to the enactment of the Special Measures Law for Handling of Legal Business by Foreign Attorneys in 1986 which allowed foreign attorneys to practise under certain conditions.²⁶ The liberalisation of restrictions under this Law, however, was seen as insufficient by foreign lawyers and businesses, and the requirements and conditions for the practice of foreign attorneys as set out in the Law has therefore been further relaxed since then. Foreign attorneys who are allowed to practise in Japan are called ‘foreign law solicitors’ (gaikoku-hō jimu-bengoshi). Although the Japanese system does not distinguish between solicitors and barristers, this denomination indicates that foreign attorneys are not allowed to act in court or similar proceedings. In order to qualify as foreign law solicitors, foreign attorneys are required to apply to the Minister of Justice for a licence. The basic requirements are: (i) qualification and three years’ experience in the home jurisdiction, and (ii) intention to carry on business with integrity and the existence of a plan, residence, and the financial basis to discharge the duty appropriately and reliably, as well as the capacity to compensate any damage caused to a client. The absence ²³ Ibid., p. 26. ²⁴ Ibid., pp. 27–28. ²⁵ For an overview of the system in English, see . ²⁶ An unofficial translation of the Law is available at . See also the explanation of the system at .

The Legal Profession

83

of prior criminal conviction (imposition of a penalty of imprisonment) is also required (Art. 10). The licence will be withdrawn if the foreign law solicitor loses his qualification to practise in his home country. The 1986 Law originally required five years’ practice in the home jurisdiction. This was unpopular amongst foreign lawyers, since some foreign attorneys who had been working in Japan as ‘trainees’ had to go back to their home country to accumulate five years’ experience, although in reality they had been practising in Japan for some years. Eventually, via the 1998 amendment, this requirement was relaxed and now only three years’ practice is required. Experience in an auxiliary capacity in Japan can be counted up to one year. After obtaining a licence from the Minister of Justice, foreign attorneys must register with the Japan Federation of Bar Associations (Nichibenren). The Federation may refuse registration if the applicant is likely to disrupt the order or harm the credibility of the Bar or the Federation. Following registration, a foreign attorney will be admitted as a member of the Federation. Foreign law solicitors are subject to the rules and the ethical code of the Federation and can be disciplined by a special committee of the Federation. Foreign law solicitors are allowed to practise only the law of their home jurisdiction. An exception is made for the law of a ‘specially designated country’: a foreign attorney who is either qualified in a third country in addition to the home jurisdiction, or has knowledge similar to that of a qualified attorney in that country and more than five years’ experience of practice, may practise the law of that third country by obtaining the appropriate designation from the Minister of Justice. Foreign law solicitors are not allowed to represent a client in court, in the Public Prosecutors’ Office or other agencies, nor to prepare documentation for such proceedings. They may not act as defence counsel in criminal proceedings. The Law was unclear as to the possibility of foreign law solicitors representing clients in international arbitrations, but with the subsequent amendment to the Law this has become possible (Art. 5-3). Foreign law solicitors are not allowed to serve documents on behalf of foreign courts and administrative agencies. Furthermore, representing a client or preparing documents in cases involving the transfer of rights in respect of real property located in Japan, or industrial property rights, or mining rights which are subject to registration with a Japanese administrative agency does not fall within the scope of permitted activities. Foreign law solicitors are obliged to use the title of gaikoku-hō jimu-bengoshi and to indicate the name of their home jurisdiction. Initially, their office was not allowed to display the name of the foreign law firm for which they work, but this requirement has now been removed. Foreign law solicitors must stay in Japan for more than 180 days a year. Foreign law solicitors were not allowed to employ Japanese attorneys, nor to effect a joint practice with specific Japanese attorneys on the basis of a partnership or any other contract. These restrictions were intended to prevent circumvention

84

The Basis of the System

of the ban on foreign law solicitors practising Japanese law. However, these restrictions, particularly the ban on forming a partnership, came under criticism from abroad, and as a result they have been lifted. There are now a sizeable number of foreign law firms which form a ‘foreign law joint enterprise’ with a Japanese firm and also employ Japanese attorneys. As of 2008, there are 272 foreign law attorneys registered in Japan, of which by nationality, 110 are from the United States, 36 from the UK, 23 from China, 8 from Germany, and 49 from Japan.²⁷

7. The Uniform State Examination and Legal Training Those who intend to join one of these professions are required to pass the uniform State examination for judges, public prosecutors, and attorneys. Th is examination was known for its low pass rate. Of the total number of law faculty graduates, which was annually around 36,000, only 500 became lawyers. Many years of preparation were required for this annual examination and applicants took the examination more than six times on average before passing it. The average age of those who pass the examination was over 28 in the 1980s. Attempts for reform of this system began in the 1990s. The Supreme Court, the Ministry of Justice, and the Japan Federation of Bar Associations finally agreed on some reform measures in 1991. In 1992, the number of those who pass the examination was increased by 200. Restrictions on the number of times the applicant may take the examination were not introduced, but 200 out of the 700 successful applicants will be selected from among those who first took the examination not more than three years ago. In 1998 the average age of the 800 applicants who passed the examination was 26.9. From 1999 the number of applicants who passed the examination was increased to 1,000, and then to 1,500 in 2004. In the process of the ‘Justice System Reform’, the need for the increase in the number of attorneys was proposed in order to provide better legal service to the general public. It was agreed to increase the number of the successful applicants of the examination to 3,000. The increase in the number of successful candidates is linked to the reform of the system of legal education. In the past, legal education in Japan was provided at an undergraduate level. Of the four years at the university, law students normally studied law for two to three years. As seen from the small number of successful candidates of the State examination, law faculties were not designed to educate and train professional lawyers alone. Only a limited number of students took the State examination. Rather, the primary purpose of the law faculties was thought to be the production of individuals with sound legal minds, not ²⁷ .

The Legal Profession

85

necessarily lawyers. A mere ten out of ninety law faculties annually produce more than ten graduates who pass the State examination for judges, public prosecutors, and attorneys. Remaining graduates either enter the civil service or become businessmen. Law faculties may have been better characterised as institutions which offer advanced social science education in the form of legal studies. As part of the ‘Justice System Reform’, a US-type law school system, where law is a graduate degree, was introduced. While in the past few students in law faculties intended to become lawyers, law schools instead are specifically intended to produce lawyers. In order to take the State examination, it is necessary either to have completed law school, or to pass a special preliminary examination. The increase in the number of successful candidates in the State examination was key to this system, since it would make the examination less competitive. Originally, with less pressure resulting from the low success rate, law school students were expected to be able to concentrate on the broadening of legal expertise. However, things did not necessarily go as planned. There are now 70 law schools and the total number of law school students is around 7,000. Even if the number of successful candidates is to be increased to 3,000 by 2010 as planned, the success rate will be much lower than initially predicted. This is very different from the US law school system. Furthermore, the Bar is now opposed to increasing the number of successful candidates—certainly 3,000 successful candidates—on the grounds that it would affect the quality of lawyers. Those who pass the State examination are entitled to enter the Legal Training and Research Institute, which is run by the Supreme Court. During their time at the Institute, prospective judges, public prosecutors, and attorneys undergo the same training. The trainees select their future profession at the end of the training. The length of training was previously two years, but has been reduced to one year since 2008. Instead, ‘on the job’ training is to be enhanced.

5 The Protection of Human Rights 1. Development of Human Rights Law The concept of individual rights was unknown to Japan until the mid-nineteenth century. Under the rule of the Tokugawa Shogunate, a status system had developed in which ordinary people had few rights against the ruling territorial lords (daimyō) and warriors (samurai). By the end of the Tokugawa Shogun’s rule, Western ideas gradually started to penetrate Japan, and this flow of ideas continued after the overthrow of the Tokugawa Shogunate in 1867. Works of British and French philosophers such as J. S. Mill, J. Bentham, and J. J. Rousseau were translated into Japanese and influenced intellectuals. Initially, ideas of the school of Natural Law were widely accepted and inspired a movement which was called the ‘Civil Rights and Freedom Movement (Jiyū minken undō)’, which gained momentum in the 1870s. The government was forced to enact the first Constitution and then establish the Imperial Diet (see Chapter 1).¹ The first Constitution of Japan was ‘granted’ to the ‘subjects’ by the Emperor in 1889. This Constitution was modelled on the Prussian Constitution of 1850, since the Emperor’s advisers considered that the monarchy of Prussia should be the model which Japan should follow. It should be noted that what was left of the liberal and democratic elements included in the Prussian Constitution, which had in turn been influenced by the Constitution of Belgium, were effectively omitted from the Japanese Constitution. Instead, the existence of harmonious relations between the ruler and the ruled under the religious and ethical authority of the ‘sacred and inviolable’ Emperor whose family had ostensibly ruled Japan for eternity was stressed. The guarantee of individual rights under this Constitution was by no means sufficient. There was a short list of individual rights, which were guaranteed in a chapter entitled ‘Rights and Duties of the Subjects’. These rights were by no means regarded as inherent natural rights. Moreover, the rights listed in the Constitution were guaranteed only ‘in accordance with the provisions of the law’, giving the legislature freedom to limit individual rights by way of legislation. In fact, the adoption of the Constitution was preceded by the enactment of laws ¹ M. B. Jansen (ed.), The Emergence of Meiji Japan (Cambridge, 1995), pp. 238–267.

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

The Protection of Human Rights

87

aimed at suppressing oppositions. A system of censorship was introduced soon afterwards. Institutions designed to guarantee individual rights were also limited. A system of administrative courts existed, but its jurisdiction was very limited, and it was made part of the administration, not the judiciary. In the latter half of the 1920s, when Japan embarked on a course towards militarism, flagrant violations of individual rights occurred frequently. Especially after the Law on the Maintenance of Public Security of 1925 was enacted, those who were suspected of being communists or anarchists could be tried by summary procedure and convicted for their political beliefs. The Special Division of the police, which was primarily in charge of controlling political dissidents, resorted to various illegal means to suppress dissidents and non-conformists. Freedom of conscience and freedom of expression were severely limited until the end of the Second World War. One of the primary goals of the post-war reforms was to provide better protection of individual rights. The present Constitution was enacted in 1946 and took effect the following year. At the drafting stage of this Constitution, there was a difference of views between the US advisers and the Japanese. The initial draft was prepared by a government committee chaired by Professor Jōji Matsumoto, who had a chair of commercial law at the University of Tokyo. Committee members were not really aware of the necessity of a fundamental reform of the regime set up by the 1889 Constitution. The committee specifically aimed at preserving the status of the Emperor as the sovereign. It produced a draft constitution with little change to the existing Constitution. The Allied Forces, despairing over the reluctance of the Japanese to introduce reforms, prepared their own draft, which became the basis of the present Constitution.

2. The Present Constitution Unlike the 1889 Constitution, the present Constitution has a fairly long list of fundamental rights. It is generally accepted that the list of rights and freedoms explicitly provided in the Constitution is not exhaustive. Some rights and freedoms which are not specifically provided by the Constitution are nevertheless protected.² The following provision of the Constitution often serves as a basis for such interpretation: All people shall be respected as individuals, and their right to life, liberty, and the pursuit of happiness should be the supreme consideration in legislation and in other governmental action. (Art. 13)

² Judgment of Tokyo District Court, 28 September 1964, Kaminshū 15-9-2317 (After the Banquet case).

88

The Basis of the System

Constitutional and judicial review was introduced in order to safeguard these individual rights. Japan does not have a special constitutional court. The system is based on the US system, where courts of all levels, from the Supreme Court to the district court, may judge the constitutionality of laws, ordinances, and administrative decisions. It is not rare for lower courts to render a judgment finding certain laws or acts of government unconstitutional. Since the wording of the Constitution is general, the role of the court in interpreting the Constitution is particularly significant. Vested with the power of review over the constitutionality of laws as well as governmental acts and administrative decisions, it is not an exaggeration to say that Japanese Constitutional law has developed on the basis of judicial precedent. In addition, because the present Constitution has never been amended since its enactment, the courts have played a major role in adjusting the Constitution to social changes which have taken place since its inception. There have been eight cases so far where the Supreme Court found a provision of a certain law to be unconstitutional. For example, in 1973, the Court found a provision of the Criminal Code that provides for harsher penalties for patricide as compared to general homicide to be unconstitutional. These cases also include two instances where the Court found the demarcation of the constituencies in the lower house election, which resulted in a significant difference in the value of the vote between constituencies, to be unconstitutional (see Chapter 4 for the complete list of cases where the Supreme Court found a provision of a law to be unconstitutional). Foreigners are also entitled to protection by the Constitution, depending on the nature of the right or freedom involved. As a general rule, the Supreme Court pointed out that the guarantee of basic human rights by the Constitution equally extends to resident foreigners in Japan, unless it is understood to address Japanese nationals only in consideration of the nature of the right. This includes the freedom of political activities.³ In a case where the right of a resident Korean to apply for a management position in the Tokyo Metropolitan Government was in question, the Supreme Court ruled that the regulation which does not allow non-Japanese nationals to apply for the promotion examination was not unconstitutional.⁴ When the constitutionality of fingerprinting of resident foreigners was contested, the Supreme Court ruled that fingerprinting had a ‘close connection’ with privacy, which is protected by Article 13 of the Constitution, and that this protection also extended to resident foreigners. However, the Court found that such freedom is subject to restriction if restriction is necessary for reasons of

³ Judgment of the Supreme Court, 4 October 1978, Minshu 32-7-1223. ⁴ Judgment of the Supreme Court, 26 January 2005, Minshu 59-1-128.

The Protection of Human Rights

89

public welfare.⁵ The right to social security benefits of a resident Korean was also denied by the Supreme Court.⁶ There are rights that were not foreseen at the time of enactment of the Constitution but which have gained significance since then. An example is the right to privacy. In a celebrated case, a novelist published a fictional account based upon the life of a politician, vividly depicting the relationship between the politician and his mistress. The politician sued the author for infringement of his right to privacy and the district court upheld his claim. In this judgment, the right to privacy was acknowledged for the first time as having a basis in this provision. The parties reached a settlement after the death of the plaintiff and the case did not reach the Supreme Court.⁷ The Supreme Court has acknowledged that the right to privacy was protected by Article 13 of the Constitution in a case where the constitutionality of photographing a political demonstration by the police was at issue. The Court ruled that individuals, as part of the right to privacy, have a right not to be photographed without consent. However, in this particular case, the Court found that the activities of the police were justifiable, since the photographing took place immediately after an offence had been committed and there was an urgent need to collect evidence, and moreover, the actual photographing was conducted in a socially acceptable manner.⁸ In a more recent case, the Supreme Court found that a university had acted in breach of privacy by submitting a list of students who applied for the attendance at a public lecture by the Chairman of the State of the People’s Republic of China without their consent. Although the information contained in the list was not particularly relevant, the expectation of students that such personal information would not be arbitrarily disclosed to those people whom they would prefer not to have access to it should be protected. Information contained in the list constitutes privacy and should be protected by law.⁹ Also the concept of ‘general rights of personality’ based upon the same provision was recognised by the Supreme Court. In a libel case, the Court found that the defamed person was entitled to seek an injunction on the basis of general rights of personality.¹⁰ Traditional concepts such as freedom of expression have also been expanded to cover rights and freedom which the legislature had not 5

Judgment of the Supreme Court, 15 December 1995, Keishu 49-10-842. Judgment of the Supreme Court, 2 March 1989, Hanji, 1363–68. 7 For the history of the current Constitution, see S. Kozeki, Shin-Kenpō no Tanjō (The Birth of the New Constitution) (Tokyo, 1989). H. Tanaka, Kenpō-Seitei-Katei Oboagaki (Notes on the Procedure of Preparing the Constitution) (Tokyo, 1979). See also articles in Tanaka, The Japanese Legal System (Tokyo, 1968). 8 Judgment of the Supreme Court, 24 December 1969, Keishū 23-12-1625 (Kyoto Zengakuren Demonstration case). 9 Judgment of the Supreme Court, 12 September 2003, Minshu 57-8-973. ¹⁰ Judgment of the Supreme Court, June 11, 1986, Minshū 40-4-782 (Hoppō Journal case). 6

90

The Basis of the System

envisaged at the time the Constitution was enacted. Examples are the right to know and the right to have access to information.

3. Restrictions on Human Rights The way in which fundamental rights and freedoms are guaranteed differs, depending on the nature of each right or freedom. The realisation of social rights, such as the right to minimum standards of life (Article 25), depends largely on the policy of the government. The Supreme Court has maintained that this provision does not grant an individual a specific right on which to base a claim to require certain measures to be taken by the government.¹¹ In one case, a person living on social security sued the government for not providing a minimum standard of living. The plaintiff argued that her benefits were insufficient to lead a ‘minimum civilised life’ as guaranteed by the Constitution. The district court upheld this claim, but the Supreme Court ruled that whether a specific measure met the standard of ‘cultural and healthy life’ as provided by the Constitution was to be primarily determined by the government and that unless it exceeded the scope of discretion, the court may not interfere. This judgment was based upon the view that this particular provision of the Constitution was a ‘programme’ provision generally obliging the government to adopt certain measures, but not giving citizens a specific right to make a claim against the State.¹² Economic rights and freedoms are less firmly guaranteed than other rights and freedoms. Thus, the right to ownership is guaranteed insofar as it is not contrary to public welfare (Art. 29). In contrast, Article 21, which guarantees freedom of expression, has no such reservation. Restrictions on individuals’ economic rights may be inevitable in the contemporary social State: the right to private ownership is not regarded as absolute anymore, as it used to be under a laissez-faire State. Private ownership of land, for instance, is limited in various ways, such as by planning controls, acquisition of property for public purposes, etc. In contrast, rights, such as freedom of expression and freedom of conscience, require stronger guarantees than economic rights. It is unavoidable that the exercise of freedoms or rights brings people into conflict with the interests of others, and that under certain circumstances these rights and freedoms may have to be restricted. Nevertheless, due to their significance, it is generally accepted that the restriction of these rights and freedoms should be kept to a minimum. Thus, the doctrine of the dual standard, or the preferred doctrine, is generally supported in Japan. The essence of this doctrine is that a stricter standard should be applied to determine the constitutionality of measures which restrict individual rights, such ¹¹ Judgment of the Supreme Court, September 20, 1948, Keishū 23-12-1625. ¹² Judgment of the Supreme Court, 24 May 1967, Minshū 21-5-1043 (Asahi case).

The Protection of Human Rights

91

as freedom of expression, freedom of conscience, and other related rights. The rationale behind this doctrine is that these rights and freedoms are indispensable prerequisites to democracy and constitute the basis of the Constitution, and therefore should be fully guaranteed. The Supreme Court seems to accept this view. In a case for an injunction against a libellous publication, the Supreme Court stated that in a democratic State freedom of expression, particularly freedom of expression involving public affairs, should be respected as an ‘especially significant constitutional right’.¹³ The Constitution provides that the rights and freedoms guaranteed by the Constitution shall not be abused (Art. 12). The right to life, liberty, and the pursuit of happiness shall be guaranteed insofar as it is not inconsistent with public welfare (Art. 13). The Supreme Court initially resorted to this public welfare clause in order to justify government actions and legislation which restrict rights and freedoms. However, in the following years a more sophisticated approach, primarily imported from the United States, came to be adopted. Japanese judicial decisions on constitutional cases are often influenced by the judgments of the US Supreme Court. Since the present Constitution had been heavily influenced by the US Constitution, constitutional lawyers study US cases and doctrines, and the courts often rely on doctrines developed in the United States. For example, the provision of the Japanese Constitution on the right to a speedy trial is modelled on the Sixth Amendment of the US Constitution. When the Supreme Court of Japan rendered a judgment on this issue, it apparently based its judgment on Barker v. Wingo.¹⁴ Another example is the Lemon test concerning the separation of the State and religion.¹⁵ Similarly, the judgments of the Warren Court in the 1960s had an especially significant influence on Japanese constitutional cases. The same applies to the tests adopted by the Supreme Court in deciding whether a particular restriction on fundamental rights is constitutional or not. Tests such as the ‘clear and present danger’ test, and the ‘less restrictive alternative’ test have been introduced into Japan and have had some influence on case law. In early cases, the Supreme Court tended to refer to the public welfare clause and rather easily acknowledged the permissibility of restrictions of the freedom of expression in a liberal manner. The Court held that an act of the Tokyo Metropolitan Government which prohibited the use of a park surrounding the Imperial Palace for a May Day assembly was constitutional because this act served public welfare, i.e. the maintenance of the park.¹⁶ Whether it is appropriate to use a vague and general term such as ‘public welfare’ in order to restrict fundamental rights is questionable. After all, most laws can be construed as promoting ¹³ Supra, Hoppó Journal case. ¹⁴ 407 US 514 (1972). ¹⁵ Lemon v. Kurtzman, 403 US 602. ¹⁶ Judgment of the Supreme Court, 20 July 1960, Keishū 14-9-1243 (Tokyo Metropolitan Security Regulation case).

92

The Basis of the System

public welfare in one way or another, so excessive reliance on this clause gives the government carte blanche to restrict fundamental rights. It was suggested that a more specific and workable standard for judging the legality of restrictions on fundamental rights should be developed. The concluding observation of the then UN Human Rights Commission on the state of human rights in Japan published in 1998 criticised the approach of the court in resorting to the public welfare clause in restricting human rights.¹⁷ Perhaps influenced by the criticism of this approach, the Supreme Court adopted instead a ‘balancing of interests’ approach. Here, the value of the freedom or right in question, and the value which may be achieved by restricting it, are weighed against one another. The Supreme Court, in a case where the political rights of government employees were at issue, ruled that the necessity of guaranteeing the fundamental rights of workers and the necessity of enhancing and promoting the interests of citizens as a whole should be weighed and balanced to determine the constitutionality of restrictions on the employees’ rights.¹⁸ In a case involving the constitutionality of the general prohibition against government employees’ involvement in political activities, the Supreme Court ruled that if the purpose of the prohibition is justified and the value of the interests thereby does not unreasonably exceed the value of the interests protected by it, then such a prohibition is not unconstitutional.¹⁹ In another case, the constitutionality of a court order requiring a television company to produce a film reporting a riot was at issue. The court intended to use the film as evidence in a case where members of the riot police were being prosecuted for abuse of power against the students participating in a demonstration. Television companies argued that this order contravened the right to collect news material, since if the film was used as evidence for the prosecution at trial it could affect the relationship between the mass media and the people, and make the future collection and reporting of information difficult. The Supreme Court acknowledged that freedom to collect materials and information for the press is guaranteed by the Constitution. However, the Court proceeded to point out that such a freedom was naturally limited, and if there is a need to have a fair and just trial, it can be limited to a certain extent. The Court weighed the evidential value of the film and its necessity for securing a fair ¹⁷ UN High Commissioner for Human Rights, Concluding Observations of the Human Rights Committee: Japan, 19/11/98. CCPR/C/79/Add. 102. Concluding observations of the Human Rights Committee, Japan 2008 ¹⁸ Judgment of the Supreme Court, 26 October 1966, Keishū 20-8-901 (Zentei-Chūyū case). The Supreme Court overruled this precedent in 1973 in Zennórin Keishokuhó case. ¹⁹ Judgment of the Supreme Court, 6 November 1974, Keishū 28-9-393 (Sarufutsu case).

The Protection of Human Rights

93

criminal trial, on the one hand; and the extent to which the freedom of collecting information and material for the press would be harmed, and the effect it may have on this kind of freedom, on the other. The Court, as a result of the balancing of interest test, concluded that the restriction of press freedom was justified in this case.²⁰ As seen from these examples, the balancing of interest approach does not necessarily mean better safeguards for individual rights. When weighing freedom of expression against the interest of the public or the State, a mere balancing of interests may lead to an overemphasis on the latter. Therefore, a more specific standard has to be worked out in order to mediate conflicting interests and to safeguard individual rights as far as possible. Other tests such as the ‘clear and present danger’ test, the ‘less restrictive alternative’ test, and the ‘void for vagueness’ test, etc., were introduced to Japan by academics, and some of them have found the support of the courts. Another test used at one time was whether the legal provision restricting freedom of expression was overly vague or not. The rationale behind this test is that ambiguous provisions restricting the freedom of expression may entail abuse in implementation and, as a result, are likely to discourage people from exercising their freedom of expression. In a leading case, the constitutionality of a local regulation which required the permission of the local government to organise a mass assembly or procession was at issue. The Supreme Court ruled that although it was unconstitutional to subject such assemblies and processions to the permission of the authorities in general, it was not unconstitutional to require a prior permission as to the place or method of assembly or procession under a reasonable and clear standard. In this case, the court concluded that the local regulation was sufficiently clear and accurate.²¹ In a recent case the constitutionality of a local regulation intended to control groups of motorbike riders was at issue. The regulation prohibited ‘meetings and gatherings in a public place which incites anxiety or fear to the public’. The Supreme Court acknowledged that the revelant provision as formulated was inappropriate, and that if it were to be literally applied, the scope of prohibition would be extensive and as such ‘problematic’ in relation to Article 21, para. 1 and Article 31. However, the court ruled that if the provision was to be interpreted in a narrow way, in light of the justifiability of the purpose of the regulation, reasonableness as the means of preventing harms, and the balancing of the benefit and loss resulting from the regulation, it would not reach the level of breach of these provisions of the Constitution.²² ²⁰ Decision of the Supreme Court, 26 November 1969, Keishū 24-6-280 (Hakata Station case). ²¹ Judgment of the Supreme Court, 10 September 1975, Keishū 25-8-489 (Tokushima Security Regulation case). ²² Judgment of the Supreme Court, 18 September 2007, Minshu 61-6-601 (Hiroshima Bōsō-zoku Jōrei case).

94

The Basis of the System

4. Freedom of Expression Freedom of expression enjoys the highest of guarantees, since it forms the basis of a democratic society.²³ The Constitution guarantees the freedom of expression as follows: Freedom of assembly and association, as well as freedom of speech, press and all other forms of expression are guaranteed. No censorship shall be exercised. Secrecy of communication is guaranteed. (Art. 21)

The scope of this provision is fairly broad, covering freedom of assembly, association, press and broadcasting as well as the right to know (access to information), which is regarded as a prerequisite to the freedom of expression. Admittedly, there may be cases where freedom of expression must be limited for the benefit of other interests. The problem is how to maximise guarantees of freedom of expression while minimising the negative effect it may have on other interests protected by law. There have been various cases where the extent of the guarantee of the freedom of expression was at issue. The constitutionality of public security regulations enacted by local governments was a highly controversial issue in relation to freedom of assembly in the earlier days of the Constitution. These regulations required permission from the relevant local authority for assemblies and processions; violations were punishable. The Supreme Court invariably upheld the constitutionality of these regulations. The Court pointed out that although the regulation requires permission, permission is to be given unless it is evident that public safety is at immediate risk, and therefore the permission system is in effect equivalent to a notification system.²⁴ A potentially significant restriction on the freedom of association and the freedom of assembly is the Prevention of Subversion Law, which was enacted in order to cope with violent political turmoil in the early 1950s. This Law is intended to control the activities of groups and organisations involved in violent and destructive acts, listing a wide range of such acts, from treason to distribution of leaflets and publication of documents for specific purposes. The Public Security Review Board is empowered to prohibit processions and public assemblies involving these organisations and the publication and distribution of their literature. The Board is attached to the Ministry of Justice and its members are appointed by the Prime Minister with the consent of both Houses. Under certain conditions the Board may order the dissolution of such organisations (Art. 7). ²³ N. Ashibe, Kenpō (Constitutional Law), 4th edn, supplemented by K. Takahashi (Tokyo, 2007), p. 165. ²⁴ Judgment of the Supreme Court, 20 July 1960, Keishū 14-9-1243 (Tokyo Metropolitan Public Security Regulation case).

The Protection of Human Rights

95

This Law had been criticised for potential violation of the freedom of expression by the government. There has been no case where an organisation was ordered to dissolve. In 1997, the Public Security Intelligence Agency applied for a dissolution order against a religious cult which spread toxic gas in the underground, killing many people, and committing various other atrocities, but the application was rejected by the Board.²⁵ Concerning the freedom of publication, the constitutionality of the provision of the Criminal Code which punishes the distribution, sale, and public display of obscene photographs, pictures, and other material (Art. 175) has been contested. In 1953 the Supreme Court upheld the judgment of the High Court, which convicted the publisher and the translator of Lady Chatterley’s Lover. The Court pointed out that the maintenance of minimum sexual morals was part of public welfare, and that freedom of expression can be restricted to this extent.²⁶ Fifteen years later, in a case concerning the work of the Marquis de Sade, the district court acquitted the defendants on the ground that the artistic and ideological content of the work reduced the obscenity of the sexual content. The Supreme Court overruled the judgment, but with four dissenting opinions.²⁷ The Court pointed out that the artistic and philosophical value of the work does not in itself make the publication legal. In contrast, one dissenting opinion acknowledged that the standard of obscenity is variable, and whether the work is obscene should be judged by taking into account changes in people’s perception of obscenity, as well as the artistic and philosophical value of the work. Another dissenting judge argued that a balancing test should be applied, weighing the harm which may be caused by publication against the value that the work may have for the public. Another ten years later, in a case where a publisher was prosecuted for publishing a short pornographic work by a renowned author, the defendant argued that Article 175 of the Criminal Code was vague and therefore unconstitutional. The Supreme Court rejected this argument, but set out detailed standards for judging the obscenity of publications. Thus, in order to determine whether a given work is obscene or not, the extent of direct and detailed sexual description and its means; its significance as part of the entire work; the relationship between such descriptions and the ideas and thoughts expressed in the work; the structure and development of the work; the extent of reducing sexual impetus by its artistic and ideal content; and whether the primary purpose of the work is to appeal to the sexual curiosity of the readers should be considered in the light of the healthy, socially acceptable values of the time.²⁸ ²⁵ T. Nonaka et al. (eds), Kenpō (Constitutional Law), vol. I, 4th edn (Tokyo, 2006), pp. 357–358. ²⁶ Judgment of the Supreme Court, 13 March 1953, Keishū 11-3-997 (Lady Chatterley’s Lover case). ²⁷ Judgment of the Supreme Court, 15 October,1969, Keishū 23-10-1239 (Prosperity of Vice case). ²⁸ Judgment of the Supreme Court, 28 November 1980, Keishū 34-6-433 (Yojō-han Fusuma no Shitabari case).

The Basis of the System

96

In another case, in which the Supreme Court found a publication to be obscene, one concurring justice pointed out that when judging the obscenity of the work, hard-core pornography and quasi-hard core pornography should be distinguished. While hard-core pornography is not of much value to society, and is therefore not protected by the Constitution, some types of soft pornography are covered by the Constitution. In such cases, the harm which may result from sexual expression should be weighed against the value of the work.²⁹ In the pre-war period there was a system of censorship in Japan. The present Constitution explicitly prohibits censorship (Art. 21). Th is provision is also understood to prohibit other forms of prior restraints on the freedom of expression. In this regard, the constitutionality of the system of reviewing textbooks for schools by the then Ministry of Education was contested. School textbooks are subject to screening by the Ministry, and only books approved by the Ministry can be used in schools. In one case, a textbook written by a professor of history was rejected by the Ministry for, inter alia, ‘describing the Second World War in excessively negative terms’. The author was advised by the Ministry, for instance, to omit the phrase ‘reckless War’, and to replace ‘invasion of China’ by ‘advancement into Asia’. The author sued the government for revocation of the decision. The district court found that the screening system itself does not amount to censorship insofar as the system is administered adequately and does not extend to the appropriateness of the author’s thought as expressed in the publication. In this particular case the court found that the screening had gone too far and interfered with the thoughts of the author, therefore constituting a violation of the freedom of education guaranteed by the Constitution.³⁰ The High Court upheld this judgment, but the Supreme Court reversed the decision and remanded it to the High Court, since the Ministry’s guideline for the screening of textbooks had substantially changed in the meantime, and there was a possibility that the plaintiff had lost standing.³¹ The High Court denied the plaintiff standing. The concept of censorship is a much-debated issue. There is a school of thought which defines censorship as a system in which administrative authorities check the content of expression in advance of its publication and prohibits those expressions. Another school of thought defines censorship in a broader way. Censorship, according to the proponents of this view, means prior review of the contents of expression by public authorities. It should be noted that courts are included in ‘public authorities’. A variation of the second view extends the scope of ‘prior restraint’ by including restraints imposed after publication, but before it reaches the public.³² ²⁹ ³⁰ ³¹ ³²

Judgment of the Supreme Court, 8 March 1983, Keishū 37-2-15. Judgment of Tokyo District Court, 17 July 1970, Hanji 604–29. Judgment of the Supreme Court, 8 April 1982, Minshū 26-4-594. See N. Ashibe, Kenpō-gaku (Constitutional Law) vol. 3 (Tokyo, 1998) pp. 262–272.

The Protection of Human Rights

97

In this regard, the constitutionality of customs control over the importation of foreign pornography was contested in the court. The Japanese Customs Tariff Law prohibits the importation of items which are likely to affect public morals. A person who was refused importation of films and magazines from Europe brought an action in court. The Supreme Court ruled that censorship was impermissible without exception, but that customs control did not amount to censorship. The court defined censorship in a narrow way, and denied that customs control was censorship, since (i) the work had already been published overseas and therefore customs control did not prohibit its publication; (ii) the task of a customs official does not include reviewing the thoughts within the publication; and (iii) decisions of the customs office are not final but are subject to judicial review. Four dissenting opinions found the relevant provision of the Customs Tariff Law to be excessively vague and therefore unconstitutional.³³ Another problem is the constitutionality of interim measures in the civil procedure, when used to prevent the publication of slanderous material. Although these are interim measures pending the examination of the case on its merit by the court, such measures could have the same effect as a prior restraint on freedom of expression. In one case the district court granted a preliminary injunction against the publication of a periodical containing libellous statements concerning a candidate in an election for prefectural governorship. This decision was upheld by the High Court. The publisher appealed to the Supreme Court, arguing that an injunction in this case was contrary to Article 21 of the Constitution. The Supreme Court denied that a preliminary injunction in such a case constitutes censorship, since it is not a thorough and comprehensive prior check of the contents of expression by an administrative agency. The court admitted that a prior restraint is likely to be broader in effect than a restriction after the event, and is potentially open to abuse. Therefore, prior restraints on the freedom of expression are only allowed under strict and clear conditions derived from the Constitution. Furthermore, when the expression concerns public interest, such as criticism of government officials or candidates for election to public office, it requires special protection by the Constitution and in principle an injunction should not be granted. On the other hand, as an exception, when the statement is not true, or it is evident that the statement is not primarily intended for the benefit of the public, and at the same time the victim is likely to suffer serious and irrecoverable loss, an injunction should be granted. The Court found that in this particular case, such an exception should be applied and the injunction should be granted.³⁴ Defamation is punishable under Article 230 of the Criminal Code by a maximum of three years’ imprisonment. In some jurisdictions a strict libel law unduly restricts the freedom of expression, but in Japan, following the adoption of the ³³ Judgment of the Supreme Court, 12 December 1984, Minshū 38-12-1308. ³⁴ Judgment of the Supreme Court, 11 June 1986, Minshū 40-4-872).

98

The Basis of the System

present Constitution, a new provision was added to the Criminal Code in order to safeguard freedom of expression. Article 230–2 provides that when a libellous act concerns matters of public interest, and the act is primarily intended for the benefit of the public, then whether the asserted fact is true or not should be judged, and if the defendant proves that the statement was true he shall not be punished. A magazine published articles criticising a large religious organisation. In one article the private life of the head of this organisation was examined. The article asserted, inter alia, that he had used his influence to make his mistresses members of the Diet. The district court and the High Court found the defendant guilty, but the Supreme Court quashed the judgment. The Court ruled that the behaviour of a private person could also be a matter of public concern, depending upon the nature of this person’s social activities and the extent of his influence on society. Therefore, by virtue of Article 230–2, the defendant should be allowed to prove the truth of his statement.³⁵ In another case, the Supreme Court found that, even when the defendant could not prove the truth of the statement concerning public interest, if he had mistakenly but with reasonable grounds believed that the statement was true, there is no libel.³⁶ In a recent case, the Supreme Court acknowledged the right of a reporter not to disclose the source of information. In this case, the Japanese court was requested by a court in the United States to obtain testimony of a reporter of the Nippon Broadcasting Corporation. The reporter refused to give testimony on the ground that it constituted a professional secret. The Supreme Court ruled that not all professional secrets, but only professional secrets which deserve protection should be protected and refusal to testify justified. Whether the information is worth protecting should be determined by balancing the disadvantage caused by the disclosure of the secret against the possibility of finding the truth and ensuring of fair trial which may be sacrificed by the refusal to testify. In this case, the Court acknowledged that if the information source of reporters is liberally disclosed, the mutual trust between the provider of the information and the reporters would be harmed, the smooth collecting of information in the future would be damaged, and ultimately, the business of the media companies would be seriously affected. Therefore, the secrecy of the information source constitutes a professional secret. In conclusion, the Court allowed the witness to refuse to disclose the information.³⁷

³⁵ Judgment of the Supreme Court, 16 April 1981, Keishū 35-3-84 (Monthly Pen case). ³⁶ Judgment of the Supreme Court, 25 June 1969, Keishū 23-7-975 (Evening Wakayama Jiji case). ³⁷ Decision of the Supreme Court, 3 October 2006, Minshū vol. 60, No. 8.

The Protection of Human Rights

99

5. Access to Information In the era of rapid technological progress, in which information tends to be concentrated in the hands of governmental agencies and powerful private entities, the necessity of ensuring that individuals have access to information has become increasingly important. It is also necessary to control the use of information regarding individuals collected by the government and such entities. Therefore, the right to know or the right of access to information has received growing attention. Such rights are now considered to be covered by the Constitution as part of the guarantee of freedom of expression. In 1988 the Law on the Protection of Computer Information on Individuals was enacted. This regulates the handling of information on individuals processed and stored in computers by government agencies.³⁸ According to this Law, government agencies are prohibited from using information on individuals for purposes other than the original purpose for which files were compiled. Any person may require a government agency to disclose information concerning them which is stored in a computer, and if necessary demand its alteration. In 1999, the Law on the Access to Information Held by Administrative Agencies was enacted.³⁹ The goal of the Law is to encourage disclosure of information and enhance accountability of the government by providing people with a right to request disclosure of documents. Agencies covered by this Law include ministries, the Cabinet Office, committees, and the Government Accounting Office. Any person may request the disclosure of documents possessed by these agencies (Art. 3). Government agencies are under a general obligation to disclose information (Art. 5). However, not all government information is accessible. Exceptions include: • information on individuals through which a specific individual can be identified; information on juridical persons or individuals involved in business which, if disclosed, may harm their legitimate interest; • information which the head of an administrative agency has reasonable grounds to believe could, if disclosed, harm national security or relationships with other countries; information whose disclosure the head of an administrative agency has reasonable grounds to believe may affect the maintenance of public security and order, including prevention or investigation of crimes; • information on internal or mutual discussions of governmental agencies and local agencies, which may hamper a frank exchange of views or appropriate decision-making if made public;

³⁸ Law No. 95, 1988.

³⁹ Law No. 42, 1999.

100

The Basis of the System

• information on the activities or business of government or local government agencies that may affect the implementation of such activities or business (ibid.). Access can be denied without disclosing whether the relevant document is in the possession of the agency or not, if disclosing this would mean the disclosure of the information itself (Art. 8). The right to know becomes particularly vulnerable where State secrets are involved. Japan does not have a comprehensive law to penalise the divulgence of State secrets, such as the UK Official Secrets Act. Regarding State and local government employees, however, the leaking of information obtained in office is a criminal offence. In a case where a reporter obtained information from a female employee of the Ministry of Foreign Affairs, when this reporter was prosecuted together with the employee, the reporter argued that he had merely exercised his right to know and the right to collect information for the press. The Supreme Court ruled that the freedom of the press to collect information should be appropriately respected, and that persuading a government employee to disclose a secret is not in itself illegal, provided that it is for reporting purposes and the means employed are socially acceptable in the light of the spirit of the entire legal order. However, in this particular case the Supreme Court ruled that the means employed to obtain information were unjustifiable and that the reporter had exceeded the scope of permissible activities.⁴⁰

6. Equal Treatment The Constitution guarantees equal treatment as follows: All people are equal under the law and there shall be no discrimination in political, economic, or social relations because of race, creed, sex, social status, or family origin. (Art. 14, para. 1)

The Supreme Court found a provision of the Criminal Code punishing homicide of a direct ascendant to be unconstitutional. The Code provided for either a death sentence or life imprisonment for patricide, while ordinary homicide was punishable by death or a minimum of three years’ imprisonment. The Court examined whether this constituted unreasonable discrimination, and found the difference between the penalties to be excessive and the provision therefore to be extremely unreasonable.⁴¹ However, in another case on a provision of the Criminal Code, which punished the injury of a direct ascendant more severely ⁴⁰ Decision of the Supreme Court, 31 May 1978, Keishū 32-3-457 (Divulgence of Ministry of Foreign Aff airs’ Secret case). ⁴¹ Judgment of the Supreme Court, 4 April 1973, Keishū 27-3-265 (Patricide case).

The Protection of Human Rights

101

than ordinary injury, the Supreme Court ruled that the difference in penalties (life or a minimum of ten years’ imprisonment, as compared with a maximum three years’ imprisonment) was not unreasonable.⁴² The problem of whether the provision on equal treatment has a direct effect on discrimination by private entities was at issue in a case where a company refused to employ a person after a probationary period of employment because of his past political activities. In this case, the Supreme Court, in theory, acknowledged that unreasonable discrimination by private entities can be invalidated through the general provisions of private law, such as the provision on public order and good morals in the Civil Code (Art. 90). However, in this case, the Supreme Court ruled that, based upon the freedom of contract, companies are in principle free to employ workers and to set conditions of employment, and refusal to employ on the ground of political belief was not in itself unlawful.⁴³ In a case concerning gender discrimination, the Supreme Court found an office regulation which provided for a different retiring age for men and women to be unreasonably discriminatory and void by virtue of this provision of the Civil Code.⁴⁴ There is also a lower court judgment which found that mandatory retirement for women who got married was discrimination.⁴⁵ Also concerning gender discrimination, the constitutionality of a provision of the Civil Code which prohibits an ex-wife from remarrying for six months after divorce was contested. The High Court examined whether this was necessary and the only available measure to prevent disputes concerning the paternity of a child, and concluded that the provision was unconstitutional, since it was evident that it was unreasonable in relation to the goal which it aimed to achieve. The Supreme Court, however, overruled this judgment and found the provision to be constitutional on the ground that differential treatment had a reasonable basis.⁴⁶ Another contested issue in recent years is the treatment of illegitimate children in inheritance law. According to the Civil Code, an illegitimate child is entitled to only half the share of a legitimate child in inheritance (Art. 900). The plaintiff claimed that this was discrimination. The Supreme Court rejected this argument since this provision was designed to strike a balance between the protection of legitimate marriages on the one hand and the protection of illegitimate children on the other, and the arrangement in the Civil Code cannot be regarded as excessively unreasonable in relation to this legislative goal.⁴⁷ The court tends to determine the constitutionality of differential treatment by considering whether the measure at issue is reasonable or not. This approach ⁴² Judgment of the Supreme Court, 26 September 1974, Keishū 28-6-329. ⁴³ Judgment of the Supreme Court, 12 December 1973, Minshū 27-11-1536 (Mitsubishi Plastics case). ⁴⁴ Judgment of the Supreme Court, 24 March 1981, Minshū 35-2-300 (Nissan Motors case). ⁴⁵ Judgment of the Tokyo District Court, 20 December 1966, Rōmin 17-6-1407 (Sumitomo Cement case) ⁴⁶ Judgment of the Supreme Court, 5 December 1995, Hanji 1563–81. ⁴⁷ Decision of the Supreme Court, 17 July 1995, Minshū 49-7-1789.

The Basis of the System

102

stems from the reasonableness test applied by the US Supreme Court. However, the reasonableness test is applied in Japan in a rather general and abstract way. The necessity of introducing a more sophisticated approach, taking into account the grounds for differential treatment and the nature of the rights involved, has been felt for some time. It is proposed, for instance, to apply three different tests: the reasonableness test, the strict scrutiny test, and the strict reasonableness test, similar to the US tests.⁴⁸ In a recent case involving the Nationality Law, the Supreme Court has gone further. In this case, the provision of the Nationality Law requiring the marriage of the parents for a child between a Japanese father and a foreign mother to be eligible for Japanese nationality was at issue. The plaintiff argued that the differential treatment between a child who was legitimised by the father, but whose parents had not married, and whose parents had married, was a breach of Article 14, para. 1 of the Constitution. The Supreme Court ruled that if the legislative purpose of the differentiation was not justifiable, or if there was no reasonable link between the legislative purpose and the arrangement at issue, it was against Article 14, para. 1 as an unreasonable act of discrimination. In this case, the intended purpose of the Law was found to be justifiable, but the link between the purpose and the differential treatment was not justifiable any more in the light of social changes over the years. The provision was found to be unconstitutional.⁴⁹ Concerning equal treatment, the discrepancy in the value of votes in the election is a major issue. At one stage, the difference in the value of votes between the constituencies reached almost five to one. The Supreme Court ruled that if the inequality in the value of the votes reached an excessively unreasonable level, unless there was a justifiable reason, it was unconstitutional. In this case, the value of the vote in a general election was 1:4.99, and the Court found this to have exceeded a reasonable level and the allocation of seats was unconstitutional. The Court also noted that the legislature had failed to take measures to rectify the situation within a reasonable period.⁵⁰ The Court did not nullify the result of the election, but simply declared that the relevant provision in the Public Election Law was unconstitutional. In another case involving a Lower House election, the difference was 1:3.94 and the Court found this to be a generally unreasonable level, but took into consideration that it was not long since the legislature had taken some corrective measures, and refrained from finding this to be unconstitutional.⁵¹ However, in the 1983 general election in which the discrepancy reached 1:4.40, the Supreme Court again found this to be unconstitutional, particularly ⁴⁸ ⁴⁹ ⁵⁰ ⁵¹

Ashibe, Kenpō-Gaku, supra, pp. 24–31. Judgment of the Supreme Court, 4 June 2008. Judgment of the Supreme Court, 14 April 1976, Minshū 30-3-223. Judgment of the Supreme Court, 7 November 1983, Minshu 37-9-1243.

The Protection of Human Rights

103

since the legislature had failed to take rectifying measures after the 1985 general election.⁵² The Supreme Court requires less strict adherence to equality in the value of votes in Upper House elections in comparison with Lower House elections, since, according to the Court, the system of the Upper House election takes into consideration various historical, political, economic, and social factors other than the number of the population. In 1998 the Supreme Court ruled on the constitutionality of the Upper House election in which the difference in the value was 1:4.81. The Supreme Court pointed out that the legislature is entitled to exercise reasonable discretion which may affect the equality of votes; and by taking into account the legislative measure implemented in 1995, which reduced the difference in the value of votes, concluded that the difference of 1:4.81 had not reached the level of impermissible inequality, and that the Diet had not exceeded its scope of discretion in the allocation of the seats. There were five dissenting opinions which found the election to be unconstitutional and an opinion which set the ratio of 4 to 1 as a threshold of unconstitutionality.⁵³ The Court has continued to hold Upper House elections in which the difference was 1:4.79 and 1:5.13 respectively, since then.⁵⁴

7. Freedom of Religion Freedom of thought and conscience is also guaranteed by the Constitution (Art. 19). This is followed by a provision which guarantees freedom of religion, and prohibits religious acts and education by the State (Art. 20). An important issue is the separation of State and Shintoism under this provision. Before the end of the Second World War, the political system was ultimately based upon the religious authority of the Emperor, and Shintoism was regarded as the State religion. As part of the post-war reforms, religion was separated from the State. However, in recent years there have been cases where this principle seems to have been undermined. An example is the practice of Prime Ministers to visit the Yasukuni Shrine, a Shinto shrine built before the Second World War in order to commemorate Japanese soldiers who fell in the wars. The constitutionality of such visits is questionable, and has been contested in court. In a way, Shintoism is closely intertwined with daily life in Japan. There are cases where local governments become involved in activities which have a Shintoist nature. In one case, a city authority organised a ceremony which was ⁵² Judgment of the Supreme Court, 17 July 1985, Minshu 39-5-1100. ⁵³ Judgment of the Supreme Court, 2 September 1998, Minshu 52-6-1373. ⁵⁴ Judgment of the Supreme Court, 14 January 2004, Minshu 58-1-56; 4 October 2006, Saibansho-Jihó, 1421–1.

104

The Basis of the System

intended to ensure the safety of workers before starting construction of a city gymnasium which was conducted by a Shintoist priest. The High Court found this ceremony to be unconstitutional, but the Supreme Court overruled this judgment. The majority opinion maintained that a complete separation of State and religion was impossible, and the Constitution should not be construed in the sense that any kind of relation between the State and religion was impermissible. The purpose of the allegedly religious activity, the place of the ceremony, the intention of the organiser, and its effect on the general public should be taken into account, and only when the relationship is unreasonable from the viewpoint of the social and cultural background of the country, should the act be found to be impermissible. Five dissenting justices were of the view that the ceremony was nothing less than religious and therefore unconstitutional.⁵⁵ In another case, a city government provided land free for a war memorial maintained by an organisation which conducted Shintoist and Buddhist ceremonies in front of the memorial. The Supreme Court ruled that the act of the local government was not unconstitutional.⁵⁶ The test applied by the Supreme Court seems to have been inspired by the Lemon test which is applied in the United States. This test examines (i) the purpose of the given act, (ii) whether or not the primary effect of the act is to promote or suppress religion, and (iii) whether or not there is an excessive entanglement with religion.⁵⁷ Some lower courts have applied this test and concluded that the act in question was unconstitutional, but the Supreme Court has always found such acts to be constitutional by applying the same test. However, in a more recent case, the Supreme Court found a donation by a prefectural government to a Shintoist shrine to be unconstitutional. In this case, a prefectural government had been paying donations to the Yasukuni Shrine on a regular basis. The Supreme Court ruled that in light of the purpose and effect of the given act, if the relationship between the State and religion exceeded the level permissible under social and cultural conditions in Japan, it was unconstitutional. Religious activities prohibited by the Constitution are those which assist, promote, enhance, or suppress interference with religion. In determining whether a given act is prohibited, not only the appearance of the act, but also the place where the act is performed, the perception by the general public of the act, the intention of the organiser, the existence of religious meaning in the act and effects on the general public amongst other factors should be considered. In this case the Court found that the donation would be seen by the general public as religious, and the donor must have been aware of its religious meaning. The act creates an impression amongst the general public that the prefecture was specifically supporting a particular religious organisation and inspires public interest in ⁵⁵ Judgment of the Supreme Court, 13 July 1977, Minshū 31-4-533; Tsu Jichinsai case. ⁵⁶ Judgment of the Supreme Court, 16 February 1993, Minshū 47-3-1687 (Minomo Chūkokuhi case). ⁵⁷ Ashibe, supra, p. 137. Lemon v. Kurtsman 403 US 607 (1971).

The Protection of Human Rights

105

this organisation. Thus the Supreme Court found this act to be unconstitutional by a 13 to 2 majority.⁵⁸

8. Due Process of Law The Constitution, which has a close affinity to the US Constitution, also contains a provision on the due process of law which provides that no one shall be deprived of life or liberty or face a criminal sanction without recourse to procedures established by the law (Art. 31). It evidently has its origins in the Fifth and Fourteenth Amendments of the US Constitution. It differs from the US model in that the provision requires observance of procedures established by law, but does not explicitly require the procedures to be ‘due’. Also, property rights are not explicitly covered by the provision. Nevertheless, the courts and academic opinion in Japan have interpreted this provision broadly. First, it is generally agreed that this provision covers substantive as well as procedural due process. Thus, the requirements that statutory provisions restricting fundamental rights should not be vague, that the content of regulation should be reasonable, and the doctrine of proportionality are derived from this provision. Secondly, the procedure and the substance of the law restricting fundamental rights should be fair, although the provision does not explicitly require fairness. For example, notice and a hearing are required for limiting fundamental rights on the basis of this provision. In a case where the plaintiff ’s property in the possession of a third party was confiscated, the Supreme Court found that the confiscation, with no opportunity for the owner to defend his rights, was a breach of due process.⁵⁹ Thirdly, the provision is not limited to life, liberty, or imposition of criminal penalties. Restrictions on property rights are also understood to be covered by this provision. The principle of nulla poena sine lege is not explicitly set out in the Constitution, but there is no doubt that this is also guaranteed by the Constitution, which commits itself to safeguarding fundamental rights and freedom under this due process provision. Some court judgments presupposed that the due process provision includes this principle. The Constitution does explicitly guarantee some related principles. Thus, no one shall be held criminally liable for an act which was lawful at the time it was committed or for an act of which he has been acquitted (Art. 39). The same provision also prohibits double jeopardy. The due process provision and the provisions protecting the rights of suspects and defendants which follow are also extended to administrative procedure. In one case, whether the order of the tax authority to produce documents was compatible with this provision was contested. The Supreme Court ruled that ⁵⁸ Judgment of the Supreme Court, 2 April 1997, Minshū 51-4-1637 (Ehime Tamagushi-ryō case). ⁵⁹ Judgment of the Supreme Court, 28 November 1962, Keishū 16-11-1593.

106

The Basis of the System

these provisions primarily covered criminal procedure, but do not necessarily exclude other procedures.⁶⁰ More recently, in a case on the procedure under a special law to protect the Tokyo International Airport, the Supreme Court confirmed that administrative procedure is not excluded from protection under the due process provision.⁶¹

9. Rights of Suspects and Defendants The Constitution guarantees the rights of defendants and suspects in criminal procedure (Arts 33–39). After the adoption of the Constitution with these provisions, the Code of Criminal Procedure was totally amended in 1948. While the previous Code was primarily based upon German law, the present law is influenced by US law. The Constitution provides that no one should be arrested without a warrant issued by a competent judicial officer, i.e. by the court or judge, and not by public prosecutors or police officers, except in cases where the arrest is in flagrante delicto. Similarly, no one shall be arrested or detained unless he is immediately notified of the grounds of arrest or detention and given access to legal advice. Furthermore, a person cannot be detained without justifiable reason, and upon the request of any person such grounds shall be shown in an open court in the presence of defence counsel (Arts 33 and 34). The Habeas Corpus Law was enacted in 1948.⁶² In addition to freedom of expression, which also guarantees the secrecy of communications, homes and other property are protected from unlawful search and seizure (Art. 35). The use of torture and cruel punishment by government officials is strictly prohibited (Art. 36). The constitutionality of capital punishment was tested against this provision. The Supreme Court ruled that when the crime committed by the offender is extremely serious and, considering the purpose of general deterrence, requires an extreme penalty, then the death penalty is justified.⁶³ Capital punishment still exists in Japan, despite calls from other countries to suspend it (see Chapter 18). Defendants have a right to a fair and speedy public trial (Art. 37, para. 1). In cases where all judges agree that an open trial is likely to damage public order or public morals, a closed trial is allowed. However, if the procedure involves a political offence, crimes related to the publication of information, or fundamental rights guaranteed by the Constitution, the trial must be held in open court. ⁶⁰ Judgment of the Supreme Court, 22 November 1972, Keishū 26-9-544 (Kawasaki Minshō case). ⁶¹ Judgment of the Supreme Court, 1 July 1992, Minshū 46-5-437 (Narita Shinpō case). ⁶² Law No. 199, 1948. ⁶³ Judgment of the Supreme Court, 12 March 1948, Keishū 2-3-191.

The Protection of Human Rights

107

Defendants have a right to legal representation, and if they cannot afford it the State has the responsibility to provide counsel (Art. 37, para. 3). More than 98 per cent of defendants are assisted by counsel in the first instance court. Around 76 per cent of defendants are assigned counsel by the State, of which 10 per cent had counsel from the pre-trial stage.⁶⁴ Defendants are also guaranteed the right to cross-examine all witnesses (Art. 37, para. 2). Cross-examination was introduced into Japan after the Second World War. Hearsay evidence is not generally allowed in court, but exceptions to this rule are fairly wide. Documents which contain statements recorded during the investigation still play a significant role at trial. The Constitution also guarantees that no one should be forced to make incriminating statements (Art. 38, para. 1). This provision has its origin in the Fifth Amendment of the US Constitution, which guarantees the right against selfincrimination. Concerning this provision, the Road Traffic Law, which requires those who cause a traffic accident to report it to the authorities under the threat of criminal penalty, was found constitutional by the Supreme Court.⁶⁵ Confessions made under compulsion, torture, or threat, or after unduly prolonged arrest or detention, shall not be admitted as evidence. No one should be convicted when the only proof against him is his confession, i.e. corroborative evidence is required (Art. 38, paras 2 and 3).

10. Economic Rights Economic rights, such as the right to choose one’s occupation, the right of residence and removal, and property rights are protected by the Constitution. Concerning property rights, the Constitution declares that property rights are inviolable, but in the following paragraph provides that the contents of property rights are to be defined by law in accordance with public welfare. Therefore, although the system of private property itself is safeguarded by the Constitution, the legislature is empowered to restrict property rights by way of legislation. Furthermore, private property may be used for public purposes with appropriate compensation (Art. 29). The Law on Acquisition of Land for Public Purposes, for example, provides for the procedure of compulsory acquisition of land, but with payment of compensation.⁶⁶ The constitutionality of a provision in the Forestry Law was contested in court. The Law restricted the right of joint owners of a forest to demand division of the property, in order to prevent the forest being divided into excessively small lots. The Supreme Court found this provision to be unconstitutional on the ground ⁶⁴ . ⁶⁵ Judgment of the Supreme Court, 2 May 1962, Keishū 16-5-4959. ⁶⁶ Law No. 219, 1951.

108

The Basis of the System

that the restriction was neither reasonable nor necessary in view of the aim of the law, and was in breach of Article 29.⁶⁷ The Constitution provides that every person has the right to choose an occupation insofar as it is not against public welfare (Art. 22, para. 1). This covers the right to do business. Japan has a highly regulated economic system. In this regard, the constitutionality of various restrictions on businesses set by the government has been at issue in court. An example is the Law on Pharmaceutical Business, which restricted the locations of new pharmacies. This law was found to be unconstitutional by the Supreme Court, since the restriction was neither reasonable nor necessary.⁶⁸ On the other hand, the Supreme Court found that the licensing system for the sale of alcohol was constitutional. In this case, an entrepreneur contested the refusal by the local tax agency to grant a licence on the ground of ‘lack of solid financial basis’ on the part of the applicant. The Supreme Court ruled that the licensing system was within the discretion of the legislature.⁶⁹ In any case, due to the progress of the regulatory reform since the mid-1990s, such excessive regulations have been removed.

11. The Role of the Supreme Court As seen above, one may safely conclude that, overall, human rights are appropriately protected in Japan. The system of constitutional/judicial review has been functioning properly, in the sense that citizens who have felt their constitutional rights have been infringed by government action are able to challenge such action in open court. There are many cases where citizens have contested the constitutionality of laws, ordinances, or government action, and in some cases, have been successful. There is a criticism that the Supreme Court has been reluctant to rule against restrictions imposed by the legislature or the government on fundamental rights. Some judgments in the 1970s showed a tendency to uphold the constitutionality of laws and acts by simply juxtaposing public welfare and individual rights. In one case, the Supreme Court even reversed its own decision only seven years after a judgment which held a provision of the Law on Government Employees to be unconstitutional. This involved the constitutionality of the provision which punished government employees for their involvement in political activity. The 1966 judgment of the Court ruled that the restrictions on basic rights of workers should be kept to a necessary minimum, that the imposition of criminal sanctions should be especially limited, and that the provision at issue exceeded this ⁶⁷ Judgment of the Supreme Court, 22 April 1984, Minshū 41-3-408 (Forestry Law case). ⁶⁸ Judgment of the Supreme Court, 30 April 1975, Minshū 29-4-572. ⁶⁹ Judgment of the Supreme Court, 15 December 1992, Minshū 46-9-2829.

The Protection of Human Rights

109

limit and was thus unconstitutional.⁷⁰ This judgment was followed by two judgments of the Supreme Court which took a similar approach. However, in 1973, when an identical case reached the Supreme Court, the Court explicitly reversed its previous judgment, and found that the rights of the workers should be limited by taking into account ‘public welfare’. A change in the composition of the Bench between the dates of these two judgments may have affected the latter judgment, which was reached by an eight to seven vote.⁷¹ In some cases, the Supreme Court seemed to be insensitive to the protection of individual rights such as in the case regarding the unequal treatment of illegitimate children in inheritance law. On the other hand, in recent years, there have been some areas in which the Supreme Court has been fairly active in upholding the Constitution. The inequality of the value of votes is an example. There were two judgments which found a provision of the Public Election Law to be unconstitutional. Also, there were some landmark judgments, including the Ehime Tamagushi case regarding the separation of the State and religion cited above, where the Supreme Court found an act of the prefectural governor to be unconstitutional. The most recent judgment regarding the Nationality Law is another example.

12. International Treaties and Human Rights Japan has ratified the International Covenant on Civil and Political Rights, but with a few reservations. Japan is not bound by Article 8, paragraph 1(d), which provides for workers’ rights to industrial action. The reservation is due to restriction of such rights on certain categories of government employees. Although the Covenant was ratified and promulgated, it is rarely used in court as a basis for actions to protect human rights in Japan. This may be due to the extensive and open-ended list of fundamental rights provided by the Constitution, which apparently makes it unnecessary to resort to the Covenant. However, the Covenant was referred to in court in a case concerning the Aliens Registration Law, requiring foreigners to have their fingerprints taken when their registration is renewed. The plaintiff, a resident of Korean origin, claimed that this requirement was against the equal treatment clause of the Constitution and the International Covenant on Human Rights. He argued that this constituted ‘degrading treatment’, and thus was prohibited by the Covenant. The High Court ruled that the Covenant was directly applicable, but did not accept the plaintiff ’s argument.⁷² The Supreme Court acknowledged that Article 13 of the Constitution included a right not to be forced to have fingerprints taken,

⁷⁰ Zentei-Chūyū case, supra. ⁷¹ Sarafutsu case, supra. ⁷² Judgment of Tokyo High Court, 25 August 1986, Hanji 1208–66.

110

The Basis of the System

but found the fingerprinting under the Aliens Registration Law to be sufficiently reasonable and necessary.⁷³ The 1992 amendment abolished the fingerprinting of aliens with permanent resident status. However, due to the rise of terrorism, fingerprinting was introduced for all foreigners entering Japan. The Covenant was also referred to in a case involving the right to a pension for the handicapped of a resident Korean. The plaintiff argued that a provision of the relevant law was against the Covenant, and therefore void. The Supreme Court denied that the Covenant granted specific rights to individuals directly and immediately.⁷⁴ Japan has ratified the International Convention on the All Forms of Racial Discrimination; the Convention on All Forms of Discrimination Against Women; the Convention on the Rights of the Child; the Convention Against Torture, and Other Cruel, Inhuman, or Degrading Treatment or Punishment; and the Convention Relating to the Status of Refugees.

⁷³ Judgment of the Supreme Court, 15 December 1995, Keishū 49-10-842. ⁷⁴ Judgment of the Supreme Court, 2 March 1989, Hanji 1363–68 (Shiomi case).

6 General Rules and Institutions of Private Law 1. General (1) The Civil Code and the Commercial Code The Civil Code and the Commercial Code are the two pillars of Japanese private law. Both codes were enacted in the late 1890s, and are of European origin. The Civil Code had remained unchanged for many years except for the part on Family and Succession. However, in the 2000s there were major amendments, including the modernisation of the wordings of the Code and amendments in relation to juridical persons. In 2005, the new Company Law was enacted, and the entire company law part of the Civil Code was separated from the Commercial Code. The Japanese Civil Code is a comprehensive Code which covers property law, the law of obligations including contract law, tort law, family law, and the law of succession. The Civil Code is divided into five Books. Book One is the General Part which provides for the basic rules and institutions of civil law. These include the civil law capacity of natural and juridical persons, juristic acts, and agency. Book Two is entitled Real Rights and covers property and real security rights. Book Three is the Law of Obligations. Tort is considered to be one of the sources from which an obligation emerges together with unjust enrichment, and is therefore included in this part along with contract law. Book Four deals with family relations, and Book Five covers inheritance. The present Civil Code was enacted in 1896. While Books One to Three have not been substantially amended since enactment, Books Four and Five, which deal with Family Law and Inheritance Law respectively, were almost totally amended after the Second World War to democratise family relationships and ensure gender equality. The first attempt to draft a Civil Code began soon after the fall of the Tokugawa Shogunate in 1867 under the initiative of the Minister of Justice, Shinpei Etoh. In 1870, a commission for the preparation of the Civil Code was formed and the work of translating the French Code Civil with the assistance of a French adviser began. The initial intention of the commission was to transplant the French Code Civil into Japan as soon as possible. The draft which came out in 1878 was almost

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

114

The Civil Code—The Cornerstone of Private Law

a complete copy of the French Code. The translation was very poor in quality and, what was more, had not paid due attention to the issue of transplanting the French Code to a very different soil—pre-industrial Japan. The government soon realised this problem and decided to prepare a Code based upon European legal principles, but which was also ‘practical and appropriate’.¹ Gustave Boissonnade was invited as a government adviser from the University of Grenoble, and was commissioned to undertake this formidable task. Most of the draft, except for family and inheritance, was worked out primarily by Boissonnade on the basis of the French Code Civil, and to a certain extent German law, although some innovations were added by him. Japanese members of the drafting committee had studied French law. Simultaneously with the drafting of the Civil Code, the Commercial Code was being drafted— although this time the leading role was given to a German adviser. The draft Civil Code was discussed in the Senate and the Privy Council. The parts on property, the acquisition of property, obligation, securities, and evidence were promulgated in 1890.² This Code—referred to in Japan as the ‘old Civil Code’—adopted the system of the French Code, although in some provisions the influence of Italian, Belgian, and Dutch Codes can be seen. Although the parts on family law and inheritance were prepared by Japanese specialists, these were also inspired by the European concept of a family based upon the equality of husband and wife, rather than that of the traditional Japanese family dominated by the male head of the family. This Code was subject to a barrage of criticism from various quarters. It was true that the Code, being the first major legislative work by the Japanese, had shortcomings and ambiguities. It was not surprising that the Code was criticised on these technical points. However, the criticism was more deeply rooted. First, the Code was claimed to have been drafted almost entirely on the basis of French law and did not pay due attention to other jurisdictions, such as English or German law. This led to factional criticism from lawyers trained in German or English Law. This rivalry between French specialists and German and English specialists was not merely a struggle for hegemony. The French specialists had been inspired by the theory of natural law, while German and English specialists had studied historical jurisprudence. The former acknowledged the universal applicability of legal principles, while the latter emphasised the historical and social environment within which a particular legal system had developed. Therefore, the latter were sceptical of the possibility of transplanting the French Code into Japan. The opponents of the Code were also associated with those who were against rapid modernisation and who stressed that the traditional virtues of Japan should ¹ For the influence of French law on the Japanese Code, see E. Hoshino, Minpō-Ronshū (Treatise on Civil Law), vol. 6 (Tokyo, 1980), pp. 90–149. Translated into English in H. Tanaka, The Japanese Legal System (Tokyo, 1976), pp. 229–235. ² See R. Frank, ‘The General Part’ in W. Röhl, History of Law in Japan Since 1868 (Leiden, 2005), p.166ff.

General Rules and Institutions of Private Law

115

not be replaced by a Christian ideology and European individualism. The family law and succession parts of the Code especially were anathema to them. In an opposition tract published at the time, it was pointed out that the Civil Code destroyed traditional morals and diminished the role of the State. Some people even asserted that the concept of natural rights was against the Constitution. The criticism was primarily concentrated on the family law part. For example, the Code provided that the father exercised parental rights. If the father died, the mother was to take over those rights. This arrangement was criticised for being against Japanese tradition, because in such cases traditionally a guardian was always appointed.³ After a long and fierce debate, the Imperial Diet decided in 1892 to postpone the implementation of the Code, as well as the Commercial Code. Although formally the Diet merely decided to amend the Code, in fact the Government set up another commission and instructed it to draft another Code. This Code, eventually adopted in 1898, is the present Civil Code. It should be noted that this was adopted two years earlier than the German Bürgerliches Gesetzbuch (BGB) and nine years earlier than the Swiss Civil Code. The new Civil Code has long been considered to be based upon German law. It is true that the Code was strongly influenced by the second draft of the German BGB and the Saxonian Civil Code. The Code was organised on Pandekten lines starting with the General Part which is to be applied to the rest of the Code, followed by Property and Securities Rights and the Law on Obligations. There are many provisions resembling the German BGB. For example, the concept of juristic acts (Geschäftshandlungen/Rechtsgeschäft) evidently came from Germany. Taking into account that the new Code was enacted after the previous Code had been scrapped for its strong French influence, it was not surprising that the new Code was regarded as a rehash of the German Code. At that time, a German commentator pointed out that when the Code was enacted it was almost entirely based upon German law and was much clearer and simpler than the previous Code. ‘It does not look like a translation (as was the case with the previous Code), but can be read as an original work.’⁴ Because of the belief that the new Code was based on German law, Japanese scholars and lawyers have worked hard to digest German civil law theories. The most common destination of Japanese academics studying abroad was Germany, especially before the Second World War. However, contemporary research shows that the influence of French law was still present in the new Code. In order to enact a new Code in a short timespan, the drafters had to rely on the abortive previous Code. Many provisions of the old Code have been inherited by the new. For example, the provision which ³ T. Hoshino, Minpōten Ronsō-shi (The History of the Debates Concerning the Civil Code) (Tokyo, 1942), p. 234. ⁴ L. Lönholm, Das Bürgerliche Gesetzbuch von Japan, vol. I (Tokyo, 1896), iii–iv.

116

The Civil Code—The Cornerstone of Private Law

requires registration of title in order to claim a property right over immovable property against a third party in the new Code can be found in the previous Code. Incidentally, in German law registration is a requirement for the transfer of immovables to take effect, while in French law the transaction is valid without registration, although the parties may not claim their rights against a third party without registration. In this respect the present Code has clearly adopted the French approach.⁵ Thus, while maintaining the facade of being strongly influenced by German law, the legislature at that time kept certain parts of the previous Code that had been influenced by the French Code. It is more correct to say that the drafters intended to produce an ideal system by taking the best of the German and French Codes. It should be added that some of the civil law doctrines and institutions came from sources other than French or German law. For instance, the doctrine of ultra vires came originally from English law, but probably via French law.⁶ Some laws supplementary to the Civil Code were enacted at the end of the last century. These include the Law on the Registration of Real Property (1899) and the Law on Deposits (1899).⁷ Other laws, such as the Law on the Hypothec of Factories and laws relating to the security over enterprises and some movable property, including cars and ships, were adopted later as the economy developed.⁸ The by-product of modernisation was the emergence of socially deprived people, primarily workers and tenant farmers. In order to protect those who were in socially weak positions, laws were enacted to modify the provisions of the Civil Code. Thus, the Law on the Protection of Buildings (1907), the Law on the Lease of Houses (1921), and the Law on the Lease of Land (1921) were enacted.⁹ In 1991 these three were merged into one new law—the Law on Lease of Land and Houses.¹⁰ In recent years, with increased risks accompanying advances in technology, some new laws in the field of tort law have been enacted. These include the Law on Compensation for Nuclear Damage, which provides for strict liability (1961) and the Law on the Compensation of Losses caused by Pollution (1971), which provides for a sophisticated mechanism of compensating victims of pollution.¹¹ The Law on Compensation for Losses arising from Car Accidents was enacted in 1955 in order to cope with growing number of traffic accidents.¹² 5 E. Hoshino, supra, p. 99. See also S. Koyanagi, ‘Minpō-ten no Tanjyō (The Emergence of the Civil Code)’, in E. Hoshino and T. Hironaka (eds), Minpō-ten no Hyakunen (Centenary of the Civil Code), vol. 1 (Tokyo, 1999), p. 3ff. 6 See the chronological table in K. Shinomiya and Y. Nomi, Minpō-Sōsoku (The General Part of the Civil Code), 7th edn (Tokyo, 2006), p. 8. 7 8 Laws No. 15 and 24, 1899. Laws No. 54, 1905; No. 106, 1958; and No. 187, 1951. 9 Laws No. 40, 1909 and No. 49 and 50, 1922. ¹⁰ Law No. 90, 1991. ¹¹ Law No. 111, 1973. ¹² Law No. 97, 1955.

General Rules and Institutions of Private Law

117

Some developments could be seen in consumer protection. In 1994, the Product Liability Law was enacted.¹³ This was followed by the Consumer Contract Law in 2000.¹⁴ In 2006, a major reform of the system of juristic persons took place. This part of the Code was substantially amended and a set of new laws including the Law on General Associations and Foundations and the Law on Certification of Public Interest Associations and Foundations were enacted.¹⁵

(2) The Commercial Code The present Commercial Code is divided into the General Part, Commercial Transactions, and Merchant Shipping and Insurance.¹⁶ There was a part on company law, but this part has been separated from the Commercial Code by the enactment of the Company Law in 2005 (see Chapter 11). The Commercial Code is supplemented by various laws such as the Law on Cheques, the Law on Bills, and the Law on Commercial Registration.¹⁷ The first Commercial Code of Japan was promulgated in 1890. It was based upon a draft prepared by a German adviser, Herman Roesler, who consulted German, French, and English law in the course of its preparation. The composition of the Code was similar to that of the French Commercial Code of 1807, although in substance it could be described as a blend of German and French law. However, the Code was caught in a crossfire of criticism together with the Civil Code, and it was some years before it took effect. A revised Code, still in effect, was finally adopted in 1899. This was primarily modelled after the German Commercial Code (Handelsgesetzbuch) of 1897, but with some French influence.¹⁸ The Code has undergone some major changes since its enactment. Japan ratified the Geneva Conventions on the Unification of the Law of Bills and the Law of Cheques in 1930 and 1931 respectively, which resulted in the separation of the part of the Commercial Code on bills and cheques from the rest of the Code.

(3) The relationship between the two codes The provisions of the Commercial Code are special rules in contrast to the general law of the Civil Code, and therefore the former takes priority whenever provisions of both codes apply. In the absence of relevant provisions in the Commercial

¹³ Law No. 85, 1994. ¹⁴ Law No. 61, 2000. ¹⁵ Laws No. 48 and 49, 2006, ¹⁶ Law No. 48, 1899. ¹⁷ Laws No. 57, 1933; No. 20, 1932; and No. 125, 1963. ¹⁸ F. Takakura, ‘Shōhō-ten no Tanjō (The Emergence of the Commercial Code)’, Jurist, 1999, No. 1155, pp. 5–15.

118

The Civil Code—The Cornerstone of Private Law

Code, commercial custom is first applied, and only when there is no such custom is the Civil Code applied (Art. 1, Commercial Code). Contract law serves as an example of the order of application of these codes. Contract law provisions are found in both codes. The second chapter of Book Three of the Civil Code, following the first chapter on the General Rules of the Law of Obligation, deals with contracts. This chapter is divided into a general part and provisions on individual contracts including contracts of sale and loan, and leases. Furthermore, since contracts are juristic acts, provisions in the General Part (Book One) of the Civil Code on juristic acts apply to contracts. Thus, a contract which is an outcome of a declaration of will can be null and void or voidable on various grounds, such as fraud, mistake, duress etc., as provided in the General Part. Agency is also covered in the General Part. Book Three of the Commercial Code deals with commercial transactions. There is a general part, followed by provisions on typical contracts such as sale, accounts current, anonymous associations, etc. The Commercial Code provides that certain transactions are commercial per se. These include transactions whose purpose is the acquisition for value of movables, immovables, or securities with the intention of transferring them for profit, or the transfer of movables, immovables, or securities so acquired (Art. 501). Then there are transactions which are commercial if effected as a business. These include transactions relating to manufacture or processing done for other persons as well as money-changing and other banking transactions and insurance (Art. 502). In addition, there are incidental commercial transactions which are effected by a merchant for his business (Art. 503). A merchant is defined in the Code as a person who, on his own behalf, effects commercial transactions by way of business (Art. 4, para. 1). Thus, while contracts of sale are covered by both codes, provisions of the Commercial Code have priority insofar as the contract falls within the category of commercial transactions.

2. General Principles and Basic Rules (1) Civil law rights and public welfare It is one of the characteristics of the German Pandekten system that general principles and basic rules are singled out and put at the beginning of the Code.¹⁹ The Japanese Civil Code is no exception; the General Part of the Code sets out these principles and rules. They are applicable not only to civil law transactions, but also to commercial transactions. The General Part begins with a general provision on the exercise of private rights. ¹⁹ N. Horn, H. Kötz, and H. G. Leser, German Private and Commercial Law (translated by T. Weir) (Oxford, 1982), pp. 66–67.

General Rules and Institutions of Private Law

119

The Civil Code provides as follows: Private rights shall conform with public welfare. The exercise of rights and the performance of obligations shall be effected in a fair way and in good faith. The abuse of rights is not permitted. (Art. 1, para. 1)

This provision was added to the Civil Code after the promulgation of the present Constitution. The first paragraph coincides with the provision of the Constitution which states that the contents of property rights are to be regulated by law in accordance with public welfare (Art. 29, para. 2). This provision symbolises the rejection of the sanctity and absolute inviolability of property rights, but is seldom applied in practice. One of the rare cases where this provision was applied involved the claim of a landowner who let his land for use as a US military base. When the lease expired, the landowner claimed that his property should be returned to him. The Supreme Court ruled that the loss incurred by the State if the land was returned to the owner would be bigger than the benefit receivable by the owner, and therefore the claim was contrary to public welfare.²⁰ The second and third paragraphs, on abuse of rights and good faith and fair dealing respectively in contrast, are often referred to in court judgments where an equitable solution cannot be reached by relying on specific provisions of the Civil Code. It should be added that the provision on public order and good morals in the General Part (Art. 90) serves a similar purpose.

(2) The doctrine of good faith and fair dealing The doctrine of good faith and fair dealing (shingi seijitsu) had long been recognised by the courts before it was formally incorporated into the Civil Code after the Second World War. French and German Codes have similar provisions.²¹ This doctrine is applied in various circumstances, including cases which in the UK would be covered by collateral estoppels. The court resorted to this doctrine when there was a need to pierce the corporate veil. In one case the lessee of a piece of land—a company—was sued by the lessor for failing to pay the rent. The president of this company established another company with a similar name in order to avoid such claims. He contested a claim in the court. Then, after a year, while the case was still pending, this person argued that his company was a different entity from the one which had been sued, and that the plaintiff should have sued the new company. The court rejected this argument as being contrary to good faith and fair dealing.²²

²⁰ Judgment of the Supreme Court, 9 March 1965, Minshū 19-2-233. ²¹ Horn et al., supra, pp. 86–87. ²² Judgment of the Supreme Court, 26 October 1973, Minshū 27-9-1240.

120

The Civil Code—The Cornerstone of Private Law

The court also applied this doctrine in order to protect the lessee of a house or land from eviction. According to the provisions of the Civil Code, the lessor is entitled to rescind the contract of a lease when the lessee sublets the property, or assigns his interest to a third party without the consent of the lessor (Art. 612). The contract can also be rescinded when the lessee fails to pay the rent. However, the court restricts rescission of the contract by the lessor to cases where the act of the lessee amounts to a destruction of mutual trust. In one case, the court refused to terminate a lease on the ground of this doctrine; the court pointed out that the amount of arrears was small and that the lessee was entitled to a claim for repair, therefore the lessee could not be regarded as having acted against the doctrine of good faith and fair dealing.²³ In a similar vein, the court developed the doctrine of unfair dismissal out of this provision (see Chapter 16). Sometimes a claim that a certain right has been extinguished by prescription is turned down by the courts on the ground that it is against good faith and fair dealing. A widow who had obtained a piece of land from her eldest son (the only heir under pre-war family law) failed to have it registered in her own name. She was not on good terms with the eldest son and raised her other children by farming this piece of land. Some 20 years later she asked the eldest son to cooperate in registering the property in her name. He refused, and as a defence in court, claimed that her right to demand cooperation in registration had already been extinguished by prescription. The Supreme Court found that this defence was against fairness and good faith.²⁴ In a recent case, the court found that the State was not entitled to invoke a prescription in relation to a Japanese national who was a victim of the atomic bomb in Hiroshima and who later emigrated to Brazil, for his claim for a benefit under the special assistance law. Th is was based upon the doctrine of good faith and fair dealing.²⁵ Since the 1960s this doctrine has come to be utilised in an even broader manner.²⁶ Culpa in contrahendo has been acknowledged on the basis of this provision. In some cases, based on this doctrine, the court acknowledged the duty of a bank official and a real estate agent respectively to make certain enquiries before effecting a transaction.²⁷ In other cases, a party in the process of negotiation was found to owe a certain duty to the other party involved. In other cases the courts have ruled that rescission or refusal to renew a continuous contract under certain circumstances ran counter to this doctrine (for culpa in contrahendo, see Chapter 7). ²³ Judgment of the Supreme Court, 28 July 1964, Minshū 18-6-1220. ²⁴ Judgment of the Supreme Court, 25 May 1976, Minshū 30-4-554. ²⁵ Judgment of the Supreme Court, 6 February 2007, Minshu 61-1-122. ²⁶ T. Uchida, ‘Gendai keiyaku-hō no aratana tenkai to ippan-jōkō (New Development of Modern Contract Law and General Clauses) (3)’, New Business Law, No. 516, pp. 22–28. ²⁷ Judgment of the Supreme Court, 26 May 1961, Minshū 5-5-1440.

General Rules and Institutions of Private Law

121

(3) Abuse of rights While the doctrine of good faith and fair dealing is used in cases where a particular relationship—such as a contract—exists between the parties, the prohibition against the abuse of rights is generally used in cases where there is no such relationship. As was the case with the doctrine of good faith and fair dealing, this doctrine had also been acknowledged by the court before it was incorporated into the Civil Code. The exercise of one’s right can be regarded as abusive if it unreasonably infringes another’s rights. No intention to harm on the part of the holder of the right is needed. In a leading case, a pipeline came from a hot spring and crossed a small piece of land which belonged to another person. The plaintiff purchased this piece of land and required the owner of the pipeline to purchase it at a high price. When this was not accepted, he brought an action against the owner of the pipeline, demanding that the pipeline be removed. The court rejected the claim as an abuse of rights.²⁸ Another case involved the trademark registration of Popeye the Sailorman. The trademark in question was composed of the name Popeye and a figure of this cartoon character. Someone then acquired the right to use the character as a trademark from the holder of the copyright on their products. The person who had registered the trademark in Japan sued this person for infringement of a registered trademark. The Supreme Court found this also to be an abuse of rights.²⁹ This provision is sometimes used in cases of public nuisance. The construction of a two-storey building was found to be an abuse of rights, since it seriously blocked sunshine and ventilation for an adjacent house. In this case, the building did not meet the standard required by the Law on Architectural Standards.³⁰ However, such cases can be dealt with under tort law or property law, and the reasonableness of resorting to this provision is being questioned.

3. Legal Capacity (1) Physical persons The first chapter of Book One of the Civil Code deals with the capacity of physical and juridical persons. The term ‘legal capacity’ was introduced from Germany (Rechtsfähigkeit). It denotes the capacity to be a subject of rights and duties and is distinguished from the capacity to act (Handlungsfähigkeit), ²⁸ Judgment of the Supreme Tribunal, 5 October 1935, Minshū 14–1965 (Unazuki Hotspring case). ²⁹ Judgment of the Supreme Court, 20 July 1990, Minshū 44-5-876. ³⁰ Judgment of the Supreme Court, 27 June 1972, Minshū 26-5-1067.

122

The Civil Code—The Cornerstone of Private Law

meaning the capacity to obtain rights, assume duties, and incur liabilities via juristic acts. All physical persons have legal capacity without exception. They are entitled to hold private rights from the moment of their birth (Arts 1–3). These rights also extend to a child in the womb in relation to tort and inheritance. Thus, an unborn child is regarded as though it had been born and is entitled to claim for damages (Art. 721). The same applies to inheritance (Art. 886). A physical person has legal capacity until his or her death. When several people have died and the order of death is not known, it is presumed that they have died simultaneously (Art. 32-3). When it is not known whether a person is dead or alive for seven years, the family court may declare this person to be missing (Art. 30, para. 1). In cases of war or shipwreck, a person can be declared missing one year after the incident (Art. 32, para. 2). Foreign citizens are also entitled to be subjects of private rights insofar as such entitlement is not prohibited by law or ordinance (Art. 2). In some cases, for instance, in government liability, instead of equal treatment of Japanese and foreign citizens, the principle of reciprocity is applicable. The Law on Compensation by the State provides that when the victim is a foreign citizen, the law applies only when the law of his home country provides for equivalent treatment (Art. 6). There are also laws which restrict the rights of foreign citizens to obtain specific rights or operate certain businesses in one way or another. Recently, acquisition of shares of a power utility by a foreign investment fund was blocked under the Foreign Exchange and Foreign Trade Law.³¹ A rather obsolete Law on the Rights of Foreigners on Land provides for reciprocity and enables the government to restrict acquisition of land in areas which are needed for national defence (Art. 4, para. 1).³² Not every person with legal capacity can act on his own and acquire entitlement and assume duties. The Civil Code previously provided for ‘incompetents’ and ‘quasi-incompetents’. Until 1947 wives were considered to be legally incompetent. In 1979, the provision which categorised blind, deaf, or dumb persons as quasi-incompetents was repealed. The system of incompetency and quasi-incompetency went through comprehensive review, particularly from the viewpoint of reinforcing the right to self-determination on the part of those who are to be protected and their ‘normalisation’ in the late 1990s. As a result of this review, the system of incompetence was substantially changed and a new system of adult guardianship (seinen-kōken seido) was introduced.³³ Under the new system, the concept of ‘incompetent’ was abolished. Those whose capacity is limited are categorised as persons with limited capacity. These include minors, adults under guardianship, and persons under curatorship. The family court may adjudicate on the commencement of guardianship in relation to ³¹ Nikkei, 13 May 2008.

³² Law No. 42, 1925.

³³ Law No. 149, 1999.

General Rules and Institutions of Private Law

123

those who are in a permanent state of being incapable of understanding reason as a result of mental disturbance, upon application by the person themselves, their spouse, a member of the family within the fourth rank, the public prosecutor, etc. (Art. 7). As a result of the adjudication, a guardian for adults can be assigned (Art. 8). Acts of the person under guardianship can be rescinded (Art. 9). For those whose capacity for understanding reason is insufficient as a result of mental disturbance, a curator can be assigned (Arts 11 and 12). Certain acts of those who are under support, such as borrowing and guaranteeing, real estate transactions, etc. require the consent of the curator (Art. 13, para. 1). Acts effected without the consent of the curator where it was required can be rescinded (ibid., para. 4). Minors have limited capacity to act. A person acquires majority at the age of 20, or by marriage (Arts 4 and 753). A minor is required to obtain the consent of his legal representative to acquire entitlement or assume duties (Art. 5, para. 1). Usually, those who have parental rights over a minor become the minor’s legal representatives. Acts done without the consent of the legal representative can be rescinded (ibid., para. 2). Although there is no statutory provision to this effect, it is considered that the act of a person who is incapable of understanding the meaning and effects of his action is void. For instance, if a person who is suffering from serious mental disease but who has not yet been declared incompetent by the court concludes a contract, that contract is void.

(2) Juridical persons As in other jurisdictions, juridical persons have legal capacity just as individuals— physical persons—do. The Civil Code has recently undergone a major reform in the 2000s.³⁴ The Civil Code provides for two types of juridical persons: associations and foundations. An association is a group of individuals who come together to achieve certain purposes. In contrast, a foundation is a set of properties endowed for a certain purpose, and has no members. This two-tiered system of associations and foundations emanates from the German Civil Code, which distinguishes between Vereins and Stiftungen. However, while German law divides Vereins into commercial and non-commercial associations, the Japanese Civil Code used to divide associations into profitmaking associations and public interest associations. Profit-making associations are companies and are governed by the Commercial Code (now Company Law). The Civil Code left no room for non-profit associations that were not public-interest

³⁴ H. Nakata, ‘Ippan Shadan/Zaidan Hōjin-Hō no Gaiyō (An Outline of the Law on General Associations and Foundations)’, Jurist, No. 1328, p. 2ff.

124

The Civil Code—The Cornerstone of Private Law

associations. Organisations such as social clubs and alumni associations were not entitled to juridical personality. Since associations and foundations under the Civil Code involved public interest, in order to establish such organisations, approval of the relevant administrative agency was required. Some organisations refrained from applying for juridical personality in order to avoid the cumbersome procedures, costs, and supervision by the administrative agency. Although obtaining approval was difficult, subsequent control by the relevant ministry was lax. In the late 1970s, in response to mounting criticism of such public interest juridical persons for allegedly abusing their status and being involved in profit-making activities, the supervisory power of administrative agencies was strengthened, but this was not really effective. In 2001, the Law on Intermediate Juridical Persons which enabled non-profit, non-public interest juridical persons to be established was enacted. However, this Law did not function well, and was repealed in the process of the further reform. The reform which took place in 2006 involved the enactment of the Law on General Associations and Foundations, and the Law on the Certification of Public Interest Associations and Foundations. By virtue of these laws, associations and foundations can now be set up without approval of the relevant administrative agency, regardless of whether they involve public interest or not. Associations can be set up by two or more persons via the preparation of the articles of association, after which they must have it notarised, and must register (Arts 10, para. 1, 13, and 22 of the Law on General Associations and Foundations). For foundations, in addition to the preparation of the act of endowment and its notarisation, a contribution of assets of three million yen or more is required (Arts 152, para. 1, 155, 157, 153, para. 2, and 163). There is no restriction as to the activities associations may be involved in. Foundations do not necessarily have to be public interest foundations as was previously the case. In order to become a public interest association or a foundation, associations and foundations need to be certified by the relevant administrative agency. The certification can be revoked under certain grounds (Art. 29, paras 1 and 2 of the Law on the Certification of Public Interest Juridical Persons). Unlike the previous system, it is the Prime Minister, or the local governor, who supervises these organisations and revokes the certificate when necessary (Art. 3). In reality, beefore the reform in 2006, public interest juridical persons established on the basis of the Civil Code were relatively small in number—12,677 associations and 12,586 foundations in 2005—as compared to the number of companies, which exceeds two million.³⁵ Since the Second World War a number of separate laws have been enacted, for instance the Law on Religious Organisations and the Law on Private Schools. These laws have special provisions as to the procedure for establishing and organising these entities. ³⁵ .

General Rules and Institutions of Private Law

125

Under certain circumstances, organisations without juridical personality should be treated as juridical persons and have relevant provisions of the law applied to them. As for the capacity to sue and to be sued, the Code of Civil Procedure grants these organisations such status (Art. 29). It is considered appropriate to deny attachment of the assets of the organisation by the creditors of the members when the assets of the organisation are effectively separated from those of the members. In a similar way, there are organisations without juridical personality, whose creditors may attach only the assets of the organisation and not the assets of the members. There was a case in which a director of an association, which does not have juridical personality, abused his power, incurred debts, and disappeared. The creditor sued the members of the association for repayment. A lower court found that the liability of members should be limited to the amount of the assets of the association and should not extend to their individual assets. The Supreme Court upheld this judgment.³⁶ Since the procedure for establishing a public interest foundation is rather cumbersome, trusts for public interest purposes governed by trust law have begun to be used in recent years. The new Trust Business Law was enacted in 2004.³⁷ The Civil Code provides that a juridical person acquires entitlement and assumes duties in accordance with laws and ordinances, and ‘within the scope of its purposes’ as provided by the articles of association or the act of endowment (Art. 34). Transactions which exceed the scope of purposes set out by the articles of association are void. This provision has evidently been influenced by the doctrine of ultra vires. It may be relevant to public interest juridical persons, but in relation to companies strict implementation of this provision could disadvantage those who deal with juridical persons. In cases involving companies, the courts tend to interpret the ‘purpose’ of the articles of association broadly and to acknowledge the validity of transactions which are contested to be ultra vires. In one celebrated case, a major steel company made a donation to the ruling political party. A company shareholder brought an action against the representative director of the company. The Supreme Court repeated the precedents, in that ‘acts within the scope of purposes’ in the sense of Article 43 includes not only the purposes explicitly stipulated in the articles of association, but also acts needed directly or indirectly to achieve these purposes. In this particular case, the court ruled that donations of a reasonable amount are not ultra vires insofar as they are needed to fulfil the social role expected of the company.³⁸ In comparison, in cases concerning public interest juridical persons, the courts tend to interpret the scope of purposes narrowly. In one case, an agricultural ³⁶ Judgment of the Supreme Court, 9 October 1973, Minshū 27-9-1129. ³⁷ Law No. 154, 2004. Y. Nōmi, Shintaku-hō (Trust Law) (Tokyo, 2006). ³⁸ Judgment of the Supreme Court, 24 June 1970, Minshū 24-6-625 (Yawata Steel case).

126

The Civil Code—The Cornerstone of Private Law

cooperative extended a loan to a non-member which was not allowed by the articles of association. The loan had nothing to do with the business of the cooperative. The Supreme Court found this transaction to be outside the scope of the cooperative’s business and therefore void.³⁹ The governance structure of general juridical persons is determined by the Law on General Associations and Foundations. General associations are governed by the general meeting of the members and one or more directors (Arts 35, para. 1 and 60, para. 1). They may establish a board of directors, involve an auditor or a public accountant by the articles of association (Art. 60, para. 2). Directors, auditors, or public accountants are liable to the company for neglect of duty (Art. 111, para. 1). Juridical persons are liable for tortious acts by the directors and other representatives in the course of their business (Art. 78). General foundations have councillors, a council, directors, a board of directors, and auditors (Art. 170, para. 1). The liability provisions regarding associations apply to foundations as well (Arts 197 and 198). In some cases a juridical person is established as a veil, or used as an instrument to avoid attachment. In recent years a theory which denies juridical personality to these entities has developed under the influence of similar developments in the United States and Germany. In Japan there are a number of small companies limited by shares which are actually individual businesses. The Supreme Court ruled that when the juridical personality is abused in order to by-pass the law, or the juridical personality is merely a veil, the juridical person status can be ignored by the creditor on the basis of the doctrine of good faith and fair dealing. In this case, businessman A ran a shop for home appliances which was incorporated as a company limited by shares (Company Y). The shop premises were let by X. X wanted to evict A and Company Y from the property and eventually X and A reached a settlement in court; A agreed to move out. However, A failed to comply with the agreement, claiming that Company Y was not a party to the settlement and that part of the premises used by the company need not be returned to X. X sued Company Y. The Supreme Court ruled that although Y was a company limited by shares, in reality it was nothing other than A as an individual. Therefore the settlement reached between X and A in court should be regarded as an act between X and Company Y, and was binding on Y as well.⁴⁰ This judgment indicated that the corporate veil can be pierced in cases where (i) juridical personality has no substance and is a sham, or (ii) juridical personality is abused.

³⁹ Judgment of the Supreme Court, 26 April 1966, Minshū 20-4-849. ⁴⁰ Judgment of the Supreme Court, 17 February 1969, Minshū 23-2-511. K. Egashira, ‘Kigyō no Hōjinkaku (Juridical Personality of Corporations)’, in A. Takeuchi and M. Tastuta (eds), Gendai Kigyō-hō Kōza (Contemporary Corporate Law), vol. 2, Tokyo 1985, p. 57ff.

General Rules and Institutions of Private Law

127

4. Juristic Acts (1) The concept of juristic acts The General Part of the Civil Code also provides for juristic acts. This term came from the German term Rechtsgeschäft. It is a product of the German Pandekten jurisprudence, which has a penchant for abstractism. The General Part of the BGB has provisions concerning juristic acts, a concept formulated out of common characteristics of contracts, wills, acts of incorporation, and other legal acts.⁴¹ The Japanese Code has followed this model. A juristic act is defined as an act directed towards a specific legal effect, i.e. an act aimed at obtaining, relinquishing, or otherwise altering a right, which can be enforced through the judicial system. Legal relationships between the subjects of law, as well as the subjects and objects of law, emerge as a result of a juristic act. A typical juristic act is a contract, but it also covers unilateral acts such as gifts, wills, and joint acts such as an act of incorporation. As the renowned German lawyer Friedrich Carl von Savigny elaborated in his Theory of Will, the core of the juristic act is the declaration of will, which is an expression of the will of a person directed at a specific legal effect. Specific legal effects result from the will of a person. This presupposes the principle of private autonomy; where there is no freedom of will, there are no grounds for juristic acts to have any legal consequences. The relationship between a juristic act and a declaration of will has long been an issue of controversy. In the early period Japanese lawyers did not distinguish these two concepts. The later influence of German theories led to a distinction being made between the two concepts. A declaration of will is an element— indeed the core—of a juristic act, but it is not the juristic act itself. This is because juristic acts require elements other than a mere declaration of will. Bilateral juristic acts require two declarations of will to coincide, and are therefore more than a declaration of will; there are also acts which require other elements, such as the licence of an official body, to be effective. Thus, the juristic act is understood to be a broader concept than that of the declaration of will.

(2) Juristic acts against public order and good morals The Civil Code provides that juristic acts whose purpose is against public order or good morals are null and void (Art. 90). Together with Article 1 which provides for the doctrine of good faith and fair dealing, the Code gives the court broad discretion in this general provision. The courts have been fairly active in applying this provision in order to reach fair and equitable solutions. ⁴¹ O. Jauernig (ed.) Bürgerliches Gesetzbuch, Kommentar, Munich 2004, S. 40–43.

The Civil Code—The Cornerstone of Private Law

128

Classic examples are immoral contracts or contracts which infringe the integrity of a person; they are null and void by virtue of this provision. In a case before the Second World War, Y borrowed money from X and in return sent his daughter to work under X as a barmaid. Half of her salary was deducted in order to repay her father’s debt. The daughter fled, and X claimed repayment from Y. The Supreme Court found both the employment contract between the daughter and X, and the loan contract between X and Y to be void on the ground of this provision.⁴² Also, a loan contract for gambling money is null and void if the creditor was aware of the purpose of the loan.⁴³ In a recent case, an agreement between an employee and a trade union which deprived the employee of the freedom to withdraw was found to be against this provision.⁴⁴ Contracts concluded where one party is in a strong bargaining position and which contain clauses excessively disadvantageous to the other can be null and void on the basis of this provision. For example, a loan contract was concluded in which the debtor had to transfer to the creditor a piece of land worth eight times as much as the amount he had borrowed in case he failed to repay the debt on time. The creditor had thus abused his dominant position over a person in economic difficulty. The Supreme Court found this contract to be against public order and good morals.⁴⁵ Juristic acts are required to comply with the law. The Code provides that the parties may deviate from provisions of laws and ordinances, unless these provisions concern public order, i.e. are mandatory provisions (Art. 91). Whether a given provision is mandatory or optional is not always explicit in the Code. Generally, Books Four and Five—Family Law and Inheritance, as well as Book Two—Property Law—have more mandatory provisions than Book Three—the Law on Obligations. However, it should be noted that juristic acts which are against mandatory provisions are not always null and void. This is especially significant in relation to administrative law. Violations of the laws in this field do not necessarily make an act void, although they may result in criminal or administrative penalties. For instance, a person who sells goods without the necessary licence incurs an administrative penalty, but the contract itself may still be found valid.⁴⁶ This problem is also discussed in relation to the Anti-Monopoly Law: whether acts against the Anti-Monopoly Law are void under either the Civil or the Commercial Code. In one case, the Supreme Court ruled that an act in violation of the Anti-Monopoly Law is not necessarily null and void under the civil law.⁴⁷

⁴² ⁴³ ⁴⁴ ⁴⁵ ⁴⁶ ⁴⁷

Judgment of the Supreme Court, 7 October 1955, Minshū 9-11-1616. Judgment of the Supreme Court, 4 September 1986, Hanji 1215–47. Judgment of the Supreme Court, 2 February 2007, Minshū vol. 61, No. 1, p. 86. Judgment of the Supreme Court, 18 January 1963, Minshū 17-1-25. Judgment of the Supreme Court, 18 March 1960, Minshū 14-4-483. Judgment of the Supreme Court, 20 June 1977, Minshū 31-4-449.

General Rules and Institutions of Private Law

129

In determining the validity of the transaction in question, whether the nullification of the transaction itself is needed for the achievement of the goal of the mandatory provision, and whether the nullification results in unfairness between the parties are taken into account. Recently, there have been cases where the court found certain transactions which were against the consumer protection laws to be null and void. In order to achieve the goals set by laws such as the Anti-Monopoly Law or consumer protection laws, which are designed to maintain appropriate order in the market, it has become increasingly necessary to nullify transactions which are against such laws. There is a view which suggests that a mere violation of a mandatory provision does not necessarily make a transaction null and void, but if the transaction is tantamount to a violation of public order, then the transaction is null and void by virtue of Art. 90. The proponents of this view interpret public order rather broadly and maintain that cases such as violation of Anti-Monopoly Law or consumer protection laws should be regarded as being against public order.⁴⁸

(3) Defective declaration of will It is the role of the court to interpret the will of the parties. More emphasis is placed on the objective expression of the will as the other party would have understood it rather than the internal will, because those who relied on the objective expression should be protected. Normally, the intention of the declarant and his expressed will coincide in order to bring about the intended legal effects. However, in some cases there is a discrepancy between the two. For instance, a person may be under duress or mistaken. These instances are denoted as defective declarations of will (Willensmängel). Following the model of the BGB, there are provisions dealing with the effects of defective declarations of will. The Code endeavours to balance the interests of the declarant, the recipient, and the third party. The first category of such a defect is ‘mental reservation’ (geheimer Vorbehalt). The Code provides that a juristic act should not be invalidated when a party knowingly declares a will which does not coincide with his genuine will. This does not apply when the other party was aware or should have been aware that this was not the declarant’s genuine will (Art. 93), since in such cases there is no need to protect the interest of the opposite party at the cost of the declarant. For instance, a person who sold his property as a joke is nevertheless bound by his words. However, if the opposite party was aware that this was a joke, or should have been aware of this, the act is null and void.

⁴⁸ A. Omura, ‘Torihiki to kōjo (Transactions and Public Order)’, Jurist, No. 1023, pp. 85–86; No. 1025, pp. 68–70.

130

The Civil Code—The Cornerstone of Private Law

The second category of defects of will is fictitious declaration of will by collusion (Scheingeschäft). A fictitious (or sham) juristic act made in collusion with another party is null and void because the act does not coincide with the parties’ genuine intention. However, the interests of a third party who relied upon that false declaration of will have to be protected. Therefore, the parties may not claim that the act is void against a bona fide third party (Art. 94, para. 2). Such fictitious acts are seen, for instance, when the parties intend to avoid attachment, when a husband registers his property under his wife’s name in order to avoid attachment from his creditors. It may happen that a person entrusted with property resells it to a third party, thus abusing his position. Let us take the case where X colludes with B and fictitiously ‘sells’ him a piece of land. Between X and B the sale contract is null and void, because it does not coincide with their genuine intention. B is not entitled to claim the property against X. However, if B sold the land to a third party Y, who reasonably believed that B was the genuine owner, X may not claim his rights against Y. After all, X contributed to creating the impression that B was the owner and Y relied on it; X must accept the outcome of his act. The Supreme Court has extended the application of this provision to cases where the protection of a bona fide party was necessary. For instance, in one case A registered in his name a piece of land which belonged to his friend X. X soon found this out, but left the registration unchanged. Some time afterwards A, who had married X, sold the land to a bona fide third party Y without the permission of X. Although there was no explicit collusion of will between X and A, the Supreme Court found that X could not claim her ownership against Y, since she had left the registration unchanged and created the appearance that A was the owner of the property.⁴⁹ The third instance of defective declaration of will is mistake (Irrtum). A juristic act is null and void when there is a mistake in any essential element. However, when there is gross negligence on the part of the declarant, he is not entitled to claim that the act is null and void (Art. 95). The court distinguishes between mistakes as to element and mistakes as to motive. An example of the latter is a case where a person purchases a piece of land, believing that there is a hot spring there. While the former is considered to be void, the latter does not affect the validity of the act, unless the motive is explicitly made known to the other party.⁵⁰ However, recent academic opinion is that the demarcation between mistakes as to element and mistakes as to motive is not always clear-cut, and that even when the motive is not explicitly stated, there are cases where the transaction should be declared void.⁵¹ ⁴⁹ Judgment of the Supreme Court, 22 September 1970, Minshū 24-10-1424. ⁵⁰ Judgment of the Supreme Court, 26 November 1954, Minshū 8-11-2087. ⁵¹ For different views on this matter, see Z. Kitagawa, Minpō Kōyō (Lectures on Civil Law) CD-Rom version, Part 1, pp. 101–110.

General Rules and Institutions of Private Law

131

Finally, juristic acts made by fraudulent means or under duress can be rescinded. While the declarant may claim rescission of an act made under duress against a third person, he may not do so against a bona fide third party in cases of acts made by fraudulent means (Art. 96, paras 1 and 2).

(4) Invalidity of juristic acts The Civil Code distinguishes between acts that are null and void on one hand, and those that are merely voidable—and which can be rescinded—on the other. Acts which are null and void have no legal effect whatsoever, even without a claim to that effect, and cannot be made valid by ratification (Art. 119). Voidable acts are valid until an entitled person rescinds the act. On rescission, the act is regarded as having been void ab initio (Art. 121). When the act is null and void, one can claim its nullity at any time, whereas when the act is merely voidable, the right of rescission lapses five years after ratification became possible or twenty years after the act (Art. 126). A typical act which is null and void is an act against public order and good morals (Art. 90). The act is null and void independent of the will of the declarant or others. Acts of mental reservation, fictitious declarations, and mistakes are also null and void. In contrast, acts made by fraudulent means or under duress are merely voidable. However, as mentioned above, the extent to which juristic acts are void provided by Articles 93 to 95 is limited in one way or another. In the case of mental reservation, it cannot be claimed against a bona fide third party. Theoretically, any person may claim that an act is null and void; in a case of mistake, however, although the act is supposed to be null and void, there is an established precedent that no one may claim that the act is void if the declarant who made the mistake does not intend to so claim.⁵² Rescission or ratification is effected by a unilateral act. If a person entitled to rescind a juristic act performs the act fully or partly, demands performance from the other party, renews the act, or furnishes a surety, he is deemed to have ratified the voidable act (Art. 125).

5. Agency Juristic acts can be effected by an agent. When an agent is authorised by a principal to effect juristic acts on his behalf with a third party, the legal effect of such acts are attributed to the principal. Basic rules concerning agency are provided in the General Part of the Civil Code. The Commercial Code also has provisions on commercial agency. ⁵² Judgment of the Supreme Court, 10 September 1965, Minshū 19-6-1512.

132

The Civil Code—The Cornerstone of Private Law

Agents can be divided into two types: agents created by agreement and agents by statute. In the case of agents by statute, agency arises directly from provisions of the law. For instance, minors are represented by a legal representative (Art. 5). Parents are expected to act on behalf of minors (Art. 818). Curators are appointed in order to represent those without capacity to act, including minors for whom no adult has parental rights (Art. 838). The Code also provides for the administrator of the estate (Art. 952), the executor of a will (Art. 1015), and the administrator of a property of an absentee. Administrators are appointed by the family court (Art. 25). In addition, juridical persons are represented by a representative. As for agency created by agreement, the relationship between the principal and the agent varies. Agency arises from mandate or employment contracts, work contracts, and partnership contracts. These contracts are regulated in Book Three of the Code—the Part on the Law of Obligations. No specific form is required to create an agency. A power of attorney is often issued, but this is not mandatory. An agent need not have full legal capacity (Art. 102). Agents created by agreement may not appoint a sub-agent unless the principal has given permission or an unavoidable reason exists (Art. 104). If an agent appoints a sub-agent in accordance with these requirements, he is responsible to the principal as to the selection of, and supervision over, the sub-agent. If the agent appoints a sub-agent upon instructions from the principal, the agent is not responsible for the wrongdoing of the sub-agent, unless he knew that the subagent was unfit or untrustworthy but failed to inform the principal or remove the sub-agent (Art. 105). In contrast, statutory agents have broader power to appoint sub-agents, but are still responsible for their acts (Art. 106). Agency comes to an end by agreement between the principal and the agent. In addition, agency is terminated by the death of the principal. Death, total loss of capacity, or bankruptcy on the part of the agent also end the relationship (Art. 111). However, the death of the principal does not terminate the power of the agent in commercial transactions (Commercial Code, Art. 506). In order to avoid conflict of interests, an agent is not allowed to represent a person in a transaction in which he is the other party. For instance, a seller’s agent may not conclude on the seller’s behalf a sale contract in which he is the buyer. An agent may not act for both parties in the same transaction (Art. 108). A similar provision exists for representatives of a juridical person. Where there is a conflict of interest, a special representative has to be appointed (Art. 57). An agent is required to disclose that he is acting on behalf of the principal (Art. 99, para. 1). If the agent fails to do so, the transaction has no effect upon the principal, and the agent is deemed to have acted on his own behalf. However, this does not apply when the opposite party was or should have been aware that the agent was acting on behalf of the principal (Art. 100). In this regard the Commercial Code provides an exception for commercial transactions. In such transactions, even when the agent failed to reveal that he was acting on behalf of a principal, the act is binding on the principal. If the opposite party was not aware

General Rules and Institutions of Private Law

133

that the agent was acting for the principal, he may also require performance by the agent (Art. 504). Where the validity of a juristic act is affected because of defective declarations of will, such defects are to be determined by reference to the agent’s position, not the principal’s (Art. 101, para. 1). For instance, when principal A purchases a painting through his agent B, who knew that the painting was fake, A may not claim that he had acted out of mistake, even when he had not known that the painting was fake. In cases of agency by agreement, the scope of the agent’s authority is defined by the agreement between the principal and the agent. In order to facilitate business, the Commercial Code provides that the agent in commercial transactions may act outside the mandate, provided that it is not against the substance of the mandate (Art. 505). If a person without authority acts ostensibly on behalf of the principal then, as a rule, the act has no effect on the principal. However, the scope of authority given to the agent is not always apparent from the outside. It is often not even precisely defined by the principal. This may confuse the third party, and therefore a safeguard to protect those who mistakenly believed that an agent was acting within his authority is needed. This can be justified by the idea that the principal has contributed in one way or another to the creation of such an appearance. Therefore, under certain circumstances the principal may be bound by the act of his agent, although the agent did not have the power. First, when a person declares to others that he has granted another person authority to act on his behalf, he is liable for the acts of that person (Art. 109). Therefore, once the principal has made known to others that he has given authority to another person, he may not deny the effect of the act done by the agent, insofar as it is within the scope of authority ostensibly granted to the agent. For example, if Y allows A to use his name or seal in a transaction without intending to allow him to act on his behalf, Y may nevertheless be bound by A’s actions against the third party X. The court applied this provision in a case where A issued promissory notes in the name of Y, using Y’s seal. X erroneously believed that A was authorised by Y to do so. The Supreme Court found the promissory notes to be valid on the ground of Article 109.⁵³ In another case, the Tokyo District Court was held liable for a transaction concluded by an organisation. This organisation was an association of court employees which had an office in the court building and used the name of the ‘welfare department’ of the district court. The plaintiff had sold stationery to this organisation, but the latter failed to pay. He brought a suit against the State, arguing that the district court, and ultimately the State, was liable. Although there was no formal relationship between the court and this organisation, the

⁵³ Judgment of the Supreme Court, 7 February 1957, Minshū 11-2-227.

The Civil Code—The Cornerstone of Private Law

134

Supreme Court found that the district court had created the appearance that this organisation was part of the court and was therefore liable for the transaction.⁵⁴ In a recent case, the court applied Articles 110 and 94, para. 2 in a rather flexible way in order to protect a bona fide third party. A registered real property belonged to X in A’s name by using X’s registered signet and the application form for registration signed by X. Y believed without fault that A was the real owner, since the property was registered in A’s name. The Supreme Court ruled that the contribution of X to the creation of the appearance that A was the genuine owner of the property was tantamount to cases where X was knowingly involved in the creation of such an appearance, or where X had left the situation unchanged after becoming aware of it, and concluded that by the application of the above provisions by analogy, X was not entitled to claim that A had not acquired the property from X.⁵⁵ This is an application by analogy, since in Article 94, the collusion of A and X is required, and in Article 110, A must be an agent of X, which was not the case here. It is common commercial practice for a person to allow another to use his or his company’s name in a commercial transaction in order to increase the second person’s credibility, or to do business which is subject to licence without one. In such cases, the Commercial Code provides that the principal and the person who uses the principal’s name are jointly liable in any related transaction (Art. 23). It should be noted that the Civil Code does not explicitly require that a person who has had dealings with an unauthorised agent must be a bona fide party. However, those who were aware or should have been aware that an agent was not authorised need not be protected at the cost of the principal. There is case law to the effect that such a person should be bona fide and not negligent in believing that the person was authorised.⁵⁶ The second safeguard applies in situations where an agent who has actually been granted authority by the principal exceeds the scope of that authority. Such an act is nevertheless binding on the principal provided that the third party justifiably believed that the agent had acted within his power (Art. 110). It is necessary that at least some authority was granted to the agent. For example, there was a case where the principal Y authorised an agent A to register a piece of land which he owned. A was given the title deed and Y’s seal. Instead of registering the property, A sold it to a third person X. X filed a suit against Y in order to have the property transferred. The Supreme Court acknowledged that Article 110 was applicable in such a case.⁵⁷ Blank powers of attorney are often issued in Japan. This can also be regarded as a grant of authority, and if the person receiving such a wide power abuses it, this ⁵⁴ ⁵⁵ ⁵⁶ ⁵⁷

Judgment of the Supreme Court, 21 October 1960, Minshū 14-12-2661. Judgment of the Supreme Court, 23 February 2006, Minshū vol. 60, No. 2, p. 546. Judgment of the Supreme Court, 22 April 1966, Minshū 20-4-752. Judgment of the Supreme Court, 3 June 1971, Minshū 25-4-455.

General Rules and Institutions of Private Law

135

is a matter governed by the same provision. When a representative of a juridical person exceeds his power, this provision is also applicable. The third safeguard is that the lapse of an agent’s authority cannot be claimed against a bona fide third party, unless the latter was aware, or should have been aware, that it had expired (Art. 112). Therefore, even after the termination of agency, if the former agent acted as though he was still authorised, the former principal may be held liable for the former agent’s act. In order to avoid this, the principal has to let it be known that the agency has been terminated. When a person acts ostensibly on behalf of the principal, but without authorisation, his act is not binding on the principal, unless it is covered by the three above-mentioned provisions. Where the transaction is not supported by apparent authority, the principal may ratify the act (Art. 113, para. 1). Ratification should be addressed to the other party, not to the agent. The other party may give notice to the principal and ask him to decide whether he wishes to ratify the act or not within a fi xed period of time (Art. 114). Until the principal ratifies the act, the other party is entitled to rescind the transaction (Art. 115). An agent who acts on behalf of another person, but fails to prove his authority, and also fails to have the principal ratify the act, may be required to pay damages or effect performance at the option of the other party (Art. 117, para. 2).

6. Prescription The General Part of the Civil Code provides for extinctive prescription and acquisitive prescription. This arrangement resembles French law and differs from German law (on acquisitive prescription see Chapter 8). Rights arising from an obligational relationship expire if not exercised for ten years. Rights other than those arising from obligational relationships or ownership expire if not exercised for twenty years (Art. 167, paras 1 and 2). Apart from this general provision, the Code provides for short-term prescription of three years, two years, and one year for some categories of rights arising from obligational relations (Arts 170–174). Prescription can be interrupted or suspended under certain circumstances (Arts 147 and 158–161). The raison d’ être of extinctive prescription is first that those who do not exercise their rights for a long period do not necessarily deserve protection, and secondly, that after a long period it becomes difficult for the debtor to prove that he had performed his obligation, and such debtors need protection. As mentioned earlier, the invoking of prescription may be found to be against the doctrine of good faith and fair dealing.

7 Law of Obligations and Contracts 1. General Rules of the Law of Obligations (1) The structure of Book Three Book Three of the Civil Code, which covers the law of obligations, begins with a chapter containing general rules applicable to all kinds of obligations. It is followed by a chapter on contracts. This chapter contains general rules of contract law as well as provisions on typical contracts such as sale and lease. Then come chapters on the management of affairs without mandate, unjust enrichment, and tort. Obligations arise not only from contracts but also from non-contractual matters such as tort or the management of affairs without mandate (for tort, see Chapter 9). Book Three starts with a voluminous chapter ‘General Rules of the Law of Obligations’. It contains provisions on the effects of obligations, statutory interest rates, non-performance, damages, obligations with multiple parties, as well as the assignment and extinction of obligations. On the other hand, issues such as capacity to act, agency, prescription, public policy, and defective declaration of will are dealt with in the General Part of the Civil Code. On the occasion of the centenary of the enactment of the Civil Code, proposals for the reform of the Law of Obligations were made.¹ In 2001, the Part of the German BGB on the Law of Obligations underwent a major change, including the incorporation of consumer protection legislation in the Code. The French Code is not in the process of reform. These developments worked in favour of the reform. The Ministry of Justice has started preparation of a fundamental review of this part of the Civil Code, but it is still at an early stage.

(2) Performance of obligations It is the duty of the obligor to perform the obligation in accordance with the terms of the obligation and in good faith. Unlike the German BGB, the provision on good faith and fair dealing is found at the beginning of the Code, instead of in ¹ Y. Nōmi (ed.), Saiken-Hō Kaisei no Kadai to Hōkō (The Task and Direction of the Reform of the Law of Obligations) (Tokyo, 1998).

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

Law of Obligations and Contracts

137

the Law on Obligations. This principle is considered to be applicable throughout the entire Code. In the performance of an obligation, irregularities such as delayed performance, defective performance, and impossibility of performance may occur.

(a) Delayed performance The Code provides that if the obligation involved a fi xed time for performance, the obligor is in delay after the obligation becomes due. If there is no fi xed time for performance, the obligor is in delay after the obligee requires performance (Art. 412). Performance of obligations may require the cooperation of the obligee. If there is a justifiable reason for the delay, the obligor is not legally in delay. In cases of delay, the obligee may apply to the court for enforcement, or execute real security rights if the obligation is secured. If the obligation arose under a contract, the obligee is entitled to rescind the contract and claim damages. In order to claim damages, fault on the part of the obligor is a prerequisite. In the case of default on a monetary debt, the obligor is not required to prove loss and the obligee is not entitled to claim force majeure (Art. 419, para. 2). The obligor has to pay interest for the delay (ibid., para. 1).

(b) Impossibility of performance There are instances where the performance of an obligation becomes impossible. There are also obligations that were impossible to perform already at the time they came into effect. In the latter case the obligations are null and void, but this is not a matter of impossibility of performance. An example is a contract concluded after the destruction or loss of the subject matter, and the parties being unaware of such circumstances. The obligor may be liable for damages in such cases if he should have known of the prior loss of the subject matter. An example of the impossibility of performance is a contract for the sale of a house that was destroyed by fire after the conclusion of the contract. In another case, a lessee of real property assigned the lease to a third party, but failed to obtain the required consent to the assignment of the lessor.² Whether or not an obligation is impossible to perform is decided by socially acceptable standards. Although performance may be physically possible, there are cases where the obligation is recognised as practically impossible to perform.³ In cases of impossibility of performance, the obligor is liable for damages only if he was at fault (Art. 415). However, this rule does not apply if, at the time when the obligation became impossible to perform, the obligor was already in delay. In such cases the obligor is liable, even though he was not at fault for the impossibility of performance itself. ² Judgment of the Supreme Court, 17 September 1959, Minshū 13-11-1412. ³ Judgment of the Supreme Court, 21 April 1960, Minshū 14-6-930.

138

The Civil Code—The Cornerstone of Private Law

It is generally acknowledged that force majeure releases both parties from their obligations, except in cases of monetary obligation. If the obligation arose from a contract, the obligee is entitled to rescind the contract on the ground of impossibility of performance, but this is not a precondition for claiming damages (Art. 543).

(c) Imperfect performance Obligors are liable for failure to perform the obligation in accordance with its purported meaning (Art. 415). This is denoted as imperfect performance in that the obligation may have been performed, but not in a proper manner. An example is the delivery of defective goods in a contract for sale. Another example is where the obligor delivered poultry infected with disease, which later spread to the obligee’s farm.⁴ As for defective goods, there are other provisions of the Civil Code in the part on contracts, which can be applied concurrently with this provision. The obligee is entitled to refuse to accept imperfect performance and to claim damages. If proper performance can be expected, the obligee may demand such performance within a reasonable period. Only when the obligor fails to make such performance is the obligee entitled to claim damages. If proper performance is impossible or impractical, the obligee may claim damages straight away. In order to claim damages, there must be fault on the part of the obligor. Although the Code does not explicitly require fault on the part of the obligor for the delay in performance and improper performance, the court has acknowledged that fault of the obligor is a prerequisite to the claim for claiming damages.⁵ In some instances the obligor may perform his obligation through another person. Where it is common practice to employ such a person, or it was allowed by the obligee, the obligor is liable for the acts of this person to the same extent as he would be liable for his own acts. If the obligor was required, by statute or contract, to perform the obligation himself, but still employed another person to perform it, the obligor is liable for any act of that person.

(d) Duty of care for other person’s safety (obligation de securité) Since the mid-1970s, another type of non-performance of obligation has emerged through a series of judgments of the Supreme Court. In a leading case, a member of the Self Defence Force was killed in a car accident on a base. His family brought the case to court and claimed damages from the State four years after the accident. A claim for damages based on tort had already become barred by prescription, whereas a claim on the basis of general rules of obligation was still possible. The Supreme Court ruled that the employer had an obligation on the basis of the doctrine of good faith and fair dealing to take such necessary steps ⁴ German theory categorises such improper performance as positive breaches of obligation (positive Vertragsverletzungen). ⁵ Judgment of the Supreme Tribunal, 22 November 1922, Minroku 27–1978.

Law of Obligations and Contracts

139

to protect the life and health of employees, and that this applied to the State as well.⁶ In another case, an employee of a company was killed on night duty. The Supreme Court ruled that the employer was liable, since he had failed to take sufficient measures to protect the employee.⁷ This ‘duty to care for safety’ is considered to be one of the effects of obligations and is based upon the same provision that covers impossibility and imperfect performance (Art. 415). This concept was devised to deal with cases where a remedy in tort is either not available or inappropriate. It was influenced by developments in Germany (BGB, Art. 618) and France. It has developed as a doctrine in employment contracts, but it is not necessarily limited to them.

(3) Refusal to accept performance In some cases the obligee unreasonably refuses to accept performance, or it becomes impossible for him to do so. The Code provides that the obligee is in delay from the moment he refuses acceptance or it became impossible for him to accept performance (Art. 413). If the obligee refuses to accept performance tendered by the obligor, or is unable to accept it, the latter may deposit the subject matter of the obligation (Art. 494). Money and securities can be deposited at the public depository of the local legal bureau. If the obligation arises from a contract, the question of whether or not the obligor is entitled to rescind the contract because of delay or refusal of acceptance by the obligee and claim damages has been a focus of discussion. Some civil law experts are of the opinion that the obligee has a duty to accept performance, and his failure to do so will entail the same result as non-performance of the obligation by the obligor. The court has generally denied such rights to the obligor. The Supreme Court ruled that the obligor is not entitled to rescind the contract in such a case unless there are exceptional circumstances.⁸ However, there was a case where a mining company concluded a continuous supply contract with another company for a fi xed period. After several deliveries and payments the latter company refused to accept further delivery because of the fluctuations in the market. The Supreme Court ruled that this company was obliged to accept the delivery, and by his failure to do so, the mining company was entitled to rescind the contract and claim damages. The Court based this on the doctrine of good faith and fair dealing.⁹

⁶ ⁷ ⁸ ⁹

Judgment of the Supreme Court, 25 February 1975, Minshū 29-2-143. Judgment of the Supreme Court, 10 April 1984, Minshū 38-6-557. Judgment of the Supreme Court, 3 December 1965, Minshū 19-9-2090. Judgment of the Supreme Court, 16 December 1971, Minshū 25-9-1472.

140

The Civil Code—The Cornerstone of Private Law

It should be noted that the General Part of Contract Law (Chapter 2, Section 2) contains a provision to the effect that in a contract in which both parties have an obligation to do or give something, a party may refuse to perform until the other party offers to perform his part of the obligation (simultaneous performance: Art. 533). This defence, referred to as a defence of simultaneous performance, can also be invoked where a contract has been rescinded and both parties have an obligation to restore the status quo ante.

(4) Enforcement of obligation If the obligor does not perform his obligation voluntarily, the obligee may apply to the court for enforcement. The Law on Civil Enforcement governs enforcement procedures.¹⁰ The method of enforcement varies depending on the nature of the obligation. If the obligation in question is monetary, the assets of the obligor (land, building, movables, ships, cars, and construction machinery, as well as claims and other property rights) may be attached and auctioned by the court. The obligee receives payment from the proceeds. If the obligation is to give movables to another person, the bailiff takes possession of the property and hands it over to the obligee. If the property in question is immovable, the bailiff relieves the property from the possession of the obligor and gives it to the obligee. The method of enforcing an obligation to do something differs from that of an obligation to give something. It is not possible directly to compel the obligor to perform an obligation to do something. The Civil Code provides that in such cases the obligee may apply to court for substitute performance, i.e. to have a third party perform the obligation at the expense of the obligor (Art. 414). If the obligation is to perform a juristic act, it can be substituted by a decision of the court (Law on Civil Enforcement, Art. 173). If this is not possible, indirect enforcement is available: the court orders the obligor to pay a certain amount of money to the obligee until the former performs the obligation. Detention of the obligor in cases of failure to perform an obligation is not available. An obligation to desist from doing something is also enforced by indirect enforcement (Law on Civil Enforcement, Art. 172, para. 1). If the result of nonfulfillment of such an obligation remains, for instance when a person has built a house unlawfully on another’s property, the latter may apply for substitute enforcement to remove the house. The methods of enforcement have been a focus of discussion in two categories of cases. One is the enforceability of an obligation to transfer custody of a child. There is controversy as to whether a bailiff may take possession of the child and hand it over to the person with parental authority, or whether

¹⁰ Law No. 4, 1979.

Law of Obligations and Contracts

141

indirect enforcement should be used.¹¹ Habeas corpus procedure is often used in this regard.¹² Another problem concerns the publication of apologies in libel cases. The Civil Code has a special provision that empowers the court to order the tortfeasor to take necessary measures to restore the honour of the aggrieved party in cases of libel (Art. 723). The courts often order the tortfeasor to publish an apology in major newspapers. If he refuses to do this, the court allows substitute enforcement. There was a case where the tortfeasor argued that substitute enforcement in such a case was against the Constitution, which guarantees freedom of conscience. The Supreme Court rejected this argument.¹³

(5) Effects of irregularity of performance The obligee is entitled to damages in cases of irregularity of performance (delay, impossibility of performance, and imperfect performance) on the part of the obligor. Fault is a prerequisite, except in cases of monetary debts. Damages are calculated on a monetary basis unless the parties choose otherwise (Art. 417). The Civil Code has a special provision concerning the scope of damages (Art. 416): The object of a claim for damages is the recovery of loss which would normally arise from the non-performance of an obligation. Damages for loss that has arisen from special circumstances may also be claimed, provided that the parties had foreseen, or could have foreseen, such circumstances.

It is generally accepted that non-performance in this context covers all kinds of irregularities in performance, including impossibility and imperfect performance. Normal loss is recoverable in principle, while loss arising from special circumstances is recoverable only when it was or could have been foreseen by the obligor. The burden of proof of the foreseeability of special circumstances lies with the obligee. The first problem here is the scope of ‘normal loss’. Whether the loss is normal or has arisen from special circumstances is often difficult to determine. The law protects the expectation and reliance of the obligee, but various factors such as whether the party to the transaction was a merchant or not, and the type and nature of the transaction, have to be taken into account.¹⁴ When, due to the default of the seller, the buyer has to purchase similar merchandise at a higher price, the difference in price as well as the cost of finding

¹¹ Judgment of the Supreme Tribunal, 19 December 1912, Minroku 18–1087. ¹² Law No. 199, 1948. ¹³ Judgment of the Supreme Court, 4 July 1956, Minshū 10-7-785. ¹⁴ H. Nakata, Saiken Sōron (The General Part of the Law of Obligations) (Tokyo, 2008), pp.153–171.

142

The Civil Code—The Cornerstone of Private Law

an alternative source of supply are normal loss.¹⁵ If the buyer expected to resell the merchandise for a profit, this will also be normal loss. In one case, a contract of sale was rescinded by the buyer because of default on the part of the seller. The price of the merchandise had trebled by the time the contract was rescinded. The court found that the loss should be calculated on the basis of this higher price, since the increase in the price was the result of inflation that had already existed at the time that the contract was concluded. Therefore, the difference between the contract price and the price at the time of rescission by the buyer was found to be a normal loss.¹⁶ On the other hand, the fact that the buyer had promised to resell the goods to a third party at a price three times as high as the buying price was found to be ‘special circumstances’, and unless it was foreseen by the obligor (seller), the latter was not liable.¹⁷ Previously, it was generally accepted that this provision presupposes the existence of ‘adequate causation’ between the irregularity of performance and the loss. A study showed that this provision did not, as had been believed, come from Germany; it actually came from English law, which in turn was influenced by French law. The part dealing with loss arising from special circumstances originated from the celebrated English case of Hadley v. Baxendale.¹⁸ However, specialists of civil law in Japan had long maintained that this provision had come from German law and interpreted it in a way similar to that of German law. The difference between German law on one hand and French and English law on the other is that the former presupposes full compensation as a principle, for all loss caused by irregularities of performance, while the latter limits the scope of damages. In order to mitigate the requirement of full compensation, German law had to introduce the concept of ‘adequate causation’. However, there was almost no use for such a concept in Japanese law, since the scope of damages was already limited in French and English law. Another problem related to this provision is the reasonableness of its application to tort cases. Since tort is part of the law of obligations, and is regarded as one of the causes from which obligations arise, this provision was intended to apply also to tort. The Supreme Court has ruled that this provision, with modifications, is applicable to tort.¹⁹ However, there is an influential view that casts doubt on the applicability of this provision to tort cases. The Code provides that damages for delay in repaying a money debt should be calculated on the basis of a statutory interest rate of 5 per cent (Art. 404). ¹⁵ Judgment of the Supreme Court, 28 April 1961, Minshū 15-4-1105. ¹⁶ Judgment of the Supreme Court, 18 December 1953, Minshū 7-12-1446. ¹⁷ Judgment of the Supreme Tribunal, 5 April 1929, Minshū 8–373. ¹⁸ [1843–60] All ER 461. See Y. Hirai, Songaibaishō-hō no Riron (Theory of the Law on Compensation) (Tokyo, 1971); E. McKendrick, Contract Law, 7th edn (New York, 2007), pp. 423–424. ¹⁹ Judgment of the Supreme Court, 7 June 1973, Minshū 27-6-681. See also Judgment of the Supreme Tribunal, 22 May 1926, Minshū 5–386; Fukimaru case.

Law of Obligations and Contracts

143

For obligations arising from commercial transactions, the rate is 6 per cent (Commercial Code, Art. 514). The parties may agree to a different interest rate, but this rate should not exceed that provided by the Law on the Limitation of Interest Rates.²⁰ In determining the amount of damages, fault on the part of the obligee who contributed to the loss is also taken into consideration by the court (Art. 418).

(6) Assignment of claims Claims can be assigned to a third party unless the nature of the relationship does not allow it (Art. 466). Assignment can be restricted between the parties, but this cannot be set up against a bona fide third party. Assignment of an ordinary debt where the obligor is specified (unlike securities) can be effected between assignor and assignee. However, it cannot be claimed against the obligor or any other third party unless the assignor notifies the obligor, or the obligor consents to the assignment (Art. 467, para. 1). Notification or consent must be made by a document with a fi xed date, such as a notarised document or registered and certified mail. Assignment of securities such as promissory notes, bills of exchange, and cheques, as well as bearer claims, cannot be claimed against the obligor and other third parties unless the assignor endorses the assignment in writing on the securities and hands it to the assignee (Art. 469). With the development of securitisation, it was felt that this method of publicising assignment of claims was unsuitable when there were a number of debtors such as housing loan debtors in relation to which the claim has to be assigned. In order to facilitate securitisation, a new Law on Exceptions to the Civil Code on Means of Publicity concerning Assignment of Claims was enacted in 1998.²¹ This Law enables juridical persons to publicise assignment of claims by registration at the local legal bureau (Art. 2, para. 1). Although there is no explicit provision in the Code, the obligor may assign his obligation to a third party under certain conditions (assumption of debt). Assumption of debt is commonly used in cases where a person intends to purchase real property that is already hypothecated. If the obligor, the obligee, and the third party all agree, the debt can be assumed by the third party. If the obligor and the third party agree that the latter should perform the obligation in lieu of the obligor, unless the obligee agrees, the obligor is still required to perform obligation. However, if the obligee demands performance of this third party, the latter must perform the obligation. When the obligee agrees to the assumption of debt, whether the original obligor is totally exempted from performance or is still liable with the third party has to be determined.

²⁰ Law No. 100, 1954.

²¹ Law No. 104, 1998.

144

The Civil Code—The Cornerstone of Private Law

(7) Action revocatoire and action subrogatoire In case of non-performance of obligations, the obligee may want to attach the assets of the obligor. It is in the interest of the obligee to ensure that the assets of the obligor do not fall below the amount owed and thus endanger the performance of the obligation. The Civil Code provides two devices to safeguard the obligee’s expectation: the right to revoke the act of the obligor that is against the obligee’s interest (the action revocatoire), and the right of subrogation (the action subrogatoire). German law provides only for the latter, while the French Code provides for both devices. In an action subrogatoire, the obligee may exercise a right belonging to the obligor in order to ensure the performance of a monetary obligation by the latter (Art. 423, para. 1). For example, A lends one million yen to B and the repayment is due. B, in turn, had lent half a million yen to C some years ago, but failed to remind C, since he was aware that once he received the money from C, he would have to repay it to A. B does not have any other assets. In such a case, A may exercise B’s right against C, and thus prevent prescription. The action subrogatoire was designed to ensure the performance of monetary obligations. It was supposed to be a stage preceding civil enforcement, but today, by substitution, the same effect as civil attachment can be achieved in some cases. In the above example, obligee A has two alternatives. First, he may sue B and obtain an enforcement judgment against B, attach B’s right against C, and then demand payment from C. Secondly, he may simply substitute B and claim payment directly from C. Initially, C was required to repay the debt to B, not A. However, by the judgment of the Supreme Court in the 1930s, obligees were allowed to claim performance directly from the third party (in this example, C).²² In order to justify such substitution, it is required that the obligor does not have sufficient assets to repay the debt. However, the courts have gradually relaxed this requirement and broadened the applicability of this provision. Firstly, this right can now be used to secure the transfer of a specific property. For instance, A purchases a house from B, who had originally purchased it from C. However, B has failed so far to register his ownership and therefore A is also unable to register the property in his name. A may exercise B’s right against C to demand that he cooperate in registering the property. In order to make things simpler, A is actually allowed to demand directly that C cooperate in registering the house in A’s name.²³ Secondly, in leases of land or houses the status of the lessee is not fully protected, since the lessee’s interest is not a right in rem, but a right in personam. However, in some cases lessees are entitled to exercise those rights belonging to ²² Judgment of the Supreme Tribunal, 12 March 1935, Minshū 14–482. ²³ Judgment of the Supreme Tribunal, 6 July 1910, Minroku 16–537.

Law of Obligations and Contracts

145

the lessor-owner. For example, A owns a house on a piece of land owned by B under a lease. C is obstructing the use of this land, but B does not take necessary measures to terminate this, although he is entitled to do so on the basis of his ownership. On the other hand A, as a lessee, is not entitled to take action directly against C. The court has acknowledged that B, as a lessor, has obligations to A to enable him to use the property, and therefore A may exercise B’s right to terminate obstruction by C. Whether B has sufficient assets to cover the debt to A is irrelevant in both cases.²⁴ Another device designed to safeguard the assets of the obligor for the benefit of the obligee is the action revocatoire, the latter’s right to revoke an act of the obligor harmful to the interests of the obligee(s). When an obligor knowingly effects such a juristic act, the obligee may request the court to rescind this act (Art. 424, para. 1). Unlike the right to subrogation, the obligee’s right has to be exercised through the court. For example, X lends one million yen to Y. Y does not want to repay the debt, so he gives away his only property to Z. X may apply to the court to rescind the transaction between Y and Z. It should be added that once bankruptcy proceedings have started, obligees are entitled to deny the validity of the acts of the obligor performed after his financial status has become critical. This right of disclaimer is provided in the insolvency legislation.²⁵ The right of revocation is often resorted to when several obligees (creditors) compete for priority. In the above example, Z and X are both obligees against Y, but they are unsecured. Therefore if Z receives repayment in one way or another from Y, X will try to annul the transaction by resorting to the right of revocation and have the money or assets returned to Y. The right to revocation is designed to safeguard the interests of ‘all obligees’ by preventing a decrease in the obligor’s assets below the value of the debt (Art. 425). Unlike the right of subrogation, the obligation does not have to be due when the obligee exercises his right. Acts which can be rescinded are those which harm the interests of the obligee and render full performance of an obligation impossible. A sale of property at an unreasonably low price, or giving away property, are examples. As a rule, if the remaining assets are sufficient to perform the obligation, such acts cannot be revoked. The court has even found a sale of a real property at a reasonable price to be harmful, since cash is more easily disposed of than real property, and therefore a decrease in the assets is more likely, although the nominal amount of the assets has not changed.²⁶ The act of the obligor that harms the interests of the obligee may involve a third party. If invalidation of such an act is without limitation, it may affect ²⁴ Judgment of the Supreme Tribunal, 16 December 1929, Minshū 8-12-944. ²⁵ Law No. 71, 1922. ²⁶ Judgment of the Supreme Tribunal, 5 February 1906, Minroku 12–136.

146

The Civil Code—The Cornerstone of Private Law

the interests of those who unwittingly entered into a transaction with the obligor. Therefore, the Code provides that the obligee may not exercise this right of revocation when the beneficiary of the obligor’s act was not aware at the time of transaction that the act was harmful to the obligee (Art. 424, para. 1). Thus, if obligor A sold his only property to Y at a low price, obligee X may not revoke the sale contract between A and Y insofar as Y had not known that the sale was harmful to the interests of X. The burden of proof lies with the beneficiary Y. The same applies where there is a bona fide purchaser from Y.

(8) Obligations with multiple parties (a) Divisible and indivisible obligations The General Part of the Law of Obligations accommodates provisions concerning obligations involving several obligees or obligors. There are three kinds of obligations with multiple obligees or obligors: divisible obligations, indivisible obligations, and joint and several obligations. In cases where there are several obligees or obligors, the obligation is divisible in equal proportions unless the parties have agreed otherwise (Art. 427). This presumption of divisible obligation may be against the expectation of the obligee, since if one of the obligors repaid his portion of the debt, he is discharged, regardless of whether the remaining obligors repay their portion. Therefore, scholarly opinions attempted to narrow the application of this presumption. For instance, where the joint financial status of obligors was taken into account when the contract was made, such an obligation should not be regarded as divisible. Furthermore, when the obligation arose in return for a benefit which all obligors share, this obligation should not be considered to be divisible.²⁷ However, the court maintains that without a special agreement or particular circumstances, obligations are divisible.²⁸ The second type of obligation with several obligees or obligors is indivisible obligation. The Code provides that an obligation is indivisible when the parties have so agreed, or when the object of obligation is by its nature indivisible (Art. 428). An obligation of joint lessees of the same property to pay the rent is an example of the latter. When there are several obligors under an indivisible obligation, the obligee may demand full performance from any or all of the obligors. A change in relationship between the obligee and one of the obligors does not affect the relationship between the obligee and other obligors, except for discharge and novation. On the other hand, when there are multiple obligees the obligor may effect performance against any of the obligees. A change in circumstances

²⁷ Nakata, supra, p. 441. ²⁸ Judgment of the Supreme Court, 13 October 1970, Hanji 614–46.

Law of Obligations and Contracts

147

between any one obligee and the obligor does not affect the others, except where novation or discharge is involved. The third type of obligation with multiple obligees is joint and several obligation. In joint and several obligations, the obligee may demand performance from any or all of the obligors. The obligee may demand all obligors to repay the total amount of debt or ask any of them to repay the same amount. If the debt is repaid by any of the obligors, the obligation is extinguished and the obligors who repaid the debt can be indemnified by other obligors. In joint and several obligations, circumstances involving one of the obligors and the obligee affect the relationship between the other obligors and the obligee less than in the case of a divisible obligation but more than in an indivisible obligation. As compared with German law, circumstances affecting others are broader in Japan.²⁹ Prescription, discharge, merger, and novation affect other parties (Arts 435–439). Thus, indivisible obligations are more advantageous to the obligee than joint and several obligations, since in the latter there are more instances where circumstances arising between the obligee and one of the obligors affect the other parties.

(b) Suretyship The Civil Code also provides for suretyship as a type of obligation with several obligees or obligors. A surety is liable if the principal obligor does not perform the obligation. Suretyship arises from a contract between the obligee and the surety, without the consent of the principal obligor. However, in practice, it is usually a tripartite contract between obligee, obligor, and surety. When the principal obligation is extinguished, the suretyship extinguishes as well. If the principal obligation is assigned by the creditor, the suretyship follows. As a result of the amendment to the Civil Code in 2004, a suretyship contract is required to be in writing. If the contract is concluded by recording the content electronically, it is deemed to have been concluded in writing (Art. 446, paras 2 and 3). Suretyship covers the principal obligation as well as the interest, liquidated damages, and penalty. When the contract between the principal obligor and the obligee is rescinded, the suretyship secures the obligor’s duty to recover the status quo ante. For instance, when a sale contract is rescinded, the surety of the seller guarantees the return of the money to the buyer.³⁰ There are two kinds of defence that a surety may raise when an obligee demands performance. Firstly, the surety may ask the obligee to demand performance from the principal obligor (Art. 452). Secondly, the surety may refuse performance if he proves that the principal obligor has sufficient financial capacity to ²⁹ E. Hoshino, Minpō-gairon (Outline of Civil Law), vol. III (Tokyo, 1978), pp. 156–157. ³⁰ Judgment of the Supreme Court, 30 June 1965, Minshū 19-4-1143.

148

The Civil Code—The Cornerstone of Private Law

perform the obligation, and that enforcement of the obligation would be easy (Art. 453). From the viewpoint of an obligee, these two defences are disadvantageous. Therefore, instead of ordinary suretyship, joint and several suretyship is utilised more frequently.³¹ The above-mentioned two defences are not allowed and the provisions of joint and several obligations apply (Art. 454). Another variation is the floating suretyship. In a continuing relationship such as that between a bank and its customer, or a wholesaler and a manufacturer, it is necessary to secure an unspecified number of obligations, the amount of which varies. The Code has no special provision for this kind of suretyship, but the courts have long acknowledged it. Such a suretyship could be too harsh on the surety. It is generally acknowledged that when there is a significant change of circumstances, for example when the fi nancial status of the principal obligor rapidly deteriorates, or the status of the principal obligor changes, the surety may rescind the contract of suretyship and be released from further obligation. In 2004, the Civil Code was amended and provisions on floating suretyship for money loans were introduced (Arts 465-2–465-5).³² It is common for Japanese companies to require a surety when employing an individual. The surety is expected to guarantee payment of any damages that arise from future acts of the employee. However, sureties were often unexpectedly made liable for large amounts of money, and the courts therefore tried to limit the liability of the surety. In 1933 the Law on Suretyship for Employment was enacted.³³ According to this Law, the term of a suretyship cannot exceed five years, although it is renewable (Arts 1 and 2). A surety may rescind suretyship and be discharged from further obligations under certain conditions (Art. 4). When deciding the amount of damages, fault on the part of the employer and other relevant circumstances are to be considered (Art. 5).

(9) Extinction of claims Claims may become extinguished on various grounds. The Code lists the following grounds of extinction: performance, set-off, novation, discharge, and merger. Performance can be effected by a third party, unless the nature of the obligation does not allow it, or the parties expressed a different intention (Art. 474, para. 1). Those with no legal interest in the obligation may not perform the obligation against the intention of the obligor (ibid., para. 2). Performance is valid in some cases even where it was not made to the genuine obligee. The Code provides that performance of the obligation to a person who appears to be an obligee is valid, if the obligor was not aware that the obligee was not genuine, and was not at fault in believing so (Art. 478). This provision is ³¹ Y. Hirai, Saiken Sōron (The Law of Obligations, General Part) (Tokyo, 1985), pp. 252–254. ³² Nakata, supra, pp. 480–484. ³³ Law No. 42, 1933.

Law of Obligations and Contracts

149

designed to protect those who rely on appearance. For instance, if a bank allows someone who turns up with a certificate of deposit and a signet to withdraw money from an account, the bank is normally exempted from liability, provided that it has exercised the required standard of care. The Supreme Court acknowledged the validity of payment by a bank in these circumstances to someone who claimed to be the depositor.³⁴ The obligor may effect substitute performance with the consent of the obligee (Art. 482). For instance, the obligor may repay the debt by giving the obligee a piece of land instead of money with the latter’s consent. This has the same effect as a performance. It is different from novation, in which parties agree to alter essential elements of the original contract, and as a result the original obligation is extinguished and a new obligation emerges (Art. 513). Where the obligee either refuses to accept performance, or is unable to accept it, the obligor may deposit the subject matter of the obligation at a depository and is then exempted from liability. The same applies where the obligee cannot be identified or found without any fault on the part of the obligor (Art. 494). Substitute performance also functions as a means of securing the performance of obligation.³⁵ Set-off is commonly used as a means of security in banking transactions. The Code provides that when two persons have obligations to one another, each may be relieved of his obligation by a set-off to the extent corresponding to their obligation (Art. 505, para. 1). In order to set off an obligation, both obligations have to be of the same nature and due. Set-off is effected by a declaration of will by a party. The effect of set-off is retrospective to the time when both obligations became mature for set-off (Art. 506). Set-off is not possible when the parties agreed otherwise, or the nature of the obligation does not allow it. However, the agreement between the parties cannot be claimed against a bona fide third party. In obligations arising from tort, the obligor may not set off his obligation against the obligee (Art. 509). Banks use set-off in the following manner. When a bank lends money to a customer, the latter is asked to open a fi xed-period deposit account. It is agreed in advance between the parties that if the customer’s creditor attaches this account, the bank will set off its obligation against the customer’s obligation. In this way, the bank manages to secure at least the amount of the fi xed deposit in priority to other creditors. The lawfulness of this practice was contested before the Supreme Court. The Court upheld the validity of such an arrangement.³⁶ Other causes of extinction of claims include discharge and merger. If the obligee discharges the obligor, the obligation is also extinguished (Art. 519). Merger denotes a situation where the right and the obligation come to belong to the same person (Art. 520), for example when the obligor inherits the status of the obligee. ³⁴ Judgment of the Supreme Court, 4 October 1966, Minshū 20-8-1565. ³⁵ Law No. 78, 1973. ³⁶ Judgment of the Supreme Court, 24 June 1970, Minshū 24-6-587.

150

The Civil Code—The Cornerstone of Private Law

2. The Law of Contract (1) The sources of contract law Japanese contract law is not embodied in a single piece of legislation. It is found in parts of the Civil Code and the Commercial Code. The second chapter of Book Three of the Civil Code, following the first chapter on the General Rules of the Law of Obligations, deals with contracts. Chapter Two is divided into the general part and the special part. While the former sets out general rules of contract law, the latter lists 13 types of ‘typical contracts’: gift, sale, exchange, loan for consumption, loan for use, lease, employment, work contract, mandate, bailment, partnership, life annuity, and settlement. In addition, the Commercial Code has provisions on commercial transactions that are applicable to contracts. The Commercial Code also provides for typical commercial contracts such as sale, société anonyme, carriage of goods, warehousing, and insurance. The provisions of the Commercial Code are special rules in relation to the Civil Code, and therefore have priority whenever they are applicable. In the absence of relevant provisions in the Commercial Code, commercial custom is first applied; only when there is no such custom is the Civil Code applied. Since contracts are juristic acts, provisions in the General Part (Book One) of the Civil Code on juristic acts apply to contracts. Thus, a contract, which is an outcome of a declaration of will, can be null and void or voidable on various grounds, such as fraud, mistake, or duress, as provided in the General Part. Agency is also covered in the General Part.

(2) The role of contracts in Japan A contract comes into effect when the intentions of the parties coincide, i.e. when offer and acceptance correspond. The concept of consideration does not exist in Japan. A gift is also considered to be a contract. A contract is concluded without any formality, subject to some exceptions. For instance some contracts, such as a contract to sell arable land, require permission from an administrative agency. In a contract of pledge, actual transfer of the collateral is needed to give rise to the contract. As mentioned earlier, the contract of suretyship is required to be in writing. The Law on Sale by Instalments requires that a statement in writing be given after the contract is concluded (Art. 4).³⁷ The fact that the Code does not require a contract to be made in a written form does not mean that, in Japan, contracts are generally made orally. On the contrary, contracts are concluded in writing in business transactions as well as transactions amongst ordinary people. The issue of whether there is a unique ³⁷ Law No. 57, 1976.

Law of Obligations and Contracts

151

Japanese approach to contracts has been discussed in Japan and abroad for some time. A distinguished specialist of the sociology of law in Japan once pointed out that the necessity of concluding a formal contract is not fully recognised in Japan, and that the binding force of contract is not as strict as in Europe and the United States. The Japanese prefer not to form a relationship based on contract, since this presupposes the possibility of conflict.³⁸ This notion of the limited role of contracts in Japanese society is now being questioned. In contemporary Japan contracts do play a significant role in various areas. Contracts which large companies conclude with foreign companies differ little from contracts seen in Europe or the United States, while contracts between Japanese companies can be brief. Ordinary people also have to use written contracts, for instance agreements of employment, loan agreements, and leases. These kinds of contracts are often in a standard form, and contain clauses disadvantageous to those in the weaker bargaining position. Although parties generally feel bound by a contract, the validity of specific clauses has been contested in the courts. The courts have invalidated some clauses out of considerations of fairness. Incidentally, if one of the parties to a contract is a major company, they do not usually invoke those clauses against ordinary individuals. Neither do they sue individuals for breach of contract, preferring to settle the case out of court to avoid damaging the company’s reputation and, in the long run, causing harm to the company.³⁹ On the other hand, contractual relationships between companies within Japan are somewhat different, and perhaps this is why Japanese contracts are considered to be unique. A majority of contracts between companies are long-term contracts in the sense that they are valid for one year, but are automatically renewed unless either party objects. These contracts, especially between longstanding trading partners, are often very short, in some cases only a few pages. They define the rights and duties of the parties in broad terms and leave the rest to negotiation between the parties should a conflict arise. When a difficulty arises the parties do not necessarily stick to the terms of the contract, but try instead to reach a mutually acceptable compromise.⁴⁰ A foreign observer pointed out that parties to a contract in Japan are not seen as entities with conflicting interests; they are considered to have entered into a mutually beneficial and cooperative relationship to achieve a common purpose. In this sense, a contract represents a relationship of mutual trust, and therefore it ³⁸ T. Kawashima, ‘The Legal Consciousness of Contract in Japan’, Law in Japan, vol. 7, (1974), pp. 1–21. ³⁹ For detailed discussion, see Société de legislation comparé, L’ étude de droit japonais (Paris, 1989), pp. 391–491. ⁴⁰ Ibid. See also K. Egashira, Shōtorihik-hō (Law on Commercial Transactions), 3rd edn (Tokyo, 2002), pp. 4–5. V. Taylor, ‘Continuing Transactions and Persistent Myth: Contracts in Contemporary Japan’, Melbourne University Law Review, 1993, p. 352ff. T. Uchida and V. Taylor, ‘Japan’s “Era of Contract”’, in D. Foote, Law in Japan: A Turning Point (Tokyo, 2007), p. 454ff.

152

The Civil Code—The Cornerstone of Private Law

is sometimes considered to be a sign of distrust if either party attempts to cover every possible contingency in the contract.⁴¹ It should be noted that flexible and simple contracts are not necessarily unique to Japan. A survey conducted in the United States showed that even their contracts between companies with continuing relationships are simple and flexible. In Japan simple and brief contracts are also normally used between companies which have had continued a business relationship for some years. It is also erroneous to state that the Japanese feel less bound by a contract than the nationals of other countries. Studies indicate that Japanese people may disregard standard contracts, but once a formal written contract has been concluded they observe it faithfully.⁴² A recent international survey on the observance of contracts suggested that, contrary to the conventional view, the level of observance of contracts by the Japanese is around the world average.⁴³

(3) General rules of contract law Freedom of contract is recognised in Japanese law, despite the absence of an explicit provision in the Code. It includes the freedom to conclude a contract, as well as the freedom to decide its content. As in other industrialised countries, this principle, which emerged in the nineteenth century laissez-faire State, cannot be maintained without modification in a modern age. For example, if employment agreements or leases of immovables were to be left entirely to the contracting parties, it might lead to unfairness and injustice to employees and lessees respectively. Modifications have therefore had to be made to this principle in light of contemporary developments. In the field of housing law, for example, the right of the parties to decide the content of a contract is limited in various ways. Under certain conditions, the court may substitute its own views for the will of the lessor. Clauses of a lease of land and buildings that are against the law and the interests of the lessee are void (Law on Lease of Land and Houses, Arts 21 and 37).⁴⁴ Similarly, in the field of labour law, employment agreements are subject to strict control by labour legislation. Furthermore, due to the growing necessity to safeguard the interests of consumers, laws concerning consumer protection, which impose further restrictions on the freedom of contract, have been enacted. In order to conclude a contract, an offer must be made by one party and accepted by the other. Japanese companies often make inquiries and exchange letters of intent. However, these enquiries and letters of intent by no means constitute offers. The offeror is not necessarily free to retract his offer. When the ⁴¹ E. J. Hahn, Japanese Business Law and the Legal System (Westport, 1985), pp. 10–11. ⁴² W. Gray, ‘Use and Non-Use of Contracts’, Law in Japan, vol. 17 (1984), pp. 98–99. ⁴³ M. Kato and R. Fujimkoto, Nihonjin no Keiyaku-Kan (The View of the Japanese on Contracts) (Tokyo, 2005), pp. 82–88. ⁴⁴ Law No. 90, 1991.

Law of Obligations and Contracts

153

offeror asks that acceptance be made within a fi xed period, he may not retract the offer until the period has expired (Art. 521, para. 1). Even when the period of acceptance is not set by the offeror, he may not retract the offer within the period reasonably necessary for him to receive the acceptance (Art. 524). In commercial transactions, if the offeree fails to accept the offer within a reasonable period the offer loses its effect (Commercial Code, Art. 508, para. 1). Contracts between the parties who are apart in distance come into effect when the notice of acceptance was sent out (Art. 526, para. 1). In recent years, some special laws that set out exceptions to the general rules of contract law have been enacted. First, the Consumer Contract Law was enacted in 2000.⁴⁵ According to this Law, if an entrepreneur, when soliciting consumers to conclude a consumer contract, misled consumers by (i) providing consumers with untrue information regarding material facts; or (ii) giving a decisive statement regarding the payment consumers are to receive out of the goods, rights, or service which in reality is uncertain, consumers are entitled to retract their offer or acceptance (Art.4). Secondly, the Law on Special Rules to the Civil Code concerning Electronic Consumer Contracts and Electronic Notice of Acceptance was enacted in 2001. The Civil Code provides that mistake on significant matters renders a juristic act null and void, but if the declarant of will is grossly negligent, he is not entitled to claim that the act is null and void (Art. 95). In electronic consumer contracts (i.e. contracts between an entrepreneur and consumers concluded electronically via computers), this rule does not apply to offers or acceptances by consumers if (i) at the time the consumer sent the offer or acceptance via a computer, he did not have any intention of offer or acceptance; or (ii) the consumer had a different intention (Art. 3). Furthermore, a provision of the Civil Code which provides that the contract comes into effect by the party sending out the acceptance (Art. 526, para. 1) does not apply when sending out acceptance by electronic means.⁴⁶ There may be cases where, due to a change in circumstances, it is no longer fair to require a party to perform his obligations. Although there is no explicit provision in the Code, it is generally understood that under certain conditions such obligations should not be enforced. In a leading case the Supreme Tribunal acknowledged in principle that when, due to circumstances such as the enactment of a new law regulating prices, the contract becomes impossible to execute at the price which had been agreed, and when this impossibility of performance is likely to continue for a considerable time, it is not reasonable—taking into consideration the doctrine of good faith and fair dealing—to bind the parties to the contract.⁴⁷ ⁴⁵ Law No. 61, 2000. English translation is available at: . ⁴⁶ Law No. 95, 2001. ⁴⁷ Judgment of the Supreme Tribunal, 6 December 1944, Minshū 23-19-613.

154

The Civil Code—The Cornerstone of Private Law

After the end of the Second World War, confronted with steep inflation, the Supreme Court held, obiter dicta, that a seller may rescind his contract on the ground of change in circumstances.⁴⁸ However, the Supreme Court has not applied this doctrine in a specific case so far. In recent years the price of land has risen sharply and there still are cases where this doctrine can be applied, but the Supreme Court remains cautious.⁴⁹

(4) Culpa in contrahendo Parties may be found liable not only for the breach of a contract, but for an act or omission in the process of concluding a contract. The leading case was the judgment of the Supreme Court in 1984. In this case, a real estate developer relied on a dentist who expressed his intention to purchase premises in a building. After the developer modified the design of the building so that it was suitable for a dental practice, the dentist did not object to the developer’s proposal to add the cost of doing so to the price of the premises and continued the negotiation for the purchase. However, in the end, he failed to purchase the premises. The court found the dentist liable for the cost of changing the design for a breach of duty in the process of concluding the contract based upon the doctrine of good faith and fair dealing.⁵⁰ The doctrine of culpa in contrahendo originated in German case law. It was accommodated in the BGB by the recent reform of the Law of Obligations.⁵¹ However, it has been noted that this doctrine emerged out of the unique structure of the BGB, and is not necessary in Japan, where the court can simply resort to the doctrine of good faith and fair dealing and achieve the same end.⁵² Whether it should be characterised as culpa in contrahendo or not, the court has acknowledged certain duties of the parties before the conclusion of a contract, namely regarding the duty to provide information or explanation. In a recent case, a bank and a construction company were found liable for the failure to provide information that the planned construction of a building was potentially in conflict with the Architectural Standard Law, and that the price of the land was destined to fall. The court based this judgment on the doctrine of good faith and fair dealing.⁵³ In another case, the court acknowledged tort liability of the seller and the construction company for the failure in providing ⁴⁸ Judgment of the Supreme Court, 6 February 1951, Minshū 5-3-36. ⁴⁹ T. Watanabe in: Minpō Hanrei Hyakusen (Hundred Selected Cases in Civil Law), vol. II (1996), pp. 100–101. ⁵⁰ Judgment of the Supreme Court, 18 September 1984, Hanji No. 1137, p. 51. See also the Judgment of the Supreme Court, 27 February 2007, Hanji No. 1964, p. 45. ⁵¹ G. Wegen et al. (eds), BGB Kommantar, 3 Auflage, (Köln, 2008), S. 551. ⁵² Y. Hirai, Saiken Kakuron (The Special Part of Contract Law), I (a), (Tokyo, 2008), pp. 128–130. See also T. Uchida, Minpō II, Saiken Kakuron (Civil Law, The Special Part of the Law of Obligations), 2nd edn (Tokyo, 2007), p. 26. ⁵³ Judgment of the Supreme Court, 12 June 2006, Hanji No. 1941, p. 94.

Law of Obligations and Contracts

155

information regarding the state and the manner of operation of the fire shutter. Again, this was based on the same doctrine.⁵⁴

(5) Termination of continuous contracts In Japan, contractual relationships between companies often continue for many years because of the intention of the parties to develop a long-term business relationship. A contract between a manufacturer and a distributor is an example. The common practice is to conclude a contract that is valid for a year or several years which is automatically renewable, unless either party gives advance notice of non-renewal. Many of these continue for ten to twenty years, and sometimes for thirty years. This does not mean, however, that these contracts had provided for a long effective period from the beginning. In most cases, a short-term contract later develops into a long-term (continuous) contract after being renewed multiple times. In a survey of the long-term contracts of 130 companies conducted in 1993 respondents were given a hypothetical case of a supplier refusing to renew a contract which had been renewed for ten years. While only 6.1 per cent of the respondents replied that the refusal to renew was invalid, 54 per cent replied that compensation should be paid, and 23 per cent replied that the contract should continue for some time and that during that time the parties should negotiate.⁵⁵ Under the Civil Code, according to the principle of freedom of contract, parties are free to terminate the contract on the grounds provided by the contract or to refuse its renewal. However, there is established case law that requires a justifiable ground (some judgments refer to a ‘compelling ground’) for the termination (either by rescission or by refusal of renewal) of a contract which presupposes a continuous relationship, such as distributorship agreements. This emanates from the doctrine of good faith and fair dealings and is applicable regardless of any clauses in the agreement that allow termination or limit the renewal of the agreement. The underlying idea here is that since such a relationship has developed on the basis of mutual trust, and since the parties, particularly distributors, have made investments upon the legitimate expectation that the relationship would continue, they should be given an opportunity to recoup their investment, provided that the distributors had acted in good faith. Such disputes have not reached the Supreme Court. Instead, judgments of the lower court comprise the case law. In a case decided by the Nagoya High Court, there was a sole distributorship contract without fi xed terms. After three years, due to a disagreement over the rate of the commercial margin, the supplier terminated the supply. The distributor had made a significant investment ⁵⁴ Judgment of the Supreme Court, 16 September 2005, Hanji 1912–8. ⁵⁵ S. Kitayama, ‘Keisokuteki-keiyaku nikansuru Kokkunai-Chōsa no Kekka (The Outcome of the Survey of Continuous Contracts in Japan)’, NBL No. 629, pp. 56–58.

156

The Civil Code—The Cornerstone of Private Law

and had marketed the product as their primary merchandise, built sales facilities, paid for advertisements, and developed the market. The court ruled that, under such circumstances, where the distributor has made some reasonable investment, unless there is a significant act of bad faith by the distributor or a significant reason which makes it impossible for the parties to continue (in other words, ‘a compelling ground’), stability of contractual relationship is required, and a unilateral termination of the contract is impermissible, unless there is a reasonable period of notice which enables the loss to be recovered, or reasonable compensation on the basis of the doctrine of good faith and fair dealing. The court ordered the supplier to pay compensation equivalent to one year’s profit.⁵⁶ The Tokyo High Court followed this line of reasoning in 1984, where it found the contract to be a ‘continuous sales contract’, ruled that the supplier was in default since there was no act of bad faith, or circumstances indicating that continuation of the contract could not be expected, and ordered the supplier to pay compensation.⁵⁷ Regarding the refusal to renew a contract, theoretically the parties are fully entitled to refuse the renewal since freedom of contract allows it. However, this is again limited by the doctrine of good faith and fair dealing. In a recent case, the Fukuoka High Court ruled on the refusal to renew a contract of newspaper agent by a newspaper company. In this case, the contract was first concluded in 2000 and had been renewed until 2006. The distributor had made substantial investment in order to facilitate the sale of the newspaper. The court ruled that in order for the newspaper company to refuse renewal of this continuous contract, a justifiable ground, i.e. that the distributor was in substantial breach of the purpose of the contract, had destroyed mutual trust, and thus, circumstances that made the continuation of the contract difficult had emerged. Insufficient sales, lack of marketing efforts, and false reporting did not qualify as such grounds.⁵⁸ The court takes into consideration various factors when deciding whether there is a reasonable ground/compelling ground. In the above case, the Nagoya High Court ruled that whether or not a continuous transaction could be unilaterally terminated should be decided by taking into account the stakes of both parties in the transaction, the level of effort put into the transaction, and the amount of damage likely to be suffered by the termination should be weighed. The court pointed out that if the distributor had significantly invested in the transaction, had made efforts to maintain and expand business, and is likely to suffer substantial damage, unless there is a sufficient reasonable ground, the transaction could not be terminated. In conclusion, the court ordered the supplier to pay compensation. On the other hand, by taking into account various circumstances, the court may find the termination to be with grounds. In a case involving Gillette, a US ⁵⁶ Judgment of the Nagoya High Court, 29 March 1971, Hanji No. 634, p. 50. ⁵⁷ Judgment of the Tokyo High Court, 24 December 1984, Hanji No. 1144, p. 99. ⁵⁸ Judgment of the Fukuoka High Court, 19 June 2007, Hanta No. 1265, p. 253.

Law of Obligations and Contracts

157

company producing and marketing razor blades, and a Japanese wholesaler, the Tokyo District Court ruled that refusal to renew the contract by the supplier should be placed under some restriction based upon fairness or the doctrine of good faith and fair dealing. The court proceeded to examine whether there was a justifiable ground for refusing renewal in this case. The court found that there were instances where the wholesaler had favoured Gillette’s competitors over Gillette. Although the wholesaler claimed that it had invested substantially in developing a sales network and in advertisements, etc., there was no proof of this. It was pointed out that the wholesaler was actually the largest wholesaler in razor blades, and its investment was not solely for selling Gillette products. The court ruled that in light of the fact that the wholesaler was the largest in that particular market in Japan, the relationship between the manufacturer and the wholesaler in this case was on an equal footing, and that it cannot be said that as a result of the termination of the contract the wholesaler had become unable to recover its investment. Therefore, the refusal to renew the contract was found not to be against the doctrine of good faith and fair dealing.⁵⁹ According to an authoritative commentary, the court takes into consideration, amongst other matters, the following factors:⁶⁰ (i) the circumstances which led to the conclusion of the contract; namely whether it was intended to be a continuous relationship and to what extent the supplier created the expectation on the part of the distributor that it would be a long-term contract; (ii) the status of the parties in the market and the relative bargaining power between the parties; (iii) the extent of investment by the distributor in the sale of the product; (iv) the length of the relationship; (v) the contribution of the distributor to the increase in the sale of products; (vi) the circumstances or reasons which led to termination; any special advantage accorded to the supplier by termination; (vii) the behaviour of the supplier throughout the process of dissolution of the relationship; whether or not there was sufficient advance notice, renegotiation of terms etc.; (viii) the expected loss of the distributor. Thus, it is now an established precedent that in order to terminate a continuous contract, regardless of the existence of any provisions in the contract that allow it, a justifiable ground or compelling ground is required. This is generally supported by academic opinion.⁶¹ ⁵⁹ Judgment of the Tokyo District Court, 5 February 1999, Hanta No. 1073, p. 171. ⁶⁰ K. Iwaki, in T. Taniguchi et al. (eds), Shinpan Chūshaku Minpō (14) (Tokyo, 1993), pp. 108–109. ⁶¹ T. Uchida, Keiyaku no Jidai (Era of Contracts) (Tokyo, 2000), p. 11. See also H. Nakata, Keizokuteki Keiyaku no Kenkyū (Les aff aire successives: étude juridique) (Tokyo, 2000).

158

The Civil Code—The Cornerstone of Private Law

This approach has been generally supported by experts. However, recently, some academics have been promoting the view, in light of ‘deregulation’ and the principle of ‘self-responsibility’, that as a rule, companies should be allowed to terminate such agreements solely on the basis of commercial considerations, and only in exceptional cases should it be restricted. This view is yet to find support by the courts. The balancing of interests by the court so far seems to have adequately weighed the interests of the parties.

(6) Contract of sale Although the Special Part of the Contract Law covers thirteen types of contracts, due to limited space, only the contract of sale will be focused on here. In a contract of sale, the title to the goods is transferred in accordance with the terms of the contract, i.e. it depends on the intention of the parties. The problem of when title is transferred to the buyer has long been a controversial issue in Japanese civil law. Some have suggested that the answer to this question has little practical effect. There are provisions in the Code that regulate the transfer of risk and the rights and duties of the parties, and these provisions can be applied without determining exactly when title is transferred.⁶² The Code provides for the transfer of risk: (i) when a specified thing, the object of a contract, is lost or damaged by a cause not attributable to the seller, the risk is borne by the buyer (Art. 534); (ii) otherwise, when performance of an obligation has become impossible due to a cause not attributable to either of the parties, the seller is not entitled to performance (Art. 536, para. 1). However, if the first principle is applied strictly, it may be unfair to the buyer. For instance, if A contracts to purchase a painting from B, but before the painting is handed over to A it is damaged by an earthquake, under this principle A, the buyer, has to bear the loss and therefore still has to pay the agreed price. Th is can hardly be considered as an appropriate solution. Scholarly opinion maintains that in such cases, where the object has not been handed over to the buyer, nor the price paid, this provision should not be applied on the ground that this was against the intention of the parties, or that there is a different trade practice. In cases of non-performance of contractual obligations, provisions in the general part of the Law of Obligations (Arts 412–422) as well as special provisions included in the part dealing with contracts (Arts 540–548) apply. If it is a contract for sale, provisions in the part on contract of sale also apply (Arts 560–578). The Chapter on Contracts includes provisions on the liability of a seller who does not have full legal rights over the property, or where the object of sale is ⁶² R. Suzuki, Bukken-hō no Kenkyū (Treatise on Property Law) (Tokyo, 1976), pp. 126–143.

Law of Obligations and Contracts

159

defective. Firstly, when the object of sale belongs to a third party and not to the seller, unlike in French law, the contract itself is valid. The seller is obliged to obtain rights over this object and transfer them to the buyer (Art. 560). If he fails, the buyer may rescind the contract and claim damages (Art. 561). Secondly, there are cases where part of the rights over the object belong to a third party. This happens, for example, when a joint owner sells property without the consent of other owners. In such a case, if the seller is unable to transfer the entire object to the buyer, the latter may ask for a reduction of the price in proportion to the part which is unavailable. If the buyer would not have purchased the object had he known that only part of it was available, he may rescind the contract. The seller is liable in both cases (Art. 563). In a similar vein, when the amount of the object delivered is less than that agreed in the contract, or when a part of the object is lost, the buyer is protected in the same way (Art. 565). The same applies to cases where rights of others to use the property such as superficies, emphyteusis, servitude, or a registered lease, etc., exist on the property: the buyer may rescind the contract and demand compensation (Art. 566). Th irdly, there are cases where the object of sale has an encumbrance over it. When the buyer loses the property as a result, he may rescind the contract and claim damages. Furthermore, if the buyer pays money and discharges the hypothec or preferential right, he may demand reimbursement from the seller (Art. 567). Finally, the seller is liable for objects with latent defects. The Code provides that when any latent defect is found in the object sold the buyer may rescind the contract if he is unable to achieve the purpose of the contract with that defect (Art. 570). The defect has to be latent, i.e. a defect which an ordinary buyer would not be able to find with the normally required care. If the seller can prove that the buyer knew or should have known, by exercising due care, the existence of the defect, he can avoid liability. The buyer has to exercise this right within one year of discovering the defect (Art. 566, para. 3). It should be noted that the Commercial Code contains special provisions governing sales between merchants. The Code provides that a buyer should inspect the object of sale without delay after he has received it, and if he fails to inform the seller immediately of any defect found at that time he is not entitled to claim against the seller. Even when the defect was of a nature that could not be found at the time of this initial inspection, the buyer has only six months after receiving the object in which to enforce his rights (Commercial Code, Art. 526, para. 1). The defect does not have to be physical. The Supreme Court has acknowledged a latent defect in a case where a buyer purchased a piece of land destined to be part of a planned road. The plan to build a road had been officially announced, but it was more than 10 years before the contract was concluded and it was

The Civil Code—The Cornerstone of Private Law

160

unknown to the buyer.⁶³ There was a similar case where a seller sold a forest that was designated as a preservation area.⁶⁴ There is some controversy over the relationship between the provision on the seller’s liability in the part of the Code on contract of sale (Art. 570), and the provision on incomplete performance in the General Part of the Law of Obligations (Art. 416). When a defective item is sold, the seller’s liability based upon Article 570 can be pursued, but it can also be considered as an improper performance on the part of the seller, and Article 416 may possibly apply. Practical differences between applying Articles 416 and 570 are that firstly, the buyer may claim damages, but not replacement by Article 570. Secondly, claims based on Article 570 have to be made within one year, while claims under Article 416 can be made for 10 years. Thirdly, Article 416 requires fault on the part of the seller, while Article 570 imposes strict liability. While there are different views amongst specialists of civil law, the courts seem to be of the view that the buyer may freely choose between those two provisions. In one case, the buyer purchased broadcasting equipment. The seller demanded payment, which the buyer refused on the ground that the equipment was defective. The buyer claimed that the contract was rescinded on the basis of Articles 416 and 570, and demanded replacement. The seller argued that since the buyer had accepted the equipment he had no right to claim replacement because of defective performance. The Supreme Court ruled that the buyer was entitled to invoke either provision and was still entitled to replacement.⁶⁵ This view is shared by most academics. It is also asserted that in such cases claims based on Article 416 should be subject to the same time limit as Article 570—one year—by reason of the doctrine of good faith and fair dealing. A separate law on product liability was enacted in 1994 (see Chapter 9).⁶⁶ Japan has been reluctant to ratify the UN Convention on the International Sale of Goods. Companies involved in international sale of goods were not particularly keen to join, since the business practice seemed to be remote from the Convention. However, with more countries ratifying the Convention, Japan is now moving towards joining the Convention. The Ministry of Justice has begun preparation for ratification.

(7) Consumer protection In recent years, calls for better protection of consumers’ rights have gained support in Japan. Incidents where consumers suffered from fraudulent businesses such as pyramid business schemes occurred from time to time. Consumers were sometimes forced to accept disadvantageous terms in standard form contracts. ⁶³ ⁶⁴ ⁶⁵ ⁶⁶

Judgment of the Supreme Court, 14 April 1966, Minshū 20-4-649. Judgment of the Supreme Court, 8 September 1981, Hanji 1019–73. Judgment of the Supreme Court, 15 December 1961, Minshū 15-11-2852. Law No. 85. 1994.

Law of Obligations and Contracts

161

Significant changes to the law of contract have been made in recent years in order to protect the interest of consumers by the amendment to the Law on Installment Sales and the enactment and subsequent amendments of the Law on Door-to-Door Sales.⁶⁷ The former mandates the seller to explain to the buyer relevant terms of sale, such as the cash price, the price payable by installments, terms of payment, and the rate of commission. After the conclusion of the contract, the seller is required to issue a written statement to the buyer which specifies these terms and the time of the transfer of title as well as conditions for rescission (Arts 3 and 4). The latter has identical provisions (Arts 4 and 5). Similar arrangements can be found in the Law on the Regulation of Credit and Loan Business.⁶⁸ A novelty resulting from the increased protection of consumers is the ‘cooling-off ’ period. This is designed to protect consumers who have been unfairly persuaded by the seller to make an unnecessary purchase. The Law on Installment Sales and the Law on Door-to-Door Sales provide that when a seller concludes a contract or accepts an offer in a place other than his sales office, the buyer or the offeror may rescind the contract or retract the offer respectively in writing within eight days of being informed of his rights by the seller (Law on Installment Sales, Art. 4-3; Law on Door-to-Door Sales, Art. 6). The seller is not entitled to compensation in such cases. A similar provision can be found in the Law on Investment Advisory Business (Art. 17).⁶⁹ Another development was the enactment of the Law on the Sale of Financial Instruments in 2001.⁷⁰ This Law provides for the duty of the seller to give explanation on material facts regarding the financial product, namely the possibility of losing the capital, and the possibility of loss exceeding the capital (Art. 3, para. 1). The seller is liable for the loss caused to the buyer in cases of a breach (Art. 5). These are exceptions to the general rule of Japanese contract law, which does not require any formality for concluding a contract. There are also problems concerning standard form contracts. In a modern society, ordinary people usually do not have a say in forming contracts concerning various goods and services, such as transportation, the supply of gas and electricity, telephone services, insurance, and banking. They merely have the choice of whether to enter into a contractual relationship or not; even this choice is very limited, since these services or items are indispensable to normal living. In standard form contracts, where one party is an individual and the other is a major company, the latter may abuse its bargaining power and force the former to accept unfair or unjust contract terms. Some standard form contracts are so specialised and complicated that ordinary people find them unintelligible. Various provisions in standard form contracts have led to controversy. Clauses which limit liability are particularly problematic. ⁶⁷ Laws No. 159, 1961 and No. 57, 1976. ⁶⁸ Law No. 32, 1983. ⁶⁹ Law No. 74, 1986. ⁷⁰ Law No. 101, 2000.

162

The Civil Code—The Cornerstone of Private Law

Although no special law on this issue—such as the German Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbedingungen (recently integrated in the BGB) and the UK Unfair Contract Terms Act—has yet been enacted, some laws have been amended in order to exercise more control over such standard contracts. Apart from the measures adopted by administrative and economic laws, methods of controlling standard form contracts have also been discussed in civil law. Some experts propose that the public order and good morals provision of the Civil Code (Art. 90) should be broadly applied in order to invalidate unfair terms, while others propose to resort to the doctrine of fairness and good faith. Another approach denies the validity of unreasonable clauses in a standard form contract because of the lack of consent. In support of this latter approach, there have been cases involving standard form leases of houses or land where lower courts found some clauses to be clauses de style under which the parties had no intention to be bound. In 2000, after a prolonged history, the Consumer Contract Law was finally enacted. As mentioned above, this Law provides for the right of consumers to retract their offer or acceptance in certain circumstances. If an entrepreneur solicits unspecified and many consumers in a misleading manner, certified consumer organisations may seek an injunction in court (Art. 12, para. 1). This Law also enables certain limitation of liability on the part of the entrepreneurs to be set aside (Art. 8, para. 1).

3. Management of Another Person’s Affairs and Unjust Enrichment Book Three of the Civil Code also deals with obligations arising without any contract. There are three categories: management of another’s affairs without mandate, unjust enrichment, and tort. (Tort will be covered separately in Chapter 9.) A typical case of management of another’s affairs without mandate is when someone repairs the roof of a neighbour’s house in his absence when the area is hit by a storm. There are also cases where a person repays the debt of another person without being asked to do so. The Code provides that those who started to manage affairs for the benefit of another person without any obligation to do so are under an obligation to manage the affairs in accordance with the nature of the affairs, and by means which most suit the interest of the other person. If the person managing the affairs is able to assume the will of the principal, he must manage the affairs in accordance with his will (Art. 697). The necessary expense incurred for the benefit of the principal can be reimbursed (Art. 702, para. 1). A person shall not be allowed to enrich himself at the expense of another. The Code provides that those who benefited from another person’s assets or service

Law of Obligations and Contracts

163

with no legitimate ground and thus caused loss to that person are liable for restitution insofar as the benefit remains (Art. 703). For example, a landlord who loses his title, but keeps taking rent from the tenant, enriches himself without legal ground and is obliged to reimburse the rent to the new owner. In one case, X repaired a bulldozer for M, who had rented it from Y. M went bankrupt and the repaired bulldozer was returned to Y. X sued Y in order to recover the fee for the repair on the ground of Y’s unjust enrichment. The Supreme Court found Y to have benefited from unjust enrichment.⁷¹ There are cases where a person gives something to another person, but it later turns out that this person was under no obligation to do so. For example where, after the buyer paid the price, the sales contract was rescinded. In such cases the seller has an obligation to return the money received as payment, plus interest. However, where the absence of the obligation was known to the obligor, but he nevertheless performed the obligation, he is not entitled to restitution (Art. 705). Those who gave something on illegitimate grounds, i.e. against public policy and good morals, are also not entitled to restitution. For instance gambling debts cannot be claimed (gambling is prohibited in Japan). On the other hand, even after the money has been paid there are cases where restitution is possible. The Code provides that if the ground for illegitimacy is primarily on the part of the beneficiary, restitution is possible (Art. 708).

⁷¹ Judgment of the Supreme Court, 16 July 1970, Minshū 24-7-909.

8 Property Law 1. The Concept of Real Rights Book Two of the Civil Code covers ‘real rights’. This concept comes from the German BGB, where Sachenrecht (the law of property) and Schuldrecht (the law of obligation) are contrasted. Real rights are the rights of a person over a thing, i.e. a relation in rem rather than in personam. They are distinguished from rights arising from obligational relationships in two ways. Firstly, real rights are rights which allow one to take control of, use, and make profits from a specified thing, while rights arising from obligational relations are rights that require another person to do or not to do something. Secondly, real rights can be claimed against any other person, whereas in rights arising from obligational relations only the parties are involved, and the relationship exists only between them. Therefore, the former is often referred to as an absolute right, and the latter a relative right. This distinction has some practical consequences: in cases of infringement, a holder of real rights is entitled to demand termination of such infringement by any person, while as a rule a holder of rights arising from obligational relations does not have such power against a third party. Thus, rights of ownership can serve as a basis for an action requiring the removal of an obstruction to the property, but a lessee may not initiate such an action on the basis of his rights under a lease. Furthermore, if a real right and a right arising from an obligational relation coexist on the same property, the former has priority. For example, if the owner of a piece of land sells it, the lessee of the property may not claim his rights against the new owner unless his right is registered. However, the distinction cannot be strictly maintained any more. Some rights arising from obligational relations are protected in a similar way to real rights, as a result of the enactment of special laws and case law which has accumulated since the enactment of the Civil Code. For example, lessees of a piece of land may claim rights against a new owner under certain conditions. Lessees, who do not have standing, may also protect their interests from infringement by a third party in the same way as owners, by substituting the owner-lessor.¹ ¹ Judgment of the Supreme Court, 18 December 1953, Minshū 7-12-1515.

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

Property Law

165

The General Part of the Civil Code defi nes a thing as a corporeal thing (Art. 85). Things are divided into immovables and movables. Immovables are land and ‘things firmly attached to it’ (Art. 86, para. 1). Houses and buildings are examples of immovables. They are treated separately from the land to which they are attached. This is one of the peculiarities of Japanese property law. Trees used to be traded separately from the land, but the Civil Code does not specifically refer to trees. By virtue of the Law on Trees of 1909, trees which are registered, or which have signs indicating the name of the owner are treated as separate immovables.² All things which are not immovables are movables (Art. 86, para. 2). The distinction between immovables and movables has practical effect in that, firstly, in transactions involving the former, registration or another means of publicity is needed. Secondly, a person may obtain ownership of a movable instantly by taking possession peacefully and openly with an intention to own. Ownership of immovables cannot be obtained in this manner. Thirdly, some rights, such as hypothec, may exist over immovables only. One of the attributes of real rights is that whenever a real right is infringed, the holder of the right may take an action in court to eliminate the infringement. Historically, this has developed out of the rei vindicatio and the actio negatoria of Roman law, as modified by the German Gemeinesrecht. The current Civil Code does not have general provisions concerning actions based on real rights. The closest provisions are those concerning actions on the basis of possession (Arts 197–202). However, it is understood that the Civil Code presupposes such actions based upon real rights, namely ownership. The three types of action based upon real rights against infringement are actions for recovery, actions to eliminate infringement, and actions to prevent infringement. In recent years, the latter two types of actions are sometimes used in disputes concerning the protection of the environment, particularly against noise, vibration, and odour. The most important of the real rights, which serve as the basis of such actions, is ownership, but such actions can also be taken by secured creditors in case of infringement of hypothec. The Civil Code lists ten kinds of real rights; no rights other than those provided for by the Code or other laws may be created (Art. 175). The Code firstly provides for the right of possession, which emanates from actual possession of a thing. This arrangement of the Code is problematic because possession is not a right in itself, but merely a state of affairs. In any case, the Code gives protection to actual possession in various ways. Secondly, the Code provides for ownership. Thirdly, there are also four types of real rights which allow a person to use another’s property: superficies, emphyteusis, servitude, and commonage. Superficies is a right to use the land of another for the purpose of owning a building or trees and plants (Art. 265). Emphyteusis is a right to cultivate or raise livestock on another’s land ² Law No. 22, 1909.

166

The Civil Code—The Cornerstone of Private Law

subject to paying a rent (Art. 270). Servitude (servitus praedorium) is the a right to use another’s land for the convenience and benefit of one’s own land, for example using adjacent land for access (Art. 280). Finally, commonage is a traditional right which belongs to a collective body, for instance a village community, to use a forest, field, fishery zone, or irrigation system. Commonage under the Civil Code primarily concerns forests and fields. In addition, there are four types of real security rights: rights of retention, preferential rights, pledge, and hypothec. In pledge, the possession of the collateral is transferred to the creditor: in case of default the creditor may secure repayment from the proceeds of auction. In hypothec, the creditor does not have possession of the collateral, but if the debtor defaults, the creditor may secure repayment in the same way as in pledge. The principle that only those real rights provided by law should exist and that one may not change the content of a real right arbitrarily is justified by the ‘absolute’ nature of real rights, i.e. real rights affect not only the other party but everyone else. If one could freely change the content of a real right or create new rights, this would prejudice the predictability and stability of transactions. This principle was also needed to eliminate traditional rights which did not fit into the scheme of the modern Code in the late nineteenth century. However, since the enactment of the Code, some new real rights have developed either by statute or by practice. Firstly, laws such as the Mining Law, the Fishery Law and the Law on Hypothec of Factories have created new types of real rights.³ The Civil Code itself was amended and a new type of hypothec, base (floating) hypothec, was introduced. Secondly, various atypical security rights have developed out of practice, sometimes against explicit provisions of the Code. Some of these later found a statutory basis. The Law on Contracts of Security by Provisional Registration is an example. Case law has played a significant role in shaping these rights and ensuring fairness in their enforcement.

2. Registration The Code provides that the establishment and assignment of real rights are given effect by the declaration of will of the parties (Art. 176). No formalities such as registration or transfer of possession are needed. This arrangement follows the pattern of French law in which property transactions are completed par eff et des obligations. In contrast, the German BGB requires the registration or the actual transfer of the object for the transaction to be effected. There, ownership of immovables, for instance, is not assigned by mere agreement; entry into the

³ Laws No. 289, 1950; No. 267, 1949; and No. 54, 1907.

Property Law

167

Grundbuch (Land Register) is needed.⁴ Registration must be made jointly by the current and the prospective holders of the right concerned. Although registration or other means of publicity are not a prerequisite for the transaction to take effect in Japan, in order to claim rights against a third party, they are necessary. Thus, the Code provides that the acquisition, relinquishment, or alteration of a real right cannot be set up against a third party unless it is registered when it involves an immovable (Art. 177), or the profession transferred when it involves a movable (Art. 178). Land, buildings, and trees are registered in accordance with the Law on the Real Property at the local legal bureau.⁵ Registers are organised so that each piece of land, building, or tree is assigned a separate section. Ownership and other real rights are entered on the register in chronological order. Most rights which can be registered are real rights, but a lease of immovables, which is a right arising from obligational relations, can also be registered. The registration procedure for immovables is now computerised. There are two major issues with regard to registration. First is the scope of transactions which require registration. There is no doubt that changes of property relations resulting from sale, gift, or other juristic act must be registered. In addition, changes caused by the rescission of a juristic act must also be registered under certain circumstances. In a leading case, A sold a house to B. A later rescinded the sales contract because of fraud on the part of B. However, after the rescission but before A restored his registration, B sold the house to C who registered it in his name. The court ruled that A was not entitled to assert his ownership or to claim rescission against C because he had failed to register the return of property in time.⁶ The second problem is the scope of the third parties in Article 177. The Code does not limit the scope of the third parties against whom registration is needed in order to claim alteration in real rights. Therefore, technically, if A sells his house to B, while C, knowing that the house was sold to B, nevertheless purchases the house from A and registers it in C’s name, B cannot claim his ownership against C because B had failed to register his interest. Thus, even a third party who was aware that the seller was not the real owner is entitled to claim the lack of registration on the part of the genuine owner. The issue is whether any category of third parties, for instance a third party acting in bad faith, should be protected in this way. It should be noted that the Law on Registration of Immovables provides that those who obstruct registration by fraudulent means or by extortion are not entitled to take advantage of the lack of registration (Art. 4). The Supreme Tribunal, the predecessor of the present Supreme Court before the end of the Second World War, limited the scope of third parties as provided ⁴ N. Horn, H. Kötz, and H. G. Leser, German Private and Commercial Law: An Introduction (Oxford, 1982), pp. 179–182. ⁵ Law No. 24, 1891. ⁶ Judgment of the Supreme Tribunal, 30 September 1942, Minshū 21–911.

The Civil Code—The Cornerstone of Private Law

168

in Article 177 soon after the adoption of the Code. In a leading case, it ruled that a third party against whom no right can be claimed without registration meant those who have a justifiable interest in claiming the lack of registration.⁷ The Supreme Court further limited the range of third parties covered by this provision. This concerns ‘third parties in extremely bad faith’. In a leading case, A sold a forest to Y. Part of the forest had been left out of the register and was therefore not registered even after this change in ownership. X became aware of this and also found out that A still had the deed, so he purchased this part of the forest with a view to selling it to Y at a high price. Y refused to buy, so X sold it to B. When B brought an action against Y, X repurchased the property from B, registered it in his name and continued the suit. The Court ruled that X had acted in extreme bad faith, and was not entitled to claim the lack of registration on the part of Y.⁸ Similarly, when the third party acts against his previous words or acts, or with the intention of harming the person who has not registered, the court has ruled that these third parties may not take advantage of the lack of registration. This conclusion can be justified by estoppel or the doctrine of good faith and fair dealing.⁹ Unlike the German Grundbuch, in which registration has a constitutive effect, the registry in Japan does not always reflect the true state of property relations. People often fail to register transactions because of tax consequences, or simply because of the cumbersome procedure. When one purchases land from its registered owner, there is no guarantee that the registered owner is the genuine owner. In some cases, the court has interpreted the law flexibly to protect those who relied on registration. In one case, the owner of a piece of land, X, had registered the property in A’s name without the latter’s consent. X had no intention of transferring the property to A. A found out later that the property was registered in his name and, taking advantage of this, sold the property to Y, who registered it in his name. X brought a suit against Y to have his ownership confirmed. The Supreme Court applied Article 94, para. 2 which provides for declaration of will by collusion, although there was no collusion between X and A, and ruled that X was not entitled to claim ownership against Y. In this case X was responsible for creating the appearance that A was the genuine owner. Instead of protecting A, who, according to the register, was the owner, or the genuine owner X, the court chose to protect Y, who had relied upon the register.¹⁰

7

Judgment of the Supreme Tribunal, 15 December 1908, Minroku 14–1276. Judgment of the Supreme Court, 2 August 1968, Minshū 22-8-1571. e.g. Judgment of the Supreme Court, 16 January 1969, Minshū 23-1-18. ¹⁰ Judgment of the Supreme Court, 24 July 1970, Minshū 24-7-1116. 8 9

Property Law

169

3. Ownership The Civil Code protects possession of property without questioning whether the possessor has a genuine right to the property in question. The possessor of an object is presumed to have a lawful right over the object (Art. 188). A possessor in good faith acquires the fruits of the thing in his possession (Art. 189, para. 1). If his possession is infringed, he is entitled to claim recovery of the object, the elimination of an infringement, or the prevention of further infringements (Arts 197–200). The Code defines ownership as the right to use, make profit from, and dispose of a thing, subject to such limitations as may be imposed by law (Art. 206). The Constitution provides that the contents of property rights are to be defined by law in accordance with public welfare (Art. 29, para. 2). Private property may be taken for public purposes upon payment of just compensation (Constitution, Art. 29, para. 3). Ownership is no longer considered as absolutely inviolable. As the Germans say, Eigentum verpflichtet (ownership is accompanied by duties). There are various limitations on ownership arising from different policy considerations. In particular, the ownership of land and houses is subject to various restrictions. For instance, the Law on Agricultural Land provides that agricultural land may not be transferred or sold without the permission of the governor of the prefecture government (Art. 3).¹¹ The City Planning Law imposes restrictions on the use of land in order to ensure the ‘healthy development and orderly maintenance’ of towns and cities (Art. 1).¹² The Law on Acquisition of Land for Public Purposes allows private land to be expropriated, but with just compensation (Art. 1).¹³ Another important development concerning the ownership of land and houses is the gradual move towards strengthening protection of lessees. Laws such as the Law on the Lease of Land and Houses protect tenants by limiting the rights of owners.¹⁴ For instance, a lease contract for a piece of land is automatically renewed, unless the lessor objects to it without delay and with justifiable reasons, provided that there is a building on it (Art. 5, para. 1). Refusal to renew the contract requires a justifiable reason on the part of the lessor (Art. 6). The court has strengthened the protection afforded to tenants by finding claims by landlords to be abuses of rights, or by resorting to the doctrine of good faith and fair dealing as provided by the Civil Code. Ownership of a thing can be acquired by different means, such as by contract or inheritance. Movables can be acquired by taking possession of things without an owner (Art. 239, para. 1) or of lost articles (Art. 240). Also in cases of accession, consolidation, and processing, ownership may be acquired (Arts 242–246). ¹¹ Law No. 229, 1952. ¹² Law No. 100, 1968. ¹³ Law No. 219, 1951. ¹⁴ Laws No. 49 and No. 50, 1921 (replaced by Law No. 90, 1991).

170

The Civil Code—The Cornerstone of Private Law

Movables can also be acquired through immediate acquisition. The Civil Code provides that a person who has peacefully and openly started to possess a movable with an intention to exercise a right over it shall acquire that right immediately. The person must have acted in good faith and without negligence (Art. 192). In addition to ownership, rights which can be obtained by immediate acquisition include the right to pledge. Immediate acquisition is designed to protect those who deal in movables because, unlike immovables, rights over movables are not publicised. Possession is the primary means of manifesting ownership, and therefore those who believe that the possessor is the genuine holder of the right need to be protected if they acquire the apparent interest. As a corollary, movables which can be registered, such as cars, ships, and aircraft, cannot be acquired in this way. Similarly, immediate acquisition is not possible when the transaction itself is void or voidable for want of capacity to act, defects in the declaration of will, or through acts of an unauthorised agent. Ownership may be acquired through acquisitive prescription. Acquisitive and extinctive prescriptions are both provided for in the General Part of the Civil Code. For acquisitive prescription, the general rule is that a person who, with an intention to own, has peacefully and openly possessed a thing belonging to another for twenty years acquires ownership. If a person has possessed a property peacefully, and at the time of taking possession was in good faith and acted without negligence, this person acquires ownership in ten years (Art. 162, paras 1 and 2). Good faith in this context means that the possessor was not aware that the property in question belonged to another person. In both cases ‘intention to own’ on the part of the possessor is required. Thus, the lessee of land will not acquire ownership of the land since he possesses the property with the intention to use it as a lessee and not to own it. Prescription is interrupted by acknowledgement on the part of the possessor, or by demand, attachment, provisional attachment, or disposition by the genuine holder of the title (Art. 147). A reminder (extra-judicial) must be followed by legal process within six months in order to effect interruption (Art. 153). The raison d’ être of prescription has been a source of controversy among civil law specialists. The prevailing view is that acquisitive prescription is needed to protect those who deal with possessors of a property in the belief that the present state reflects the genuine legal relations. The Register of Immovables in Japan does not necessarily reflect the true state of affairs; there is no guarantee that the registered owner is the genuine holder of the title. Therefore, in parallel with immediate acquisition for movables, the Code provides for acquisitive prescription of ten years covering immovables, requiring good faith and the absence of negligence. The reasoning for the acquisition after twenty years of possession is that after a long period of time it is difficult for anyone out of possession to prove that he is a

Property Law

171

genuine holder. Therefore, the fact that a party has continued to possess the property openly and peacefully should serve as a basis for establishing his ownership. It may be the case that there is a genuine owner other than the possessor, but he should have claimed his right during the twenty years, and since he has not done so, the possessor is protected. Someone intending to purchase land should of course check the register. The fact that property is registered in someone’s name does not necessarily mean that this person is the genuine owner. This person may have purchased the property from someone who was not a genuine owner. Or this person may have abused his power as agent and registered the property in his own name. However, if the prospective buyer checks the past record of the property and ascertains that the registered owner has occupied the property peacefully and openly with the intention to own for more than 20 years, it can be assumed that this person holds the title.¹⁵ Incidentally, a possessor may assert his own possession only, or may choose also to have the period of his predecessor’s possession counted (Art. 187).

4. Joint Ownership Title to property can be held or shared by several persons. The Civil Code has general rules for joint ownership, and special rules concerning the property of associations (kumiai) and inherited estate. Scholarly opinion recognises indivisible joint ownership (gōyū), and collective joint ownership (sōyū) along with joint ownership in general (kyōyū). In indivisible joint ownership, the right of each owner to dispose of his share is limited. Commonage is denoted as collective joint ownership. No member has a divisible share, each being entitled only to use and profit from the property together with the other owners. The property is administered not by the parties jointly, but by a representative selected according to custom or tradition. However, in recent years commonage has gradually lost its original meaning and become more individualistic. In general joint ownership, as provided by the Civil Code, each owner has a share, and is entitled to make use of the whole property in proportion to his share (Art. 249). Each joint owner may dispose of his share, but may not change the state of the property without the consent of the other owners (Art. 251). The administration of the property is determined by a majority vote of the joint owners whose voting rights are related to the value of their shares (Art. 252). There are special provisions concerning associations and inherited estate (Arts 676, 906–911). In recent years, joint ownership has gained significance in relation to collective housing. Due to the concentration of population in the cities, a large ¹⁵ E. Hoshino, Minpō Gairon (An Outline of Civil Law), vol. 1, new edition (Tokyo, 1993), pp. 249–253.

172

The Civil Code—The Cornerstone of Private Law

number of people now live in a block of flats, which is often jointly owned by the inhabitants. The provisions on joint ownership in the Civil Code were unable to cope effectively with these types of buildings. For instance, the Civil Code requires the consent of all joint owners when altering the state of the property (Art. 251). Therefore, if a block becomes old and needs refurbishment, or needs to be rebuilt, the unanimous support of all owners is necessary. Th is is very difficult to obtain in a large block of flats where many people with different interests live together. The Law on Divided Ownership of Buildings was enacted in 1962 to deal with jointly owned buildings. This Law was extensively amended after the rapid growth in the number of blocks of flats and other buildings in urban areas.¹⁶ It applies to buildings which are divided into separate flats, shops, or storage rooms owned by different persons. These buildings have individual as well as communal parts. Individual parts are owned and used exclusively by an individual owner, while communal parts are owned jointly by all or some owners. Although the relationship involved in such buildings is basically joint ownership, provisions of this law have priority over the provisions of the Civil Code on joint ownership. An owner may not, in using or administering the building, do anything against the common interest of the owners, such as acts prejudicing the preservation of the building (Art. 6, para. 1). In cases where such acts have taken place, or are likely to take place, other owners may take such action as is needed to prevent or terminate those acts, or to remove their results (Art. 57, paras 1 and 2). In extreme cases, other owners may request the court to sell the part owned by a particular person by auction or order him to surrender it (Art. 59). The decision-making body of the owners is the general meeting. Each owner has votes in proportion to the size of his share, unless provided otherwise by the charter (Arts 38 and 14, para. 1). Decisions of the general meeting and the charter are binding on the owners and their successors in title (Art. 46, para. 1).

5. The Right to Use Another Person’s Property There are four types of real rights which allow a person to make use of immovable property which does not belong to him. These are: superficies, emphyteusis, servitude, and commonage. Holders of superficies are entitled to use another person’s land for the purpose of owning a building or trees (Art. 265). Provisions of the new Law on the Lease of Land and Houses also apply to superficies. The 1966 amendment to the Civil Code introduced superficies for owning installations under or above the land (Art. 269–2). In emphyteusis, a farmer rents land and cultivates it or uses it for raising livestock (Art. 270). However, most farmers now own their land, and this right therefore is no longer relevant. ¹⁶ Law No. 69, 1962.

Property Law

173

Commonage denotes a traditional right of the collective (village) to use land. Provisions of ownership in common or servitude are applied to commonage, depending on the nature of the commonage in question. Local custom supplements the Code (Arts 263 and 294). Today, the lease is the most common form of using other people’s property in built-up areas. A large proportion of housing in major cities is comprised of either rented flats or rented houses. Buildings are often built on rented property. Legally, such arrangements can be either leases or superficies, but owners prefer leases, because holders of superficies are in a stronger position against the owner than are lessees. Rights based upon a lease are not ‘real rights’ in terms of the Civil Code. Leases are provided for in Book Three of the Civil Code (the Law of Obligations) as one of the typical contracts. In the Code the term ‘lease’ covers leases of both immovables and movables. It is not surprising that the Civil Code provisions failed to give sufficient protection for lessees of houses and land. Since the enactment of the Civil Code, in the wake of industrial action and social unrest, separate laws were adopted to supplement the Code and to strengthen the protection of lessees of houses and land. These are the Law on the Protection of Buildings, the Law on the Lease of Land, and the Law on the Lease of Houses.¹⁷ A new law, the Law on the Lease of Land and Houses, which integrates those three laws with some amendments, was adopted in 1991. There are some problems with the provisions on lease in the Civil Code. The first problem concerned the means of publicity. The Code provides that if a lease of immovables is registered, the lessee may claim his right against anyone subsequently acquiring real rights over the property (Art. 605). In practice, registration of a lease is difficult, since the lessor has no obligation to cooperate with the lessee in registering the lease. Only real rights can serve as a basis for requiring cooperation, and a lease is not one of them. The Law on the Protection of Buildings had a provision which strengthened the lessee’s position. It enabled a lessee or a holder of superficies who owned a registered building on the land to assert his rights against a new owner of the land without registration (Art. 1). It should be noted here that the ownership of land and the building which stands on it can belong to different persons. This provision is now incorporated in the new Law on the Lease of Land and Houses (Art. 10, para. 1). If the lessee of a house was actually given possession of it, he is entitled to assert his right as lessee against a new owner of the house without registration (Art. 31, para. 1). The second problem with the provisions on lease in the Civil Code concerned renewal of lease. The Civil Code is silent, but restrictions on the lessor’s freedom to refuse renewal in the lease of houses and land were introduced by separate statutes as well as case law. The Law on the Lease of Land and Houses provides ¹⁷ Law No. 40, 1909, Laws No. 49 and No. 50, 1921.

174

The Civil Code—The Cornerstone of Private Law

that if the lessee required renewal of the lease, the lease is deemed to have been renewed under the same conditions as before, provided that the building owned by the lessee is still there, and that the lessor did not object in a timely manner (Art. 5, para. 1). The lessor is entitled to refuse renewal only when there is a justifiable ground (Arts 6 and 28). The Law provides for the following factors to be considered in such cases: (i) the reason why the lessor and lessee need the property; (ii) circumstances and facts relevant to the agreement (e.g. the amount of rent); (iii) the purpose and use of the property (e.g. whether it is for housing or business, whether the property is in good shape or not); and (iv) any financial offer made by the lessor. At the time the Law was being discussed, property developers proposed the inclusion of the necessity of using the land in a more effective way (e.g. for the redevelopment of the area) as a justification, but this was not accommodated in the Law. The new Law did not change the scope of justifiable grounds for refusal. It merely incorporated the existing court practice. On the other hand, based on the view that excessively strict control over the lessor’s refusal to renew leases could inhibit the effective use of land and the supply of housing in urban areas, fi xedterm leases which are not renewable were introduced (Arts 22 and 38, para. 1). For instance, if the owner of a house is unable to live there for a certain period because he has been transferred abroad by his employer, but it is apparent that he would want to live there on his return, he may enter into a lease which is not renewable.

6. Real Securities Book Two of the Civil Code also contains provisions on real security. There are four types of statutory real security rights: right of retention (ryūchi-ken), preferential right (sakidori-tokken), pledge (shichi-ken), and hypothec (teitō-ken). In addition, various statutes provide for real security, such as the Law on Security over Enterprises and the Law on Hypothec over Factories.¹⁸ There are also types of real security which have developed out of practice and have been endorsed by the court. These real securities, which are denoted as atypical real securities, include, inter alia, proprietary securities and retention of title. Some of them later found legal basis in the Civil Code and other laws. A person who is in possession of another person’s property may retain the property until the latter performs the obligation owed to the possessor involving that property (Art. 295). The right of retention arises only in cases where the creditor already has possession of the property. The property need not be movable. The obligation secured by the right of retention must have arisen in relation to the retained property. This relationship between the obligation and ¹⁸ Law No. 106, 1958 and Law No. 54, 1905.

Property Law

175

the property retained is not required in the Commercial Code. Merchants are entitled to retain property received in a commercial transaction in order to secure payment of any debt arising from such transactions (Art. 521). In cases provided for in the Civil Code or other laws, a creditor is granted a preferential right to secure payment, either from a specified property or assets of the debtor in general, in preference to other creditors. Such preferential rights arise automatically when certain conditions are met. Someone with a preferential right may demand that the property be auctioned and that his right arising from the obligational relationship satisfied from the proceeds of the auction. For example, employees’ wages are secured by a preferential right over all the employing company’s assets. If the company goes bankrupt and its assets are auctioned, employees have a preferential right to six months’ wages out of the proceeds (Art. 306). In contrast to preferential rights and the right of retention, generally, pledge and hypothec are created by agreement between the parties. A pledgee is entitled to possession of the property pledged to him, and in case of the pledgor’s default the pledgee may have the property auctioned (Art. 342). The actual transfer of possession to the pledgee is required for the creation of a pledge (Art. 344). Pledges are not limited to movables; immovables, securities, and intellectual property rights can also be pledged (Arts 356 and 362). The pledgee is entitled to demand the sale by auction of the property; on the other hand, he is prohibited from acquiring ownership over the property without going through the formal enforcement procedure (Art. 349). This is designed to prevent the pledgee from obtaining excessive profit from the collateral. However, this restriction is removed in the Commercial Code. In commercial pledge, parties to commercial transactions may agree that title to the collateral shall transfer to the creditor in the case of default by the debtor (Art. 515). Whereas pledgees have possession of the property, in hypothec possession of the property is not transferred to the obligee. Both the title to and possession of the property remain with the person who hypothecated it (Art. 369). Therefore, the hypothecary debtor may borrow money while continuing to use the property. Hypothecary creditors may not repossess the collateral without recourse to the court. A special kind of hypothec, which had developed in practice and was acknowledged by the courts in the pre-war period, was incorporated into the Civil Code in 1971. This is called the base hypothec (neteitō) and secures unspecified obligations within a fixed limit. When the obligation in ordinary hypothec is fulfilled, the hypothec is extinguished. In a base hypothec it does not extinguish, but covers future obligations whenever they arise. It is designed primarily to secure payments relating to a long-term supply contract between merchants, and current account agreements between a bank and a customer, both up to an agreed amount. The Code limits the object of hypothec to ownership of immovables and superficies and emphyteusis over land. This is because there is no way to publicise the

176

The Civil Code—The Cornerstone of Private Law

existence of a hypothec over movables. If hypothecs over movables were allowed, the interests of those who purchase movables could be harmed. However; since the enactment of the Civil Code, the necessity of hypothecs over certain categories of movables, or group of movables and immovables, has increased. This led to the enactment of laws such as the Law on Hypothec over Automobiles, the Law on Hypothec over Factories, and the Law on Securities over Enterprises.¹⁹ Corporate bonds can be secured by the entire assets of the company.²⁰ A creditor who has a hypothec over property receives payment from the proceeds of its sale by auction in preference to other creditors should the debtor default. The existence of a hypothec is publicised by means of registration. Without registration, the creditor who has a hypothec cannot assert his rights against another hypothecary creditor or any purchaser of the property. Situations where several hypothecs exist over one and the same property are not rare. Priority between different hypothecs is decided in accordance with the order of registration, i.e. a creditor who registered earlier has priority over others. When a hypothec which has priority is extinguished, the hypothec of the next rank is upgraded. It is common for land and buildings attached to land to be treated as different things in Japan. Hypothec over land does not cover buildings on it, nor does hypothec over a building have effect over the land. Th is causes a problem when either the land or the building is hypothecated and sold by auction to a third party. The Code provides for statutory superficies, which is unique to Japanese law. When land or a building attached to it, both of which belong to the same person, is hypothecated and then purchased by a third person at auction, a statutory superficies is deemed to have been created for the building (Art. 388). Real rights to use immovables, which were registered after the hypothec, extinguish once the hypothec is enforced. However, there was an exception in which short-term leases of less than five years for land and three years for buildings were not extinguished, even though they were registered after the hypothec. However, in practice this can be abused by the owner of the immovable in order to obstruct the creditor in the exercise of his rights. The system protecting a short-term lease of land was abolished as a result of the amendment to the Civil Code in 2003.²¹ Another problem regarding hypothec was the right to discharge the hypothec of a third party who has obtained ownership, superficies, or emphyteusis over the hypothecated property. These persons are entitled to offer the hypothecary creditor a sufficient amount of money in exchange for the discharge of the hypothec. ¹⁹ Laws No. 187, 1951, No. 54, 1895, and No. 106, 1958. ²⁰ Law No. 52, 1905. ²¹ H. Dogauchi et al., Atarashii Tanpo • Shikkō—Seido (The New System of Real Security and Enforcement) (Tokyo, 2003), pp. 74–77.

Property Law

177

If the hypothecary creditor(s) considers this amount to be insufficient, he may demand auction within a month. The creditor was under an obligation to purchase the property himself, unless the property was sold at auction at a price more than 10 per cent higher than the price offered by the third party. This right of the person who acquired the hypothecated property to discharge the hypothec comes from French law. The problem is that under this system hypothecary creditors are forced to initiate the auction procedure at a time which may not be desirable for them, or to accept a relatively low price for the property. This is often unfair to secured creditors, and therefore its abolition was proposed. As a result, some laws providing for specific hypothecs no longer incorporate this system of discharge. By the 2003 amendment to the Civil Code, the system of discharge underwent significant changes. The person who is entitled to request discharge is now limited to a third party who acquired ownership to the property. The obligation on the part of the hypothecary creditor to purchase the property at a price of 10 per cent more than the offer by the third party was abolished.

7. Atypical Real Security Rights The Civil Code provides for only the above four real securities. However, other types of securities, denoted as atypical real securities, have developed in practice. Concerning real security rights by way of provisional registration, a separate statute was adopted in 1978, but other atypical rights remain without statutory basis.²² These atypical securities have developed in order to fill the gaps in the Civil Code that were thought to be impractical for commercial transactions. A major shortcoming of the Code is that it does not provide for any means of security over movables which allows an owner/debtor to use the property until he repays the debt. Hypothec on movables is not acknowledged by the Code; a pledge is possible, but in pledge the owner is deprived of possession of the collateral. Atypical security rights are designed to secure a loan while allowing the debtor to continue using the property. Another shortcoming of real security rights is the cumbersome and often costly enforcement procedure provided in the Civil Code. By using atypical securities, a creditor can avoid the formal enforcement procedure, and secure payment by selling the object or acquiring it himself. Furthermore, if there are many creditors, atypical security rights may provide a better and easier way of ensuring priority of payment.

²² Law No. 78, 1978.

178

The Civil Code—The Cornerstone of Private Law

On the other hand, atypical security rights have disadvantages in that they often unfairly benefit the creditor at the expense of debtors and the others. The courts have tried to avoid such unfair results by developing a body of case law. The first type of atypical security rights involves the sale of property to the creditor. By this arrangement, the parties do not intend to effect a genuine sale, although there appears to be a contract of sale. The debtor sells a property to the creditor, who promises to let the debtor repurchase the property once he repays the debt (an option to repurchase). Alternatively, the creditor may agree to redemption; if the debtor repays the debt then the debtor is entitled to rescind the contract of sale and have the property returned. In a recent case involving a sale with an option to repurchase the object, the Supreme Court ruled that if it is a genuine sale, it normally entails the transfer of the possession of the property from the seller to the buyer. If such a contract is not accompanied by the transfer of possession, the contract should be presumed to have been concluded for the purposes of securing a loan unless there are special circumstances, and should be characterised as a contract of atypical real security.²³ The second type of atypical security rights is effected by the conditional assignment of ownership, combined with a loan agreement. The assignment of ownership becomes final when the debtor defaults. As a variation, the parties may agree to substitute performance: if the debtor defaults he is obliged to assign the ownership of the collateral to the creditor as a substitute.²⁴ Options for repurchase and substitute performance involving immovables can be registered as provisionary. Securing a debt by way of provisionary registration developed out of practice, and was embodied in law by the Law on Contracts of Security by Provisional Registration.²⁵ Technically, some atypical security rights seem to contradict provisions of the Civil Code. For instance, security by way of assigning the title to a movable is contrary to the provision in the Code which prohibits the pledgee from agreeing in advance to acquire ownership of the collateral (Art. 349). Furthermore, only those real rights which have a basis in the Code or other laws are acknowledged (Art. 175). However, the court felt it desirable to overcome these limitations and to give legal substance to atypical security rights. Previously, a creditor whose right was secured by an atypical real security right was entitled to receive full ownership of the property, regardless of its value. Hence the creditor could acquire ownership of a property with a much higher value than that of the loan. However, this was thought by the court to be unfair. It is now

²³ Judgment of the Supreme Court, 7 February 2006, Minshū 60-2-480. ²⁴ For detailed discussion on atypical security rights, see R. Suzuki, Bukken-hō Kōgi (Lectures on Property Law), 5th edn (Tokyo, 2007), pp 344–399. ²⁵ Law No. 78, 1978.

Property Law

179

established case law that the difference between the amount of the secured loan and the price of the property should be returned to the debtor.²⁶ In addition to the above-mentioned atypical securities, in order to secure the payment of sales of goods via installments (hire purchase in English law) retention of ownership is commonly used.

²⁶ See for example, the judgment of the Supreme Court, 25 March 1971, Minshū 25-2-208.

9 Law of Torts 1. The Development of Tort Law Provisions on tort liability are found in Book Three, the Law of Obligations, of the Civil Code. This categorisation is shared by the German and French Codes, where tort falls under the law of obligations. The section of the Civil Code which deals with tort liability starts with a general provision (Art. 709): A person who intentionally or negligently violates the rights of others shall be liable for the loss caused by the act.

Provisions concerning non-pecuniary loss, the liability of minors, vicarious liability, contributory negligence, and other matters follow this general provision. This way of setting out tort law is common in Continental legal systems. In fact, the Japanese Code is close to the French Code which has a single general provision on tort liability, rather than to the German Code which has three basic provisions which define the grounds for tort liability. At the time when the Civil Code was enacted, tort liability was mostly limited to cases between individuals. However, subsequent social changes led to the emergence of new types of torts. There are pollution cases and product liability cases, where tortfeasors are major companies and the loss is widespread. The development of technology made atomic energy and various highly hazardous materials available. There are also medical malpractice cases. In 2007, of the 140,086 civil cases involving monetary claims accepted at the district court level, there were 483 cases of claims for compensation for defective buildings, 927 cases of medical malpractice, and 36 cases of claims arising from pollution.¹ Despite the social changes since the enactment of the Civil Code in 1896, provisions regarding tort liability in the Civil Code have remained unchanged. These provisions, especially the general provision of Article 709, were made intentionally abstract in order to give sufficient discretion to the courts in their interpretation. This enabled the courts to cope with newly emerging problems such as pollution. ¹ .

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

Law of Torts

181

In fact, it is not an exaggeration to state that judgments, not only of the Supreme Court but also of the lower courts, have played a major role in forming the modern Japanese law of tort. One example is the judgments of the lower courts in the celebrated four major pollution cases where victims who suffered as a result of serious pollution sued the companies which had allowed the escape of toxic substances. These judgments, although given by lower courts, introduced new concepts such as ‘epidemiological causality’, which in fact reduced the burden of proof for the plaintiff.² There are some special laws pertinent to tort which should be mentioned here. The first is the Law on the Compensation of Losses arising from Car Accidents, which was enacted in 1955. This imposes liability on the owner or possessor of a car involved in an accident, regardless of whether he was the driver or not. This almost amounts to strict liability. This Law also introduced the system of mandatory insurance. Secondly, laws concerning pollution control enacted in the late 1960s and early 1970s, incorporated provisions for strict liability. Thirdly, the Law on the Compensation for Loss caused by Nuclear Energy also introduced strict liability. Fourthly, the Law on the Remedies of Harm Caused to Human Health by Pollution which was enacted in 1973 is of significance.³ This Law accommodates a new system in which those who suffer from designated diseases caused by air or water pollution in particular regions are entitled to have their hospital costs, the cost of supporting a family, and other expenses paid from a general fund contributed by the companies considered to have caused such pollution. Victims are not required to individually prove the liability of the companies. It is sufficient if they are certified as victims of a disease designated by the governor of the prefecture. Finally, the long-awaited Law on Product Liability was enacted in 1994.⁴

2. General Rules of Tort Law Traditionally, it has been considered that there were four elements which constitute tort. Firstly, the tortfeasor should be at fault: i.e. he acted either with intent or negligently. Secondly, the act has to be unlawful. Thirdly, a causal link should exist between the tortious act and the loss. Finally, loss should have been incurred. These elements of tort are almost parallel to the elements which constitute a crime under the theory of criminal law in Japan as well as in Germany. In criminal law, an act is punishable when (i) the person in question has acted intentionally ² J. Gresser et al., Environmental Law in Japan (Cambridge, Mass., 1981), pp. 128–130. See also K. Fujikura, ‘Litigation, Administrative Relief, and Political Settlement for Pollution Victim Compensation’, in D. Foote, Law in Japan; A Turning Point (Tokyo, 2007), p. 384ff. ³ Law No. 111, 1973. ⁴ Law No. 85, 1994.

182

The Civil Code—The Cornerstone of Private Law

or by negligence, (ii) the act is unlawful, (iii) causality exists between the act and criminal damage, and (iv) the person is capable of bearing responsibility. However, whether it is appropriate to transplant this framework into tort law is now being questioned. Moreover, some academics maintain that these four elements are not really independent. For example, if negligence is considered not to be a psychological state of mind but instead a breach of duty to foresee or to avoid the outcome of one’s act, it may not be different from the concept of unlawfulness. In principle, fault is a prerequisite of tort liability. The problem lies not with intentional acts, but with acts arising out of negligence. Scholarly opinion was divided as to whether negligence is a state of mind—lack of attention—or a breach of duty. The latter seems to be the prevailing view today. Basically, there are two approaches to defining negligence. One school of thought asserts that a person should be considered negligent for his failure to foresee the loss which is likely to occur from his act. The other school maintains that a person is negligent if he fails to take measures needed to avoid and prevent the loss. In their view, foreseeability is required, but in addition to the breach of the duty to foresee the outcome of his act, there should be a breach of the duty to avoid the outcome.⁵ The court has adopted the second approach, considering negligence to be a failure to avoid the result which was or should have been foreseen. In one case, inhabitants who lived near a chemical plant sued the company for air pollution, which caused damage to their crops. The Supreme Tribunal ruled that insofar as the company had taken adequate measures to prevent the loss likely to occur in the course of its operations, even if by chance loss was caused, the company was not liable. In this case the result was foreseeable, but since the company had taken measures to avoid the result, it was held not liable.⁶ In a more recent case, the Supreme Court ruled that a driver does not have a duty to foresee that a car driving parallel to him would act contrary to traffic rules and accordingly take action to prevent an accident.⁷ Thus, most court judgments take the position that even if the tortfeasor had or should have foreseen the result of his act, he is not liable if he fulfilled his duty to take measures to prevent and avoid loss. At first sight, this approach by the courts may seem to narrow the liability of the tortfeasor. However, the difference between the two approaches—one stressing foreseeability and the other avoidability—can be very small if the duty to prevent or avoid the result is interpreted broadly. In cases involving pollution in the 1960s and 1970s the courts imposed a stricter duty on companies to avoid and prevent the results of their actions and thus held them liable. In one case involving serious loss of life by a toxic substance discharged into a river, the district court ruled that if damage to human health is likely and unavoidable even though the ⁵ Y. Hirai, Saiken-Kakuron (Special Part of the Law of Obligations), vol. 2, (Tokyo, 1992), pp. 25–28. ⁶ Judgment of the Supreme Tribunal, 22 December 1916, Minroku 22–2474 (Osaka Alkali case). ⁷ Judgment of the Supreme Court, 24 September 1968, Hanji 539–40.

Law of Torts

183

most advanced technology is utilised, it is the duty of the company to curtail or suspend the operation of the plant.⁸ It should be noted that even in the abovecited case involving air pollution, after the Supreme Tribunal had reversed the case the lower court again ruled in favour of the plaintiff and acknowledged the negligence of the company. In some cases the court expects a person to perform a specific act to avoid causing loss, and if he fails to do it, he will be liable. This often happens in medical malpractice cases. In one case, a doctor administered a transfusion of blood infected with syphilis. The doctor asserted that since he was shown certificates stating that the donor was healthy and was not infected with syphilis, he had good reason to proceed. The Supreme Court ruled that the doctor should not have used the blood unless he had personally questioned the donor about the possibility of his being infected.⁹ In a case where a baby suffered from the after-effects of an influenza vaccination, the Supreme Court ruled that the doctor had a duty to question the patient as to his state of health in a clear and concrete way.¹⁰ The standard of care generally required is that of the reasonable man. While the Code does not expressly provide for the standard of care, a concept similar to the reasonable man is found in the General Part of the Law of Obligation (Art. 400). A person who is under a duty to deliver an item is bound to look after that item with a standard of care equivalent to that of a ‘good manager’. Naturally, a higher standard of care is required of those engaged in a profession which requires expertise, or in some areas of industry such as pharmaceuticals and food processing. Thus, the Supreme Court in the above-mentioned blood transfusion case ruled that people engaged in a profession which deals with the life and health of others are required to exercise the highest standard of care that is empirically proved to be necessary. In a case where a toxic substance—PCB—was mixed into rice oil in a food processing plant, the court acknowledged that the producer of the substance, as a supplier to a food processing plant, was also under a high duty of care.¹¹ A similar standard of care was required of a chemical company that discharged waste water into a river.¹² In a recent case, an architect and a construction company were found to be liable for a defective building with cracks and insufficient reinforcement steels. The Supreme Court ruled that they bore a duty of care for ensuring that the building did not lack basic safety features in relation to the residents who are not in a contractual relationship with them.¹³ 8

Judgment of Niigata District Court, 29 September 1971, Hanji 642–96 (Niigata Minamata

case). 9

Judgment of the Supreme Court, 16 February 1961, Minshū 15-2-244. ¹⁰ Judgment of the Supreme Court, 30 September 1976, Minshū 30-8-816. ¹¹ Judgment of Fukuoka District Court, Kokura Division, 29 March 1982, Hanji 1037–14 (Kanemi Yushō case). ¹² Gresser et al., supra. ¹³ Judgment of the Supreme Court, 6 July 2007, Minshū 61-5-1769.

The Civil Code—The Cornerstone of Private Law

184

On the other hand, if a doctor has taken sufficient care in light of scientific research and surgical knowledge concerning a given disease, i.e. he has used state of the art procedures and equipment, and has satisfied the medical standards of the time, he will not be liable. For example, in a case where a premature baby suffered from retinal disease caused by oxygen treatment, the Supreme Court ruled that the doctor was not liable, since his treatment was in accordance with the current standard of academic opinion and surgical knowledge.¹⁴ However, in a similar case 10 years later, the Supreme Court held that the hospital was liable, presumably taking into account the advances made by medicine in the meantime.¹⁵ The burden of proof that the tortfeasor acted negligently or with intent lies with the plaintiff. However, in practice, if the plaintiff proves the existence of certain relevant factors, fault on the part of the tortfeasor can be presumed, and the defendant has to prove that he was not at fault. Thus, in a case involving aftereffects of an influenza vaccination, the Supreme Court ruled that the breach of the duty on the part of the doctor could be presumed by his failure to question the state of health of the patient properly.¹⁶ Since fault is a prerequisite of tortious liability, it presupposes the ability on the part of the tortfeasor to make certain judgements. The Civil Code provides that where a minor causes damage to another person, he is not responsible provided that he was not capable of recognising his responsibility for the act (Art. 712). The court has found a boy of 12 years old who discharged an air gun into the face of another boy not liable.¹⁷ Furthermore, a person who, while mentally unsound, causes loss to another person is not liable (Art. 713). Where the person who perpetrated the act or omission is not liable, then the person responsible for overseeing that person is liable, unless he proves that he did not neglect his duty (Art. 714). A problem arises when a minor is found responsible and thus liable for his tortious act. The wording of the relevant provision seems to indicate that in such cases, the persons in charge of overseeing him are not liable. If so, however, the victim will be confused as to whether he should sue the minor or the person in charge of overseeing him, since it is up to the court to decide whether the minor was liable or not. Therefore, scholarly opinion has taken the position that the victim is entitled to claim damages either from the tortfeasor or from those in charge of overseeing those individuals (a minor or a person who is mentally unsound) on the general ground of tortious liability (Art. 709). According to the proponents of this view, the essence of Article 714 is that the person in charge of overseeing the minor is exempted from liability if he proves that he did not neglect his duty. It is not designed to exclude the possibility of claiming damages from a person in ¹⁴ ¹⁵ ¹⁶ ¹⁷

Judgment of the Supreme Court, 13 November 1979, Hanji 952–49. Judgment of the Supreme Court, 26 March 1985, Minshū 39-2-124. Judgment of the Supreme Court, 30 September 1976, Minshū 30-8-816. Judgment of the Supreme Tribunal, 30 April 1917, Minroku 23–715.

Law of Torts

185

charge of overseeing a minor or mentally unsound person on the general ground of tortious liability. The Supreme Court accepted this argument in a case where a paperboy was killed by a minor aged 15, and robbed of the money he had collected. The mother of the boy sued the minor and his parents as co-tortfeasors, and claimed damages for future anticipated earnings and non-pecuniary loss. In this case, the tortfeasor’s parents had failed to teach him the basic rules of social behaviour and allegedly taught him to take evasive action when he was caught for shoplifting. The Supreme Court ruled that, even where the minor can be held liable, if there is ‘adequate causality’ between the loss on one hand and the neglect of duty on the part of those overseeing him on the other hand, they are liable on the general grounds of tortious liability.¹⁸ The second requirement for tort is the unlawfulness of the act. The Code provides that tort is a violation of the rights of a person. The prevailing view among academics is that, in interpreting this provision, one should not be concerned about the extent to which the right in question is recognised. Instead, they assert, the ‘unlawfulness’ of the act is decisive. This ‘unlawfulness’ is not explicitly provided by the law. It is not equivalent to illegality or breach of law, although they may overlap. The unlawfulness of the act is decided by balancing the nature of the interest which was violated and the mode of the tort. For example, where pollution or public nuisance exceeds the limit tolerable by the victims, it is regarded as ‘unlawful’.¹⁹ If the infringed interest is significant, even a slight contravention of law or breach of duty may result in liability; if the interest is not so significant, a major violation of law is required to establish liability. In essence, the remedy is not to be limited to cases where a right in the strict legal sense has been infringed. The court initially took the position that infringement of a certain right had to exist, and rejected a claim for the violation of an author’s rights by a traditional story-teller, since it was not covered by copyright law.²⁰ However, the court changed its position ten years later and ruled that ‘rights’ in the context of Article 709 do not have to be rights in a strict sense. It is sufficient if such an interest is considered to deserve protection under tort law.²¹ Since then, the court has interpreted the violation of rights fairly broadly. Remedies were provided in cases such as breach of common law marriage, deprivation of sunshine by an adjacent building, defamation, breach of privacy, and other cases where ‘interests’ which cannot necessarily be regarded as rights in a strict sense, have been infringed. Scholarly opinion which replaced the concept of infringement of rights with the concept of unlawfulness was instrumental in making remedies available for ¹⁸ Judgment of the Supreme Court, 22 March 1974, Minshū 28-2-347. ¹⁹ I. Kato, Fuhō-kōi-hō (Tort Law), supplemented edition (Tokyo, 1980), p. 36. ²⁰ Judgment of the Supreme Tribunal, 4 July 1914, Keiroku 20–1360 (Tōchūken Kumoemon case). ²¹ Judgment of the Supreme Tribunal, 28 November 1925, Minshū 4–670 (Daigaku-yu case).

186

The Civil Code—The Cornerstone of Private Law

a broader range of acts. It has also helped tort law to avoid the all-or-nothing approach inherent in the rigid interpretation of the law by taking into account various factors relevant to a specific case and balancing them. However, whether this concept of unlawfulness is really needed in order to achieve equitable results is now being questioned. It is pointed out that if the concept of ‘rights’ in the context of Article 709 can be interpreted broadly, there is no need to resort to the concept of unlawfulness. The concept of unlawfulness derives from the doctrine developed in Germany. However, the structure of the provision is different in the German Code, and the appropriateness of resorting to this doctrine in interpreting the Japanese Code is questionable. Furthermore, the courts do not necessarily resort to the concept of unlawfulness to reach a decision. It has been argued that in practice this concept is not used as a positive element of tort.²² The third requirement is a causal link between the tort and the loss. Two different matters have been discussed in this respect: (i) the causal relationship between the act and the loss, and (ii) the scope of loss to be compensated. As to the first problem, the plaintiff bears the burden of proof in demonstrating the existence of a causal relationship between the tortious act and the result. Th is arrangement seldom causes a problem in cases where the causal link is clear, such as in a typical traffic accident. However, in pollution cases, and cases involving medical malpractice or product liability, this may disadvantage the plaintiff, who lacks the highly technical knowledge required to prove causality. In some cases the loss may accrue gradually over decades, and it is almost impossible for the victim to prove that the loss was caused by a specific act. Therefore, theories have been developed to make it easier for such victims to prove causality. It was proposed, for example, that in pollution cases it should not be necessary to prove a causal link with high probability, and that a mere probability is sufficient. In fact, the court has sometimes alleviated the burden of proof. One example is the judgment of the district court in the celebrated Itai-itai case, which involved a number of victims suffering impaired health through effluent discharges from factories into the river. The court ruled that the causal link between the toxic substance and the disease did not have to be proved beyond any doubt. It is sufficient to prove the ‘epidemiological causality’ between the damage to health and the discharge. More specifically, the court ruled that the following factors had to be proved: (i) that the discharge of the polluting substance preceded the outbreak of the disease; (ii) that increased exposure to the substance resulted in increased occurrence of the disease; (iii) that areas where pollution was not serious were associated with low occurrence of disease; and (iv) that epidemiological data do ²² E. Hoshino in I. Kato (ed.), Nihon Fuhō-Kōi-Hō no Restatement (Th e Restatement of Japanese Tort Law) (Tokyo, 1988), pp. 37–39. For the summary of the debate, see T. Uchida, Minpō II Saiken-kakuron (Civil Law II, Special Part of the Law of Obligations), 2nd edn (Tokyo, 2007), pp. 336–341.

Law of Torts

187

not contradict the clinical or experimental evidence.²³ In a similar case, a district court ruled that if the substance causing the disease is specified and can be traced from the victim to the factory and supported by circumstantial evidence, it is for the company to prove that its factory had not created the substance in its production process or emitted the substance.²⁴ However, it was not necessarily clear how the alleviation of the burden of proof in limited categories of cases can be legally justified. Therefore, another theory, known as the doctrine of indirect counter-proof, and based upon a doctrine of civil procedure, has developed. According to this theory, if the victim proves the existence of facts which are regarded as ‘intervening facts’, and if the causal link between the act and the loss can be empirically presumed from these facts, then the existence of a causal link should be confirmed, unless the defendant proves the existence of facts indicating otherwise. The Supreme Court appears to have adopted this approach. In one case, a child who suffered from bone-marrow disease was injected with penicillin. The child had a convulsive fit and suffered after-effects. The parents sued for damages. The district court rejected the claim on the ground that the doctors were not at fault, and the High Court supported this conclusion, since it was not certain whether the after-effects were caused by the bone-marrow disease itself or by the injection. However, the Supreme Court quashed the judgment of the High Court and reversed the case. In this judgment, the Supreme Court discussed the standard of proof as regards the link between the act and the loss. The Court ruled that unlike a proof in natural science, in the court causality is established if it is proven that there is a high probability that a specific fact caused a specific loss in the light of experience. It is satisfactory if the causality is proven to the extent that no ordinary person would cast doubt on the conclusion. Concerning this particular case, the Supreme Court acknowledged causality, since the convulsion happened suddenly a short while after the injection, the possibility of this bone-marrow disease recurring is normally low, and there were no other special circumstances which could explain its recurrence.²⁵ Even when the requirements of fault, an unlawful act, causality, and loss are fulfilled, there are instances where the perpetrator of the act or omission is not liable. Firstly, when someone acts in defence of his or another’s rights against a tort by a third person, he is not liable for loss caused (Art. 720, para. 1). Secondly, when a tort is committed against the property of another person out of extreme necessity to avoid imminent danger arising from this property, the perpetrator is not liable for the loss caused to that property (Art. 720, para. 2). ²³ Judgment of Toyama District Court, 30 June 1971, Kaminshū 22–5/6–1. For epidemiological causality, see Gresser et al., supra, pp. 128–130. ²⁴ Supra, Niigata Minamata case. ²⁵ Judgment of the Supreme Court, 24 October 1975, Minshū 29-9-1417.

188

The Civil Code—The Cornerstone of Private Law

In addition to self-defence and extreme necessity, the consent of the victim may exempt a person from liability. Also, where an act is a legitimate exercise of a right, then the perpetrator is naturally not held liable. For an example of the latter, the Trade Union Law provides that workers are not liable for losses caused by industrial action provided that it was within the limit of the law (Art. 8).

3. The Scope of the Losses The scope of the losses to be compensated has also been discussed as an issue of causality. It has been maintained that out of the infi nite variety of losses which are caused by a tort, only those losses linked by an ‘adequate’ causal relation with the act will give rise to damages. Thus, when a car hits and injures a shop owner, his family will suffer, his shop may have to be closed, and therefore the employees may also suffer. Also the wholesale trader dealing with this shop may be affected if the shop is to close. However, it is not always equitable to require the tortfeasor to compensate all the consequential losses caused by the tortious act. Therefore, it is necessary to limit, to a reasonable extent, the scope of loss to be compensated. The doctrine of ‘adequate’ causal relationship limits the scope of loss to be compensated to that which normally results from a given tort. This doctrine was based on a provision in the General Part of the Law of Obligations in the Civil Code, which provides as follows (Art. 416): The object of claims for damages is the recovery of the loss which would normally arise from the non-performance of obligation. Damages for loss arising from special circumstances may also be claimed, provided that the parties had foreseen, or should have foreseen, those circumstances.

Technically, it is possible to apply this provision to tort, since the provisions of this section are generally designed to apply to all kinds of obligation. However, the current prevailing opinion is that this provision should not be applied to tort because, firstly, it is inappropriate to require the foreseeability of specific circumstances in tort cases. A study of the origin of this provision shows that it comes from French law via English law. Yet the doctrine of the ‘adequate’ causal relationship was influenced by German law. German law, in principle, requires the tortfeasor to compensate all loss caused by his act. Since this may result in an excessive burden on the tortfeasor, a theory for limiting the scope of damages had to be invented, and this was the role of the doctrine of the ‘adequate’ causal relationship. However, the Japanese Code does not expressly make the tortfeasor liable for all losses caused by his act. Therefore, according to the recent prevailing view, this doctrine is not as useful in Japan as in Germany, and may even be misleading.

Law of Torts

189

Instead, some lawyers suggest using the concept of the ‘scope of protection’. They maintain that the scope of loss to be compensated is not determined by foreseeability, but depends on the extent to which the law intends to protect the right or interest. The matter does not have to be linked with the problem of causality.²⁶ Although there is not that much difference in the actual outcome of these two approaches, the traditional view demonstrates the way foreign legal doctrines have been introduced into Japan. Since it was believed initially that German law was the sole model of the present Code, academics at that time often introduced German doctrines regardless of the actual differences which existed between the German and Japanese Codes. The court has held that Article 416 should be applied with modifications to tort. The court normally uses the ‘adequate causality’ doctrine, and decides whether a particular loss had an ‘adequate’ causal relationship with the act. In one case, a close relative of a person injured in an accident returned from a foreign country to take care of him. When the victim sued for the travel expenses, the court ruled that if the need to return from foreign countries was justified in light of common sense, this was a normal loss, and the defendant should meet the costs of a normal fare.²⁷ Actually, the scope of loss to be compensated is a value judgment on the part of the court as to whether the defendant or the plaintiff should bear the loss. It is determined by taking into account various factors, such as the significance of the right infringed, the amount of loss, and the mode of the tort. For example, if the act was intentional and reckless, the amount of damages can be extended to almost all loss, while if the damage resulted from mere carelessness, the scope of loss may be more limited.²⁸ Losses can be divided into pecuniary and non-pecuniary loss. As for pecuniary loss, both positive (actual) loss (for example the loss of property or a decrease in its value) and negative loss (i.e. a loss of anticipated profit) are covered. Concerning positive loss incurred on property, the court has held that damages should be computed on the basis of the market value at the time when the object was lost or damaged, unless there are special circumstances which should be taken into consideration.²⁹ In cases of physical loss, hospital expenses, costs for medicine, etc., these are covered insofar as they are reasonable and appropriate. As for negative loss, the following leading case is pertinent. A merchant lost his merchandise through a tortious act of another person. The merchant sued this person and claimed that since the price of the merchandise had gone up after the act, he had lost the opportunity to resell it and profit from the sale, and ²⁶ ²⁷ ²⁸ ²⁹

Hirai, supra, pp. 111–129. Judgment of the Supreme Court, 25 April 1974, Minshū 28-3-447. Hirai, supra, p. 126. Judgment of the Supreme Court, 31 January 1957, Minshū 11-1-170.

190

The Civil Code—The Cornerstone of Private Law

that the anticipated profit should be compensated as well. The Supreme Tribunal applied Article 416 with modifications. The court ruled that such anticipated profit should be compensated only when the victim has proved that there was a special circumstance such that, had the tortious act not occurred, the victim would certainly have made a profit from resale or other means, and that these circumstances were or should have been foreseen at the time of the act by the tortfeasor.³⁰ Anticipated profit is also at issue when physical harm or death of a person is caused by tort. For example, if a person is disabled in a car accident, he is entitled to claim damages for his lost income. Heirs are entitled to claim damages for the loss of anticipated future income of the victim. As for the anticipated income of the deceased, two basic methods of calculation are adopted by the court. At the Tokyo District Court, in cases where the victim of a tort has died, the difference between basic income and living costs is multiplied by the number of years which the victim had been expected to work, i.e. the difference between the age at which the victim would have retired and the age at which the victim died.³¹ Some adjustments are made to reflect, for example, rises in income in accordance with age and price increases.³² Loss of anticipated income on the part of the deceased is also relevant when the victim is a minor without a job, or a housewife without an income. For example, if the victim was a baby, heirs may receive damages for loss of anticipated income from the age at which he would have been expected to start working. The Supreme Court has acknowledged that on the death of a small child, parents are entitled to damages for the loss of anticipated earnings. The Supreme Court ruled that the anticipated income of a child can be calculated by using statistical methods, and therefore compensation for the anticipated income of the deceased child should not be unconditionally ruled out.³³ As for housewives, the Supreme Court ruled that damages should be calculated on the basis of the average income for female workers until the age of retirement.³⁴ Compensation is generally paid as a lump sum. In cases of disability, there are suggestions that compensation should be paid as an annuity, since the calculation is based upon various assumptions such as the average life span. On the other hand, it is burdensome for the victim to ensure that the compensation is actually paid annually. Therefore, at present payment by lump sum is the general rule and annuities are the exception.

³⁰ Judgment of the Supreme Tribunal, 22 May 1926, Minshū 5–386 (Fukimaru case). ³¹ Y. Fukuoka, ‘Kōtsū jiko ni kansuru songai-baishō-soshō (Litigation for Damages for Traffic Accidents)’, Jurist, No. 833, pp. 29–30. ³² Judgment of the Supreme Court, 27 August 1968, Minshū 22-8-1404. ³³ Judgment of the Supreme Court, 24 June 1964, Minshū 18-5-8574. ³⁴ Judgment of the Supreme Court, 10 July 1974, Minshū 28-5-872.

Law of Torts

191

Non-pecuniary loss is also compensated. The Civil Code provides as follows (Art. 710): A person who, on the basis of the preceding provision, is liable for damages of nonpecuniary loss, irrespective of whether he has harmed the other person physically, prejudiced his freedom, honour, or property rights.

There are no statutory guidelines as to the amount of non-pecuniary loss. Damages are decided solely by the discretion of the court. In traffic accident cases, however, some district courts have a standardised practice for calculating non-pecuniary damages. It is often pointed out that, since the amount of damages for non-pecuniary loss can be flexible, the court supplements compensation for pecuniary loss with that for non-pecuniary loss in order to reach a fair solution. This happens especially in cases where the victim is a child or a housewife, since in these cases compensation for pecuniary loss can be very low. A related problem is the right of heirs to claim compensation for non-pecuniary loss. The problem here is on what basis the family and relatives of the person killed should receive compensation. The Code provides as follows (Art. 711): A person who has caused the death of another shall be liable for damages for nonpecuniary loss to the parents, spouse, and children of the victim, even if their property rights were not affected.

In addition to the right to damages based on this provision, the court has maintained that the victim’s right to compensation for non-pecuniary loss is inherited by the heirs. In a leading case, a person was injured in a car accident, and later died. His brother, one of the heirs, sued the culprit claiming that he had inherited the right to compensation for non-pecuniary loss. The Supreme Court ruled that since the right to compensation is a monetary right it could be inherited. It should be noted that the brother of the deceased was not entitled to compensation in his own right under Article 711; only parents, spouse, or children are entitled to damages by this provision.³⁵ The appropriateness of this approach which acknowledges that the claim for compensation of non-pecuniary loss can be inherited is being disputed. The primary aim of that solution is to protect the dependants of the deceased who are not covered by Article 711 from economic difficulty. If this is so, the aim could be achieved simply by acknowledging the heirs’ own right to compensation. This solution may be more reasonable and fairer than the position taken by the court, since it is not always reasonable to give compensation, especially for non-pecuniary loss, to all heirs regardless of their relation to the deceased. It is far better to decide

³⁵ Judgment of the Supreme Court, 1 November 1967, Minshū 21-9-2249.

192

The Civil Code—The Cornerstone of Private Law

whether the rights of a specific person are infringed or not and whether the general requirements of tort are met.³⁶ The Supreme Court applied Article 711 flexibly in a case where a sister of the deceased, who was disabled and totally dependent on him, was granted compensation on the basis of this provision.³⁷ Furthermore, despite the wording of Article 711 which limits compensation to cases where the victim died, it was held by the Court that this provision should be applied with necessary modifications to other cases where the victim has suffered a severe injury. This is an example of flexibility in the application of private law. The court sometimes deviates from a provision when it is necessary to achieve an equitable result. Another problem is the loss to a company by the death or disability of an employee. The Civil Code does not have a provision defining the range of persons entitled to sue, except for Article 711. A problem arises when the owner or an executive of a company is killed or becomes disabled through a tort. In one case the owner of a pharmacy was injured by a motorbike and as a result his eyesight was severely damaged. The pharmacy was a limited company owned by the victim; his wife was the sole member of the company. The victim sued the defendant for non-pecuniary loss, while the limited company, the pharmacy, sued the defendant for pecuniary loss: i.e. the decrease in sales resulting from the injury suffered by the victim. The defendant argued that the company was not entitled to damages, but the Supreme Court rejected this argument. The Court ruled that since the pharmacy was an extremely small company run primarily by the victim, and economically the victim and the company were one and the same, there was a causal link between the tort and the loss to the company.³⁸ Liability has been acknowledged by the court in similar cases where the company was small and could be considered in economic terms to be identical to the victim. Th is approach is supported by most academics, since it is too harsh for a negligent tortfeasor to compensate for loss inflicted upon larger companies. The Civil Code provides for contributory negligence. When the victim is at fault the court may take this into account when assessing the amount of compensation. Since contributory negligence is a device to achieve a fair distribution of loss, fault in this sense does not have to be strictly interpreted. The victim does not even have to be capable of responsibility. The court maintains that it is sufficient if the victim had the ability to distinguish between right and wrong. For instance, the court took into account the contributory negligence of an 8-year-old boy in a traffic accident.³⁹

³⁶ I. Kato, Minpō ni okeru Ronri to Rieki-kōryō (Logic and the Balancing of Interests in Civil Law) (Tokyo, 1997), p. 289. ³⁷ Judgment of the Supreme Court, 17 December 1974, Minshū 28-10-2040. ³⁸ Judgment of the Supreme Court, 15 November 1968, Minshū 22-12-2614. ³⁹ Judgment of the Supreme Court, 24 June 1964, Minshū 18-5-854.

Law of Torts

193

When considering contributory negligence, not only the negligence of the victim himself, but also the negligence of those associated with the victim, such as those responsible for overseeing the victim, is to be taken into account. Thus, when a toddler was hit by a car while his mother was not looking, the mother’s negligence was taken into account in assessing compensation.

4. Special Provisions on Tort Liability Although Article 709, the general provision on tort, is based upon the principle of fault, some provisions in the Civil Code are close to strict liability. Provisions concerning the liability of parents and persons who have a duty to oversee the mentally unsound, which have already been mentioned, are examples. A person in charge of a minor is held liable for the latter’s acts, unless he proves that he was not negligent. In practice, the courts seldom accept that they have not neglected their duty. Also relevant is the provision on the liability of employers for the act of their employees. The Code provides as follows (Art. 715, para. 1): A person who employs another person for his business is liable for the loss caused to a third person by the latter in the course of business. However, if the employer proves that he has taken reasonable care in selecting the employee and overseeing his work, or that even with reasonable care the loss could not have been avoided, he is exempt from liability.

The employer may claim indemnification from the employee after he has paid damages to the victim. The employer’s liability was initially seen as personal liability of the employer for his negligence in selecting or supervising employees. The current prevailing view is that Article 715 involves vicarious liability. Generally, the employer is pursuing profit by employing others, and should therefore be liable for loss caused in the course of his business. The fact that the employer has opportunities to adopt effective measures to prevent the loss-causing action is also considered as the basis of this liability. ‘Business’ in this provision is not limited to commercial or profitoriented undertakings, so this argument alone cannot serve as a basis of liability on the part of the employer. The liability of the employer presupposes the liability of the employee. The act of the latter has to fulfi l the requirements of tort: i.e. the employee has to be either negligent or have acted intentionally, his act has to be unlawful, and there has to be a causal link between his act and the loss. Recently, some have proposed that fault by the employee should not be required in a certain category of cases. It is pointed out that where companies are involved, for instance in pollution cases, it is often difficult to specify which employee is at fault. Therefore a strict requirement of proof of negligence on the part of the

194

The Civil Code—The Cornerstone of Private Law

employee may unfairly disadvantage the victims.⁴⁰ However, this remains a minority view. In order to pursue the liability of the employer, the act has to be committed in the course of business. More specifically, the act of the employee which caused the loss has to be within his competence or closely related to it. This becomes an issue particularly when an employee abuses his position, acts out of self-interest, and causes loss, for example, where an employee who is authorised to sign contracts on behalf of the company abuses his position and transacts with a third party out of his own interest. This is usually considered by the courts to be action ‘in the course of business’. Initially, the court tended to interpret this clause narrowly and limited the liability of the employer to cases where the act of the employee was ‘inseparable’ from the business of the employer. However, in the 1920s the court changed the position and found employers more broadly liable. The leading case involved a senior executive of the general affairs section of a company who abused his power and issued share certificates. The company was found liable for his act.⁴¹ The Supreme Court places weight on the issue of whether the given act appeared to be performed in the course of business. In another case, a manager of the accounting department of a company abused his power, by using the signet of the executive chairman and issuing a promissory note in the name of the company. The Supreme Court found that this was done in the course of business on the ground that it appeared to a third party to be an act within the employee’s power.⁴² In such cases, the court requires that at least the victim was not aware, and was not seriously negligent in believing that the transaction was effected in the course of business.⁴³ Thus, the crucial point is whether it was reasonable for an average person in business to have assumed that the employee was acting legitimately. This conclusion is supported by the necessity of balancing the interests of the employer, who had employed the person for his business, and the third party, who believed that the tortfeasor was acting within his power. If the third party knew that the tortfeasor was abusing his power, or was seriously negligent in believing that he was acting within the scope of his power, the employer is not liable. The court uses the phrase ‘in the course of business’ fairly broadly in cases other than business transactions. In one case, an employee of a car dealer killed a person while he was driving a car which belonged to the company without permission. The Supreme Court ruled that the act of the employee appeared from the outside to be part of the employer’s business, taking into account the type ⁴⁰ S. Itoh, Fuhō-kōi-hō no Gendaiteki-kadai (Current Problems of Tort Law) (Tokyo, 1980), p. 124ff. Uchida, supra, pp. 472–473. ⁴¹ Judgment of the Supreme Tribunal, 13 October 1926, Minshū 5–785. ⁴² Judgment of the Supreme Court, 16 July 1957, Minshū 11-7-1254. ⁴³ Judgment of the Supreme Court, 2 November 1967, Minshū 21-9-2278.

Law of Torts

195

and size of the employer’s business, and that it should therefore be considered to have been performed in the course of the business.⁴⁴ It is questionable whether the ‘appearance’ of the act should be crucial in cases other than those involving business transactions, since in cases such as traffic accidents the victims have not relied on ‘appearance’.⁴⁵ The Law on Compensation of Losses arising from Car Accidents has a provision on the liability of those who provide a car to the driver.⁴⁶ Employers are covered by this Law and are liable for loss caused by the driver even when the latter is not negligent (Art. 3). In general, in cases involving the liability of the employer, the defence that the employer had not been negligent in selecting or supervising the employee is seldom accepted by the court. Another provision of the Civil Code which has moved towards strict liability is the provision on the liability of the owner of a building or a structure. If loss is caused to another person due to defects in the construction or maintenance of a building or structure on land, the person who possesses it is liable. If the possessor proves that he had taken the necessary care to prevent such loss, then the owner is liable (Art. 717). The liability of the possessor is based on fault, while the owner bears strict liability. The rationale for this provision is that those who administer, manage, or own a building or structure which is potentially dangerous to others should take sufficient steps to prevent the occurrence of harm, and if loss occurs it is fair to make those people liable.⁴⁷ Structures in this context include bridges, tunnels, roads, dikes, and lifts. The Supreme Court acknowledged that a railway crossing was a structure within the meaning of this provision and found that its owner was liable. In that case, the safety devices installed were considered to be insufficient.⁴⁸ The loss must arise from a defect in the construction or maintenance of the building or structure. If the loss would have occurred even without a defect, the loss is deemed to arise from force majeure and this will excuse the possessor or owner from liability. A similar provision exists in the Law on Compensation by the State.⁴⁹ This makes the State or other public entities liable for damages where loss is caused by a defect in the construction or administration of roads, rivers, or other public installations (Art. 2, para. 1). This provision does not require fault on the part of the State or the public entity. If the installation does not meet the normally required safety standard, it is regarded as defective. In one case, the Supreme Court ruled that the State was liable for improperly maintaining the highway when a driver was killed by a fall of rocks.⁵⁰ On the other hand, in a case where ⁴⁴ ⁴⁵ ⁴⁷ ⁴⁸ ⁴⁹ ⁵⁰

Judgment of the Supreme Court, 4 February 1964, Minshū 18-2-252. Hirai, supra, pp. 233–234. ⁴⁶ Law No. 97, 1955. Hirai, supra, pp. 223–228. Judgment of the Supreme Court, 23 April 1971, Minshū 25-3-351. Law No. 125, 1947. Judgment of the Supreme Court, 20 August 1979, Minshū 24-9-1268.

196

The Civil Code—The Cornerstone of Private Law

inhabitants who suffered flooding sued the State for improper maintenance of the river, the Supreme Court considered various factors including budgetary limits, and dismissed the claim.⁵¹

5. Joint Liability The Civil Code has a provision dealing with tort committed by several persons (Art. 719, para. 1): In cases where several persons have jointly caused loss to another person by a tortious act, each person is liable jointly and severally with the others. The same applies when it is impossible to specify which of the joint perpetrators actually caused the loss.

The first part of this provision deals with joint tort liability. The most typical case is where several persons injure somebody. Everyone who takes part in the act is liable, even though not all of them have directly inflicted damage on the victim. Fault is required of all the tortfeasors. A causal link must also exist between the act of each person and the result, but this requirement is somewhat relaxed in the prevailing scholarly opinion. It is sufficient if the act of each perpetrator is ‘related’ to the joint act which directly causes the loss. After all, if each perpetrator has to fulfil all the requirements of the definition of a tort, there is almost no point in providing for joint tort liability in addition to the general provision on tort. The court does not require prior agreement, conspiracy, or a common intention. It is sufficient if the act can be objectively regarded as being committed jointly.⁵² Instigators and accomplices are considered to be joint tortfeasors together with the principal and are jointly and severally liable for the loss. Joint liability means that the victim may demand full compensation from any one of the tortfeasors. Thus, the victim does not have to sue all the tortfeasors, nor does he have to decide the proportion of liability amongst them in order to demand compensation. Joint tort liability is designed to safeguard the interests of victims. If one tortfeasor pays full compensation, he is entitled to demand indemnification from the others in accordance with the extent of liability. Joint tort liability became an issue in pollution cases in the 1960s and 1970s. In one case several factories discharged polluted air and caused local inhabitants serious bronchial problems. These factories formed an industrial complex in the area and were closely connected with one another. The victims sued the companies which formed the industrial complex. The district court ruled that even when the act of each tortfeasor did not by itself cause loss, if it caused loss in concurrence ⁵¹ Judgment of the Supreme Court, 26 January 1984, Minshū 38-2-53 (Daitō Suigai case). ⁵² Judgment of the Supreme Court, 26 March 1955, Minshū 11-3-543.

Law of Torts

197

with other tortfeasors’ acts, all of them were liable. In this case, it was ascertained that without each party’s act the loss would not have been caused. The court also acknowledged that the defendants, who formed an industrial complex, were sufficiently related to be made jointly liable.⁵³ The latter part of Article 719, para. 1 deals with cases where it is not known which of the persons involved in the act is liable for the loss. It is presumed that those who were involved caused the damage jointly. A defendant may refute the presumption by proving that there was no causal link between his act and the harm caused. For example, if three persons were smoking and a fire broke out afterwards they are jointly liable even if it is not specified which of them caused the fire. In one case, a person was injured in a car accident and later died in hospital. The condition of the victim had deteriorated in the hospital due to negligence on the part of a doctor. However, it was not known whether the accident or the malpractice was the real cause of the death. The court found both the driver and the doctor liable for the death of the victim on the basis of this provision.⁵⁴

6. Remedies The remedy for tort is monetary compensation (Art. 722). The plaintiff may also demand the restoration of the status quo ante in some cases. In libel cases the court may order the publication of an apology together with compensation (Art. 723). As regards injunctions, there is no explicit provision in the Civil Code allowing for injunctions. Where a real right has been infringed, an injunction is available. For example, when someone is building a house on another’s property, the owner, on the basis of his right of ownership, is entitled to an injunction. In fact, this remedy is not based on tort law, but is regarded as an attribute of real rights. Therefore, fault on the part of the trespasser is not required. In some cases other than the infringement of real rights, injunctions are also available. For instance, when there is an infringement of privacy, honour, or reputation, it is asserted that an injunction should be made available on the basis of the general right of personality, emanating from the Constitution, despite the absence of an explicit provision in the Code. For pollution and public nuisance cases, injunctive relief is needed, but its availability and legal basis are a focus of discussion. Some experts broaden the concept of real rights, while others resort to the notion of ‘general rights of personality’ or ‘rights to a proper environment’ in order to justify injunctions. ⁵³ Judgment of the Tsu District Court, Yokkaichi Division, 24 July 1967, Hanji 672–30 (Yokkaiachi Pollution case). ⁵⁴ Judgment of the Tokyo District Court, 7 June 1967, Kaminshū 18–5/6–607.

198

The Civil Code—The Cornerstone of Private Law

The court has sometimes found that a property right of the plaintiff was infringed and has granted injunctions. According to a study of cases between 1950 and 1980, there were 145 cases where injunctions were sought. In seventy-seven cases the ground for seeking an injunction was not specified, and in twenty-nine cases, the claim was based on real rights.⁵⁵ It should be added that interlocutory injunctions are used to achieve a goal similar to that of injunctions. It is possible to ask the court to order a temporary freezing of the situation, or to suspend tortious activities. Since the mid1960s there have been cases where householders sued a developer to prevent him from constructing a building which could limit their access to sunlight. In such cases the court sometimes orders suspension of the construction until the case is decided on its merits.⁵⁶

7. Product Liability There was no special law on product liability in Japan until 1994. This is in contrast to some other jurisdictions including the European Union where special legislation has come into force some years ago. The amount of litigation concerning product liability was fairly small in Japan—less than 100 cases in total since the Second World War. This is not to say that serious incidents where product liability was at issue did not occur in Japan. On the contrary, there were cases where toxic substances included in food caused serious harm to human health. One case involved milk powder for babies containing arsenic, and another involved rice oil intoxicated with PCB, both mentioned above. There were also cases such as the Thalidomide case where, as a result of side-effects of a medicine, newly born babies suffered. The problem of defective cars was also highlighted some years ago. Technically, product liability can be enforced using either contract law (Art. 415) or tort law (Art. 709). Differences are that (i) tort law requires fault on the part of the tortfeasor which has to be proved by the plaintiff, while contract law provides for strict liability and Article 415 lays the burden of proof with the obligor-defendant; and (ii) contract law applies only between seller and buyer; it does not extend to the manufacturer. The liability of those who produced and marketed contaminated food or medicine causing harmful effects was pursued primarily on the basis of tort law. This was because the manufacturers’ and not the sellers’ liability was at issue. However, it is often very difficult for an individual with limited resources to prove causal links and fault. In the cases cited above the plaintiffs were successful, but ⁵⁵ For details, see M. Kato, in Nihon Fuhō-kōi-hō no Restatement, supra, pp. 75–83. ⁵⁶ T. Ikuyo, Fuhō-kōi-hō (Tort Law) (Tokyo, 1977), pp. 300–301.

Law of Torts

199

in these cases the harm was widespread and a number of people were involved. Since the incident drew the attention of the general public, official bodies assisted the plaintiffs in collecting the necessary information and providing evidence. The court endeavoured to alleviate the burden of proof. Even with such support, it took many years to reach the final settlement. Individuals who suffer loss arising from defective home appliances or cars also find it hard to prove the case against manufacturers. For instance, a television set was suspected of being the cause of a household fire. Victims saw flames coming out of a TV set, but the manufacturer refused to pay damages on the ground that there was no causal link. The parties reached settlement on condition that the name of the manufacturer not be disclosed. In order to make matters easier for those who suffer loss from defective goods, the enactment of the law on product liability has been proposed. In 1990 an advisory committee to the then Economic Planning Agency published a report which stressed the necessity of a new law. The Japan Federation of Bar Associations published a draft law on product liability in the same year. Some were cautious about the enactment of such a law, since in their view it could give rise to a flood of litigation and excessive demands for damages. The Law on Product Liability was finally enacted in 1994. It provides special rules in relation to the provisions on general tort in the Civil Code. If there is no applicable provision in the Law, the Civil Code is applied (Art. 6). The Law deals with losses caused to the life, health, or property of a person by a defect in a product (Art. 3). Products in this context denote movables which have been produced, manufactured, or processed (Art. 2, para. 1). The Law introduces non-fault liability. Instead of fault, the concept of defect plays a major role. A product is defective if it lacks the safety which is normally expected of such a product, taking into account the specific nature of the product, the normally expected means of usage, the time of transfer of the product to the user, and other circumstances related to it (Art. 2, para. 2). The burden of proof that the product is not defective lies with the manufacturer. If the loss could not have been foreseen in the light of the standard of science and technology at the time of transfer of the product, then the manufacturer is not liable. If the product contains parts, components, or material which are themselves a product, and the defect in the final product emerged from the design instruction of the manufacturer of the final product, manufacturers of the parts, components, or material are not liable provided that they were not at fault for the emergence of the defect (Art. 4). While there were proposals to presume the existence of a defect, in the end this presumption was not incorporated in the Law. Introduction of triple damages was also proposed, but rejected. Persons who are liable for defective goods are not limited to those who manufactured, processed, or imported products in the course of their business. Those

200

The Civil Code—The Cornerstone of Private Law

who allow goods to be marketed in their name or trade name or using their trademark are equally liable. In addition, those who display their name on products so that—taking into account the form of manufacturing, processing, importing, or sale—it could be regarded as the name of the manufacturer, are also liable (Art. 2, para. 3).⁵⁷ ⁵⁷ For the Law on Product Liability, see Tokyo Fire and Marine Institute (ed.), SeizōbutsuSekinin-Hō Taikei (Compendium on Product Liability Law), vol. 2 (Tokyo, 1998).

10 Family Law and Inheritance 1. Historical Background Family law in Japan is embodied in Book Four of the Civil Code. Together with Book Five which deals with inheritance, this part of the Code has undergone a total change in the course of the post-war reform. In the pre-war period, the family was dominated by the head of the family, and was considered to be the basic unit of the entire system of the State. The power was concentrated in the head of the family; other members of the family were ‘protected’ by the head, but had no formal rights against him. The head of the family had the power to designate the place where family members should live, to control their choice of marriage partner, and ultimately to expel them from the family. He had exclusive rights of control over the property of the family. Family relationships were strictly hierarchical. Thus, children were subordinate to their father, and the eldest son was the sole heir and enjoyed a privileged status. Female members were considered inferior to males; the wife had no legal capacity at all and was listed as an ‘incompetent’ in the Civil Code. The Criminal Code had a provision punishing adultery which only applied to wives. It should be noted that this Confucian, male-dominated hierarchical ‘house (ie)’ was considered to reflect the entire social system, at the top of which reigned the Emperor. The idea that the Emperor was the benevolent father and head of the entire Japanese family was promoted by the rulers in the period of modernisation in order to ensure national unity. The reform of family law was thought to be a priority after the Second World War, because the family system in the pre-war period served as a basis of the Emperor-centred political system. Preparations for amending the Civil Code started almost simultaneously with the drafting of the new Constitution. The reform of the family system did not proceed without opposition. Some Japanese conservatives who took part in the drafting process defended the old ‘house’ system.¹

¹ T. Kawashima, ‘Americanisation of Japanese Family Law’, Law in Japan, vol. 16 (1983), p. 55.

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

202

The Civil Code—The Cornerstone of Private Law

The present Constitution preceded the amendment of the Civil Code by a year. The Constitution incorporated a provision on family relations as follows (Art. 24, para. 2): With regard to choice of spouse, property rights, inheritance, choice of domicile, divorce and other matters pertaining to marriage and the family, laws shall be enacted from the standpoint of individual dignity and the essential equality of the sexes.

Family relations as provided by the amended Civil Code are entirely different from those in the pre-war period. First, members of the family are now treated as equals instead of being dominated by the head of the family. The previous chapter of the Code on the ‘house’ and the head of the family has been deleted. Secondly, the unequal status between the sexes has changed. Husbands and wives and fathers and mothers now have equal rights to property as well as in the upbringing of children. Thirdly, while before the war, the eldest son enjoyed privileges under the previous system as the sole heir, the amended Code provides for equality among children. Finally, provisions concerning the lack of legal capacity of wives were removed from the Code. In 1996, after half a century of the post-war reform, in light of the social changes, the Legislative Council, consulted by the Ministry of Justice, published the Programme for the Partial Amendment to the Civil Code regarding family law and succession. This programme accommodated the following proposals: • • • •

increase of the eligible age for marriage from 16 to 18 for females; introduction of the choice of the same or separate surnames for the spouses; removing mental illness from the grounds for divorce; adding separation of the spouses for five years or more without disruption as a ground for divorce; • empowering the court to dismiss the claim for divorce, if the divorce results in substantial impoverishment of the spouse or children, or intolerable pain, or is against good faith; • making the share of inheritance equal for legitimate and illegitimate children. However, the proposal regarding the increase of the eligible age for females, enabling of separate surnames for spouses, and the equal treatment of legitimate and illegitimate children met with strong opposition from conservative quarters, and as a result, the bill has failed to be submitted to Parliament.²

2. Marriage and Divorce Book Four of the Civil Code is divided into five chapters: the General Part, Marriage, Parents and Children, Parental Rights, and Guardianship. ² T. Nomura, ‘Heisei 8-nen Kaisei-Yōkō o yominaosu (Re-Reading the 1996 Programme)’, Jurist, No.1336, pp. 2–4.

Family Law and Inheritance

203

While under the pre-war system, consent of the head of the family was required for a marriage, marriage under the present law is solely based upon the agreement of the parties. Marriage comes into effect by registration in accordance with the Law on the Civil Status.³ The minimum age for marriage is 18 for males and 16 for females (Art. 731). However, for those below age 20, parental consent is needed. If the views of the parents differ, consent of either is sufficient (Art. 737). Minors acquire full legal capacity upon marriage (Art. 753). Those who are married may not marry again (Art. 732). Such an act— bigamy—is an offence under the Criminal Code. Marriage between lineal relatives by blood, or between collateral relatives by blood of up to the third degree of relationship is prohibited (Art. 734, para. 1). For instance, an uncle may not marry his niece, but cousins may marry. Furthermore, marriage between lineal relatives by affinity is banned (Art. 736). A male may not marry his mother-inlaw, even after his marriage has been dissolved. A provision in the Civil Code which prohibits a woman from remarrying within six months of the dissolution or rescission of her previous marriage (Art. 733) has long been a focus of controversy. This provision is intended to avoid difficulties in determining the father of any child born after the dissolution or rescission of the marriage. However, a child born after 200 days of marriage or within 300 days of the dissolution or rescission of a marriage is presumed to have been conceived during the marriage (Art. 772, para. 1). Therefore, theoretically, a ban on remarriage for 100 days should suffice. There is a proposal to amend the law to this effect which was accommodated in the 1996 Programme.⁴ The Civil Code does not have explicit provisions regarding engagement, but it is an institution protected by law. The courts have maintained that a breach of engagement without a justifiable reason entails compensation in either contract or tort law.⁵ On the other hand, engagement to a married person in the expectation that the marriage will be dissolved is void, since it is against public order and good morals.⁶ The husband and wife must have a common family name. Under the previous Code, wives had to use the husband’s family name: now the spouses may choose which family name to use (Art. 750). In recent years, this arrangement of a common family name has come to be criticised, since it is disadvantageous for the spouse who has to change his/her name. The 1996 Programme allows each spouse to use their original surname, but the proposal met with strong resistance from the conservative circle, and is yet to become law.

³ Law No. 224, 1947. ⁴ S. Yoshikai, ‘Minji-kihonhōno saikin no Rippōno Dōkō to Kadai (The Current State and Tasks of Civil Legislation)’, Jurist 1999, vol. 1149, pp. 106–107. ⁵ Judgment of the Supreme Court, 11 April 1958, Minshū 12-5-789. ⁶ Judgment of the Supreme Tribunal, 28 May 1920, Minroku 26–773.

204

The Civil Code—The Cornerstone of Private Law

When the marriage has been terminated by the death of a spouse, the remaining spouse may choose to use the family name before marriage. After a divorce, the spouse may choose to continue using the family name used before the divorce. A married couple have mutual obligations. They have a duty (not enforceable) to live together and to support and cooperate with each other. A breach of the duty to live together, cooperate, and support each other without justifiable reason is a ground for divorce. In practice, due to the difference in the living and educational standards between urban areas and other parts of Japan, it is not unusual for spouses with children to live separately. The property of a married couple can belong separately to either spouse. Property which belonged to one spouse before the marriage, or which the spouse obtained in his or her own name during the marriage belongs to this spouse during the marriage (Art. 762). Property whose ownership cannot be determined is presumed to be jointly owned by the couple. This contrasts with the previous system where the husband had control over the wife’s property. The husband and wife may conclude a contract as to their property before marriage (Art. 756). This contract cannot be altered after the marriage has taken effect (Art. 758). In practice, such pre-nuptial arrangements are seldom effected in Japan. A problem arises when property is acquired in the name of one spouse, but the other contributed to obtaining it. Such contribution is to be taken into account when determining the distribution of property. This was contested in a case where a husband and wife ran an inn inherited from the husband’s mother, but managed by the wife and registered in her name. When the wife was divorced for infidelity, she claimed that the land on which the inn was built belonged to her, since it was registered in her name. The Supreme Court rejected this argument and ruled that registration is not sufficient to determine whether the property belonged to the wife.⁷ This judgment has been criticised since it failed to take into account the contribution made by the wife in running the inn. The cost incurred during the marriage are shared by husband and wife, taking into account their assets, income, and other circumstances (Art. 760). When either spouse incurs debts in relation to daily household matters, they are jointly liable (Art. 761). Daily household matters include the purchase of everyday goods, contracts for medical treatment, and domestic rent. Marriage is dissolved by the death of either party, a declaration of disappearance, or divorce. Divorce is possible by agreement between the parties (Art. 763) and there is no restriction on the ground for such divorce. When the parties fail to reach agreement, a conciliation procedure is available. Even when the parties intend to contest the case in a formal court procedure, the case must first go through the conciliation procedure. Conciliation is conducted by the conciliation committee of the family court. The committee is composed of a conciliation ⁷ Judgment of the Supreme Court, July 14, 1959, Minshū 13-7-1023.

Family Law and Inheritance

205

officer, who is a judge of the family court, and two conciliation commissioners. Even when conciliation fails, the committee is entitled to grant divorce in the form of adjudication by taking into account all the circumstances of the case. This happens, for example, when the marriage has actually broken down beyond repair but the parties fail to agree because of emotional reasons. Divorce can also be effected via a formal court procedure. However, in Japan most divorce cases are settled by conciliation or end with adjudication, and it is rare for a divorce case to proceed to the formal procedure of personal status litigation. Reportedly, ninety per cent of divorce cases are consensual, nine per cent are effected by conciliation, and only one per cent go through the formal court procedure.⁸ The divorce rate is not high in Japan compared to other countries. The rate is 4.7 per thousand inhabitants in the United States, 2.9 in the UK, and slightly over 2 per thousand in Japan.⁹ The Civil Code lists five grounds for divorce by court procedure: infidelity, desertion in bad faith, death, or life of the spouse being unknown for more than three years, serious and incurable mental disease, and any other ground which makes it impossible to continue the marriage (Art. 770, para. 1). Divorce on a ground which makes the continuation of marriage impossible, i.e. where the marriage has irretrievably broken down, includes cases such as a criminal conviction, alcoholism, severe incompatibility, and maltreatment by parents-in-law. It is considered to be impractical to force a couple to continue a marriage despite its actual breakdown. The court may refuse to grant a divorce notwithstanding the existence of one of the grounds for divorce provided in the Code (ibid., para. 2). The Supreme Court has refused to grant divorce in a case where the spouse was suffering from mental disease. It ruled that unless sufficient arrangements were made for medical treatment and the future life of the spouse, divorce should not be allowed.¹⁰ Furthermore, there is a controversial line of cases to the effect that the party responsible for the breakdown of the marriage cannot sue for divorce. There is no statutory basis for this. The rationale is that a divorce at the initiative of such a party may result in unfairness to the other party or children. In a leading case, the Supreme Court refused to allow the divorce claim by a husband who had left his wife and chosen to live with a pregnant mistress.¹¹ Th is has been relaxed to a certain extent since then: the Supreme Court subsequently ruled that the party ‘primarily’, but not solely, responsible for the breakdown of the marriage

8

A. Omura, Kazoku-Hō (Family Law), 2nd edn with Supplements (Tokyo, 2004), p. 41. The ratio in Japan was 2.04 in 2006 in Japan: . ¹⁰ Judgment of the Supreme Court, 15 July 1958, Minshū 12-12-1823. ¹¹ Judgment of the Supreme Court, 19 February 1952, Minshū 6-2-110. 9

206

The Civil Code—The Cornerstone of Private Law

was entitled to seek a divorce.¹² Therefore, the court came to grant divorces even when sought by the responsible party, provided that sufficient financial arrangements are made for the other party and that there are no children aged under 20. The Supreme Court explicitly changed its approach in 1987. In this case, a couple had adopted two daughters. The husband actually had relations with the birth mother of these two adopted daughters, and when this was revealed he began to live with her. Husband and wife lived separately for more than thirty years. The husband was well-off, but failed to support the abandoned wife, who had no assets. The husband sought a divorce procedure, but the lower courts refused to grant a divorce. The Supreme Court reversed the judgment and referred the case back to the lower court. The Court ruled that when a couple has been living separately for a sufficiently long period, has no young children, and there are no special circumstances making a claim by the responsible party unjust, such a claim for divorce should not be rejected.¹³ The 1996 Programme incorporated this doctrine. When divorce is granted, issues concerning the property of the parties and the welfare of the children must be settled. The couple must also discuss the problem of which person should take custody of the children. If the parties fail to reach agreement, the family court makes the decision (Arts 766, para. 1 and 771). After divorce either party may claim distribution of property (Arts 768, para. 1 and Art. 771). This claim includes redistribution of matrimonial property and payment of alimony, as well as damages for non-pecuniary loss. It is generally accepted that the party responsible for the breakdown of the marriage is liable for compensation based on tort law. Whether damages can be claimed together with redistribution of matrimonial property and alimony has been a focus of discussion. The Supreme Court allows the party to choose whether to claim damages together with other claims or not.¹⁴ Distribution of property is made through conciliation proceedings, but if the parties fail to agree the family court will adjudicate, taking into account ‘the amount of property which has been obtained with the assistance of the spouse and all other circumstances’ (Art. 768, para. 3). The Code has only two provisions concerning matrimonial property and its distribution. Therefore, a wide range of issues is left to the discretion of the family courts. The contribution of a spouse in acquiring matrimonial property is often difficult to assess, especially when only one member of the couple had an income. The contribution of the wife through housework is generally taken into consideration by the court. In some cases where only the husband had an income, the house which the couple had acquired during the marriage was acknowledged to ¹² Judgment of the Supreme Court, 24 November 1955, Minshū 9-12-1837. ¹³ Judgment of the Supreme Court, 2 September 1987, Minshū 41-6-1423. ¹⁴ Judgment of the Supreme Court, 23 July 1971, Minshū 25-5-805.

Family Law and Inheritance

207

be joint property by taking into consideration the non-monetary contribution of the wife.¹⁵ Common law marriages were not unusual, particularly in the pre-war period, because of the system which inhibited free marriage. The Supreme Tribunal extended some protection to such marriages. It acknowledged that a common law wife deserted by her common law husband was entitled to compensation for breach of contract.¹⁶ Furthermore, a common law wife was allowed to claim damages in tort resulting from the death of the common law husband. Since the Second World War, the Supreme Court has treated common law marriage as a quasi-marriage that should be treated in a similar way to formal marriage. The court ruled, for instance, that desertion without justifiable ground in a common law marriage constituted a tort.¹⁷ In financial arrangements also, common law marriage is treated in a similar way to formal marriage. Thus, spouses have the same mutual duties as in formal marriage. Matrimonial property is distributed in the same way.¹⁸ In one case, a common law wife who ran a cloth shop with her common law husband claimed rights over pieces of land that the couple had obtained during the marriage. The land was registered in his name. The court acknowledged the contribution of the common law wife and ruled that the land belonged to them jointly.¹⁹ It should be added that in insurance claims and pension rights, common law marriage is treated equally with formal marriage. A problem arises in common law marriage where one of the parties is formally married to another person. Initially, the court ruled that this kind of relationship had no legal effect. Later, the court changed its stance and now acknowledges such common law marriage, provided that the extant formal marriage has irretrievably broken down.²⁰

3. Family and Children A child born to a married couple is a legitimate child. There are presumed legitimacy and non-presumed legitimacy. A child conceived by the wife during the marriage is presumed to be legitimate (Art. 772, para. 1). A child conceived after 200 days of marriage or within 300 days of the dissolution or rescission of marriage is presumed to have been conceived during the marriage (ibid., para. 2). The presumption of legitimacy can be reversed only by a court order sought by the

¹⁵ ¹⁶ ¹⁷ ¹⁸ ¹⁹ ²⁰

Judgment of the Sapporo High Court, 19 June 1986, Hanta 614–70. Judgment of the Supreme Tribunal, 26 January 1915, Minroku 21–49. Judgment of the Supreme Court, 11 April 1958, Minshū 12-5-789. Decision of the Hiroshima High Court, 19 June 1963, Kōminshū 16-4-265. Judgment of the Osaka High Court, 30 November 1982, Kagetsū 36-1-139. Judgment of the Supreme Tribunal, 8 April 1937, Minshū 16–418.

208

The Civil Code—The Cornerstone of Private Law

husband (Art. 775). The husband may initiate proceedings against the mother to deny the legitimacy of the child. Legitimacy is not limited to children conceived after 200 days of marriage. The Supreme Tribunal acknowledged a child which was born on the day of marriage to be legitimate where a common law marriage between the parents preceded the formal marriage, although the child was not presumed to be legitimate.²¹ An illegitimate child can be legitimised either by the father or mother (Art. 779). The child may initiate an action against the father for legitimacy. This action cannot be brought more than three years after the father’s death (Art. 787). A legitimised child has the same rights as other children, except that the portion of inheritance is half that of legitimate children. This arrangement has been contested in court for its constitutionality. Family relationship can be created by adoption. There are only three legal requirements for adoption. The adopter has to be over 20 years of age, the person to be adopted must be younger than the adopter, and should not be the adopter’s lineal ascendant (Arts. 792 and 793). A married person must adopt a child jointly with the spouse. The adoption of a minor must be approved by the family court. The court decides the matter from the viewpoint of whether or not the adoption is appropriate for the welfare of the child. The motives and purposes for adoption, the suitability of the adopter, and family relations are taken into consideration. In one case, the adoption of a baby in order to make him the successor of an abbot was rejected by the family court.²² When the child is less than 15 years old, a legal representative may agree to adoption on behalf of the child. If there is a person who has custody of the child, this person’s consent is also needed (Art. 797). It is not uncommon for a married couple to adopt a baby and register it as their legitimate child. The court has denied the legitimacy of such children.²³ Some people maintain that this arrangement should be considered as a valid adoption. The amendment of the Code in 1987 introduced a system of ‘special adoption’. This applies to children below six years of age whose parents have serious difficulties in bringing up the child, and where the adoption is particularly needed for the welfare of the child. After a six-month trial period, the family court may approve adoption. With the adoption, the relationship between the child and the birth parents is severed, and the child becomes a legitimate child of the adopters. It is not apparent from the registry that the child has been adopted (Arts 817-2–817-11). Parents have rights and duties to care for and bring up the child. A child who has not yet attained majority is subject to parental power, which is exercised jointly by the parents. The parents have the right to designate the child’s place ²¹ Judgment of the Supreme Tribunal, 23 January 1940, Minshū 19–54. ²² Adjudication of the Niigata Family Court, 10 August 1982, Kagetsu 35-10-79. ²³ For example, judgment of the Supreme Court, 8 April 1975, Minshū 29-4-401.

Family Law and Inheritance

209

of residence and to give consent to the choice of occupation (Arts 821 and 823, para. 1). Those with parental power have the right to administer the property of the child and act on the child’s behalf in financial matters. In cases of conflict of interest, for instance, the transfer of the child’s property to the parents, a special legal representative for the child must be appointed by the family court (Art. 826, para. 1). Where a father or mother abuses parental rights, or commits gross misconduct, the family court may deprive the person of parental rights on the application of the public prosecutor (Art. 834). When a minor is left without both parents or when there is no one to exercise parental power for other reasons, a guardian is appointed. Unless the person who last held parental power had designated a guardian, the family court makes the appointment. A guardian is also needed for those who are declared to have limited capacity. If either partner of a married couple is declared to have limited capacity, the unaffected spouse becomes a guardian. Guardians are supervised by the family court. In practice, when there is no person to exercise parental power over a minor, the relatives care for the child without formally selecting a guardian.

4. Procedure for Settling Disputes on Family Matters There is a special court procedure for family matters—proceedings on personal status. This procedure covers matters such as divorce, dissolution of adoption, invalidity and revocation of marriage and adoption, legitimisation, and denial of legitimacy. As part of the ‘Justice System Reform’, the new Law on the Proceedings on Personal Status was enacted²⁴ and the jurisdiction of the court on this procedure shifted from the district court to the family court. The procedure is different from civil procedure in various aspects. Firstly, the court may take into consideration facts that have not been asserted by the parties and examine evidence ex officio (Art. 20). Secondly, the questioning of the parties, their representatives and witnesses on matters which constitute significant secrets regarding their privacy can be closed to the public by a unanimous decision of the judges. This applies in cases where their testimony obviously affects their social life, and therefore they are unable to testify fully, and where the testimony cannot be substituted by other evidence (Art. 22, para. 1). Thirdly, the judgment is binding not only on the parties, but also on third parties (Art. 24). This procedure is preceded by a conciliation procedure.²⁵

²⁴ Law No. 109, 2003. ²⁵ Concerning the procedure, see T. Uchida, Minpō IV Shinzoku • Sōzoku (Civil Law IV, Family Law and Scucession), Supplemented edn (Tokyo, 2004), pp. 313–319.

210

The Civil Code—The Cornerstone of Private Law

There is also a family law adjudication (determination) procedure. Cases are heard by the adjudication committee chaired by a family court judge with the participation of family law councillors. The committee hears cases on the allocation of the cost of marriage, custody of children, allocation of the inherited estate, etc. The unsatisfied party to the outcome of adjudication is entitled to file an objection. If there is no objection, the adjudication has the same effect as a formal judgment.

5. The Law of Inheritance The law of inheritance also underwent significant changes after the Second World War. In the pre-war period, the ‘household’ and all the assets were inherited by the eldest son. The younger sons and daughters had no rights whatsoever to the estate. This system was totally changed in the post-war reforms. The estate is distributed among the spouse and all sons and daughters. There are two kinds of inheritance: testate and intestate. In practice, the former is not common. The rules concerning the distribution of inherited property are set out in the Code in detail. The surviving spouse is always an heir. Children of the deceased are heirs of the first rank, lineal ascendants (parents and grandparents) are heirs of second rank, and brothers and sisters come third. Thus, where there is a wife and children, the heirs of the second and third rank have no share in the estate. In such cases, half the estate is distributed to the surviving spouse, and the remaining half is divided equally between the children. If there is a spouse but no children, the estate is divided among the spouse and the lineal ascendants. The former takes two-thirds of the estate. If the latter have already died, the spouse and siblings divide the estate. The surviving spouse takes three-quarters of the assets (Arts 887, 889, 890, and 900). The share of an illegitimate child is half that of a legitimate child (Art. 900, subpara. 4). This has come to be criticised within Japan as well as from outside Japan as being discriminatory. Nevertheless, the Supreme Court ruled that the matter is within the reasonable discretion of the legislature and that this differential treatment was not unreasonable discrimination.²⁶ If a prospective heir (a child, sister, or brother) dies before the deceased, this person’s lineal descendant (grandchild, niece, or nephew of the deceased) becomes the heir (Art. 887). A person may apply to the family court for disinheritance of the prospective heir (Art. 892). Disinheritance can also be effected by will. The grounds for disinheritance are maltreatment or serious insult to the testator, or gross misconduct on ²⁶ Decision of the Supreme Court, 5 July 1995, Minshū 49-7-1789; UN High Commissioner for Human Rights, Concluding Observations of the Human Rights Committee: Japan, 19/11/98. CCPR/C/79 Add. 102 [See the 2008 UN HRC Report]

Family Law and Inheritance

211

the part of the prospective heir. An heir can also be disqualified on grounds specified by the Code, which cover instances where the heir has killed or attempted to kill the deceased or other heirs who have priority, failed to report the death of the deceased while knowing that he has been killed, forged the will, or forced the deceased to alter his will (Art. 891). Disqualification is effected without any formality. An heir has a choice to accept or renounce inheritance. The heir may also accept inheritance with a reservation by declaring that he is liable for the debts of the deceased only up to the amount of the inherited estate (Arts 920, 922, and 938). Renunciation or acceptance with reservation has to be effected within three months after the person has become aware of the death of the deceased and of the fact that he is to inherit the estate. He must prepare an inventory of the estate and declare renunciation or acceptance at the family court in order to effect renunciation or acceptance with reservation. When an heir fails to renounce or accept inheritance with reservation within three months, he is deemed to have accepted the inheritance. By inheritance, the estate of the deceased as well as his or her debts pass directly to the heirs. The Code provides that until the estate is distributed among the heirs, it belongs to them jointly (Art. 898). The system of personal representatives is unknown in Japan. Administrators are rarely appointed in practice. The distribution of the estate is deemed to take effect retrospectively when succession takes place (Art. 909, para. 1). Since the estate passes to the heirs immediately by inheritance, there are cases, for instance, where one heir sells part of the property without the consent of the others before the division of the estate. Or one heir may want to pay his debts out of the estate. In such cases the distribution of the estate does not affect the third party who emerged before the distribution (Art. 909, para. 2). Thus, if one of the heirs sold part of the inherited land to a third party before distribution, this transaction is valid, provided that the third party was not negligent.²⁷ The actual distribution of assets is effected in accordance with the will, if there is one. If there is no will the heirs try to agree on the way that the estate should be distributed. When this fails, an heir may apply to the family court for distribution. The court will try to conciliate, but if this attempt fails the case will be adjudicated. The distribution of the estate takes into account the nature of the property, the age of the heirs, their occupation, their mental and physical health, the circumstances of their life, and all other circumstances (Art. 906). It does not necessarily have to follow the Code or will, provided that all parties agree. An heir whose right to inherit the estate has been ignored may claim recovery of his share within five years after he or his legal representative became aware of the fact (Art. 884).

²⁷ Judgment of the Supreme Court, 22 February 1963, Minshū 17-1-235.

212

The Civil Code—The Cornerstone of Private Law

The scope of an inherited estate is disputed in some cases. First, whether a lease of a flat or a house is inheritable or not has been discussed. For instance, where the deceased was living with a common law wife, after his death she may be evicted by the heirs, if the status of lessee is to be inherited by the heirs. Regarding the claim of eviction from a landlord, the Supreme Court has acknowledged that a common law wife may exercise the right of the heir against the landlord.²⁸ Secondly, whether insurance payments should form part of the inherited estate has been the focus of debate. Generally, when one heir has been designated as a beneficiary of insurance, it is considered not to be included in the estate. The same applies to a death allowance paid by a company where the deceased worked. The beneficiary receives such allowances separately from the sums inherited. Amongst the heirs those who, by providing labour, service, or financial support to the business of the deceased or by nursing him, made special contributions for maintaining or increasing the assets of the deceased receive an additional share from the estate. If the heirs fail to agree, the family court decides on the matter (Art. 904-2). This system was formally introduced by the amendment of the Code in 1980, but in practice family court had taken into account the contribution by the heirs in dividing the estate even before the amendment. In a typical case after the amendment, the second wife of the deceased, her daughter, the daughter of the former wife, and her husband who was later adopted by the couple claimed that they were entitled to an additional share. The second wife had worked for forty years on a pig farm on behalf of the deceased who was employed somewhere else. The adopted son also worked for eight years and contributed to the assets. Their contribution was found to warrant an additional share by the court. The daughter had helped her mother, but not enough to constitute a special contribution. The other daughter had left the family after she had grown up and was found not to deserve an additional share.²⁹ Succession by will is available, but uncommon. Any person over 15 years of age is capable of making a will. Persons who lack capacity to act may also make a will. A will can be revoked at any time by the testator. The will must follow the formalities set out in the Code. There are three kinds of ordinary wills: a will in the testator’s own hand (a holographic will), a notarised will, and a secret will (Arts 968–970). There are also less common types of will, such as a deathbed will, and a will at a remote place, for instance on a ship. A holographic will must be written by the testator with the date of the will and the name of the testator and must have his or her seal on it. Witnesses are not needed. In order to have effect, probate must be obtained from the family court. A notarised will is made by dictating the will to a notary in the presence of two witnesses. It is signed and sealed by the testator, witnesses, and the notary. In a will by secret deed, the testator writes the will, or has someone write it on ²⁸ Judgment of the Supreme Court, 28 April 1967, Minshū 21-3-780. ²⁹ Adjudication of the Maebashi Family Court, 14 July 1985, Kagetsu, 38-12-84.

Family Law and Inheritance

213

his behalf, signs and seals it, and puts it in an envelope. The envelope is then sealed and signed by the testator, two witnesses, and the notary. This also requires probate by the family court. The deceased may dispose of his property in his lifetime or by his will as a testamentary disposition. If the deceased has given property to one of the prospective heirs during his lifetime or by testamentary disposition, this is counted in the distribution of the estate. A certain category of heirs have a secured portion of the estate that they cannot be deprived of, even by will. This is intended to safeguard the family from arbitrariness on the part of the deceased. Heirs entitled to this secured portion are children, spouses, and lineal ascendants (Art. 1028). When the lineal ascendants are the only heirs, one-third of the estate is reserved for them. Otherwise, half of the estate is reserved. Therefore, if a wife and two children are left, they are entitled to half of the estate regardless of the will of the deceased.

11 Corporate Law 1. The History of Japanese Company Law Until 2005, Japanese company law was embodied in the Commercial Code. Limited liability companies (an equivalent of the German GmbH) were covered by a separate law. In 2005, as a result of the enactment of a comprehensive company law—the Company Law—company law was separated from the Commercial Code. The Commercial Code itself remains in force, covering the general rules, merchant shipping, and insurance. The current Commercial Code goes back to the late nineteenth century. A draft Commercial Code was prepared by Hermann Roesler, a German adviser to the Japanese government, and was adopted in 1890. Roesler based the draft Code on the French Code, but referred to German and English law as well. His intention was to adopt the latest and best principles available at that time. However, the entry into force of this Code in its entirety was postponed as a result of the controversy over the draft Civil Code which was prepared by Gustave Boissonnade, reflecting the rivalry between the supporters of English law and French law. The part of the Code on company law and bankruptcy came into force in 1893 as an interim measure. The preparation of the Code was taken over by another governmental body and a new draft Code was prepared without the participation of Roessler. Based upon this new draft, the current Code was enacted in 1899. The new Code was strongly influenced by the German Commercial Code of 1861 (the current German Commercial Code was enacted in 1897).1 Thus, company law before the end of the Second World War was predominantly German, although in 1938 the Japanese Code was amended with some US influence, which came via Germany. Convertible bonds and shares as well as non-voting shares were introduced by this amendment. There was a major influence of US corporate law after the end of the Second World War in the 1950 amendments to the Commercial Code, which took ¹ H. Schlosser, Grundzüge der Neueren Privatrechtsgeschichte, 9 Aufl age (Heidelberg, 2001), S. 174–179. For the legislative history of the Commercial Code, see F. Takakura, ‘The Enactment of the Commercial Code’, Jurist No.1155, pp. 5–13.

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

218

Business-related Laws

place under the Allied occupation. The 1950 amendments focused on three areas: • Facilitation and simplification of financing of companies. • Reorganisation of corporate bodies. • Strengthening of the status of shareholders. While before the end of the war companies were directly managed by shareholders (directors had to be a shareholder), in this reform, the separation of capital and management was purported by the introduction of the board of directors and representative directors. It should be added that, while the Americans urged the Japanese to strengthen the rights of minority shareholders, there was a strong resistance from the Japanese industry and those who took part in the preparation of the bill for fear of the ‘abuse of shareholders’ rights’.2 The legacy of the failure to strengthen minority shareholders’ rights at this stage remained for many years. A series of company law reforms began in 1974. The audit system was subject to major reform with the enactment of the Special Measures Law on the Audit of Large Companies Limited by Shares. This reflected the public outcry at the time of the first ‘Oil Crisis’ that companies were behaving badly at the cost of consumers and therefore should be placed under proper control. It was also a rather delayed response to a major window-dressing case which resulted in the failure of a company with a 50 billion yen debt, as well as some other major corporate failures in the mid-1960s. In 1981, there was another major reform. In total, the company law part of the Commercial Code has undergone amendments more than seventeen times since the Second World War and before the enactment of the 2005 Company Law.3 Although the reforms in the 1980s were triggered by some corporate wrongdoing, there was an overall blueprint of the reform which was to be implemented in a piecemeal manner over the next few decades. However, in the 1990s, in addition to these planned reforms, amendments outside the original plan began to take place. The 1993 amendment was a direct result of the SII Talks with the US. The fall in the securities and property markets in 1990, which was followed by a deepening recession over the years, led business organisations to believe that a wide-scale deregulation was needed. The failure of the economy was thus partly blamed upon ‘over-regulated’ company law, and more autonomy (‘teikan jichi’, literally, autonomy of the articles of incorporation) was demanded by companies. This view was supported by an emerging theory of company law which favoured the review of the mandatory nature of company law provisions. In the past, the rigidity of the company law was adjusted by shareholders’ agreements, ² T. Uemura, ‘The Allied Occupation and the Reform of Company Law’, Jurist No. 1155, pp. 23–25. ³ An excellent introduction to the pre-2005 system in English can be found in I. Kawamoto et al. in K. Geen (ed.), International Encyclopedia of Laws, vol.3, Corporations and Partnerships (Alphen aan den Rijn, 2001).

Corporate Law

219

Table 11.1 Company Law Amendments4 1950

Introduction of the system of the board of directors and representative directors; limitation of the power of the shareholders’ meeting; limitation of the power of auditors to audit of finance; introduction of the authorised capital system; expansion of shareholders’ rights such as the introduction of freedom of transfer of shares, cumulative voting, derivative action, injunction against unlawful acts of directors, appraisal rights.

1966

Introduction of restriction on the transfer of shares by the Articles of Incorporation.

1974

Expansion of the power of corporate auditors to the supervision of business in general; enactment of the Special Measures Law on the Audit of Large Companies Limited by shares requiring audit by accounting firms for large companies; exclusion of cumulative voting by Articles of Incorporation.

1981

Invigoration of the general shareholders’ meeting and strengthening of supervision by shareholders (introduction of the duty of directors to give explanation); the right of shareholders to make proposals for the general shareholders’ meeting; prohibition of offering of benefits to special shareholders; increase the size of the unit of shares; introduction of voting in writing for large companies; introduction of an explicit provision on the supervisory role of the board over directors and the duty of the representative director to report regularly to the board; strengthening of the power of auditors and increase in number.

1990

Relaxation of regulations on small closed companies; the introduction of minimum capital; lowering of the ceiling of issuing non-voting shares; lowering of the ceiling of the issuing of corporate bonds.

1993

Strengthening of supervision by shareholders (reform of the system of derivative actions; relaxation of the requirement for the inspection of the books of account by shareholders); strengthening of the audit system (extension of the term of auditors to three years, increase of auditors to three or more; introduction of external auditors, introduction of the audit board); reform of the system of corporate bonds (abolition of the ceiling, and the mandatory appointment of a bond-management company).

1994

Relaxation of restrictions on buy-back of shares.

1998

Introduction of stock options; enactment of the Law on the Redemption of Shares; simplification of the merger procedure.

1999

Introduction of the exchange and transfer of shares in order to facilitate the creation of a holding company (holding companies were liberalised in 1998).

2000

Introduction of the system of splitting of companies.

2001

Liberalisation of treasury shares; introduction of new classes of shares; introduction of pre-emption right for new shares; reform of the system of derivative action.

2002

Reform of corporate governance; introduction of new classes of shares with the right to appoint and dismiss directors; reduction of quorum for qualified majority votes.

2004

Electronic announcement; paperless shares.

2005

Adoption of the Company Law.

2006

The Company Law takes effect (except the part on cash merger).

⁴ E. Ueda, Heisei Shoho Kaisei (Amendments to the Commercial Code in the Heisei Period) (Tokyo, 2004), pp. 2–15.

220

Business-related Laws

but the enforceability of such agreements was not certain. For setting up joint ventures and financing venture businesses, this was thought to be insufficient.5 Amendments conforming to this view have taken place since 1997.6 This was in line with the general drive for deregulation initiated by the government in the mid-1990s. The Ministry of Justice’s deregulation plan announced in 1998 included the reform of company law. The 2001 Three Year Programme on the Promotion of Regulatory Reform specifically referred to the review of the Civil and the Commercial Codes.7 After a series of changes to the Commercial Code that at that time accommodated company law, the Company Law was enacted in 2005. The new Law replaced the company law part of the Commercial Code as well as other related laws. The Law came into force in June 2006.8 It should be noted that the new Company Law did not take effect in its entirety in 2006. The entry into force of the part of this new Law concerning the ‘diversification of the payment for mergers etc.’ was deferred for a year after the Japan Business Federation (Keidanren) successfully lobbied for the deferral.9 This part finally took effect in May 2007. With the enactment of the Company Law, laws which had previously supplemented company law, such as the Special Measures Law on the Audit of Large Companies Limited by shares, were abolished. The Company Law has delegated some details to ministerial ordinances. These are ordinances enacted by the Ministry of Justice. They include: • enforcement Rules of the Company Law;10 • rules on Corporate Accounting;11 • rules on Announcement by Electronic Means.12

2. Types of Companies in Japan Before the 2005 Company Law, there were four types of companies: companies limited by shares (kabushiki-kaisha), limited liability companies (yugen-kaisha), limited partnership companies, and full partnership companies. Partnerships also have juridical personality in Japan. Limited liability companies under the 5 J. Mori, in K. Egashira and S. Morimoto (eds), Kaisha-hō kommentaru (Commentary to the Company Law) (Tokyo, 2008), pp. 326–327. 6 This was particularly the case with the amendments initiated by the members of parliament. Until then, all amendments to company law were initiated by the government via deliberation at the Legislative Advisory Council. 7 Three Year Programme on the Promotion of Regulatory Reform, 30 March 2001. . 8 On the basic traits of the Company Law, see S. Iwahara, in Shōji-Hōmu, No. 1775, pp. 4–16. 9 Nikkei, 22 March 2005. 10 Ordinance No. 12 of the Ministry of Justice, 7 February 2006. ¹¹ Ordinance No. 13 of the Ministry of Justice, 7 February 2006. ¹² Ordinance No. 14 of the Ministry of Justice, 7 February 2006.

Corporate Law

221

pre-2005 system should be distinguished from the LLC of the US type. These originated in Germany—an equivalent of Gesellschaft mit beschränkte Haftung— and were regulated by a separate law, the Law on Limited Liability Companies, which was enacted in 1922 modelled upon German law. There were some other vehicles available for business. The Civil Code provides for associations (kumiai) as one of the typical contracts. Associations are used as a business vehicle, but the problem is that in associations, members bear unlimited liability. Furthermore, the Commercial Code provides for silent associations (stille Gesellschaft). Under the pre-2005 system, there was a major gap between the company law provisions intended for large public companies which finance themselves from the securities market, and the reality in which even small local shops were ‘incorporated’. Companies limited by shares were designed to be large public companies, whereas limited liability companies were intended for small and medium-sized businesses. Thus, the maximum number of members for limited liability companies was restricted to 50. In reality, companies limited by shares mushroomed after the Second World War. According to the National Tax Agency statistics, in 2005 there were 2,580,089 juridical persons in Japan, of which 1,036,664 were companies limited by shares and 1,453,540 were limited liability companies. Of the companies limited by shares, 86.7 per cent were companies with a capital of less than 20 million yen (with limited liability companies, 94.2 per cent had a capital below five million yen).13 Most of these companies limited by shares were not listed—there were less than four thousand companies which were listed— and the remaining were private companies with the transfer of shares subject to the company’s approval by virtue of the Articles of Incorporation. A great majority of them never issued shares nor had any substance of companies limited by shares. Efforts were made to fill the gap between law and reality. In 1974, the Special Measures Law on the Audit of Large Companies Limited by Shares was enacted, which distinguished between large companies, small companies, and the rest and set out stricter requirements to the former in audit.14 This Law defined companies with capital of half a billion yen or more or debts of 20 billion yen or more as ‘large companies’, and imposed more stringent rules on these in comparison to small and medium-sized companies. The 1990 amendment to the Commercial Code introduced the minimum capital system which was set at 10 million yen for companies limited by shares and three million yen for limited liability companies. In 1993, an audit by an accounting firm and the ‘audit board (kansayaku-kai)’ with three corporate auditors became mandatory for large companies. However, the tide changed in the second half of the 1990s when the Japanese economy experienced serious difficulties. In order to reinvigorate the economy, ¹³ . ¹⁴ Law No. 22, 1974.

222

Business-related Laws

it was thought that setting up business should be made easier, without requiring a significant amount of capital. In 2003, a special arrangement which enabled companies not to have this amount of capital at the time of establishment, but gave them an allowance period of five years from establishment to meet the requirement, was introduced. At the time of the enactment of the Company Law, there was a choice of lowering this amount for companies limited by shares to three million yen or to abolish the minimum capital requirement altogether.15 The legislature opted for the latter. In the end, the Company Law abolished the system of minimum capital requirement entirely. Another novelty of the 2005 Company Law is the abolition of limited liability companies that was introduced from Germany in 1938. Limited liability companies were ‘absorbed’ into the category of companies limited by shares. Thus, companies limited by shares encompass a wide range of companies, from major corporations to companies with a negligible amount of capital. Companies limited by shares are allowed to choose various types of governance structure (see Table 11.5). While the choice of structure for large public companies is limited, other companies limited by shares have a broad range of structures, including a system without a board or a corporate auditor. The rationale for the abolition of limited liability companies was that the distinction between companies limited by shares and limited companies has become blurred in recent years, namely the distinction between non-public companies limited by shares (companies limited by shares with restriction on transfer of shares) and limited liability companies. The idea was to let businesses start from a structure with a director plus a general shareholders’ meeting, and then move to a more complex system as the company developed.16 Rather than applying the rules that had previously been applicable to limited liability companies to private companies limited by shares and thus bring the law closer to reality, the 2005 Company Law chose to absorb the existing limited liability companies into the category of companies limited by shares. Limited liability companies which existed at the time of the entering into force of the Company Law were automatically converted to companies limited by shares. As a result, the concept of companies limited by shares has been largely diluted. While the company law provisions in the Commercial Code before 2005 primarily envisaged large public companies limited by shares, companies limited by shares under the new Company Law encompasses a wide range of companies, including the former limited liability companies. This may allow a fairly large company to adopt a simplified governance structure which may be inappropriate from the viewpoint of corporate governance.17 ¹⁵ Asahi, 15 October 2003. ¹⁶ T. Aizawa (ed.), Shin-Kaisha-Hō (New Company Law) (Tokyo, 2005), p. 13. ¹⁷ T. Inaba, Kaisha-ho no Kihon o Tou (Questioning the Fundaments of Company Law) (Tokyo, 2006), pp. 62–64.

Corporate Law

223

With the abolition of the minimum capital requirement, combined with the abolition of limited liability companies, there is concern that companies without the substance of companies limited by shares would be formally set up. However, it is argued that this is better than not allowing these companies to be formally set up and left without regulations. It is also suggested that the doctrine of piercing the corporate veil and the liability of directors vis-à-vis a third party would be able to deal with these abuses.18 The Company Law provides for four types of companies: companies limited by shares, full partnership companies, limited partnership companies, and limited liability companies (LLC). Companies other than companies limited by shares are categorised as partnership companies. The new limited liability companies (LLCs) are different from the limited liability companies before 2005. In contrast to the former limited liability companies of German origin, they are of US origin—modelled on the LLCs which originated in Wyoming in the 1970s and are widely used as vehicles for venture businesses, joint ventures, and investment funds in the US. Members bear limited liability vis-à-vis a third party, while the internal relationship is similar to that of associations in the Civil Code in that major decisions are made unanimously and every member is entitled to execute business (it is possible to entrust it to an executive member). A major difference between these and the US LLCs is that the tax burden does not pass through. This may be reviewed in the future, however. In addition to those companies provided for in the Company Law, there are limited liability partnerships (yūgen-sekinin jigyō-kumiai) (LLPs) introduced by Table 11.2 Types of companies Companies limited by Shares (joint stock companies) Companies limited by Quota (mochibun-kaisha) Full Partnership Companies (gōmei-kaisha) Limited Partnership Companies (gōshi-kaisha) Limited Liability Companies (LLC, gōdō-kaisha)

Table 11.3 Juridical persons by organisation and the amount of capital Capital Companies limited by shares Full Partnership Companies Limited Partnership Companies Limited Liability Companies

less than 10m

10m to 100m

100m to 1bn

over 1 bn

1,392,178 5,247 28,813 594

1,066,320 523 3,364 11

31,418 12 22 0

6,916 0 1 0

Source: National Tax Agency:.

¹⁸ Aizawa, supra, p. 32.

224

Business-related Laws

the Law on Limited Liability Partnership.19 This was modelled on limited liability partnerships introduced in the UK in 2000. In Japan, unlike limited liability partnerships provided in the Company Law, LLPs do not have juridical personality. On the other hand, they are different from contractual associations in the Civil Code in that members do not bear unlimited liability. Distribution of profit and allocation of loss do not have to be proportionate to the contribution. The tax burden passes through. Reportedly over ten thousand LLPs have been set up in the UK. As of December 2006, 1,600 LLPs were registered in Japan. 70 per cent of those were in the service industry (3.5 per cent of them in finance/insurance industry).20 The Company Law distinguishes between public companies and remaining companies. Public companies are defined as ‘companies that, as a content of shares, do not require the consent of the company on the acquisition of their shares through assignment, either for all or part of the shares they issue’ (Art. 2, subpara. 5). In other words, companies which have a restriction on assignment only in relation to part of the issued shares are public companies. As a corollary, non-public companies are those companies that require the consent of the company in the transfer of shares in relation to all the issued shares.21 Thus, public companies are not always listed companies. Listing rules of exchanges require that listed companies do not have any restriction on assignment of shares. As of 31 May 2008, 1,746 companies were listed in the first section (of which twenty-two are foreign companies), and 469 in the second section of the Tokyo Stock Exchange (hereinafter, ‘the TSE’). In the market for emerging businesses of the TSE, 197 companies are listed.22 In 1999, the TSE set up a market called ‘Mothers’ in order to facilitate financing of emerging venture businesses.23 In the past, it took some 25 to 30 years for companies to be eligible to be listed on the stock exchange. It was felt that easier access to the financial market by small and medium-sized companies should be provided. In order to be listed in the Mothers, the requirement of three years’ existence, the requirement of profits of 100 million or more, etc. for the listing in the first and second sections are dropped; instead, companies are required to be ‘companies recognised to have growth potential by conducting a business expected to grow or expand, or by conducting as its core business activities based on new ideas or technology’.24 ¹⁹ Law No. 40, 2005. This should not be confused with the investment business LLPs (tōshi jigyō yūgen sekinin kumiai) introduced earlier. ²⁰ . ²¹ Egashira in K.Egashira and S.Morimoto (eds), Commentary, supra, p. 30. ²² . ²³ In Japan, the term ‘venture business’ is often used to denote emerging businesses. In a narrow sense, ‘venture business’ means small innovative and ‘intelligence concentrated’ companies with a niche business. ²⁴ Japan Securities Research Institute, Securities Market in Japan 2001 (Tokyo, 2001), pp. 155–157.

Corporate Law

225

The Osaka Stock Exchange followed the ‘Mothers’ by forming an association with NASDAQ and opening NASDAQ Japan, but NASDAQ withdrew, and the market is now called ‘Hercules’. The market for over-the-counter trade run by the Japan Securities Dealers Association became an exchange for listed shares in 2004 (‘JASDAQ’). In total, there are 953 companies whose shares are traded here.25 JASDAQ and the Osaka Stock Exchange are planning to merge in 2009. Thus, as a whole, there are some 4,000 companies whose shares are traded publicly. Another distinction of companies in the Company Law is between large companies and other companies. As was the case with the 1981 Special Measures Law, large companies are defined as either companies with a share capital of half a billion yen or more in the last business year, or debt of 20 billion yen or more (Art. 2, subpara. 6). Whether the company is a public company, large company, or fits into another categorisation matters on various occasions, including when it is necessary to determine the governance structure of the company.26 Unless otherwise specified, public companies are focused on in this chapter.

3. Share Ownership Structure of Japanese Companies According to the annual survey of all stock exchanges in Japan, in terms of market value financial institutions account for 30.9 per cent, business companies for 21.3 per cent, and individuals for 18.2 per cent.27 Until the late 1990s there was a widespread system of cross-shareholding in Japan by which companies mutually held shares. This was advantageous for companies in developing a network of stable shareholders who will not dispose of the shares regardless of the price, due to a longstanding business relationship. It also contributed to the maintenance of share prices at a higher level. Banks played a major role in this relationship. However, this system came to be criticised for its lack of transparency, its exclusivity, and inefficiency. Due to the constant decline in share prices since 1990 and the financial crisis in 1997/1998, this system became untenable. The ratio of cross-shareholding has substantially fallen. According to the report of the Nissei Research Institute, which published an annual report on cross-holding of shares until 2003, the rate of cross-shareholding has constantly fallen since 1991, from 14.9 per cent to 6.3 per cent in 2003. The percentage of shares cross-held by banks fell from 7.95 per cent in 1996 to 3.0 per cent in 2003.28 ²⁵ . ²⁶ See also Aizawa (eds), supra, pp. 267–276. ²⁷ TSE, Kabushiki Bunpu Jōkyō Chosa 2007 (Share Ownership Survey 2007). . ²⁸ Nissei Research Institute, Kabushiki Mochiai Jōkyō Chōsa 2003 (Survey of the State of Cross Shareholding 2003) , p. 16.

226

Business-related Laws

The fall is also reflected in the decrease in the percentage of shares held by fi nancial institutions. In 1990, fi nancial institutions held 43 per cent of the value of shares in the market, but by 2007, this has fallen to 30.9 per cent. Shares held by business companies have also declined from 30.1 per cent to 21.3 per cent. Th is was compensated by the increase in the shareholding by foreigners. In 1990, foreigners accounted for a mere 4.7 per cent, while in the early 2000s, the percentage was over 20 per cent and in 2007, 18.2 per cent in terms of value.29 Another characteristic of share ownership in Japan is the low percentage of individual shareholders. The percentage is around 20 per cent, and despite the effort of the government to cultivate individual investors, there has not been any significant increase. According to a survey by the Cabinet Office in 2007, only 11.3 per cent of the respondent individuals were investing in shares and investment trusts and wanted to continue, while 74.1 per cent responded that they had no intention of such investment.30 On the other hand, in terms of the number of investors, the number of individual investors has substantially increased. The use of the Internet has contributed to this increase.31

4. Setting up Companies32 (1) Methods of setting up companies limited by shares There are two methods of setting up companies: setting up solely by promoters only (hokki- setsuritsu) and setting up by offering of shares (boshū-setsuritsu). Before the 1990 amendments, in order to set up a company solely by founders, a comptroller had to be appointed. In order to avoid this, setting up by offering of shares was used in a setting up, which was in reality a setting up solely by promoters. The 1990 amendment abolished the requirement of appointing a comptroller unless there are irregular matters such as in-kind contribution to be provided in the Articles of Incorporation. As a result, there was a decline in setting up procedures by offering of shares. Therefore, when the Company Law was being enacted, there was a proposal to abolish this procedure altogether. After all, most companies are set up by promoters first, and shares are offered to the public later. However, a need for a procedure in which one can become

²⁹ . ³⁰ . ³¹ T. Kaga, ‘Heisei 18 nendo Kabushiki Bunpu Chōsa Kekka no Gaiyō (A Summary of the Survey on Share Ownership)’, Shōji-Hōmu, No. 1810, pp. 44–46. ³² For details, see JETRO ed., Setting Up Enterprises in Japan, 7th edn (Tokyo, 2006).

Corporate Law

227

a shareholder without assuming the liability of a promoter was acknowledged, and the Company Law continued to provide for both methods.33

(2) Setting up solely by promoters (a) Promoters Promoters are those who signed the Articles of Incorporation of the company to be set up. Promoters must subscribe to at least one share which is issued at the time of establishment (Art. 25, para. 2). There is no requirement for becoming a promoter. An individual as well as a juridical person can become a promoter. Whereas previously, seven promoters were required, now one promoter is sufficient. When a foreign individual or juridical person becomes a promoter, it may take time to have their identity confirmed and the power certified. Therefore, often a Japanese national sets up a company and then immediately afterwards, shares are assigned to the foreign person, or are subscribed to by foreign persons.34

(b) Articles of Incorporation The promoter(s) must prepare the Articles of Incorporation. All promoters must sign it. It is mandatory for the Articles of Incorporation to accommodate the following matters (Art. 27): • • • • •

purposes of the company; trade name; the location of the main office; the value of assets to be contributed, or their minimum value; the name of the promoter and the address.

Before the Company Law, the total number of issuable shares was a matter to be included in the Articles of Incorporation at the time of notarisation. Now it does not have to be included in the notarised Articles of Incorporation, but needs to be accommodated before the company is established. The total number of shares issued at the time of establishment may not be lower than a quarter of this amount in public companies (Art. 37). Some matters, such as the names of persons who make an in-kind contribution, the assets and their value, and the number and classes of shares allocated to this person do not have any effect unless provided for in the Articles of Incorporation (Art. 28). ³³ K. Egashira in Egashira and Morimoto supra, pp. 242–243. ³⁴ Nagashima, Ohno and Tsuenmatsu Law Office, Advance Kaisha-Hō (Advanced Corporate Law), 2nd edn (Tokyo, 2006), pp. 55–56.

228

Business-related Laws

Articles of Incorporation do not have effect without notarisation (Art. 30, para. 1).

(c) Other matters to be determined by the promoters The Company Law has abolished the system of minimum capital. The promoters must unanimously determine the following matters at the time of establishment (Art. 32, para. 1): • the number of shares issued at the time of establishment which are to be subscribed by the promoter(s); • payment to be made in consideration of the above; • the amount of capital and capital reserves. In cases where there are irregular matters, for example in-kind contributions, the promoter(s) must apply to the court for the appointment of a comptroller (Art. 33, para. 1). Normally, an attorney is appointed by the court. At the Tokyo District Court, it takes around 50 days for the comptroller to report the result of investigation to the court.35 If problems are found, the Articles of Incorporation must be amended (ibid., para. 7). The promoter(s) may, within one week of the decision of the court, withdraw the subscription of shares (ibid., para. 8). The appointment of a comptroller is not needed where: • the in-kind contribution does not exceed five million yen; • the contribution is made in the form of securities that have a market value; • experts such as attorneys, accountants, or tax attorneys certify that the value as provided in the Articles of Incorporation is adequate (Art. 33, para. 10).

(d) Pay-in by the promoters Promoters must pay in the entire amount of contribution (monetary or in-kind) without delay after subscribing to the shares (Art. 34, para. 1). If any of the promoters fail to pay in, other promoters may remind this promoter and set a date for payment which is within two weeks of the notice. If this promoter fails to pay, he loses the right to become a shareholder of the company (Art. 36).

(e) Appointment and dismissal of directors and other officers The Company Law has introduced a new concept of directors, corporate auditors, and other officers ‘in the process of establishment’. They are appointed by a majority vote of the promoters (Art. 38, paras 1 and 2 and Art. 40, para. 1). In companies with a board, the number of directors needs to be three or more (Art. 39, para. 1). A representative director(s) is elected by the directors from within them ³⁵ Ibid., p. 68.

Corporate Law

229

(Art. 47, para. 1). If the company to be established is a company with an audit board, there must be at least three corporate auditors at this stage (Art.39, paras 1 and 2). The role of these officers is to supervise the process of the establishment of the company by promoters, and is different from the role of those officers after establishment (Art. 46). Directors at the time of establishment can be dismissed by a majority vote of the promoters, while the dismissal of corporate auditors requires a two-thirds majority vote (Art. 43, para. 1).

(f) Registration The company is formally established by registration at the place of the main office (Art. 49). Matters to be registered are specified in the Company Law (Art. 911, para. 3). There are matters such as the amount of capital that are not included in the Articles of Incorporation, but need to be registered.

(g) Liability of promoters In cases where the value of in-kind contribution at the time of the completion of the company’s establishment is significantly lower than the value as indicated in the Articles of Incorporation, promoters and directors in the process of establishment are jointly and severally liable for the deficit (Art. 52, para. 1). This does not apply if they prove that they were not at fault, or the comptroller had been appointed (ibid., para. 2). Promoters, directors, and corporate auditors in the process of establishment are also liable vis-à-vis the company for the neglect of their duties (ibid., para.2).

(3) Setting up of companies by offering shares (a) Off ering of the shares Promoters may offer to others the shares to be issued at the time of establishment (Art. 57). They must determine unanimously the number of shares to be offered, the amount of payment for the shares, the date of payment or its period, etc. (Art. 58, paras 1 and 2). Promoters allocate the shares to those who applied for subscription to those shares and notify them (Art. 60). Promoters have a free hand in allocating the shares.

(b) The founding meeting of shareholders After the date of payment, promoters must convene a general meeting of those who are to become shareholders (founding meeting) without delay (Art. 65, para. 1). At the meeting, the promoter reports matters related to the establishment of the company (Art. 87). Directors and corporate auditors are appointed at the founding meeting by the prospective shareholders (Art. 88). They are required to report the result of their investigation of the establishment procedure to the shareholders (Art. 93).

230

Business-related Laws

(c) Liability of promoters and others Since this type of establishment procedure involves those other than promoters, the liability is aggravated in comparison to establishment solely by promoters. Promoters bear strict liability for the deficit of an in-kind contribution (Art. 103). Those who allowed their name to be used in advertisements and in other documents involving an offer for the support of the establishment of the company, but who were not promoters, are held liable in the same manner as promoters (Art. 103, para. 2).

5. Shares (1) Abolition of par-value shares Before the Second World War, only par-value shares were issued. In 1950, non-par value shares were introduced, but they were unpopular. Even in the 1990s, in the first section of the TSE, only eight companies’ shares were all non-par value.36 It was mandatory for the par value multiplied by the number of issued shares to be capitalised. In the second half of the 1980s, the discrepancy between the par value and the issue price was steadily growing. Therefore, there was a requirement to have at least half of the issue price of the shares (not the par value or minimum value) to be capitalised both in par-value and non-par value shares. However, if this requirement is in place, there is not much reason to maintain par value. On the other hand, the poor state of the economy in recent years necessitated change. Some companies’ share prices fell under par, which made it impossible for these companies to finance themselves. Since the 1981 amendments to the Commercial Code were made, it had always been the intention of the legislature to fade out par-value shares,37 but companies had failed to respond. Therefore, as a result of the 2001 amendments, par-value shares were abolished altogether. The current requirement is simply that up to half of the amount paid in needs to be capitalised (Art. 445, paras 1 and 2).

(2) Trading units When the par-value shares were totally abolished in 2001, the system of trading units, i.e. the minimum amount of shares which can be traded, was introduced. ³⁶ J. Ujiie (ed.), Nihon no Shihon-Shijyō (Capital Market in Japan) (Tokyo, 2002), p. 82. ³⁷ The par-value requirement of English company law has been criticised by review bodies for decades. The UK Gedge Committee of 1945 already found various advantages of non-par value shares, including the facilitation of capital reorganisations and the raising of additional equity capital. In the US, non-par value shares are widely utilised, although this occurs alongside par-value shares. Australia totally abolished par-value shares in 1998. However Europe, after enacting the Second Company Law Directive, mandates public companies to attribute par value to their shares. Ferran, Principles of Corporate Finance Law (Oxford, 2008), p. 87.

Corporate Law

231

A vote is given not to each share, but to a unit of shares set by the company (Art. 188, para. 1). One unit of shares cannot exceed 1,000 shares (ibid., para. 2). The system of unit shares is not mandatory, but if the company opts to adopt it, it has to be accommodated in the Articles of Incorporation. The board is entitled to reduce the number of shares in the unit, or abolish the system. According to the TSE Fact Book, in the first section, 1,723 companies have the unit share system in place. In almost half of them, one unit is 100 shares, and in the remaining half 1,000 shares.38 Shareholders who hold shares below a unit are entitled to require the company to purchase these shares (Art. 192, para. 1).

(3) Split-up and consolidation of shares The split-up and consolidation of shares are basically a means to adjust the size of shares to the size appropriate for a given company. These used to be highly restricted, but since 2001, the decision is largely left to the companies. Split-up can be decided by the board (Art. 183). By split-up, shares will become easier to trade and thus liquidity will be increased. At the time of the ‘IT bubble’ in the early 2000s, IT companies’ share prices became too high to be easily tradable. Therefore, the shares of these companies had to be split. TSE has been promoting the sizing down of the trading lots for some time in order to increase the number of individual shareholders. Theoretically, the splitting up of shares is neutral to the share price. However, there is a time lag between the split-up and the actual issue of new shares. In the early 2000s, some companies split up their shares by a substantial number (in one case, 10,000 times) which resulted in a surge of the share prices. TSE asked companies to refrain from splitting up their shares by more than five. Share consolidation was strictly limited until the 2001 amendment, since it may be disadvantageous to shareholders as a result of the odd shares resulting from the consolidation. Now there is no restriction regarding the grounds for consolidation, although it needs to be explained at the general shareholders’ meeting. Share consolidation requires a qualified majority vote of shareholders (Art. 180, para. 2 and Art. 309, para. 2).

(4) Share exchange and share transfer In 1999, following the liberalisation of holding companies, a share exchange (kabushiki-kőkan) and share transfer (kabushik-iten) system were introduced. In a share exchange, a company causes another company to acquire all the issued shares of the first company (Art. 2, subpara. 31). In a share transfer, one or more companies cause all their issued shares to be acquired by a newly set up company ³⁸ TSE Fact Book 2008, p. 7.

232

Business-related Laws

(Art. 2, subpara. 32). Share exchanges can be used not only in creating a 100 per cent subsidiary, but also as a means of M&A. The contract of share exchange and the plan for share transfer are subject to the qualified majority vote of shareholders (Art. 783, para. 1, Art. 795, para. 1, Art. 804, para. 1, and Art. 309, para. 2). Shareholders who are opposed to the share exchange and share transfer are given appraisal rights (Arts 785, 797, and 806). There is also a simplified procedure and a summary procedure (when in a share exchange, one of the parties is the ‘special control company’ of the other).

(5) Classes of shares (a) Introduction of new classes of shares Before the 2001 amendment, preference shares were available, but only in respect to the payment of dividends or interest, or the distribution of assets at the time of liquidation. Non-voting shares did not exist as a separate class of shares; only when preference shares relating to dividends were issued could the Articles of Incorporation determine that their shares were non-voting. The voting right was restored when the preference rights were affected, e.g. when the proposal to pay a preferential dividend was not on the agenda of the general shareholders’ meeting. Shares were either voting or non-voting; there was no share with limited voting rights. By the 2001/2002 amendments, the system was totally revised for the ‘increased flexibility in financing companies’. Non-voting shares were acknowledged as a separate class of shares and no longer have to be preference shares. Shares with limited voting rights were introduced. The maximum number of shares with limited or no voting rights was increased from one third to one half of the issued shares. Companies may make all the shares they issue fall within one of the following categories (Art. 107): (i) shares for which the transfer is subject to the approval of the company; (ii) shares where it is the right of the shareholder to require the company to acquire them; (iii) shares where it is the right of the company to acquire them without the consent of the shareholder, if certain incidents occur (shares with an acquisition clause). Companies may issue two or more classes of shares whose content may differ on the following matters (Art. 108, para. 1): (i) distribution of surplus; (ii) distribution of residual assets;

Corporate Law

233

(iii) matters on which the shareholder may cast a vote at the general shareholders’ meeting; (iv) requirement of the company’s consent for the acquisition of the given class of shares by assignment; (v) right of the shareholder to require the company to acquire their shares; (vi) right of the company to acquire all the shares of the given class from shareholders if events listed in the Articles of Incorporation occur; (vii) the right of the company to acquire all the shares of a specific class by a resolution of the general shareholders’ meeting; (viii) requirement of a resolution of the meeting of shareholders of a specific class on a specific matter in addition to the resolution of the general shareholders’ meeting or the board; (ix) the right to appoint directors and corporate auditors at the meeting of share holders of a specific class. Category (ix) is not available to public companies and companies with committees within the board. In order to issue the above classes of shares, the content and the number of such shares as can be issued need to be specified in the Articles of Incorporation (Art. 108, para. 2). The introduction of shares with no vote seems to be different from the European approach as it aims to ensure that the shareholders have effective voting rights by ensuring them votes equivalent to their investment.39

(b) Specific classes of shares • Preferred and Deferred Shares (Shares with Different Arrangements regarding the Distribution of Surplus or Liquidated Assets) (i) and (ii) immediately above cover preferred and deferred shares before 2006. A new class of shares regarding the distribution of profits is the ‘tracking stock’ which is used in the United States. It is a class of shares linked with the performance of a specific part of the business or a subsidiary of the company. Sony, in 2001, before the 2001 amendment, issued tracking stocks which were linked to the performance of its subsidiary. This system enables companies with a number of subsidiaries or a wide range of businesses to realise the value of the subsidiary or the business in the stock market. Even a company which is not doing well and whose shares are unattractive can finance itself in this way if it has a well-performing part of the business or a subsidiary. However, it has its downside in that there is a potential conflict of interests between the holders ³⁹ A. Poutianen, ‘Shareholders and Corporate Governance: the Principle of One Share–One Vote’, European Business Law Review, March/April 2001, p. 77.

234

Business-related Laws

of the common shares and the tracking stocks. Company management owes a fiduciary duty to the company and ultimately to all shareholders. If the company is in need of finance, the management may favour a particular subsidiary or a division by allocating resources so that the issue of tracking stocks would be successful. This is likely to harm the interest of the holders of the common shares.40 Previously, it was not clear whether or not tracking stock could be issued in Japan, since only the maximum amount of the dividend could be specified in the Articles of Incorporation. This problem is now solved by the Company Law, as a summary of the criteria for the calculation of the dividend can be set out in the Articles of Incorporation. This, in effect, gives more discretion to the board. • Shares with Restriction on Assignment Concerning assignability of shares, before 2005, shares were either all assignable or non-assignable. Now it is possible to make the acquisition by assignment of ‘all or part of the shares’ subject to the company’s approval. Apart from making all shares subject to a restriction on assignment, companies may create a class of shares which are not assignable without the approval of the company (Art. 108, para. 1, subpara. 4). • Shares with Limited Votes Companies may issue shares which differ in relation to the matters on which the shareholders can vote (Art.108, para.1, subpara.3). There can be shares with no vote at all, as well as shares with a vote only on certain matters. These types of shares are denoted as shares with limited votes. An example is the class of shares which gives the shareholders a right to vote only on the proposal for the disposal of profits that are intended to be used in relation to venture capitals that are primarily interested in receiving dividends rather than getting involved in business matters of the company. On the other hand, shares with multiple votes, or share capping, are not allowed under Japanese law.41 In public companies, shares with limited votes are allowed up to a limit of 50 per cent of the issued shares (Art. 115). Before 2001, the ceiling was set at one-third. If the number of such shares exceeds 50 per cent, ‘companies must take measures to reduce such shares’, but there is no penalty. Shares with limited votes are intended to give more alternatives to companies in financing. The idea was that (i) investors who are not interested in voting may be attracted, particularly with the relatively low issue price as compared to the full voting shares; (ii) companies do not need to be concerned about the ⁴⁰ H. Maeda (ed.), Shōhō-Kaisei; Jitsumu no Subete (Reform of Company Law: Practical Aspects) (Tokyo, 2002), pp. 20–21. ⁴¹ K. Egashira, Kabushiki-kaisha-hō (The Law on Companies Limited by Shares), 2nd edn (Tokyo, 2008), p. 139.

Corporate Law

235

quorum of the general shareholders’ meeting and reduce the management cost of shares; and above all (iii) the incumbent management can seek finance without endangering their position.42 There may also be cases where, between joint venture partners or investors in small/medium-sized companies, the share of the investment differs, but the votes need to be equal.43 Although diversification of finance has a rationale, there is a possibility that the incumbent management of the company may abuse the system. This is particularly true in Japan where the protection of the rights of minority shareholders is not effective in reality. Already in the mid-1990s, such apprehension was raised by some experts, but remained unheeded.44 Now that the ceiling of the number of such shares has been raised from one-third to 50 per cent, there is a further increased risk of abuse. • Shares with the Right of the Shareholder to Require the Company to Acquire them There can be shares in which the shareholder is entitled to require the company to acquire the shares (shares with a put option45) (Art. 2, subpara. 18). The price can be paid by cash, bonds, other classes of shares of the issuing company, a pre-emption right for new shares, etc. The issuing of such shares as well as the means of payment need to be set in the Articles of Incorporation (Art. 108, para. 2, subpara. 5). If the price is paid in cash, it corresponds to the former (mandatory) redeemable shares, and if it is paid by bonds, it corresponds to the former convertible shares. All or part of the issued shares can be shares with a put option on the part of shareholders (Art. 107, para. 1 and Art. 108, para. 1, subpara. 5). If the book value of the assets which are to be paid as the price of those shares exceeds the limit of distributable surplus at the time the option is exercised, the payment cannot be made (Art. 166, para. 1). • Shares with the Right of the Company to Acquire them The Company Law allows shares for which the company is entitled to purchase all or part of the issued shares from the shareholder if a certain event which is provided for in the Articles of Incorporation occurs (shares with a call option) (Art. 2, subpara. 19). This can be the entire lot of shares issued by the company, or can be made a specific class of shares (Art. 107, para. 1, subpara. 3 and Art. 108, para. 1, subpara. 6). As is the case with the shares with a put option, the price of acquisition by the company can be paid by other classes of shares, bonds, cash etc. ⁴² Maeda (ed.), supra, pp. 9–10. ⁴³ Egashira, Kabushiki-kaisha-hō, supra, p. 139. ⁴⁴ T. Uemura, ‘The Principle of Equality of Shareholders’, in A.Takeuchi (ed.), Tokubetsu Kōgi Shōhō (Special Lectures on Commercial Law) (Tokyo, 1995), p. 22. ⁴⁵ M. Kishida, Kaisha-hō Nyūmon (Introduction to Company Law), 6th edn (Tokyo, 2006), pp. 359–361.

236

Business-related Laws

• Shares with the Right of the Company to Acquire the Entire Class of Shares In addition, a class of shares in which the company, by a qualified majority vote of the shareholders, is entitled to acquire all the shares of this class, is available (Art. 108, para. 1, subpara. 7). It is presupposed that companies issue two or more classes of shares. Acquisition of the entire class of shares may be necessary when the company is insolvent and the replacement of the entire class of shareholders is needed. Before the Company Law, this was only possible by a unanimous vote of shareholders. The Company Law has relaxed this requirement, but on the other hand, shareholders who are against this are entitled to apply to the court for the determination of the acquisition price (Art. 172, para. 1). • Shares with a Veto Right Shares provided for in (viii) are shares with a veto right. ‘Veto’ in this context means that for a certain matter to be approved, in addition to the resolution of the general shareholders’ meeting or the board, whichever is required, the approval of the meeting of the shareholders of a specific class is needed. Before 2001, such veto rights given to a specific category of shareholders were practised via shareholders’ agreements when venture capitals invested in businesses. However, these agreements had some problems in their enforcement, and it was felt that these matters should be covered by company law.46 On the other hand, it should be noted here that the new system is now applicable not only to venture businesses, but companies in general. Thus, ‘golden shares’ are widely available under the Company Law. Furthermore, the assignment of such shares can be made subject to the approval of the company. While the Company Law does not have any restrictions on golden shares, the TSE published a programme on the improvement of the listing system in relation to the introduction of defensive measures against takeovers. In principle, issuing classes of shares with the requirement of the resolution of a specific class of shareholders on significant matters such as the appointment and/or dismissal of the majority of directors is a ground for delisting.47 • Shares with the Right to Appoint Directors/Corporate Auditors Companies other than public companies and companies with the committee system are allowed to issue shares which entitle the shareholders to appoint and dismiss directors and corporate auditors (Art. 108, para. 1, subpara. 9). In such companies, appointment and dismissal of directors and auditors are not made

⁴⁶ H. Nagata et al., Shurui-kabushiki no Jiyūkani Kansuru Serdo-kaiseic (Liberalisation of Classes of Shares and Related Changes to the System’, Shōji-Hōmu, 2002, No. 1630, pp. 32–33. ⁴⁷ 24 January 2006. See .

Corporate Law

237

by the general shareholders’ meeting, but by the meeting of this class of shareholders (Art. 347).

(c) New classes of shares in action Some of the newly allowed classes of shares were used as a defensive measure in a celebrated case involving UFJ Holdings in 2004. The UFJ Bank was struggling to meet the BIS capital adequacy ratio and was in need of external support. There were two offers—one by the Mitsubishi Tokyo Bank and the other by the Mitsui Sumitomo Banking Corporation. The management of UFJ Holdings preferred the Mitsubishi Tokyo Bank and issued new shares of the UFJ Bank, which is a 100 per cent subsidiary of UFJ Holdings, at 700 billion yen and allocated them to the Mitsubishi Tokyo Bank. The shares issued were preferred shares with no voting rights, but could be converted to voting shares, if a merger or other reorganisation measure was approved by shareholders of UFJ Holdings, if UFJ Holdings issued new shares to a third party, and also if a shareholder with more than one third of shares emerged as a result of a takeover bid against UFJ Holdings. The shares gave veto rights and the right to appoint a certain number of directors. In the end, Mitsubishi Tokyo Bank successfully merged with UFJ Bank.48 However, whether the measures adopted by Mitsubishi Tokyo Bank and UBJ Holdings were reasonable and proportionate was questionable. Shareholders were not given a choice by the board. Despite the fact that the merger ratio was not determined by Mitsubishi Tokyo Bank, while UFJ had made a specific proposal on this matter, the board went ahead with the former. The board was by no means neutral. There was also an abuse of the holding company system, not in the least because events involving the holding company were designed to trigger the veto right attached to the shares of the subsidiary. Under the current TSE rules, this is not possible any more. The penalty was also disproportionate and unreasonable.

(6) Reduced role of share certificates Before 2005, it was a norm that companies issue share certificates, and only as an exception, upon the request of shareholders, were companies exempt from issuing certificates. The Company Law has reversed this. Now, only those companies which, by the Articles of Incorporation, require that share certificates should be issued for all shares must issue them (Art. 214). Currently, however, listed companies are required to issue share certificates by virtue of the listing rules. In companies that issue share certificates, shareholders may request the company not to issue them in relation to the shares they hold (Art. 217, paras 1 and 3). ⁴⁸ Nikkei, 2 November 2004.

238

Business-related Laws

While share certificates continue to be issued, the central stock depository system will play a major role in the safekeeping and transfer of share certificates. Under this system, share certificates are deposited with the Japan Securities Depository Centre, which is designated as the central depository agency by the Law on the Custody and Transfer of Share Certificates.49 In 2004, the Law on Book-Entry Transfer of Corporate Bonds and other Securities was amended to include shares. This Law is to enter into force by 2009. Then, public companies will be regarded as having amended their Articles of Incorporation and as having decided not to issue share certificates. Shares will be transferable through book entry. The Centre handles not only share certificates, but also bonds and other securities. Securities companies and banks are participants of this Centre, while investors have an account with these participants. The delivery of securities, resulting from a purchase, sale, or use for collateral is processed by book-entry transfers between accounts of customers maintained by the participants and/ or the accounts of participants maintained at the Centre without any physical delivery of securities.50 As the central securities depository system has become recognised, over 80 per cent of outstanding shares of listed companies in Japan are held in custody with the Centre. From 2009, the system of share certificates of listed companies will be abolished. Shares will be administered electronically by the Centre. In order for a shareholder of a company which issues share certificates to claim rights vis-à-vis the company, the shareholder must be listed in the shareholders’ register (Art. 121). In cases where shareholders exercise their rights as a group, e.g. a general shareholders’ meeting, the company is under an obligation to prepare a substantive shareholders’ register, based upon the information from the Depository Centre. Th is list has the same effect as the shareholders’ register. In companies which issue share certificates, the assignment of shares is effected by the handing over of the share certificate. Even if the share certificate has not been issued, the assignor needs to ask the company to issue it. If a book-transfer system is available, the assignment can be effected by book transfer. Shares can be pledged (Art. 146). There are three means of pledge. In simplified pledge, the pledge takes effect by transferring the share certificate, or by book transfer. The pledge is not known to the company. With registered pledge, the pledge is registered in the shareholders’ register. The pledge is entitled to receive dividends direct from the company. There is also pledge by assignment of shares.

⁴⁹ . ⁵⁰ Japan Securities Research Institute (ed.), Securities Market in Japan 2006 (Tokyo, 2007), pp. 183–184.

Corporate Law

239

(7) Assignment of shares In principle, shares are freely assignable, but companies may place restriction on the assignment of shares, i.e. making it subject to the approval of the company. Assignment can be restricted in all the shares, or in a special class of shares. In companies with a restriction on assignment of shares, shareholders who intend to assign shares to another person may ask the company to decide whether it would approve the assignment by disclosing the name and other information regarding the assignee (Arts 136 and 138). The assignee is also entitled to do the same (Art. 137, para. 1). If the company fails to notify the parties of the decision within two weeks of the request, the company is deemed to have approved the assignment (Art. 145). If the company does not approve the assignment, the shareholder is entitled to require the company to purchase those shares, or designate an assignee (Art. 138, para. 1). The purchase price is to be determined by the company and the person who asked for the approval of the company. Either party may apply to court for the determination of the price. The court must take the financial state of the company and all other circumstances in consideration at the time of the request for approval when making such a determination (Art. 144, paras 1–3).

(8) Pre-emption right for new shares The pre-emption right for new shares is a new concept introduced by the 2001 amendment. The Company Law defines it as a right by the exercise of which the holder is entitled to receive shares of the issuing company (Art. 2, subpara. 21). To be sure, there were pre-emption rights for new shares under the Commercial Code in the form of stock options, convertible bonds, and warrant bonds before 2001. They were strictly regulated and only as exceptions in the above three instances were they allowed, since they were regarded as something similar to the issuing of shares at an especially advantageous price to a third party with the potential dilution of the shares of existing shareholders. It was thought that while debt finance could be left to private autonomy, equity finance should be regulated in a stricter way. However, in recent years, the demarcation between debt finance and equity finance has become blurred.51 By the 2001 amendment, a comprehensive concept of pre-emption rights on new shares was introduced and extensive liberalisation took place. This new concept covers the above three instances, but goes beyond them. Pre-emption rights do not need to be combined with bonds. It is possible to grant pre-emption rights for new shares on their own as well as in combination with other financial products. The value of the pre-emption right per se, which had hitherto been regarded ⁵¹ F. Endo and J. Yoshikawa, ‘Shinkabu-yoyakuken no Sōsetsu (The Creation of Pre-Emption Right for New Shares’, Shōji-Hōmu, 2002, No. 1627, pp. 18–19.

240

Business-related Laws

as an attachment to the bonds, has been acknowledged. This was made possible by developments in accounting theory which enabled the calculation of the fair value of pre-emption rights for new shares. The 2001 amendment is regarded as the widening of private autonomy in corporate finance.52 Pre-emption rights for new shares can be used by companies with insufficient finance, for issuing them to their trading partners in lieu of cash payment. There are also an increasing number of companies which issue them to a third party, such as a securities company, for finance. The third party may exercise the option over a certain length of time.53 Furthermore, they can be used and are used as defensive measures against takeovers. This has happened in some celebrated cases such as the attempted takeover of the Nippon Broadcasting System by Live Door in 2005 (see Section 7Ch). Previously, when pre-emption rights for new shares were used as stock (share) options for directors and employees, there were various restrictions such as the maximum limit of 10 years of calling the option; numerical ceiling of 10 per cent of the total number of issued shares; and a justifiable reason was needed for the stock option. The above restrictions were all removed. Actually, there is no longer any specific provision on stock options. Stock options are now fully covered by the general provisions on pre-emption rights for new shares. Pre-emption rights for new shares are issued in various ways. They can be issued to a third party, including to directors/employees as an incentive. They may also be offered to the public. In order to offer pre-emption right for new shares, certain details need to be approved by a qualified majority vote of the general shareholders’ meeting, including their content and number; whether it is issued in a gratuitous manner or not; and, if not, the amount of payment or the method of its calculation, etc. (Art. 238, paras 1 and 2 and Art. 309, para. 2, subpara. 6). However, in public companies, the board may make this decision (Art. 240, para. 1). If pre-emption rights for new shares are issued in a gratuitous manner and it comprises an especially advantageous term to the subscriber, or if the issue price is especially advantageous to the subscriber, the board must explain why the preemption rights for new shares need to be issued in such a manner (Art. 238, para. 3). Even in public companies, the terms must be approved at the general shareholders’ meeting by a qualified majority vote in such cases. Pre-emption rights for new shares may be issued to the existing shareholders. In such cases, shareholders are entitled to subscribe to the pre-emption rights for new shares in proportion to their shareholding (Art. 241, para. 2). In this way, pre-emption rights for new shares can be and have been used in a rights plan. Transfer of pre-emption rights for new shares is allowed as a rule, but can be made subject to restriction. ⁵² Ibid., p. 19. Ueda, supra, p. 139. ⁵³ Nikkei, 12 December 2006.

Corporate Law

241

Table 11.4 Issuing of pre-emption right for new shares⁵⁴ Year

No.

Amount (million yen)

2002 2003 2004 2005 2006 2007

427 636 714 897 895 663

564,197 418,577 818,094 1,236,231 1,669,825 2,117,193

As is the case with shares, issuing of pre-emption rights for new shares can be contested in court (Art. 247). In cases where the issue was against the law or the Articles of Incorporation, or was done in a substantially unfair manner and is likely to disadvantage shareholders, an injunction is available. It is also possible to contest the validity of the issue (Art. 828). An injunction was granted in a case where a company issued pre-emption rights for new shares to a third party as a defensive measure against a hostile takeover. However, in another case, the claim for an injunction was rejected by the court (see section 7Ch).

6. Corporate Governance (1) Governance structure under the Company Law The governance structure of companies has undergone a major reform under the Company Law. The core of the change is that companies are given a wide range of alternatives in designing the structure. As the scope of companies limited by shares has been expanded in the Company Law as a result of the abolition of limited liability companies of the GmbH type, even a company limited by shares without a board and a corporate auditor can be set up. However, the broad range of choice primarily benefits small and medium-sized companies. Insofar as large public companies are concerned, there are only two types of governance structure available. These are: Type A Companies with a board, three committees within the board, and an auditing firm. Type B Companies with a board, an audit board, and an accounting firm. Type A companies are those with nomination, audit and remuneration committees (Art. 2, subpara. 12). This is akin to the US type board system and was introduced by the 2002 amendment to the Commercial Code. ⁵⁴ .

242

Business-related Laws

Table 11.5 The choice of governance structure under the Company Law

Non-public companies

Non-large companies

Large companies

board + corporate auditor

board + corporate auditor + accounting firm

board + audit board

board + audit board+ accounting firm

board + corporate auditor + accounting firm

board + 3 committees + accounting firm

board + audit board + accounting firm

board + corporate auditor + accounting firm

board + accounting adviser director + corporate auditor Public companies

board + corporate auditor

board + corporate auditor + accounting firm

board + audit board

board + 3 committees + accounting firm

board + corporate auditor + accounting firm board + audit board + accounting firm board + 3 committees + accounting firm

However, the number of companies which have adopted this system is small. According to a survey by the TSE, in 2007, of the 1,687 companies listed in the first section of the TSE, only fifty companies have this system. The remaining companies have the system with an audit board.55 This had been the conventional corporate governance system before the enactment of the Company Law.

(2) The general shareholders’ meeting (a) The procedure of convocation The general shareholders’ meeting is empowered to decide on matters provided for in the Company Law as well as all matters concerning the organisation, management, administration, etc. of the company. In companies with a board, the general shareholders’ meeting is empowered to decide only on matters provided for in the Company Law and in the Articles of Incorporation (Art. 295, paras 1 and 2). ⁵⁵ TSE, White Paper on Corporate Governance of 2007, p. 13.

Corporate Law

243

The general shareholders’ meeting is convened by a director, i.e. the representative director (Art. 296, para. 3). Shareholders who have held 3 per cent or more of the voting shares from six months before the meeting without interruption are entitled to require directors to convene the general shareholders’ meeting by specifying the subject matter of the meeting and the ground for its convocation (Art. 297, para. 1). If the general shareholders’ meeting is not convened without delay after this request, or the meeting with a date within eight weeks of the request is not announced, the above-mentioned shareholder himself is entitled to convene the meeting with the leave of the court (ibid., para. 4). The notice of the general shareholders’ meeting has to be sent out at least two weeks before the date of the meeting (Art. 299, para. 1). This can be done electronically, if the shareholder agrees (ibid., para. 3). The board determines details of the meeting, including the date and venue; agenda; whether shareholders who cannot attend are allowed to vote in writing, or electronically. If a shareholder, as above, convenes the meeting, the shareholder determines such matters (Art. 298, para. 1). Shareholders who have held 1 per cent or more of the voting shares, or 300 votes without interruption for six months or more, are entitled to request directors to include a matter in the agenda (Art. 303, para. 2). Shareholders are also entitled to make a proposal concerning matters on the agenda. However, if the proposal is against the law or the Articles of Incorporation, or more than three years have not elapsed since a substantially similar proposal has failed to obtain the support of more than 10 per cent of the votes, this does not apply (Art. 304). The company or shareholders who have held a vote of 1 per cent or more for six months without interruption may apply to court for the appointment of the comptroller to investigate the procedure of convocation and methods of voting in the general shareholders’ meeting (Art. 306, para. 1). Upon the report of the comptroller, the court may order the directors to convene the general shareholders’ meeting, and/or inform the shareholders of the result of the investigation (Art. 307, para. 1).

(b) Votes Shareholders have one vote per share (Art. 308, para. 1). As an exception, if the company has adopted the system of a trading unit, one vote is given to one unit (Art. 308, para. 1). There are no multiple voting shares. Companies do not have a vote for their own shares that they hold (ibid., para. 2). If the company holds more than a quarter of the shares of another company which is its shareholder or by other means substantially control that other company, that company does not have a vote (Enforcement Order of the Company Law, Art. 67). For example, a company which has cross-shareholding with another company over a certain level is not entitled to vote in the other company. A system of voting by proxy is available (Art. 310, para. 1). The board may decide to allow shareholders who do not attend the general shareholders’ meeting

244

Business-related Laws

to vote in writing. If the company has one thousand or more shareholders, this system is mandatory (Art. 298, para. 2). In a survey of listed companies by the TSE, 97 per cent of the respondent companies have this system, which substantially exceeds companies with the system of proxies.56 Reportedly, the amount of voting in writing which vetoes the management’s proposal, often by institutional shareholders, is on the increase. It is not uncommon for proposals of the company management to be dismissed at the general shareholders’ meeting.57 Electronic voting is also available (Art. 312, para. 1). At the general shareholders’ meeting, directors, corporate auditors, and senior executive officers must give necessary explanation on the matter requested by shareholders. However, this does not apply where the given matter is not relevant to the subject matter of the meeting, or where, by providing an explanation, the common interest of shareholders is substantially harmed, or there are other justifiable grounds (Art. 314; Enforcement Order, Art. 71). There are a simple majority vote, a qualified majority vote, and a special majority vote. In a simple majority vote, shareholders representing more than half of the votes need to be present, and a majority of the votes is required (Art. 309, para. 1). Quorum can be set by the Articles of Incorporation, but this seldom takes place in practice. The Company Law has introduced a restriction in this respect. In the resolution to appoint or dismiss directors, corporate auditors, etc., even by the Articles of Incorporation, the quorum cannot be set below one third (Art. 341). In a qualified majority vote, shareholders representing more than one half of the votes should attend the meeting, and more than two-thirds of the vote is required. The quorum can be reduced to one third by the Articles of Incorporation (Art. 309, para. 2). In a special majority vote (i) one half or more of the shareholders who are entitled to vote shall be present, and a majority of over two thirds is required, or (ii) more than half of all shareholders need to be present, and a majority of at least three-quarters is required. Resolutions which require a type (i) majority include the resolution to introduce restraints on share transfer and share exchange or share transfer. Type (ii) is for the resolution to introduce or change differential treatments of shareholders in companies with a restraint on share transfer. There are also cases where the consent of all shareholders is required, e.g. in cases where the liability of directors, corporate auditors, etc. vis-à-vis the company is discharged (Art. 424).

(c) General shareholders’ meeting in practice The General shareholders’ meeting of Japanese listed companies was more of a formality until the late 1990s. The meeting of most companies took place on ⁵⁶ Kabunushi sōkai Hakusho (White Paper on the General Shareholders’ Meeting) 2007, ShōjiHōmu No. 1817, p. 60. ⁵⁷ Ibid., pp. 63–64.

Corporate Law

245

the same day and time, for example the last Thursday of June, and usually lasted a maximum of 30 minutes without any questions asked. In a case involving a major trading company, at the general shareholders’ meeting, the front rows were occupied by employee shareholders in support of the management, and in this atmosphere it was difficult to ask a question or to oppose the proposals of the management. A shareholder took an action in court contending that the resolution of this meeting should be invalidated. The court found that it was questionable that the procedure and the method of voting in this meeting was compatible with the way the law expects them to be, but taking into account that since at least shareholders, including the plaintiff, were given an opportunity to ask questions, this could not be regarded as substantially unfair.58 However, such a practice became unsustainable as shareholders became conscious of their rights and became more active. The law was amended to strengthen the rights of shareholders. Companies are making efforts to communicate with shareholders more than before. According to the annual survey of general shareholders’ meetings of 2007, at the general shareholders’ meeting in 43 per cent of companies, shareholders actually present at the meeting represented less than 15 per cent of the votes. Only in 22.6 per cent of the companies, were more than 30 per cent of votes represented.59 In 15.6 per cent of companies, the general shareholders’ meeting lasted for less than 30 minutes, while this used to be the norm for a majority of companies in the 1990s. In 55.7 per cent of companies the meeting lasted between 30 and 60 minutes.60 One of the problems with general shareholders’ meetings in Japan is the existence of ‘special shareholders’, i.e. those people who make a living out of extortion against companies. Often companies paid these shareholders to be silent or support the management at the meeting. It is a criminal offence for the company to pay specific shareholders, as it is for shareholders to demand that the company pay a special benefit (Art. 120, para. 1 and Art. 970). In the 2007 survey, 59 per cent of the respondent companies acknowledged that there are one to ten ‘special shareholders’ whose movements they mark. Only 27.4 per cent of companies responded that they had no such shareholders.61

(d) Contesting the resolution There are three types of action contesting the validity of the resolution of the general shareholders’ meeting: action for the revocation of the resolution, action for the recognition of the non-existence of the resolution, and action for the recognition of the invalidity of the resolution. In general, flaws in the procedure are

⁵⁸ Judgment of the Osaka District Court, 18 March 1998, Hanji 1658-180. ⁵⁹ Kabunushi-sōkai Hakusho, supra, pp. 94–95. ⁶⁰ Ibid., p. 83. ⁶¹ Ibid., p. 42.

246

Business-related Laws

grounds for revocation, while if the flaws involve the substance of the resolution, it is a ground for recognition of invalidity. Those who contend that the resolution of the general shareholders’ meeting does not exist may bring an action to court for the recognition of the absence of the resolution (Art. 830, para. 1). Resolutions may be regarded to be non-existent, if physically there was no resolution, or if the resolution was flawed in such a substantial manner that it is tantamount to non-existence.62 If the content of the resolution is against the law, an action for the recognition of its invalidity can be initiated (Art. 830, para. 2). Resolutions against the equality of shareholders and resolutions delegating the determination of the retirement payment of directors to the board served as a ground for recognition of invalidity.63 While in these two types of actions there is no restriction on the scope of persons who have standing, in the action for the revocation of the resolution of the general shareholders’ meeting, only shareholders, directors (liquidators), corporate auditors, and senior executive officers are entitled to bring an action in court (Art. 831, para. 1). In order to ensure stability of the resolution, these people must bring an action within three months of the resolution (Art. 831, para. 1). This is because this action is available when the flaw in the resolution is not as serious as in the other two types of actions. The grounds for this type of action are (Art. 831, para. 1): • The procedure for the convocation of the general shareholders’ meeting or the method of resolution is against the law or the Articles of Incorporation, or is substantially unfair. • The content of the resolution is against the Articles of Incorporation. • The resolution is substantially unfair as a result of voting by an especially interested party. These include a resolution which did not take into account the right of the shareholder to request a matter to be included in the agenda, or to present a proposal; a resolution on a matter which was not on the agenda; a resolution with directors and others failing to give an explanation despite the request of shareholders; a resolution adopted without fulfilling the quorum; and a resolution adopted by a simple majority vote where a qualified majority vote is required.64 The court has discretion to maintain the validity of the resolution even if the procedure for convening the general shareholders’ meeting or the method of adopting the resolution was against the law or the Articles of Incorporation, if the breach was not substantial and does not affect the outcome of the resolution (Art. 831, para. 2). The Supreme Court held the resolution valid when notice of the meeting was given six days later than the statutory period, but the plaintiff ⁶² Egashira and Monden, supra, vol. 4, pp. 318–320. ⁶⁴ Ibid., vol. 4, pp. 327–333.

⁶³ Ibid., pp. 322–323.

Corporate Law

247

shareholder was aware that the meeting was to be held in the building where he resided and failed to take part, while all other shareholders attended it.65 On the other hand, in a case where the general shareholders’ meeting was convened by the representative director without the decision of the board and the notice period was two days shorter than the statutory requirement, the court did not hold the resolution valid by exercising its discretion.66

(3) Directors and the board (a) Director It is mandatory for companies limited by shares to have a director (Art. 326, para. 1). Public companies, companies with committees, and companies with an audit board must have a board of directors (Art. 327, para. 1). In these companies, there must be at least three directors (Art. 331, para. 4). Companies with a restriction on share transfer may provide in the Articles of Incorporation that directors need to be shareholders, but such a requirement is not allowed in public companies (ibid., para. 2). Directors are appointed at the general shareholders’ meeting (Art. 329, para. 1). Shareholders representing over one half of the votes need to be present, and a majority vote is required (Art. 341). The same applies to dismissals. When the appointment of two or more directors is on the agenda, shareholders may propose resorting to the cumulative voting system, but this can be excluded by the Articles of Incorporation (Art. 342, para. 1). In almost all listed companies, it is excluded. It is possible under the Company Law to issue shares with a veto right regarding the appointment of directors. In such cases, in addition to the vote in the general shareholders’ meeting, the approval of the shareholders’ meeting of this class of shares is needed (Art. 323). There can be shares with the right to appoint a certain number of directors. If this is the case, directors are appointed at the meeting of this class of shareholders (Art. 347, para. 1). The period of appointment of directors is, as a rule, up to the last general shareholders’ meeting after two years of appointment. In companies with committees within the board, the term is one year (Art. 332, paras 1 and 3).67 Directors can be dismissed any time at the general shareholders’ meeting by a simple majority (Art. 339, para. 1 and Art. 341). Before the enactment of the Company Law, a qualified majority vote was required for dismissal. Thus, dismissal of directors has become easier, but this can be made stricter by the Articles of Incorporation. In companies that issued shares with a veto right regarding the dismissal of directors, in order to dismiss directors, in addition to the approval of ⁶⁵ Judgment of the Supreme Court, 16 June 1980, Hanji 978-112. ⁶⁶ Judgment of the Supreme Court, 18 March 1971, Minshū 25-2-183. ⁶⁷ For non-public companies, it is ten years.

248

Business-related Laws

the general shareholders’ meeting, approval at the meeting of shareholders of this class of shares is required. In companies with shares to appoint a certain number of directors, dismissal of directors thus appointed requires the approval of this class of shareholders (Art. 323 and Art. 347, para. 1). In cases where—despite the fact that a director acted unjustly or against the law or the Articles of Incorporation in a substantial manner—the proposal to dismiss this director was rejected at the general shareholders’ meeting, or does not take effect due to the lack of consent of a specific class of shareholders, shareholders who have held for six months or more without interruption 3 per cent or more of the total number of votes of the entire shareholding or 3 per cent or more of the issued shares may apply to court for the dismissal of this director (Art. 854). Shareholders who have held a share for six months or more without interruption may apply to court for an injunction in cases where a director is conducting business outside the scope of the purpose of the company, or effecting other acts contrary to the law or the Articles of Incorporation, or is likely to do so and there is a likelihood of substantial harm being caused to the company (Art. 360, para. 1). In companies with a corporate auditor or companies with three committees, the likelihood of ‘irreversible damage’ is required (ibid., para. 3). In companies with a board (other than companies with committees within the board), a representative director(s) must be elected from amongst the directors by the board (Art. 362, para. 3). In companies with committees within the board, instead of representative director(s), senior executive officers must be appointed (Art. 402, para. 1). The relationship between the company and the officers (the directors, the accounting adviser, and corporate auditors) is that of mandate (inin) (Art. 330). As such, directors and others have a duty to act as good managers (Civil Code, Art. 644). Directors owe a fiduciary duty vis-à-vis the company: i.e. the duty to comply with the law, Articles of Incorporation, and the resolutions of the general shareholders’ meeting, and loyally carry out their duties (Company Law, Art. 355). In the following cases, directors must disclose material facts regarding the transactions to the board and seek its approval (Art. 365): • Effecting a transaction within the area of business of the company for himself or for the benefit of a third party. • Effecting a transaction with the company for himself or for the benefit of a third party. • Effecting a transaction on behalf of the company with a third party in cases where there is a conflict of interests between the company and the director, such as in cases where the company guarantees the debt of the director to a lender. If directors fail to fulfil their duty, they are liable vis-à-vis the company for the loss (Art. 423, para. 1). This liability is based upon fault. There are some exceptions such as the liability of the director for paying benefits to a specific shareholder

Corporate Law

249

(Art. 120, para. 4). If a director effects a transaction in concurrent business, the profit made by the director via this transaction is presumed to be the loss to the company. If a director acted in conflict of interest with the company resulting in a loss, failure to fulfil the duty is presumed (Art. 423, paras 1 and 2). There were cases where the adequacy of business judgment was at issue. These include responsibility for the collapse of the company, transfer of the company’s assets at a low price, acquisition of property at a high price, the appropriateness of supporting a subsidiary, the failure of investment/speculation, the extending of an excess amount of loans, loans without appropriate screening, the appropriateness of discharge of debt, etc. In one case, a director of a bank extended a substantial amount of loans to a company which was already in de facto collapse and the loan subsequently became irrecoverable. The court pointed out that whether the collection of information and its analysis and examination was reasonable under the circumstances at the time of the act should be tested in light of the knowledge and expertise expected of a director of a bank, and found the director liable.68 In companies other than those companies with committees within the board, the amount of remuneration, bonuses, and other benefits payable to directors—or if the amount is not fi xed, the method of calculating it—are to be determined by resolution of the general shareholders’ meeting, if not by the Articles of Incorporation (Art. 361, para. 1). Disclosure of this amount is not sufficient because in most listed companies; only the maximum total amount of remuneration of all directors is disclosed and approved.

(b) Representative directors The board must appoint representative directors from amongst the directors (Art. 362, para. 3). Representative directors are empowered to effect all judicial and extra-judicial acts involving the business of the company (Art. 349, para. 4). In companies with committees within the board, instead of representative directors, there are senior executive officers (shikkō-yaku) who are appointed by the board, but not necessarily from amongst the directors (Art. 402, paras 1 and 2). Senior executive officers make decisions on the matters delegated to them by the decision of the board, and execute the business of the company (Art. 418). On average, such companies listed in the TSE have 12.6 senior executive officers, of which 2.2 are representative senior executive officers. Senior executive officers may be directors at the same time, but if the number of such directors is too many, this will endanger the role of the board as a supervisory body. The senior executive officer cannot be a member of the audit committee. The average number of senior executive officers combining directorship is 3.3.69 ⁶⁸ Judgment of the Sapporo High Court, 2 March 2006, Hanji 1946-128. ⁶⁹ J. Yokoyama, ‘Iinkai-Secchi-Kaisha no Shikkō-Yaku no Jittai (The Actual State of Senior Executive Officers in Companies with Committees within the Board)’, Shōji-Hōmu, No. 1819, pp. 37–39.

250

Business-related Laws

(c) The board (of directors) The role of directors differs in companies with a board and without a board of directors. In companies with a board, only the representative director and other directors selected by the board execute the business of the company (Art. 363, para. 1), while in companies without a board, directors execute the business of the board (Art. 348, para. 1). In companies with committees within the board, directors, as a rule, do not execute the business of the company (Art. 415). The board in such companies is intended to perform a supervisory role. The chairperson of the board is the president in 85 per cent of the companies, while in most of the remaining companies, the chairman of the company chairs the board meetings.70 The board (except in companies with committees within the board) has the power to: (i) determine the execution of the business of the company; (ii) supervise the carrying out of duties by directors; (iii) appoint and dismiss representative directors (Art. 362, para. 2). Matters which fall within exclusive jurisdiction of the board (decision-making in significant matters involving the execution of business) include the following (ibid., para. 4): (i) (ii) (iii) (iv)

disposal or acquisition of significant assets; borrowing of a large amount; appointment and dismissal of important employees; establishment, change, and abolition of branches and other organisational units; (v) significant matters involving the issuing of bonds; (vi) introduction of a system to ensure compliance of the carrying out of duties by directors with the law and the Articles of Incorporation.

The last item has been incorporated under the influence of the US SarbanesOxley Act. The decision of the board is adopted by a simple majority. The quorum is over one half of the directors who are entitled to vote. Both the quorum and the threshold of the vote can be increased by the Articles of Incorporation. Interested directors may not vote (Art. 369, paras 1 and 2). A new system of a vote by ‘special directors’ was introduced in the Company Law. In companies with six or more directors of which at least one is an external director, in making a decision on items (i) and (ii) of the above, the board may select three or more directors (‘special directors’) and let them decide the matter ⁷⁰ Ibid.

Corporate Law

251

by more than one half of them being present, and the support of a majority of those who are entitled to vote (Art. 373, para. 1). The Japanese board system was introduced in 1950 and was based upon the US system existing at that time. Therefore, the Japanese system is often categorised as a single tier system in contrast to the Continental system, where together with the executive board there is a supervisory board. However, since 1950, the US board system has changed significantly. The business is now carried out by executive officers, while the board primarily performs supervisory functions. In Japan, it was different. Until recently, the characteristics of the Japanese board were: • The combination of business execution and supervision functions in a single body—the board. • The existence of a large number of directors, but the power being concentrated in several senior directors. • Directors promoted from within the employees, and almost no externals. With the increasing awareness of the rather lax system of corporate governance, and growing shareholder activism, reform of the board system began in the late 1990s. At that time of slow economic growth, slimming down the board in order to ensure quick decision-making and implementation was needed. The size of the board has become much smaller than before. While in the 1990s, companies with more than forty directors were not uncommon, according to the TSE survey of 2007, the average number of directors of the companies listed in the first section of the TSE was 9.66.71 The position of executive officers was introduced in a number of companies and the function of directors was partly delegated to them. This was intended to separate business execution from supervision. Executive officers represent the business and administrative departments and are not members of the board. While in the past, directors in most cases maintained the position of head of a particular business or administrative division, now the latter is left to executive officers. It should be noted that the position of executive officer does not have a legal basis. It is a position which companies have voluntarily created. This is in contrast to the position of senior executive officer, which is a statutory position in companies with three committees on the board.72 What has not changed is that most of the directors are promoted from within the ranks of employees, and external directors are rare. In companies with committees within the board, the role of the board is different. It is more supervisory than executive. The board determines the basic ⁷¹ TSE, White Paper, supra, p. 14. ⁷² Executive officers should not be confused with senior executive officers. In Japanese, the terminology is confusing: shikkō-yakuin and shikkō-yaku. In the TSE White Paper of Corporate Governance, the term executive officer is used in the sense of a senior executive officer, supra, p. 33.

Business-related Laws

252

policy of business and supervises the carrying out of duties by senior executive officers (Art. 416, para. 1). Senior executive officers execute the business of the company, and when empowered by the board, make decisions on the execution of business (Art. 418). Each committee comprises three or more members. The members are appointed from amongst the directors by the board. At least half of the members of each committee must be external directors (Art. 400, paras 1–4). In a majority of companies, each committee has three to five members. The nomination committee has the largest average number of members (4.12), followed by the remuneration committee (3.90), and then the audit committee (3.53). It should be noted that in a majority of companies, the chairman of a majority of the committees is an insider.73 The appointment of external directors is mandatory in companies with committees within the board, since a majority of each committee’s members must be ‘externals’. The Company Law defines external directors as: Directors who are not a business executing director of the company or its subsidiary, their senior executive officer, manager, or an employee, and have, in the past, not occupied such a position in these companies (Art. 2, subpara. 15).

In companies with corporate auditors among TSE listed companies, 42 per cent of companies—of which 2 per cent were companies with committees within the board—have an external director. However, excluding those companies in which external directors are mandatory, in a majority of companies the number of external directors was one.74 Of the external directors, over 80 per cent of them are from another company. Attorneys, accountants, and academics are also appointed as externals.75

(4) Corporate auditors Corporate auditors supervise the carrying out of duties by directors (Art. 381, para. 1). As a rule, companies with a board must have a corporate auditor (Art. 327, para. 2). In addition, large companies must have an audit board comprising of three or more corporate auditors. Until recently, the improvement of corporate governance has been pursued by reinforcing the system of corporate auditors. In the late 1980s when Japan was urged by the United States to introduce external directors, there was strong resistance from the business community, and in the end external auditors were introduced. The strengthening of the corporate auditor system culminated in the formation of the audit board comprising of three or more corporate auditors. A majority of them must be external auditors (Art. 335, para. 3)

⁷³ TSE, White Paper, supra, pp. 30–32.

⁷⁴ Ibid., p. 15.

⁷⁵ Ibid., p. 17.

Corporate Law

253

Corporate auditors are appointed and dismissed by the general shareholders’ meeting (Art. 329, para. 1). However, in order to dismiss a corporate auditor, a qualified majority vote of shareholders is required (Art. 343, para. 4, Art. 339, para. 1 and Art. 309, para. 2)). Companies may issue classes of shares with the right to veto the appointment of a corporate auditor, or to appoint a corporate auditor. The term of office of corporate auditors terminates at the end of the last general shareholders’ meeting in the fourth year of appointment (Art. 336, para. 1). Corporate auditors audit the carrying out of duties by directors (Art. 381, para. 1). For this purpose, corporate auditors are entitled to procure a report concerning the business from directors and employees, or investigate the state of business and finance. Corporate auditors may also require the same of the subsidiaries, or conduct investigations into their business and finances. However, subsidiaries may refuse to comply, if there is a justifiable ground to do so (Art. 381, paras 2–4).

(5) Derivative action (shareholders’ action) In a derivative action, shareholders are allowed to pursue the liability of directors vis-à-vis the company on its behalf. In addition to the recovery of the loss to the company, this system also functions as a deterrent against neglect of duties and wrongdoing by directors and other officers of the company. It has been pointed out that this is especially the case in derivative actions initiated by shareholders of listed companies in Japan. The amount of claimed compensation tends to be much higher than the amount that defendants can reasonably afford. Shareholders who have held a share for six months without interruption before taking action are entitled to require the company, in writing, to initiate an action to pursue the liability of directors, accounting adviser, corporate auditors, senior executive officers, accountants, founders, directors and corporate auditors in the establishment procedure, and liquidators. However, if the action is intended for the unjust benefit of the plaintiff shareholder, or a third party, or to cause damage to the company, this does not apply (Art. 847, para. 1). Previously, derivative action was available only against directors, but the 2005 Company Law expanded the scope of people whose liability can be pursued by a derivative action. If the company does not take any action within sixty days of the request, the shareholder who made the request is entitled to initiate an action in pursuit of liability of the above people (ibid., para. 3). If, by waiting sixty days, there is a likelihood of irrecoverable loss caused to the company, the shareholder may initiate an action straight away (ibid., para. 5). When initiating an action in such cases, the plaintiff must inform the company. The company, in turn, is under an obligation to inform other shareholders. The ground of action against directors is the neglect of duty, i.e. the breach of fiduciary duty or the breach of the duty to act as a good manager. So far, the

254

Business-related Laws

court found directors liable in cases such as an unlawful share buy-back, unlawful loans, production and sales of contaminated medicine, remuneration of directors without the resolution of the general shareholders’ meeting, failure to supervise a rogue trader and the failure to report irregularities to the financial authority, payment to an extortionist and assumption of debts, and the sale of food containing prohibited ingredients. The system of derivative action was introduced into Japan in 1950 from the United States. Since the introduction of the system, it was seldom used for more than forty years. The total number of shareholders’ actions between 1950 and 1993 was thirty-three. This was primarily because the amount of stamp duty payable for the action was calculated on the basis of the contested amount. This could be substantial, while the plaintiff/shareholder does not directly benefit even if the plaintiff wins. There was no real incentive for shareholders to initiate an action. The only case of derivative action where the plaintiff shareholder won during this period was the Mitsui Mining case where the liability of directors who had caused the company to buy back shares from a shareholder opposing the merger was at issue. Share buy-back was in principle against the law at that time. The company paid an above the market price and purchased shares from this shareholder. It took fifteen years for the case to be finally decided by the Supreme Court in favour of the shareholder.76 The situation changed in the early 1990s. During the ‘bubble economy’ in the second half of the 1980s, companies resorted to equity finance which diluted the share of existing shareholders. Then the ‘bubble’ burst, and many companies were left with enormous debt. Shareholders who had been neglected had good reason to pursue the liability of directors. In a celebrated case involving a major securities company, the court ruled that the stamp duty in this case should not be calculated on the basis of the contested amount, but should be regarded as incalculable, and therefore, set at 8,200 yen. This coincided with the SII Talks with the United States in 1989/1990, in which Japan was urged to strengthen minority shareholders’ rights, including the facilitation of derivative action. The Commercial Code was amended accordingly, and the amount of stamp duty for a derivative action was set at 8,200 yen. As a result of this change, the number of derivative actions increased, but not as much as some people had feared. On the other hand, the amount of claimed damages has soared. According to a fairly comprehensive statistical survey of shareholders’ actions published in 2004, the total number of shareholders’ actions in the six and a half years following 1993 was seventy-five. In twenty-four cases, the claimed amount was over 10 billion yen.77 In one case, damages of 1,650 billion yen were claimed (Japan Airlines case). ⁷⁶ Judgment of the Supreme Court, 9 September 1993. ⁷⁷ C. Nunoi et al., ‘Kabunushi-daihyo-soshō no Jittai-bunseki (The Statistical Analysis of Shareholders’ Action)’, in Japan Law Foundation (ed.), Kaisha-Hōsei kara mita Funsō no Kaiketsu to Kaihi (Dispute Resolution and Avoidance from the Corporate Law Perspective) (Tokyo, 2004), pp. 41–77.

Corporate Law

255

According to this survey, of the seventy-one cases of shareholders’ actions after 1993, there were only two cases (one of which involved a non-listed company) in which the plaintiff won. In four cases (one listed company), part of the plaintiff ’s claim was acknowledged. In fifteen cases involving listed companies, the parties settled. In thirty-nine cases, the plaintiff lost the case (including the order to place a deposit, withdrawal, and dismissal of action by court). As can be seen above, it is not common for the plaintiff to win in a derivative action. Up to 2007, there have been less than ten cases where directors were found fully or partly liable.78 This may be attributed to the limited availability of evidence to the plaintiffs. In many cases, the parties settle at a much lower amount than that claimed. For example, in the Sumitomo Corporation case, while the claimed amount was 200 billion yen, the parties settled at 43 million yen. When endorsing settlement, the court must inform the company. The company has two weeks to file an objection against settlement (Art. 850, para 2.). When derivative action was facilitated in 1993, companies feared that the system might be abused. In order to prevent abusive actions, the court is empowered to order the plaintiff to place a deposit (security for action) if the defendants present a prima facie case that the plaintiff is acting in bad faith. Although the court is fairly cautious in ordering deposit placement, when the order is made the amount can be substantial. There are a sizeable number of cases where the plaintiff failed to place a deposit and withdrew. One of the highest amounts of damages acknowledged by the court before 2008 was in the Daiwa Bank case, where the court of first instance ordered the defendants to pay 775 million US dollars’ worth of damages. This was a case where a rogue trader in the bank’s US subsidiary caused a substantial loss, but the bank failed to report it to the US authority and as such had a large fine imposed upon it, eventually having to close its operation in the United States. The failure to prevent such an incident, including the failure to put a proper supervisory mechanism in place and to take necessary actions after the incident was a ground for the pursuit of liability. However, as a result of the conversion of the bank into a subsidiary of a holding company, the plaintiffs, with the loss of standing in view, were forced to settle at 250 million yen. Under the Company Law, in such a situation, the plaintiff shareholders can continue the lawsuit (Art. 851). In 2008, there were three cases where the defendants were ordered to pay a substantial amount of damages. In the case involving Duskin, which runs a doughnut chain, selling food with unlawful additives was at issue. Two directors who—even after they became aware of the existence of unlawful additives— continued to sell the products were ordered to pay 10.6 billion yen.79 In the ⁷⁸ Shiryō-ban Shōji-Hōmu, 2008, No. 6, p. 103ff contains a fairly comprehensive list of derivative actions up until the end of 2007. ⁷⁹ Judgment of the Osaka High Court, 18 January 2007. Certiorari was rejected by the Supreme Court. See also H. Matsui, ‘Duskin Kabunushi-Daihyo Soshō Jiken no Kentō (An Analysis of the Duskin Derivative Action Case)’, Shōji-Hōmu No. 1834, p. 4ff.

Business-related Laws

256

Yakurt case, a director in charge of finance invested in derivatives without the knowledge of the board and lost. He was ordered to pay 6.7 billion yen. Finally, in the Janome Sewing Machines case, five directors were ordered to pay 58.3 billion yen for paying an extortionist and assuming debts for him.80 Liability of directors can be capped by the resolution of the general shareholders’ meeting after the incident, or by the Articles of Incorporation in advance, but only in cases where the director had acted in good faith and without gross negligence. The limitation can be up to six years of remuneration and other income for representative directors, four years for other directors, and two years for external directors (Arts 425 and 426).

7. Mergers and Splitting of Companies (1) Mergers (a) Mergers in Japan Japanese companies were not known for active M&A activities in the past. However, there has been a significant increase in the number of M&A cases since the late-1990s. 3,000 2,500

IN-IN IN-OUT

2,000

OUT-IN

1,500 1,000

1–8

OUT–IN: IN–OUT: IN–IN:

Foreign-capital acquirer—Japanese-capital target Japanese-capital acquirer—Foreign-capital target Japanese-capital acquirer—Japanese-capital target

Figure 11.1 Trends in the number of M&A cases since 1985 Source: RECOF.81

⁸⁰ Nikkei, 25 October 2008. ⁸¹ .

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

0

1985

500

Corporate Law

257

However, these were mostly backward orientated ‘restructuring’ of businesses on a friendly basis, rather than M&A based upon a proactive business strategy.82 Concerning mergers between Japanese companies, if a company whose gross assets are above 10 billion yen and another company whose gross assets are above 1 billion yen are involved, reporting to the Fair Trade Commission (hereinafter ‘FTC’) which is in charge of implementation of competition law, is mandatory. In the Financial Year 2006, there were seventy-four reported cases of mergers between Japanese companies above this threshold. All mergers were mergers by absorption and not by setting up a new company. 45 per cent of the mergers involved the amount of assets after the merger being between 10 billion and 50 billion yen. Mergers with the gross assets after the merger being over 100 billion yen accounted for 14.9 per cent (eleven cases).83 Mergers involving listed companies are not common—usually less than twenty cases per annum. Provisions on mergers in the Commercial Code originated from before the Second World War and were regarded as being complicated while protection of shareholders and creditors were insufficient. In the 1990s, with the decline of the economy, M&A came to be acknowledged as an effective means of reorganising company groups and of making companies more efficient. It was felt that streamlining and simplification of the merger procedure were needed. As part of the government’s programme for regulatory reforms, it was decided to simplify the merger procedure.84 The Commercial Code was amended in 1997 to this effect.

(b) The procedure Mergers can take the form of uniting or amalgamating two or more existing companies to form a new company or the absorption of one or more existing companies by another and the continuing company inheriting the rights and obligations of the discontinuing company. In Japan, the latter form—merger by absorption— is common. Almost all cases of mergers reported to the FTC were by means of absorption.85 The reason for this is reportedly the rate of higher registration tax, and the need to reapply for the listing and licence in the first method.86 In order to merge, a merger agreement needs to be prepared, approved by a qualified majority vote at the general shareholders’ meeting, the procedure for the protection of creditors be taken, and the merger registered. The Company Law provides for mandatory and optional terms to be accommodated in the merger agreement. The mandatory terms for a merger by absorption include the following (Art. 749, para. 1): (i) Trade name and registered address of the parties.

⁸² ⁸³ ⁸⁴ ⁸⁵ ⁸⁶

. FTC, Annual Report of 2006, . Ueda, supra, p. 255. FTC, Annual Report 2006, supra. E. Ueda, supra, pp. 2–15.

258

Business-related Laws

(ii) If the continuing company is to provide shareholders of the company being absorbed with cash, pre-emption rights for new shares, etc. in exchange for the shares of the latter company, their details. (iii) If subpara. (ii) is applicable, allocation of cash etc. to those shareholders. (iv) If the company being absorbed has issued pre-emption right for new shares, details of pre-emption rights for new shares or cash to be provided by the continuing company to those who hold such pre-emption rights for new shares. (v) If subpara.(iv) is applicable, allocation of cash etc. to the holders of preemption rights for new shares. (vi) The date on which the merger takes effect. Concerning subpara. (ii), if the payment is made by shares of the continuing company, the number of shares to be paid, or the method of determining the number of shares, the amount of capital and capital reserve of the continuing company must be specified in the agreement. Similarly, if the payment is to be made in cash, the amount or the method of its calculation needs to be specified. The ratio of merger is the core of the merger agreement. In Japan, it often happens that when the merger is agreed in principle and announced, the ratio is yet to be agreed, and the determination is often left until a very late stage. The parties negotiate for a better deal, but in the meantime, the share prices fluctuate and the shareholders’ interest may be affected.87 Japanese companies often insist that the merger is effected on an equal footing regardless of the difference in the size of the parties. As a means of accounting, a share pooling method is preferred to the purchase method which is now the international norm. With the purchase method one company is purchasing another company whose assets are to be valued at the current price. This is regarded to be against the idea of a merger on an equal footing. If the payment is not made by the share of the continuing company, but by other means, shareholders of the company which is to be absorbed lose the opportunity to share the increase in the value of the company (synergy value) resulting from the merger. The Company Law provides that the ratio of merger in such cases should be determined on the basis of the value of the companies which are parties to the merger, but in addition, this synergy value should be allocated properly.88 During the period of two weeks before the general shareholders’ meeting and six weeks after the date on which the merger takes effect (for the company which is being absorbed, until the date on which the merger takes effect), ⁸⁷ Nikkei, 17 April 2003. In November 2000, two major chemical companies announced a plan for the integration of the management. At this stage, neither parties had a financial adviser who would advise them on the value of the company. For two years, they could not agree on the ratio, and eventually, the plan was cancelled. ⁸⁸ Egashira and Monden, supra, vol. 4, p. 56.

Corporate Law

259

a document accommodating the content of the merger agreement and other relevant matters, including the appropriateness of the terms of merger, must be placed at the head office of the company which is to cease to exist for inspection (Art. 782, para. 1 and Art. 794, para. 1). Shareholders, holders of pre-emption rights for new shares, and creditors are entitled to inspect and receive a copy of the document. The merger has to be approved by a qualified majority vote of shareholders of both the continuing company and the company which is to cease to exist (Art. 783, para. 1, Art. 795, para. 1, and Art. 309, para. 2, subpara. 12). If the shareholders of the company which is to cease to exist are to be paid by quota of companies limited by quota, a unanimous vote is required (Art. 783, para. 2).

(c) Appraisal rights Shareholders who are opposed to the planned merger are entitled to require the respective company to purchase their shares at a fair price (Art. 785, para. 1 and Art. 797, para. 1). Those shareholders are required to inform the company of their objection before the general shareholders’ meeting and to have voted against the merger (ibid., para. 2). The appraisal right must be exercised between twenty days before the date the merger takes effect and the day before this date (ibid., para. 3). The purchase price is to be negotiated between the shareholder and the company, but if an agreement is not reached within thirty days of the date of the merger, the shareholder or the company may ask, within thirty days, for the court to determine the price. The court practice was that fair price meant the price if there had not been a resolution of merger. However, the Company Law has adopted the concept of ‘fair price’, which is to reflect the ‘synergy value’ resulting from the merger. The method of calculation is yet to be determined.

(d) Procedure for the protection of creditors Since creditors may be affected by the merger, there is a procedure for the protection of creditors. The merging companies are under an obligation to publicly announce the merger in the Official Gazette and also to invite known creditors to come forward, if they object to the merger. By the Articles of Incorporation, companies may decide not to notify known creditors individually, but to make an announcement in the daily papers, or by electronic means, in addition to the announcement in the official gazette (Arts 789 and 799, paras 1 and 2). If a creditor objects to the merger, the company needs to either (i) repay the debt even if it is not due, (ii) instead, provide collateral, or (iii) deposit an appropriate amount to a trust company or banks involved in trust business (ibid., para. 5). However, the novelty since the 1997 amendments is that if there is no likelihood of the merger harming the creditors, these measures are not required (Art. 789, para. 5 and Art. 799, para. 5).

260

Business-related Laws

(e) Simplified procedure and summary procedure In 1997, a new simplified procedure for mergers was introduced. This is available in a merger by absorption where the total amount of (i) the number of the shares provided to the shareholders of the discontinuing company at the time of merger multiplied by the value of net assets per share, and (ii) book value of the bonds of the continuing company and other assets provided to them at the time of merger does not exceed 20 per cent of the net assets of the continuing company (Art. 796, para. 3). This procedure is not available if the amount of debt exceeds the assets of the extinguishing company and in some other cases. If more than one sixth of the shareholders express their objection to the merger in the procedure for the exercise of appraisal rights, the simplified merger procedure cannot be utilised (ibid., para. 4). What is simplified in the procedure is that the shareholders’ meeting of the continuing company is not required; the shareholders’ meeting of the discontinuing company is still required as well as the disclosure procedure and the procedure for the protection of creditors. The shareholders’ appraisal rights remain. Summary procedure is a new system introduced by the Company Law. In Japan, mergers between listed companies are rare. More than half of the mergers involving a listed company were those in which a listed company absorbed its 100 per cent subsidiary.⁸⁹ It was thought to be excessive to require the same formal procedure for merger in such cases. In cases of mergers by absorption, if one of the parties holds 90 per cent or more of the votes of the other company (‘special controlling company, Art. 468, para. 1), a summary procedure is available. Shareholders’ approval is not required in the subordinate company, regardless of whether it is the continuing or discontinuing company after the merger (Arts 784, para. 1 and 796, para. 1).

(f) Registration In mergers by setting up a new company, the merger takes effect by registration. In mergers by absorption, the rights and obligations of the extinguishing company shift to the continuing company in a comprehensive manner on the agreed date on which the merger takes effect (Art. 750, para. 1). In cases where registration or other formalities are required to set up a right against a third party, such formalities are needed for the continuing company to set up a right which it inherited from the extinguishing company against a third party.

⁸⁹ Yamaichi Securities Economic Institute (ed.), Zōshi-Hakusho (White Paper on Corporate Finance) 1996 (Tokyo, 1997), p. 8, pp. 70–71.

Corporate Law

261

(g) Invalidity of a merger Mergers can be invalidated only by an action in court within six months of the date of the merger taking effect (Art. 828, para. 1). The standing is limited to shareholders, directors, senior executive officers, auditors, liquidators, administrators, and creditors who were opposed to the merger (Art. 828, para. 2). The district court of the place of the main office of the continuing company (or a newly set up company) has an exclusive jurisdiction (Art. 835). Once the judgment takes effect, it is binding on everybody—not only on the parties (Art. 838). The Company Law does not specify the grounds for invalidity. By interpretation, typical grounds for invalidity of merger include: (i) defects in the merger agreement; (ii) absence of, or defects in, the resolution of the shareholders’ meeting approving the merger; (iii) absence of the decision of the board; (iv) failure to make documents available for inspection, or the providing of false information; (v) unlawful allocation of shares to shareholders of the company which is to cease to exist; (vi) failure to implement the procedure for the protection of creditors; (vii) mergers contrary to competition law. Whether the inappropriateness of the merger ratio serves as a ground for invalidity has been discussed for some time. The majority view was that it was not a ground for invalidity, since, after all, the merger is approved by a qualified majority vote of shareholders, and if there was a flaw in the procedure, its invalidity could be contested on other grounds. Shareholders who are against the merger are entitled to appraisal rights. There is a High Court decision which ruled that the inappropriateness or unfairness of the merger ratio is not in itself a ground for the invalidity of a merger.90

(h) Takeover law Hostile takeover is rare in Japan. Although there have been some abortive hostile takeovers in the past decade, as of 2008, there has not been a successful hostile takeover involving a listed company in Japan.

⁹⁰ Judgment of the Tokyo High Court, 31 January 1990, upheld by the judgment of the Supreme Court, 5 October 1993.

262

Business-related Laws

The reason for this can be explained in the following way. First, hostile takeovers were not regarded in the business community as a legitimate means of business. This is related to the perception of the ownership of the companies. In a company system dominated by insiders, it was inconceivable for them to envisage and accept the company being taken over by outsiders. Secondly, technically, it is difficult to take over a listed company. This is not only because it requires a significant amount of finance, but also because of the shareholding structure. In most listed companies, there is no large block of shares held by a specific shareholder—shares are spread among a large number of shareholders. A significant portion of shares is in ‘friendly hands’, i.e. stable shareholders who will normally not part with these shares. The system of takeover bids (in the US, tender offer, hereinafter, ‘TOB’) was introduced in Japan in 1971 by the amendment to the then Securities and Exchange Law based upon the US model. In fact, this was not because there was a real need for it, but because the legislature simply wanted to be prepared for potential takeovers.91 Unlike in the US, TOB was seldom used for hostile takeovers. It was primarily used for the reorganisation of corporate groups. However, since the late 1990s, cases of hostile takeovers via TOB began to emerge.92 Particularly in the last four to five years, there has been a shift towards more proactive M&A. This is demonstrated by the abortive takeover bid of Hokuetsu Pulp Mill by Oji Paper. A commentator pointed out that because a leading company in the industry such as Oji initiated a hostile bid, the hostile takeover in Japan has been recognised as a means of implementing business strategy.93 As the economic difficulties deepened in the late 1990s and continued into the 2000s, the further facilitation of corporate reorganisation became necessary. The second step after the simplification of the merger procedure, as envisaged by companies, was the diversification of payment for takeovers. Th is enables ‘triangular merger’, i.e. merger by offering shares of the parent company. The target company merges with a subsidiary of the acquiring company. Shareholders of the absorbed company are given the shares of the parent company, instead of the shares of its subsidiary. Th is method is particularly useful in cross-border (out-in) mergers. The draft Company Law incorporated this system. However, in light of some celebrated hostile takeover cases since 2003, there has been growing concern amongst companies that, as a result of triangular takeovers as part of the diversification of payment, hostile takeovers may

⁹¹ I. Kawamoto and Y. Otake, Shōken-Torihiki-Hō Tokuhon (Thesis on the Securities and Exchange Law), 7th edn (Tokyo, 2006), p. 197. ⁹² The first case of hostile takeover involved the takeover of a Japanese company by Cable and Wireless in 1999. The target company was not a listed company. ⁹³ T. Arai (ed.), Nihon no Tekitai-teki Baishū, (Hostile Takeovers in Japan) (Tokyo, 2007), p. 4.

Corporate Law

263

increase.94 In their opinion dated 16 November 2004, Keidanren pointed out as follows: . . . As a result, there is a risk that the corporate value would be harmed by a bidder who is not committed to the long term interest of the company, and aspires to pursue its own short term interest. Shareholders, employees, the local community would be substantially disadvantaged . . .

It was concluded that reasonable defensive measures should be urgently put in place by companies.95 Thus, while the new Company Law entered into force in 2006, the part on diversification of payment for mergers finally took effect on 1 May 2007. The first case of triangular merger involved the takeover of Nikko Securities by the Citi Group in 2007. In light of the near absence of hostile takeovers, the need for takeover law in Japan had never been felt acutely. It was only in 2004 that defensive measures became an issue as a result of the celebrated cases of attempted hostile takeovers.96 Generally, in the developed world, there are two different approaches to defensive measures when a company’s management is faced with an unsolicited bid.97 In the US, board-controlled defensive measures to resist the bid are available. This is explained as a mechanism for defending shareholder value and other stakeholders by protecting the company’s longer-term strategic interests. Usually it takes the form of a shareholder rights plan or colloquially, ‘poison pills’. If an unsolicited bidder acquires shares above a certain threshold, the scheme is triggered, and shareholders other than the bidder are allowed to exercise the option and acquire shares at an advantageous price. As a result, the shareholding of the bidder will be diluted. In contrast, in the UK, by virtue of Rule 21 of the City Takeover Code, the board of the target company is not allowed to frustrate the bid. The EU Takeover Directive takes a similar approach.98 In Japan, when a potential wave of hostile takeovers was seen to be imminent, discussions regarding defensive measures began. However, the focus was on the availability or feasibility of the US-type rights plans under Japanese law, and not on the principal matter of whether defensive measures should be available to the board in the first place. With the series of amendments made to the Commercial Code, various potential defensive measures had become available since the early 2000s. In ⁹⁴ T. Aizawa, ‘Gappei to Taika no Jūnan-ka no Jitsugen ni itaru Keii’ (The Process of the Realisation of the Flexibilisation of Payment for Mergers), Shōji-Hōmu 2007, No. 1801, p. 9. ⁹⁵ ⁹⁶ K. Takei et al. (eds), Kigyō-Baishu Bōei Senryaku (Strategy on the Defence of Company) (Tokyo, 2004). Takei has already pointed out the potential of the new share system to act as/provide defensive measures in 2001 in Atarashii Kabushiki Seido (New System of Shares) (Tokyo, 2001). M.Ishiwata, supra, Shōji-Hōmu, 2004, No. 1716, p. 4ff. See also G. Puff and K. Yamamoto, ‘Nihon ni okeru Poison Pill no Gutaika no Kentō’, Shōji-Hōmu, 2004, No. 1694, p. 16ff. ⁹⁷ D. Kershaw, ‘The Illusion of Importance: Reconsidering the UK’s Takeover Defence Prohibition’, International and Comparative Law Quarterly, 2007, vol. 56, pp. 267–307. ⁹⁸ Council Directive 2004/25 [2004] OJ L142/12, 12–23 (EC).

264

Business-related Laws

2001, pre-emption rights for new shares were fully liberalised. A wide range of new classes of shares were introduced. It was thought that various types of rights plan widely available in the US would now be available in Japan as well.99 The problem in Japan was that firstly, although parts and components of defensive measures became available, the schemes themselves had not been developed and had to be built from scratch. Secondly, the permissibility of the scheme had never been tested in court, nor were there any guidelines. Thirdly, rules regarding the implementation of defensive measures were totally absent. In 2005, a celebrated case of a hostile takeover took place in the absence of a takeover law. Fuji Television Network initiated a TOB against the Nippon Broadcasting System (hereinafter, the ‘NBS’) in order to purchase a majority of the NBS shares on 18 January. This was a friendly use of TOB which was common in Japan. While NBS was the parent company of Fuji Television, they intended to reverse this relationship. On 8 February, before the trading at the TSE started, a company called Live Door announced that it had purchased 29 per cent of the issued shares of the NBS via ToSTNet-1, a system of off-floor trading at the TSE, and suddenly emerged as a major shareholder without resorting to the TOB procedure. As a defensive measure, on 23 February the NBS issued pre-emption rights for new shares by the decision of the board and allocated them to Fuji Television. If all options were to be exercised, the number of issue shares of the NBS would be 2.44 times more than the present and Fuji Television would be holding up to 59 per cent of those shares, while Live Door’s shareholding would be reduced from 42 per cent to 17 per cent. Live Door sought an injunction against the issue of a pre-emption right for new shares. The district court accepted the argument of the applicant that the issue of pre-emption rights for new shares was substantially unfair, and granted an injunction. The court ruled that in cases where there is a dispute over the control of the company, if a pre-emption right for new shares is issued and allocated to a third party in a way which would reduce the shareholding of a specific shareholder, and which is primarily aimed at maintaining control by the incumbent management, unless there are special circumstances which justify it from the viewpoint of protecting the interests of the company and the common interest of shareholders, it would constitute a substantially unfair issue. NBS further appealed to the High Court. NBS argued that the issue of preemption rights for new shares was a matter of business judgment as to what should be better in terms of corporate value. This is in line with the mainstream view on defensive measures in the US.100 However, the High Court upheld the original ⁹⁹ Anon. ‘Shinkabu yoyakuken ni kannsuru Kaisei Shōho to Kigyō Baishū Bōei-saku no Tayō-ka (The Amendment to the Commercial Code re: Pre-Emption Rights and Defensive Measures against Takeovers)’, Shōji-Hōmu, 2001, No. 1615, pp. 28–29. ¹⁰⁰ H. Matsui, ‘Torishimariyaku no Shinkabu-Hakkō Kengen (The Power of Directors to Issue New Shares) (2)’, Hōgaku-Kyōkai-Zasshi, vol. 114, p. 687.

Corporate Law

265

decision based upon the argument regarding the distribution of power between the board and the shareholders: the board, which is a mere executive body, should not be allowed to usurp the power of the shareholders. Mistrust on the part of the court of the board’s capability to make a neutral and fair decision is obvious here. After all, Japanese boards are mostly composed of insiders and seldom have independent directors. At first glance, these decisions seem to maintain the traditional approach of the primary purpose rule, which was prevalent in the 1990s. The primary purpose rule presupposes that a share issue and similar measures primarily for the purpose of the maintenance of control by the incumbent management are inherently unfair and unlawful.101 As an exception, these measures are permitted if there are some overriding business needs, such as financing. Therefore, in the past, companies justified the new share issue by citing the need for finance. On occasions where the acquirer was suspected of being a greenmailer, the court readily acknowledged that there was a need for finance. This approach may have been valid when the hostile takeover was substantially rare and greenmailing was not uncommon, but not any more, when genuine legitimate M&A activities by companies are taking place. It is not surprising that a view which squarely acknowledges the legitimacy of the board’s power to adopt defensive measures and act for the maintenance of control under some circumstances, rather than resorting to dubious financial needs, emerged as M&A became a reality in Japan. According to a proponent of this view, it is part of the business judgment of the incumbent management to adopt measures against a potentially harmful takeover. If the board is not pursuing its own interest, but instead issues new shares in pursuit of the legitimate interest of the company, this should be allowed as an exercise of business judgment.102 In the NBS case, whether the primary purpose of the issue was the maintenance of control or not was not in question; it was the primary purpose. The problem was whether there were instances where the issue of the pre-emption rights for new shares by the board for the purpose of maintenance of control was justifiable, and whether this case qualified as an exception. It should be added that in the NBS case, one of the factors which cast doubt on the fairness of the acquisition of shares by Live Door was the way it acquired a substantial amount of shares and suddenly emerged as a major shareholder. If, out of the blue, a shareholder with almost 30 per cent of the shares could emerge and proceed to take over a company, a market which allows such a surprise attack to take place cannot be regarded as being adequately regulated. It could be said that the absence of proper regulation was abused by Live Door. ¹⁰¹ This view is shared by the balance of power doctrine in Germany which influenced this decision. See the Holzmüller case (BGHZ 83, 122). U. Hüffer, Aktiengesetz, 8th edn (Munich 2008) § 119, Rdn. 16–20. ¹⁰² Matsui, supra.

266

Business-related Laws

The loopholes of the then Securities and Exchange Law were hurriedly closed in 2006.103 The court in the NBS case actually had in view the work in progress of the ‘Corporate Value Research Group’ which was set up in October 2004 by the Ministry of Economy, Trade and Industry, who, in conjunction with the Ministry of Justice had been working on rules regarding pre-bid defensive measures. Based upon the report of this Group, the Guidelines on Defensive Measures against Hostile Takeovers were adopted in 2005. The Guidelines set out three principles: (i) The goal of defensive measures should be the maintenance and improvement of the corporate value and the common interest of shareholders. (ii) Defensive measures should be disclosed in advance and should be based upon the reasonable will of the shareholders. (iii) Defensive measures should be of a necessary nature and reasonable. As a corollary to (i), defensive measures are to be used primarily against greenmailing, asset-stripping, compulsory two-step takeovers, etc. By virtue of (ii), defensive measures should be introduced by the general shareholders’ meeting and not by the board. However, the Guidelines do not exclude the possibility of the board introducing such measures, but if they are to be introduced by the board, there has to be a means to cancel them in accordance with the will of shareholders. Item (iii) means that defensive measures should not be excessive. It should be noted that the Guidelines specifically allowed companies to treat the bidder differently from other shareholders. This is not against the equality of shareholders. If the permissibility of defensive measures adopted after the contest over control had started (post-bid measures) was at its most precarious under the NBS decisions, the strengthening of defensive measures put in place before the bid, i.e. pre-bid measures, such as a rights plan, were thought to have a better chance.104 According to the latest survey, 381 listed companies introduced some defensive measures as of 31 July 2007. In June 2008, it was reported that the number of companies with a pre-bid measure in place exceeded five hundred.105 The very fact that of the three thousand plus listed companies, less than 20 per cent of them have put defensive measures in place demonstrates the perception on the part of the companies of the uncertainties involving the permissibility of such measures. The second case involving the lawfulness of defensive measures—the Bulldog Sauce case—took place in 2007.106 This was the first case involving the lawfulness of defensive measures which reached the Supreme Court, but its significance as a precedent is limited. In this case, the substance of the measure was the same as ¹⁰³ Kawamoto and Otake, Shōken-Torihiki-Hō Tokuhon, supra, p. 113. ¹⁰⁴ Nikkei, 28 February 2005. ¹⁰⁵ Nikkei, 13 May 2008. ¹⁰⁶ For an English translation, see by H. Oda.

Corporate Law

267

the fairly widely practised ‘advance warning type’ rights plan. Normally, such defensive measures are put in place as a pre-bid measure, but in this case, it was introduced after the bidder had emerged. In this case a foreign investment fund initiated a TOB against a listed company. The company responded by introducing a defensive measure. The fund sought an injunction. The District Court dismissed the application for an injunction on the ground that even if the bidder’s share would be diluted by the measure adopted by the company, at least when the measure was adopted by a qualified majority vote of shareholders and the bidder was compensated, it would not be against the equality of shareholders.107 The Supreme Court upheld this judgment.108 What was unique in this case was that (i) the post-bid measure was introduced by a qualified majority vote of shareholders, and (ii) the bidder who was to be treated discriminatorily was compensated. In the end, the bidder was paid 2.1 billion yen. Therefore, the significance of this judgment as a precedent is limited. The revised Corporate Value Group Report of June 2008 stressed that the bidder should not be paid off.109

(2) Splitting of companies (a) The procedure Companies may split all or part of their rights and obligations related to their business and transfer them to an existing company or a newly set up company (Art. 2, paras 29 and 30). This system was introduced in 2000 in order to facilitate intra-company group reorganisation. Already in 2002, there were 224 cases of splitting of companies.110 In most cases this was used to reorganise the structure of group companies, e.g. spinning off part of the business to a subsidiary. Some companies used this as a means of selling part of the business.111 Splitting a company can also be used for creating a holding company by spinning off all the business to subsidiaries. The part of the company which has been split may become a newly established entity (shinsetsu-bunkatsu), or may become part of another company by ‘absorption’ (kyūshū-bunkatsu). In some cases, several companies split part of their businesses and jointly create a new company.

¹⁰⁷ Decision of the Tokyo District Court, 28 June 2007, Shōji-Hōmu No. 1805, p. 51. However, it can be questioned whether a qualified majority vote of shareholders can justify any kind of discriminatory treatment. M.Nakahigashi, ‘Bulldog Sauce case to Kabunushi-Sokai Ketsugi no soncho (Bulldog Sauce case and the Significance of the Shareholders’ Resolution)’, Jurist, No. 1346, p. 21. ¹⁰⁸ Decision of the Supreme Court, 7 August 2007, Minshū 61-5-2215. ¹⁰⁹ . ¹¹⁰ RECOF (ed.), M&A Data Book 1988–2002 (Tokyo, 2003), p. 9. ¹¹¹ Nikkei, 14 August 2002.

268

Business-related Laws

Splits resulting in setting up a new company on a large scale are not common. According to the Fair Trade Commission, there were thirty-three reported cases of company split in 2007—all of them were split by absorption.112 In 2006, of the nineteen cases of split, eighteen involved split by absorption; there was only one case of companies splitting their business and jointly setting up a company.113 Splitting of a company was used in the creation of one of the largest financial groups. In 1999, Fuji Bank, Daiichi Kangyo Bank, and Industrial Bank of Japan announced their plan for integration. In the first phase, the three banks set up a holding company by share transfer and became 100 per cent subsidiaries of Mizuho Holding. Naturally, there is no point in having three banks with a similar portfolio to be under a holding company. These three banks needed to be reorganised. In the second phase, these banks were reorganised into different types of banks—a retail bank, corporate bank, and investment bank. For this purpose, each of the above three banks was split into three parts, and those split parts were transferred to the three new banks. In splitting a company, the procedure is (i) the preparation of a plan for the split (split by setting up a new company), or a contract of split (split to an existing company), (ii) the making available of relevant documents for inspection, (iii) the approval by the general shareholders’ meeting, (iv) the procedure for the protection of creditors, and (v) registration. In a split by setting up a new company, a plan for the split needs to be prepared. The following items are required to be accommodated in the plan (Art. 763): • details of the company to be set up, including the trade name and the location of the main office; • other matters to be determined by the Articles of Incorporation of the new company; • names of the directors, corporate auditors, and the accountant at the time of establishing the new company; • matters concerning the assets, debts, employment contracts, and other rights and obligations that the newly set-up company is to receive from the splitting company; • matters concerning the shares of the newly set-up company to be provided to the splitting company or the means of calculating it and the capital and reserves of the newly set-up company; • if bonds of the newly set-up company are provided to the splitting company, their details;

¹¹² . ¹¹³ .

Corporate Law

269

• if the new company is jointly set up by two or more splitting companies, the ratio of allocation of the shares of the newly set-up company to these splitting companies. In spinning off part of the company to an existing company, a contract needs to be concluded between the parties. The contract must include the following (Art. 758): • the trade name and address of the parties; • matters concerning the assets, debts, employment contracts, and other rights and obligations that the absorbing company is to receive from the splitting company; • if shares are inherited by the absorbing company, their details; • details of the payment made to the splitting company (e.g. if shares of the absorbing company are provided to the splitting company: the classes and the number of these shares, or the means by which they are determined, and the amount of the capital and reserves of the absorbing company). The plan or the contract of a split must be made available for inspection by shareholders and creditors in the same manner as mergers (Art. 782, para. 1, Art. 794, para. 1, and Art. 803). The plan or the contract is subject to approval at the general shareholders’ meeting of the splitting company and, in cases of spin-off to another existing company, also by shareholders of that company by a qualified majority vote (Art. 783, para. 1, Art. 795, para. 1, and Art. 804, para. 1). Shareholders who are opposed to the split are granted an appraisal right as in the case with merger (Art. 785, para. 1, Art. 797, para. 1, and Art. 806, para. 1). Procedure for the protection of creditors of those companies is also available (Art. 789, para. 1, Art. 799, para. 1, and Art. 810, para. 1).

(b) Simplified procedure and summary procedure Although, as a rule, shareholders’ approval is required in company split, as an exception, in cases where the book value of the assets which are to be transferred to another company or to a new company do not exceed one fifth of the gross assets of the splitting company, shareholders’ approval of the splitting company is not needed (Art. 784, para. 3 and Art. 805). There is a simplified procedure and a summary procedure (Art. 468, para. 1, Art. 784, para. 1, and Art. 796, paras 1 and 3).

(c) Labour relations As a rule, rights and obligations of the splitting company are transferred either to the newly set-up company or to the absorbing company. This also applies to employment contracts. When the system of company split was introduced, a new Law on the Succession of Employment Contracts in Splitting of Companies was

270

Business-related Laws

enacted at the same time.114 According to this Law, the splitting company must inform the employees who were primarily working in the split part, or were designated by the plan or contract to be transferred, at least two weeks in advance of the shareholders’ meeting for approval of the split (Art. 2, para. 1). Employment contracts involving employees who were primarily working in the part which is being split, and are included in the contract of splitting or the plan for setting up a new company as a result of the split, are transferred to a new company or an existing company without the consent of the employee (Art. 3). Those who did not primarily work for the split part, but whose contract was included in the contract of split or the plan for the setting up of a company as a result of the split, are entitled to object to the transfer (Art. 4, para. 1).

8. Financing of Companies (1) Characteristics of corporate finance in Japan One of the major characteristics of the way that Japanese companies were financed was the heavy reliance on bank borrowing. This was supported by the main bank system whereby most listed companies had a particular bank to take care of their finance. The overall trend of corporate finance in Japan was a shift from indirect finance to direct finance.115 During the period of high economic growth from the mid-1960s to the 1970s, there was a strong demand for finance while the accumulation of capital on the part of companies was insufficient. Because the stock market was yet to be fully developed at that time, companies resorted to bank borrowing. In the 1980s, with the rapid appreciation of the yen, companies expanded their overseas business which, due to the accompanying business and currency risks, led to the review of the traditional method of corporate finance and a shift to equity finance. Since the Plaza Agreement in 1985—which led to the further appreciation of the yen against the US dollar by the liberalisation and internationalisation of the financial markets—equity finance by companies sharply increased in the second half of the 1980s. Japan was going through the period of a ‘bubble economy’. In 1985, the total capitalisation of the first division of the TSE was around half of GDP. By 1989, it became 1.5 times as much as GDP. The prices of land increased in the same way.116 The amount of equity finance sharply increased during this period. Between 1980 and 1984, the total amount of equity finance was 15.3 trillion yen; in contrast, between 1985 and 1989, this amount reached 66.6 trillion yen. This was mainly comprised of convertible bonds, followed by warrant bonds and new share ¹¹⁴ Law No. 103 of 2000, amended by Law No. 87 of 2005. ¹¹⁵ N. Hirai, ‘Corporate Finance’ in J. Ujiie (ed.), supra, p. 207. ¹¹⁶ Y. Noguchi, Bubble no Keizai-gaku (Economics of the Bubble) (Tokyo, 1992), pp. 22–23.

Corporate Law

271

issues.117 New shares were issued not at par as they used to, but at market price. These developments marked a major shift from debt finance to equity finance. However, it should be noted that this involved only those listed companies which could raise finance in the stock market. Naturally, the ‘bubble economy’ did not last long. It collapsed in late 1989/early 1990 when the share prices and land prices fell sharply. By 1992, the amount of total capitalisation of the market returned to its 1985 level. In the 1990s, after the bubble burst, the volume of equity finance fell sharply. Underwriting companies asked business companies to postpone their equity finance plans, and the public offering of shares was virtually halted until 1994. The Nikkei average, which reached 39,000 yen in 1989, fell by 50 per cent by 1992, and even further to one third in the late 1990s. The total amount of equity finance fell to one third of the level of the late 1980s. Companies turned to the banks, but with the introduction of the Bank of International Settlement’s capital adequacy rules, banks were reluctant to extend loans. The banking crisis in the late 1990s made bank borrowing even more difficult. Bank borrowings have also constantly decreased since 1985. In 2000, finance via the issuing of securities (debt and equity) surpassed the amount borrowed from the banks.118 On the other hand, the public offering of shares never recovered to the level of the late 1980s. In 2007, the amount raised by the public offering of shares was less than 10 per cent of the amount in 1989. Instead, third-party issue has been steadily increasing since 1991.119 Since 2006, Table 11.6 Corporate finance in Japan Year

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Share issue (excl. IPOs)

Bonds with pre-emption rights for new shares of a convertible type

No.

Amount (million yen)

No.

Amount (million yen)

42 27 96 81 37 45 63 154 121 104 52

87,998 180,812 686,739 628,571 748,831 213,029 413,176 863,423 824,442 1,237,153 425,379

30 10 33 26 28 22 20 78 128 130 42

270,480 246,580 592,453 357,349 300,621 427,960 72,330 561,453 889,689 1,422,570 127,192

¹¹⁷ Hirai, supra, pp. 209–211. ¹¹⁹ TSE Factbook, supra, p. 75.

Warrant Bonds

No.

Amount

0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0

¹¹⁸ Securities Market in Japan 2006, supra, p. 5.

272

Business-related Laws

equity finance—including the issuing of bonds with pre-emption rights for new shares—has been further decreasing. The reason is said to be that companies are concerned that equity finance may expose the company to the risk of hostile takeover.120 As for bonds, currently the majority of bonds issued are convertible warrant bonds. The issuing of straight bonds increased in the 1990s, but has been at the same level since 2000. As compared to convertible warrant bonds, the amount is very small. Bonds with pre-emption rights for new shares of a non-convertible type are no longer issued.121

(2) Issuing of bonds Before the 2001 amendment to the Commercial Code, together with straight bonds, equity type bonds such as convertible bonds and warrant bonds were issued. By the 2001 amendment, the concept of convertible bonds and warrant bonds was replaced by the concept of bonds with pre-emption rights for new shares. The Company Law followed this (Art. 2, subpara. 22). There are straight bonds and bonds with pre-emption rights for new shares. The latter are bonds with pre-emption rights for new shares which are inseparable from the bond itself. The previous separable type of warrant bonds are now regarded as a simultaneous issue of the bond and the pre-emption right for new shares.122 Of those, bonds in which the pre-emption right for new shares can be exercised with the payment from the redemption of bonds (the issue price of the bond is set at the same amount as the exercise price) correspond to the previous convertible bonds, and are called bonds with pre-emption rights for new shares of a convertible type. Bonds can be secured or non-secured. Since the default of corporate bonds during the recession in the 1920s, all corporate bonds in Japan had been secured except for bonds issued by banks and power utilities until a blue chip company issued unsecured convertible bonds in 1979. There is a Law on Secured Bond Trusts which lists nineteen types of security available to secure corporate bonds. It was also possible to create a security on the joint stock company as a whole as collateral (Law on Security on the Enterprises). A trust agreement is concluded between a bank (trust bank) as the bond manager and the issuing company. The bond manager holds the security right for the benefit of all bond holders. In 1987, the eligibility requirements for issuing unsecured bonds were relaxed in combination with the introduction of the credit rating system. There are now credit rating agencies such as the Rating and Investment Information (R&I), ¹²⁰ Egashira and Monden, supra, vol. 2, p. 345. ¹²¹ Japan Securities Dealers Association, . ¹²² Moving Strike Convertible Bonds (MSCB) is also available.

Corporate Law

273

Moodies, and the Japan Credit Rating Agency, which are active in this area.123 Still, as a rule, bonds were secured. However, in recent years, it is reported that unsecured bonds with pre-emption rights for new shares and unsecured straight bonds issued by blue chip companies are increasing.124 Previously, the issuing of bonds was subject to stringent requirements set by an informal body called the Bond Issuing Committee, primarily comprising banks. Trust banks had more say than the underwriters—securities companies.125 When issuing non-secured bonds, the issuer was invariably required by the Committee to undertake some restrictive terms such as negative pledge.126 In 1993, the system of issuing bonds was substantially streamlined and liberalised. The Bond Issuing Committee was abolished in 1995. As part of this reform, the appointment of a bond management company was made mandatory in bond issues. This is continued under the Company Law (now ‘bond manager’), unless the value of each bond is over 100 million yen, or the total amount of the bonds divided by the minimum price of the bond is less than 50 (Art. 702). In order to issue bonds, the issuer appoints a lead manager (securities company), an underwriting syndicate, a bond manager or a financial agent, and at the same time obtains a credit rating. Bond managers are banks or trust banks. They have the rights and duties to manage bonds after the bonds are issued in the interest of the bond holders and are empowered to effect any judicial or extra-judicial acts in order to ensure the realisation of the claims (Art. 705). Bond managers have statutory powers as well as contractual powers provided in their contract with the issuing company. Since bond managers in Japan are mostly banks who are at the same time creditors, there is a possibility of conflict of interests. Under the Company Law, bond managers owe a fiduciary duty vis-à-vis bond holders and are under an obligation to act as a good manager in relation to them (Art. 704). If the bond manager acted against the Company Law or the resolution of the bondholders’ meeting and caused loss to the bond holders, the bond manager is held liable (Art. 710, paras 1 and 2). Before these reforms, due to stringent regulations, only selected blue chip companies were allowed to issue bonds. Prior to the reform in 1993, default on corporate bonds had never happened in Japan (there were some defaults on bonds issued overseas to institutional investors). In cases where default was likely, it was customary for the main bank or the bond management company to purchase the bonds at face value. From 1993, this practice was discontinued. Since then, there have been cases where as a result of the collapse of a company, domestic

¹²³ ¹²⁴ ¹²⁵ ¹²⁶

Securities Market in Japan 2006, supra, p. 94. Egashira and Monden (eds), supra, p. 346. Zōshi-Hakusho, supra, p. 8, pp. 70–71. M. Tatsuta, Kaisha-hō (Company Law), 7th edn (Tokyo, 2000), p. 251.

274

Business-related Laws

straight bonds defaulted.127 The most controversial default involved the collapse of a supermarket chain in 2001. This company, Mycal, defaulted on straight bonds of around 350 billion yen, including the bonds sold to individual investors of 90 billion yen. The bonds were issued in the previous year with the face rate of 3.25 per cent. The rating at the time of the issue, October 2000, was BBB. Foreign rating institutions had never rated this company to be suitable for investment and even reduced the rating at the time of issue, but a Japanese rating institution rated it higher. This was downgraded only in June 2001. Another problem concerned the role of the bond management company. In this case, the main bank was the bond management company. This bank required the issuing company to provide security for the loan that it extended to the company, but did not ask the company to secure the bonds.128 It is now common for companies to issue bonds of over 100 million yen each without a bond manager, but with a fiscal agent who handles payment only. This is intended for the reduction of issuing costs and avoidance of liability of the bond manager.129 By the Company Law, the scope of companies eligible to issue bonds is no longer limited to companies limited by shares. Companies limited by quota (gōdō kaisha) may also issue bonds. Despite the deregulation on the issuing of bonds since the mid-1990s, bonds are still utilised primarily by blue chip companies.130 BBB-rated bonds, not to mention junk bonds, are not offered in the market. Apprehensive of the risk of default, most institutional investors do not invest in assets other than those rated A or higher.131 For short-term finance (less than one year), commercial papers are widely issued.

(3) New share issues Share issues and the disposal of the company’s own shares are now covered in the same section of the Company Law as the offering of shares. When offering newly issued shares or shares that they are disposing of, either to the public or a third party, a company is required to determine the following (Art. 199, para. 1 and Art. 202, para. 1): • the number of offered shares; • the price to be paid in or the method of calculating it; • if there is an in-kind contribution, the content of the contribution and its value; ¹²⁷ Hitrai, supra, p. 214. ¹²⁸ ; see also Mainichi Interactive, 18 November 2001. ¹²⁹ Egashira and Monden, supra, p. 354. ¹³⁰ Ibid., p. 349. ¹³¹ Ibid., p. 94.

Corporate Law

275

• the date or period of payment; • matters related to the increase of the capital and capital reserve when issuing shares. As a rule, these matters need to be decided at the general shareholders’ meeting, but this can be delegated to the board in public companies. In such cases, the maximum number of shares to be issued and the minimum amount of payment need to be determined (Art. 200, para. 1). In public companies, the above matters can be determined by the board. However, this does not apply when the shares are issued at an especially advantageous price to the subscribers (Art. 201, para. 1). Here, a qualified majority vote of shareholders is required (Art. 199, para. 2 and Art. 309, para. 2, subpara. 5). If the share issue or the disposal of their own shares is against the law or the Articles of Incorporation or was substantially unfair, shareholders are entitled to seek an injunction (Art. 210). Shareholders are also entitled to contest the validity of the issue (Art. 828, para. 1, subparas 2 and 3). In order to ensure the above rights of shareholders, where a public company offers shares to the public or a third party, the offer has to be publicised, or notified to shareholders at least two weeks prior to the date of paying in (Art. 201, paras 3 and 4). There are three types of new share issues, depending on the allocation of the newly issued shares: (i) the rights issue, (ii) the third party issue, and (iii) the public offer.

(a) Rights issue In the case of a rights issue, newly issued shares are offered to the existing shareholders, i.e. existing shareholders are given pre-emptive rights to newly issued shares. Until the 1970s, this was the primary method of financing companies. Newly issued shares were allocated to existing shareholders at par value. This method was taken over by the public offer at the market price for public companies in the 1980s. Now, it is primarily used by non-public companies. Incidentally, in Europe, shareholders are in principle given a pre-emptive right to new shares. In Germany, in order to deprive shareholders of the pre-emptive right a qualified majority vote is needed. The same applies to the UK.132 In nonpublic companies, unless the Articles of Incorporation delegate it to the board, a qualified majority vote of the general shareholders’ meeting is needed for a rights issue (Art. 202, para. 3).

(b) Third party issue Shares may be offered to a specific third party. This happens, for example, when a venture company seeks finance from a ‘venture capital’ financing emerging

¹³² Egashira, Kabushiki-kaisha-Hō, supra, pp. 526–527.

1  2 3  3 4 3  1            1

3 – 82 320 – 19 44 42 – 80 – – – – – – – – – – – 80

Amount Raised (¥100mil.) 12 35 36 18 21 40 80 80 75 71 3 7 11 7 2 9 4 8 7 5 2 6

No. of Cases 2,842 3,709 5,728 12,014 1,562 5,726 7,544 6,661 14,546 4,708 647 323 650 256 28 1,123 172 458 598 379 5 63

Amount Raised (¥100mil.)

Public Offerings

5 27 5 6 40 75 55 52 34 13 1 – 1 – 2 2 – 2 1 – 3 1

No. of Cases 4,710 70,122 1,373 2,281 10,293 25,371 14,105 14,312 6,003 8,155 114 – 200 – 2,900 3,505 – 1,080 70 – 266 18

Amount Raised (¥100mil.)

Preferred Stocks and Tracking Stocks

35 86 56 71 79 103 142 175 176 141 13 15 31 9 7 9 8 12 8 12 7 10

No. of Cases 6,963 24,448 9,720 5,671 5,015 2,335 6,242 8,101 4,736 6,841 468 470 451 329 288 526 202 1,008 187 1,075 1,323 508

Amount Raised (¥100mil.)

Private Placements

35 74 94 92 82 126 241 360 409 376 175 187 182 151 170 175 176 145 113 114 132 137

No. of Cases 883 2,624 1,077 380 2,763 397 1,041 1,819 1,647 1,716 104 130 136 56 111 200 159 133 528 51 33 69

Amount Raised (¥100mil.)

Exercise of Warrants and Stock Options

15,403 100,904 17,982 20,668 19,634 33,850 28,977 30,937 26,933 21,501 1,334 924 1,437 642 3,327 5,356 534 2,681 1,384 1,507 1,630 740

Amount Raised (¥100mil.)

Total

Notes: 1. The day after payment is used as the base date and the amount raised by the companies listed on Japan’s stock exchanges (excluding the companies listed on Hercules at Osaka and Jasdaq) is aggregated by the base date. 2. Monthly figures in the number of cases for ‘Exercise of Warrants and Stock Options’ are cumulative numbers. Annual figures are the number of companies.

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

No. of Cases

Rights Offerings

Table 11.7 Equity Financing (All Listed Companies)

Corporate Law

277

businesses, or a troubled company is being rescued. As a rule, the party to whom the shares are to be allocated can be determined by the board. With this method, shares are issued to specific third parties. This can be done by decision of the board unless the issue price is especially favourable to the third party, when it is subject to a qualified majority vote of shareholders (Art. 199, para. 3 and Art. 309, para. 2, subpara. 5). This is practised primarily when the issuing company intends to consolidate its relationship with a specific company or as a rescue operation of the issuing company—the rescuer subscribes to the newly issued shares. Also this was previously the primary means of defence against greenmailers until the 1990s.

(c) Public off er In a public offer, newly issued shares are offered to unspecified and many people. The shares are underwritten by securities companies. Shares are issued at market price or a price slightly lower than the market price. While it had been common practice for companies to issue shares at par value to the existing shareholders, this was replaced by the offering of shares to the public at market price in the late 1980s. In addition to business companies, banks issued large amounts of new shares in order to meet the capital adequacy ratio set by the BIS. A commentator pointed out as follows: . . . while new shares are issued at market prices, the practise of paying out dividends to shareholders on the basis of the par value of stocks has become deeply entrenched. Therefore, there has emerged among the investing public the idea that the issuance of new shares at market price is a gimmick for raising corporate funds at a cheap cost. Indeed, there are criticisms that corporate issuers have issued too large an amount of shares and have been neglecting to make fair distribution of their profits to their shareholders.133

With the collapse of the market in 1990, the public offering of shares was halted for three years. When equity finance was resumed, the then Ministry of Finance issued guidelines in 1993 requiring an ROE of over 10 per cent to effect public offer at market price.134 However, this was abolished in 1996 as part of the ongoing deregulation, in exchange for better disclosure. For example, securities companies are required to ask the issuing company to disclose the purported use of the finance to be raised, its effect on the profit of the company in the future, the state of the distribution of profits to the shareholders, its dividend policy, and past equity finance.135 ¹³³ Securities Market in Japan 1994, p. 41. ¹³⁴ Securities Market in Japan 2001, p. 44. ¹³⁵ Zōshi-Hakusho 1996, supra, pp. 29–30.

278

Business-related Laws

Equity finance has never returned to the 1980 level. In 1985, the total amount was 505.2 billion yen, which reached 5,830 billion yen in 1989, and is now in 2007 at 470.8 billion yen.136

9. Accounting (1) Accounting documents and financial statements Regulation of accounting in the Company Law is intended to (i) set the limit for paying out of surplus, and (ii) provide information on the financial state of the company to creditors and shareholders.137 Companies must prepare accurate accounting documents in a timely manner and keep them for ten years (Art. 432). Accounting must comply with the ‘practice of corporate accounting which is generally accepted as fair and appropriate’ (Art. 431). Before the 2001 amendments, the Code itself had some provisions on the valuation of assets. However, it was thought that in order to respond to the fairly frequent changes in accounting practice, it would be better not to provide details by law. Accounting rules in the Company Law are scarce and are supplemented by the Rules on Corporate Accounting, which is a ministerial ordinance. Via this provision, accounting standards such as the ‘Corporate Accounting Principles’ and other accounting standards set by the government Corporate Accounting Council are made available to companies. Shareholders who have 3 per cent or more of the entire votes, or of the issued shares are entitled to inspect and make a copy of the accounting documents by giving reasons. Unless the shareholder made this request in order to pursue goals other than the investigation for the protection or exercise of his rights; the request was made for the purpose of obstructing the execution of business by the company and to harm the joint interest of shareholders; the shareholder is in a business substantially in concurrence with the company, or is involved in the business; the company is not entitled to refuse the request (Art. 433, paras 1 and 2). In a case where a 100 per cent subsidiary of Rakuten Inc., which had initiated a takeover bid procedure against the Tokyo Broadcasting System (TBS) applied for inspection of the accounting documents and the book of securities of TBS, the court found that in cases where a 100 per cent subsidiary, in conjunction with the parent company, was in substance in a concurrent business with the TBS, TBS was entitled to refuse the request.138 Companies are mandated to prepare financial statements and other documents for each financial year (Art. 435, para. 2). These are: • a balance sheet; • a profit and loss report; ¹³⁶ TSE Fact Book 2007, supra, p. 40. ¹³⁷ K. Egashira, Kabushiki-Kaisha-Hō, supra, p. 529. ¹³⁸ Judgment of the Tokyo District Court, 20 September 2007, Hanji 1985–140.

Corporate Law

279

• a report on the changes of the amount of share capital during the financial year; • a business report. Financial statements are subject to the audit of corporate auditors (Art. 436, para. 1), and approval of the board (ibid., para. 3). They are then submitted to the general shareholders’ meeting for the approval of shareholders. Previously, the proposal for the distribution of profits was one of the financial statements. However, under the Company Law, the disposal of surplus is possible at any time during the financial year, so it does not have to be approved by the account settlement shareholders’ meeting. Financial statements in Japan were not known for their accuracy due to the uniquely Japanese accounting standards. They simply failed to reflect the true state of finance of the companies. For example, until 1999, financial instruments were not valued at market price, but by acquisition price. International accounting firms used to put a legend to their audit opinion, indicating that the audit was conducted in accordance with Japanese accounting standards and not international accounting standards. However, in the light of the harmonisation of international accounting standards, the uniquely Japanese accounting system became untenable. Consolidated accounting was introduced into the then Securities and Exchange Law in 1975, but has been treated as an attachment to the accounting documents of the company in question. It was only in 1997 that this was reversed and the consolidated account was made the primary document. In 2002, consolidated accounting was introduced for ‘large’ companies which are subject to the disclosure requirements of the Securities and Exchange Law. The Company Law mandates these companies to prepare consolidated financial statements (Art. 444, para. 3). Currently, the Japanese Financial Services Agency is moving towards the introduction of the International Accounting Standards by 2011.139 There were institutional changes as well. In the past, the setting of corporate accounting standards fell within the power of the Corporate Accounting Council under the Ministry of Finance and later the Financial Services Agency. However, in other countries, accounting standards are primarily set by a specialised private sector body independent of the government. In the late 1990s when banks were in difficulties, the Ministry of Finance introduced accounting standards that allowed delaying the recognition of debts. This was thought to be inappropriate and certainly worked in favour of an independent organisation.140 Thus, in 2001, the Financial Accounting Standards Foundation was set up by contributions from the private sector and under this organisation, the Accounting Standards Board of Japan was established.141 ¹³⁹ Nikkei, 3 October 2008. ¹⁴⁰ H. Kataki, Atarashii Kigyōo-Kaikei-Hō no Kangaekata (The Idea of the New Corporate Accounting Law) (Tokyo, 2003), p. 39. ¹⁴¹ .

280

Business-related Laws

(2) Share capital and reserves The amount of capital is the amount paid in by those who are to become shareholders at the time of the establishment of the company, or the issue of shares (Art. 445, para. 1). Up to half of this amount does not need to be capitalised, but this amount has to be kept as a capital reserve (ibid., para.2). The amount of the share capital is subject to registration. The significance of share capital has been largely reduced in recent years.142 There were previously three principles involving capital. These were the principles of the fulfilment and maintenance of capital, fi xed capital, and stability of capital. The principle of the fulfilment and maintenance of capital involved a requirement that the assets of the company should be at least at the level of the capital and that this should be maintained. For this purpose, subscription was paid into a designated bank, contribution in kind was subject to strict scrutiny, and shortage of payment had to be supplemented by promoters. However, there was a substantial deregulation regarding the setting up of companies. As for the principle of fi xed capital, because the minimum capital system was abolished by the Company Law, it has lost its meaning. The principle of stability of capital remains in that a strict procedure is required to reduce the capital. A qualified majority of the shareholders’ meeting is needed (Art. 447, para. 1 and Art. 309, para. 2). However, in cases where the share capital is reduced in order to cover the deficit, a majority vote at the annual shareholders’ meeting will suffice (Art. 309, para. 2, subpara. 9). In Japan, if the company is making a loss, the loss will be covered in the following manner and order:143 (i) out of the current profit; (ii) by the disposal of assets, namely realising hitherto unrealised profits through disposal of shares; (iii) use of earned surplus; (iv) use of capital reserves; (v) capital reduction. When reducing the share capital (and the reserves), a procedure to protect the interests of creditors needs to be followed (Art. 449, para. 1). The company must publicise the proposed reduction and inform creditors of their entitlement to an objection within a fixed period of less than two months in the Official Gazette (ibid., para. 2). As a rule, the company must individually notify known creditors, but this can be exempted. The capital reserve comprises (i) the amount paid in by shareholders and not capitalised; (ii) 10 per cent of the amount of reserve paid out as dividends; (iii) ¹⁴² M. Tatsuta, Kaisha-Hō Taiyō (Outline of Compendium Law) (Tokyo, 2007), p. 369. ¹⁴³ Nikkei, 12 February 2003.

Corporate Law

281

premiums resulting from mergers and other reorganisations, etc. The profit reserve is a reserve which the company is mandated to form in order to cover a potential deficit. Companies are under an obligation to accumulate the capital or profit reserve until the total of capital and profit reserve reaches a quarter of the share capital (Art. 445, para. 4). All or part of the reserves can be capitalised by a majority vote of shareholders (Art. 448, para. 1, subpara. 2).

(3) Surplus—paying out of dividends The significance of the capital may have been reduced in the recent years, but there is a major role for the capital. The capital and the reserves determine the surplus which the company can distribute to its shareholders.144 There are two such situations; paying out of dividends and share buy-back. The common denominator is that these are distributions of the company’s assets to shareholders. In order to pay out dividends, a simple majority vote of shareholders is required (Art. 454, para. 1). In companies which (i) have accounting firms as an auditor, where (ii) the term of directors does not exceed one year, and which (iii) have a committee of auditors or three committees, matters regarding the payout of dividends and share buy-back can be delegated to the board by the Articles of Incorporation (Art. 459). Dividends can be paid out from the surplus which is determined in accordance with the Company Law (Art. 461). It is based upon the assets and the book value of the company’s own shares held by the company, deducted by the amount of debt, share capital, and reserves with some adjustments. When paying dividends, 10 per cent of the surplus before the payment needs to be set aside either as capital reserve or profit reserve (Art. 445, para. 4). As a result of the abolition of the minimum capital requirement, there is a new rule that if the net assets are less than three million yen, the company cannot pay dividends (Art. 458). If the company paid dividends or purchased its own shares while the company did not have a distributable surplus, directors and others responsible for the payment are under an obligation to pay back the company the amount paid out, unless that person proves that he was not negligent in carrying out his duties (Art. 462, paras 1 and 2). Japanese companies used to be renowned for meagre dividends. However, the relationship between companies and investors has been gradually changing. According to a report by Nikkei, the total of dividends and share buy-back has reached a historical maximum of almost 50 per cent of the net profit in 2007. Dividends paid out by listed companies increased by 14 per cent.145 According to the statistics of the Daiwa Research Institute, the total amount paid out by ¹⁴⁴ P. Davis, Introduction to Company Law (Oxford, 2002), p. 86. ¹⁴⁵ Nikkei, 26 May 2008.

282

Business-related Laws

listed companies as dividends and share buy-back in the Financial Year 2007 was 12 trillion yen, which was twice as much as in 2003. The average dividend payout ratio was 29.1 per cent. Although the performance of companies since 2002 has been favourable, the increase was largely attributed to shareholders who have become more vociferous.146

(4) Surplus—share buy-back Share buy-back was generally prohibited and allowed only on limited occasions until 1997. Arguments against share buy-back were that it was against the principle of the maintenance of capital since it was basically the return of the contribution to the shareholders and would harm creditors. It may also be against the equality of shareholders, since a selected few shareholders are given an opportunity to have their shares purchased by the company. If the company is allowed to hold its own shares, it may lead to market manipulation and/or insider trading. However, it was pointed out that if the share buy-back is not sourced from capital or capital reserves, but from the surplus, it should not be a problem. If the shares are listed and are purchased through the market or by a takeover bid (TOB), it will not affect the equality of shareholders. Liberalisation of the share buy-back has been on the reform agenda proposed by companies for some decades. With the strong backing of the business circle, exceptions to share buy-back were gradually increased. By the 1997 amendment to the Commercial Code, for the purpose of assigning the shares to directors or employees, companies were allowed to buy back shares up to 10 per cent of the total number of issued shares. A ‘justifiable reason’ for granting stock options was required. Details, including the names of the persons who are granted stock options and the price of assignment, had to be disclosed at the shareholders’ meeting. A qualified majority resolution of the general shareholders’ meeting was required (for buy-back of shares for redemption, the decision of the board is sufficient). Even after the 1997 amendments, share buy-backs were still under restrictions concerning (i) purpose, (ii) procedure, (iii) method, (iv) resources, (v) amount, and (vi) period of holding. Shares purchased had to be disposed of within ten years if they were for stock options, and for redemption purposes, they had to be cancelled immediately.147 Therefore, further liberalisation of the share buy-back was pursued by the business community. This included the proposal for the liberalisation of treasury stocks.148 Treasury stocks are the company’s own shares purchased by ¹⁴⁶ Asahi, 29 June 2008. ¹⁴⁷ M. Tatsuta, Kaisha-hō, supra, pp. 216–222. ¹⁴⁸ Keidanren (Japan Business Federation), Shōken-Shijō Kasseika Taisaku nitsuite (On Measures of Invigorating the Stock Market), 23 January 2001, .

Corporate Law

283

the company, but instead of being cancelled, they are held in ‘treasury’ for an indefinite period with a view to reselling them. The UK Companies Act allows companies to hold up to 10 per cent of the capital. Amid the deepening recession in Japan, in April 2001, the Council of Economic Ministers decided that in order to reinvigorate the stock market, treasury stocks should be legalised and share buy-back should be further liberalised. Liberalisation of the treasury stock was made part of the ‘emergency economic measures’. The resulting 2001 amendment was revolutionary in that it completely liberalised share buy-backs. Treasury stocks also became available. In 2003, it became possible for the board to buy back shares, insofar as it is empowered to do so by the Articles of Incorporation. The Company Law did not fully follow the post-2001 amendment Code, but allows extensive share buy-back. It distinguishes between share buy-back based upon the consent of shareholders and share buy-back on other grounds, which include occasions where the company exercised its rights in relation to shares with the right of the company to acquire shares held by shareholders; cases where the company does not approve assignment of shares by a shareholder to a third party; exercise of the shareholder’s right to require the company to acquire shares; and requests of shareholders to buy back shares below the trading volume etc. (Art. 155). Shares can be purchased from shareholders with the consent of shareholders (i) from the market, (ii) via the TOB procedure as provided by the Financial Instruments and Exchange Law, (iii) from all shareholders, or (iv) from a specific shareholder. In the last case, the name of this shareholder needs to be disclosed and approved by the general shareholders’ meeting (Art. 158). Other shareholders are entitled to ask the company to include them as a seller (Art. 159). Companies with a board may, by the decision of the board, buy back shares from the market (Art. 165, paras 2 and 3). If the shares are purchased from all shareholders, a simple majority vote is sufficient, but if the purchase is from a specific shareholder, a qualified majority vote is required (Art. 156, para. 1 and Art. 309, para. 2). The source of share buy-back is restricted in the same manner as dividends, i.e. limited to the distributable surplus (Art. 461, para. 1). Share buy-back has been steadily increasing since 2002.149 According to a survey in 2005, more than 80 per cent of the respondents cited the necessity of reimbursing the surplus to shareholders as the reason for share buy-back. Use for stock options/corporate takeover was limited.150 According to the TSE survey, in 2007, 539 companies resorted to share buy-back, which was 100 companies more than 2006. Of this number, 520 companies have done so by decision of the board. In the same year, 182 companies disposed of the shares which they repurchased. In fifty-eight companies, these shares were offered to the others. ¹⁴⁹ Nikkei, 28 August 2006.

¹⁵⁰ Daiwa Investor Relations, 27 January 2006.

284

Business-related Laws

In sixty-three companies, shares were used for mergers, share exchange, and splitting of companies. Only in sixty-seven companies, the repurchased shares were cancelled, i.e. remaining shares are held as treasury stocks. Furthermore, the number of shares cancelled was much smaller—less than a half of the amount purchased. Overall, in a majority of companies, these shares are held as treasury stocks.151 It has been remarked that the purpose of holding a substantial number of treasury stocks should be explained by companies.152

¹⁵¹ . ¹⁵² Nikkei, 14 June 2008.

12 Insolvency Law 1. Basic Laws In 2000—immediately after the financial crisis—according to a survey by Teikoku Data Bank, the amount of corporate insolvency (bankruptcy, settlement, special liquidation, civil rehabilitation etc.) reached 24 trillion yen in 10,071 cases (companies with a capital of over 10 million yen). The amount decreased to 16 trillion, but the number of cases increased to 20,052 in 2001. In the mid-2000s, it has stabilised and the number fell to 5.4 trillion yen and 11,261 cases in 2007.¹ There are three laws governing insolvency: the Bankruptcy Law, the Civil Rehabilitation Law (Minji-Saisei-Hō), and the Corporate Reorganisation Law (Kaisha-Kōsei-Hō). While the Bankruptcy Law is for liquidation and payment from the proceeds of assets sake, the remaining two are designed for rehabilitation. The existing system of insolvency law in the 1990s originated from the early twentieth century and had become obsolete. In 1997 the Ministry of Justice published a list of issues to be addressed in the anticipated overhaul of the insolvency system. Initially, a comprehensive reform was planned, but as the state of economy worsened, a new system intended to rehabilitate medium-sized companies (and individuals) was introduced as the first step, replacing the Composition Law of 1927. This is the Civil Rehabilitation Law, which is now widely utilised by companies and individuals. This was followed by the Law on the Recognition and Assistance for Foreign Insolvency Proceedings in 2000, and the new Corporate Reorganisation Law of 2003. Finally, the Bankruptcy Law of 1922 was replaced by a new Law in 2004.² In addition to the above laws, the Company Law provides for special liquidation (tokubetsu seisan). In the process of liquidation, if there are circumstances which substantially obstruct liquidation, or insolvency is suspected, creditors, the liquidator, corporate auditors, or shareholders may apply to the court for special liquidation (Arts 510, 511). Once special liquidation is ordered by the court, the procedure of liquidation is subject to court supervision (Art. 519, para. 1). Other ¹ . ² S. Takagi, ‘Restructuring in Japan’, in International Insolvency Review, vol. 12, No. 1, pp. 1–2.

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

286

Business-related Laws

proceedings including bankruptcy, civil enforcement, etc. are suspended (Art. 515, para. 1). Enforcement of security rights may also be suspended, and set-off is restricted (Arts 516–518). In this procedure, unlike the bankruptcy procedure, the liquidator does not have the power to deny the effect of transactions carried out by a debtor in bad faith. The company may reach an agreement with the creditors with a majority vote of the creditors who took part in the meeting, and the consent of those who hold two-thirds or more of the total value of the votes (Arts 563, 567, para. 1).

2. Bankruptcy Procedure The enactment of the new Bankruptcy Law was aimed at (i) the speed-up and streamlining of the procedure, and (ii) ensuring the fairness of the procedure. The Bankruptcy Law covers the bankruptcy of juridical persons as well as individuals. Foreign individuals and juridical persons have the same status as their Japanese counterparts (Art. 3). The previous bankruptcy Law was based upon reciprocity, but this was abandoned in 2000. The court of the location of the main place of business has jurisdiction over the bankruptcy of the debtor/entrepreneur. If the entrepreneur has their main office overseas, the court of the location of the main place of business in Japan has jurisdiction (Art. 5, para. 1). In cases where there are 500 or more creditors, in addition, the district court in the location of the High Court of the region will have jurisdiction. If there are 1,000 or more creditors, the Tokyo or Osaka District Courts have a concurrent jurisdiction (ibid., paras 8 and 9). The bankruptcy procedure is triggered by the debtor’s inability to pay debts (insolvency). If the debtor ceases to pay, the debtor is presumed to be unable to pay (Art. 15). For juridical persons, ‘inability to pay’ means either insolvency or an excess of debts over assets (when the debtor cannot fully repay the debt with his assets) (Art. 16, para. 1). Creditors, debtors, and directors of companies limited by shares are entitled to apply for the initiation of the bankruptcy procedure (Arts 18, 19, para. 1). After the application, the court is empowered to implement interim measures on the assets of the debtor upon request of the interested parties or ex officio (Art. 28, para. 1). If there is a basis for the commencement of bankruptcy proceedings, the court renders a decision to commence the proceedings (Art. 30, para. 1). Simultaneously with the declaration, a bankruptcy administrator(s), normally an attorney, is appointed by the court; and the period for the presentation of claims, the date of the first creditors’ meeting to report the financial state of the debtor, and the period for the examination of claims are set (Art. 31, para. 1). All assets which the debtor owns at the time of the commencement of the proceedings comprise the bankruptcy estate (Art. 34, para. 1). This applies not

Insolvency Law

287

only to assets located in Japan, but also to overseas assets (ibid.). Until 2000, the previous Law had maintained the territorial principle. The debtor is under an obligation to give an explanation regarding the bankruptcy if so requested by the bankruptcy administrator or the creditors’ committee, or on the grounds of the resolution of the creditors’ meeting (Art. 40). Importantly, the duty to disclose significant assets on the part of the debtor has been strengthened by the new Law. The debtor must submit a document which lists significant assets such as the real property, cash, securities without delay after the commencement of the proceedings (Art. 41). This is backed up by a penalty of a maximum three years’ imprisonment or a fine of three million yen (Art. 269). After the decision to commence the proceedings, it is the bankruptcy administrator, and not the debtor, who has the power to manage and dispose of the assets belonging to the bankruptcy estate (Art. 78, para. 1). The business of the debtor may be continued by the administrator with the permission of the court (Art. 36). The bankruptcy administrator takes control over the assets which have been in the possession of the debtor. These assets may include assets which do not belong to the debtor. In such cases the titleholder is entitled to retrieve them from the bankruptcy administrator (Art. 62). As a rule, if a creditor owes a debt to the bankruptcy debtor at the time of the commencement of proceedings, it can be set off against the claim without resort to the bankruptcy proceedings (Art. 67, para. 1). However, set-off is prohibited in certain cases, such as where, after the suspension of payment, the creditor newly owed a debt to the debtor despite knowing that the debtor had suspended payment (Art. 71, para. 1). Certain acts of the debtor can be invalidated by the bankruptcy administrator. These acts include: (i) acts which the debtor effected knowing that it will harm the creditor; (ii) acts effected by the debtor after the application for the commencement of the bankruptcy proceedings, or the suspension of payment, which harms the creditor; (iii) a gratuitous act of the debtor after the suspension of payment or within six months before it, or a non-gratuitous act equivalent to it (Art. 160, paras 1 and 3). Some acts in return for a reasonable payment can also be invalidated, e.g. if such an act has the possibility to conceal or otherwise dispose of the assets, such as the sale of real property (Art. 161, para. 1). Furthermore, acts favouring a particular creditor after the commencement of the bankruptcy proceedings, such as payment or provision of security, can also be invalidated (Art. 162, para. 1). By invalidation the bankruptcy estate returns to the status quo ante (Art. 167, para. 1). Even if the assets in question belong to a third party as a result of the act by the debtor, those assets may be reclaimed, for example when the third party was aware of the existence of the ground for invalidation (Art. 170, para. 1). Claims are repaid from the proceeds of the sale of assets (Art. 193, para. 1). Some claims are paid outside the bankruptcy procedure. These are court costs,

288

Business-related Laws

the costs of the bankruptcy administration, and tax which emerged before the decision to commence bankruptcy proceedings and were not due at the tie of the decision, or have been due for less than one year (Art. 148, para. 1). In addition, claims such as wages of employees for three months after the decision to commence the proceedings are paid outside the procedure (Art. 149, para. 1). Claims secured by specific preferential rights, i.e. preferential rights over a specific thing (Arts 311 and 325 of the Civil Code), pledge, or hypothec are not affected by the bankruptcy procedure (Art. 65). However, if the sale of a particular property with a security right over it and the subsequent extinction of the security right is in the common interest of creditors, the bankruptcy administrator may apply to court for permission to sell the property and extinguish the security rights (Art. 186, para. 1). Another novelty of the new Bankruptcy Law is the system to pursue the liability of the directors of a juridical person. There may be cases where companies and other juridical persons have a claim vis-à-vis their directors for unlawful acts or breaches of fiduciary duties, etc. In the Civil Rehabilitation Law and the Corporate Reorganisation Law, there is a procedure for pursuing the liability of these people. The new Bankruptcy Law has followed this. After the decision to commence bankruptcy proceedings, the bankruptcy administrator may, if necessary, ask the court to determine the liability of the director. The court may also start this procedure ex officio (Art. 178, para. 1). For individuals, discharge is available and widely used.

3. Civil Rehabilitation Procedure The Law on Civil Rehabilitation was enacted in 2000 amidst deepening economic difficulty in Japan. The new Law provides the primary means of rehabilitation for insolvent individuals and juridical persons. The predecessor to this Law was the Civil Composition Law of 1927, which was of German origin. This Law had some problems, such as the requirement of a qualified majority for the creditors’ meeting; secured creditors being allowed to enforce their rights even after the commencement of the procedure; and above all, the absence of the means to enforce the agreed composition plan. The shortcomings of the Law were one of the reasons for resorting to private settlement out of court. The new Law is designed to ‘rehabilitate debtors who are in acute economic difficulty by establishing a rehabilitation plan with the consent of the majority of creditors and the approval of the court’ (Art. 1). The procedure is available for individuals as well as juridical persons, including foreign individuals and juridical persons. The debtor may apply to court for the commencement of the rehabilitation proceedings when there is a likelihood that a ground for the commencement of

Insolvency Law

289

bankruptcy proceedings is to emerge. The same applies when a debt which is due cannot be repaid without substantial difficulties to the continuation of business (Art. 21). Previously the debtor was entitled to apply for composition if there were grounds for bankruptcy, but this was thought to be too late for a procedure intended to rescue the entity in question. When there is an application, the court may appoint a supervisor of the proceedings upon the request of an interested party or ex officio (Art. 54, para. 1). The court, in almost all cases, appoints a supervisor, who is usually an attorney. If the management or disposal of assets by the debtor is inappropriate, the court may appoint an administrator to manage the business and assets (Art. 64). What is different from the bankruptcy procedure is that the debtor is allowed to continue the business and manage the assets (whether they are located in Japan or overseas) or to dispose of them (Art. 38, para. 1). When necessary, disposal or acquisition of property, borrowing, etc. can be subject to the permission of the court (Art. 41, para. 1). This arrangement made the rehabilitation procedure popular amongst troubled companies. The supervisor or administrator is empowered to exercise the right to invalidate certain acts which harm the interest of creditors, or are against the equal treatment of creditors in a way similar to that of bankruptcy proceedings (Arts 127–127-3). The debtor (and the supervisor) must prepare a rehabilitation plan and submit it to the court. The court refers it to the creditors for their approval. A creditors’ meeting is not mandatory—voting in writing is also available (Art. 169, para. 2). The plan is approved with (i) the consent of a majority of those who have the right to vote, and (ii) consent of those who represent a majority of the value of the vote (amount of claims) (Art. 173, para. 1). The plan is subject to the approval of the court (Art. 174, para. 1). The supervisor supervises the implementation of the rehabilitation plan (Art. 186, para. 2).

4. Corporate Reorganisation Procedure The corporate reorganisation procedure was introduced into Japan from the United States in 1952.³ This is available only to companies limited by shares. The procedure is designed for the rehabilitation of large companies. The Law was substantially amended in 2002 as part of the reform of insolvency law. One of the major characteristics of the Law before the amendment was that it did not recognise the system of a debtor in possession. Once the proceedings commence, the incumbent management loses the power to continue the business and dispose of assets, and is taken over by the court-appointed administrators. This had discouraged troubled companies from applying for this ³ Law No. 172, 1952.

290

Business-related Laws

procedure. After the Civil Rehabilitation Law was enacted, even large companies opted for this procedure rather than the Corporate Reorganisation Procedure.⁴ The amended Corporate Reorganisation Law now accommodates the debtor in possession system. The grounds for application for the commencement of the proceedings are the same as under the Civil Rehabilitation Law (Art. 17, para. 1). In addition to the company itself, creditors with a claim of 10 per cent or more of the capital of the company, or shareholders with 10 per cent or more of the votes of the company are entitled to apply (Art. 17). The court is entitled to appoint the incumbent directors, senior executive officers, or corporate auditors to the position of reorganisation administrator or deputy (Art. 37).

5. International Insolvency Law Until the insolvency law reform which began in 1999, Japanese insolvency legislation was based upon a strict territorial principle. The previous Bankruptcy Law provided that bankruptcy declared in Japan had effect only on the assets of the bankrupt located in Japan, and also that declaration of bankruptcy abroad had no effect on the assets located in Japan. The Corporate Reorganisation Law contained the same provision. However, with the internationalisation of the economy, the territorial principle became untenable. In practice, efforts were made to mitigate the effect of this principle. Regarding assets of a Japanese debtor located abroad, there have been some cases where the administrator in the Japanese insolvency proceedings was allowed to exercise their power abroad. The same applies to foreign administrators exercising power in Japan. In a leading case, a company registered in Switzerland went bankrupt based upon Swiss law, and an administrator was appointed. The company had its trademark registered in Japan. This was provisionally seized by the Swiss administrator. A creditor in Japan contested this measure on the ground of territorial principle, i.e. the Swiss proceedings should not have any effect in Japan. However, the High Court ruled that the provision of the Bankruptcy Law merely meant that the inherent effect of the overseas bankruptcy declaration does not extend to Japan, but that it is not intended to deny the general effect of a bankruptcy declaration or the appointment of an administrator abroad.⁵ Nevertheless, there was a limit to the flexible approach by interpretation, and a legislative measure was thought to be necessary.

⁴ Takagi, supra, p. 5. ⁵ Decision of the Tokyo High Court, 30 January 1981, Hanji 994-53.

Insolvency Law

291

UNCITRAL prepared a model law on cross-border insolvency in 1997.⁶ In 2000, Japan adopted a new law—the Law on the Recognition of Foreign Insolvency Proceedings and Relief. This Law was more or less in line with the UNCITRAL Model Law.⁷ Relevant insolvency legislation was amended in line with the new law. The Law provides for the procedure in Japan for the recognition and assistance of insolvency proceedings commenced abroad. The recognition of foreign insolvency proceedings is not automatic. A foreign administrator is required to apply to the court for such recognition. The Tokyo District Court has an exclusive jurisdiction in these matters, although at a later stage, the court may transfer the case to another district court (Arts 4, 5, para. 1). There are grounds on which the recognition may be refused. These include: • It is evident that the foreign proceeding was not intended to have effect on the assets located in Japan. • Provision of relief in relation to the foreign proceedings is against the public order or good morals of Japan. • The foreign administrator failed to report to the court the progress of the foreign proceedings and other matters required by the court. • It is evident that the application was made for an unreasonable purpose or otherwise not in a serious manner (Art. 21). Upon recognition of the foreign proceeding, the court may grant relief such as: • stay of enforcement or interim measures in relation to the assets of the debtor; • prohibition of disposal of assets in Japan, and repayment; • suspension of auction as a result of foreclosure of security rights. If necessary, the court may appoint an administrator to manage the assets of the debtor located in Japan (Art. 32, para. 1). While under the Model Law relief is granted automatically upon recognition, under Japanese Law this is discretionary. The Law also provides for parallel proceedings. Parallel proceedings took place in some cases such as the BCCI case. According to the new Law, when the court decides on the application for recognition of a foreign proceeding, and a proceeding in Japan against the same debtor had already commenced, the application shall be dismissed, unless all the following requirements are met: • the foreign proceeding under application for recognition is the main foreign proceeding; • granting of relief is compatible with the general interest of the creditors; and

⁶ . ⁷ K. Yamamoto, ‘New Japanese Legislation on Cross-border Insolvency as Compared with the UNCITRAL Model Law’, International Insolvency Review, vol. 11, No. 1, p. 67ff.

292

Business-related Laws

• by granting relief, the interest of the creditor is not unreasonably harmed in Japan (Art. 57, para. 1). A foreign main proceeding is defined as the proceeding commenced in the country where the debtor (a business entity) has its main place of business (Art. 2, subpara. 2). In the three insolvency laws, there is a provision on the payment to those creditors in Japanese proceedings who have been paid in foreign proceedings. In such cases, those creditors cannot be paid in the Japanese proceeding until other creditors have been paid the same proportion of payment (hotch-potch rule).

13 Securities Law (the Financial Instruments and Exchange Law) 1. The Development of Securities Law in Japan The earliest law in this field was the Stock Transaction Ordinance of 1878, which was modelled on the London Stock Exchange rules. The Tokyo and Osaka Stock Exchanges were founded in the same year. Securities firms started their business, dealing with government bonds and later with shares. However, the securities market failed to play a major role in Japan’s rapid modernisation process. Business conglomerates (zaibatsu), which were the major force behind the industrialisation, did not have to rely on the securities market for financing. Shares of these conglomerates were held by holding companies and banks which were part of these conglomerates. Therefore shares available on the market were limited in number. This made the market speculative, because it was dominated by securities dealers, particularly through futures trading.¹ After the Second World War, the Allied Forces pursued the democratisation of the economic system. As part of the reform, zaibatsus were dissolved and the shares held by holding companies were released to the general public. The number of small investors sharply increased and almost reached 70 per cent at one stage. However, since then the percentage of individual investors has fallen substantially. In 1947 the Securities and Exchange Law (hereinafter, the ‘SEL’) was enacted. This was quickly replaced by another law, modelled on the US Securities Act of 1933 and Securities Exchange Act of 1934.² The Securities and Exchange Commission, similar to the US SEC, was founded to implement the Law. New stock exchanges were founded and started operation in 1949. In 1952 the SEL was amended and the Securities and Exchange Commission was abolished and replaced by supervision by the Ministry (Minister) of Finance. The internationalisation of the Japanese securities market was facilitated by the liberalisation of the yen-denominated bond issues abroad in 1971. The ban ¹ For the history of the securities market, see Japan Securities Institution (ed.), Securities Market in Japan 2006 (Tokyo, 2007), pp. 18–41. ² Law No. 25, 1946.

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

294

Business-related Laws

on investment in foreign securities was lifted. In 1980 the then Foreign Exchange and Foreign Trade Control Law was substantially amended in order to liberalise international transactions. This move was further accelerated in the wake of the US–Japan Yen–Dollar Committee Report in 1984, which emphasised the importance of an open and liberal capital market and the free movement of capital. Accordingly, access to the Japanese market for foreign companies was made easier. In 1987 a market for commercial papers was created. Trading in bond futures started in 1985, followed by stock index futures and securities option trading in 1988. The Law on Trading in Financial Futures was enacted in the same year (now repealed). The securities market in the second half of the 1980s was in a state of ‘bubble’. Share prices, together with prices of real property, went up sharply. In 1990, the Nikkei average was at an all-time high of 38,915 yen at the end of 1989. Even as late as 2008, this level has not yet been regained. The Nikkei average was around 13,000 yen in July 2008 and below 8,000 yen in November. Despite the rapid growth in the securities market in the 1980s, the regulatory framework failed to catch up with it. Expansion of the securities market required improvements in the disclosure system and the tightening of regulations on fraudulent transactions. Tighter regulation of insider trading was introduced only in 1988, after the urging of other countries concerned about the effect of lax regulation in Japan on the international market. The flaw in the regulatory system was evidenced by a series of incidents involving securities companies exposed in 1991. Large and medium-sized securities companies including the then ‘Big Four’ were found to have compensated losses accumulated by favoured customers through discretionary accounts. Market manipulation and insider trading were suspected on some occasions. There was a public outcry, particularly from small individual investors, who had also lost in the market but had never been compensated. At that time, promises of compensation were explicitly prohibited by the Securities and Exchange Law, but compensation without a promise was not. The Law was amended in 1991 in order to make compensation unlawful per se. In the wake of these incidents, a new supervisory body, the Securities and Exchange Surveillance Commission, which was entrusted with ensuring fair trading in the securities market, was established within the Ministry of Finance in 1992. It was empowered to investigate violations of the Securities and Exchange Law and other laws and to apply to the Public Prosecutor’s Office to prosecute offenders. The Commission eventually became part of the Financial Services Agency. One of the characteristics of the Japanese financial system was the strict segregation of banking and securities business. In the pre-war period banks were allowed to engage in any kind of businesses. Under this universal banking system, banks acted as major underwriters of securities. After the Second World War Japan followed the US Glass-Steagall Act and strictly segregated securities

Securities Law (the Financial Instruments and Exchange Law)

295

business from banking business. This was intended primarily to ensure the sound management of banks by distancing them from the securities market, thereby protecting the banks from fluctuations in the securities market, and to prevent them from creating financial conglomerates.³ The line between the two types of businesses had already become somewhat blurred in the 1980s. The system of segregation became even less strict in the 1990s. In 1993 a set of laws for financial reform came into effect. Securities companies were allowed to set up banking and trust bank subsidiaries. For their part, banks set up securities subsidiaries, but the scope of business was limited and the size of the subsidiaries was fairly small. The previously strict segregation of the banking and securities businesses was relaxed, and entry into each other’s business came to be allowed. However, this reform proved to be insufficient to reinvigorate the system. The financial sector at that time was administered by the Ministry of Finance in a highly detailed but often informal and discretionary way. An example is the restriction on the opening of branches by banks. Although there was no explicit statutory basis, banks were not allowed to open branches without the tacit approval of the Ministry. This was intended to protect smaller financial institutions and regional banks. Another example is the marketing of new financial products, where financial institutions had to ‘consult’ the Ministry in advance. It was feared that, because of such over-regulation, the Japanese financial market would lose competition to foreign markets and investors would leave Japan. This led the government to embark on a comprehensive deregulation programme of the financial sector, which was called the ‘financial big bang’, following the ‘Big Bang’ in the UK. The reform was based upon three principles: free, fair, and global markets. ‘Free’ means the prevalence of the market principle, including the replacement of excessive regulations. ‘Fair’ means a transparent and reliable market. This involves the improvement of the disclosure system for the promotion of self-responsibility. Methods of regulating banks and securities companies shifted from detailed advance regulation by way of administrative guidance to post facto supervision. As part of the ongoing reform, in 1998, laws including the Securities and Exchange Law were amended. This involved the shift from the licensing system to a registration system of securities companies, further lowering of the barriers between banking and securities businesses, and liberalisation of the brokerage fee. In 1997 the prohibition on holding companies in the Anti-Monopoly Law was removed. As a result, financial holding company groups were allowed to be set up. While in the 1990s, there were three long-term credit banks and nineteen city banks which operated nationwide, now, after a decade, there are four financial ³ One of the differences between the Glass-Steagall Act and the Japanese system is that in Japan banks are allowed to hold shares in business companies for investment purposes. Y. Suzuki (ed.), The Japanese Financial System (Oxford, 1987), pp. 39–40.

296

Business-related Laws

holding company groups. These groups invariably have banks and securities companies within the group. Thus segregation of banking and securities business was further relaxed. Another development in the reform is the enactment of the Law on the Bank of Japan.⁴ The old law, modelled on the German Reichsbanksgesetz of 1933, has long been considered outdated. In the new law, the independence of the Bank of Japan from the government has been strengthened. For example, the power of the government to issue orders to the Bank was abolished, and it was made clear that a difference of views between the government and the bank directors is not a good ground for the latter’s dismissal. Instead of the informal meeting of the governor and senior directors, which hitherto has been the de facto decision-making body, the new Law reconfirmed that the policy board was the supreme body of the Bank, and changed its composition. The goal of the ‘Big Bang’ in Japan was two-fold: the reform of the system and the sorting out of the problems involving non-performing loans which had been accumulating since the burst of the bubble in the early 1990s. The problem with the latter was already evident in the early 1990s, but the banks failed to take decisive measures to cope with it, while the government remained complacent. In March 1998 the government finally decided to inject capital into the troubled banks. This, however, proved to be ‘too little, too late’. Some banks found it difficult to meet the BIS capital adequacy ratio, and had to reduce the scope of their business. Banks became reluctant to extend loans and even accelerated the recovery of debts, which led to a credit crunch, resulting in the collapse of business companies. A set of laws to cope with the crisis was adopted in 1998. As part of the emergency package, a new agency, the Financial Reconstruction Commission was set up and was in operation until 2001. This function was taken over by the Financial Services Agency (hereinafter the ‘FSA’). One of these laws, the Law on Emergency Measures for the Restoration of the Functioning of the Financial System, provides inter alia for measures to be applied to failed banks.⁵ Immediately after the enactment of this Law, one of the long-term credit banks was forced to apply for special public administration, i.e. virtual nationalisation with a view to selling the business in the future.⁶ Another long-term credit bank followed soon afterwards.⁷ The crisis was overcome only because the government decided to inject public funds into the banks and restore the credibility of the financial system, but the effect of the crisis continued well into the 2000s.⁸ ⁴ M. Hall, ‘Financial Reform in Japan: Redefining the Role of the Ministry of Finance’, Journal of International Banking Law, 1998, Issue 5, pp. 171–176. ⁵ Law No. 132, 1998. These include administration by a financial administrator, the establishment of a bridge bank, and special public administration. ⁶ Nikkei, 23 October 1998. ⁷ Nikkei, 12 December 1998. ⁸ D. Puchniak, ‘Perverse Main Bank Rescue in the Lost Decade: Proof that Unique Institutional Incentives Drive Japanese Corporate Governance’, Pacific Rim Law and Policy Journal, January 2007, Vol. 16, No. 1, p. 55.

Securities Law (the Financial Instruments and Exchange Law)

297

2. The Enactment of the FIEL In the process of the ‘Big Bang’, a forum of experts was set up by the Ministry of Finance and other ministries in order to discuss the prospective reform of the financial system. The interim report of this group published in June 1998 pointed out that a new law or a set of rules encompassing a wide range of financial instruments and services across the board was needed, with a UK Financial Services Act of 1986 type of law in view. The need for common rules applicable to collective investment schemes, irrespective of the investment vehicles or the objects of investment, was stressed.⁹ In fact, the Securities and Exchange Law has never been a comprehensive law covering the whole range of financial products. The US Securities Act has a broadly defined concept of securities which includes investment contracts, i.e. contracts, transactions, or schemes whereby a person invests his money in a common enterprise. In contrast, The SEL has an exhaustive list of specific securities it covers (Art. 2). Although the list had been expanded over the years, various financial products fell outside the scope of the SEL and were left entirely unregulated or regulated by other laws implemented by different agencies. In the 1990s, a wide range of financial instruments began to emerge, but the regulations failed to catch up with such developments. Some financial instruments were left without any regulation at all. An example is the foreign exchange margin transaction which was unregulated and resulted in investors with insufficient knowledge and expertise being lured into investment and losing. Only with the amendment to the Financial Futures Trading Law in 2005, were such transactions placed under the supervision of the Financial Services Agency and the problems more or less subsided. As for collective investment schemes, only a part of them was covered by the SEL. In the autumn of 1997, the Japanese financial system fell into a major crisis which led to the collapse of a city bank and one of the big four securities companies followed by others. The Ministry of Finance, which was promoting the idea of a new comprehensive law covering financial instruments, was criticised for the way it had been supervising financial institutions. Furthermore, a major scandal involving Ministry officials was exposed, and the Ministry was seriously discredited. With the decline of the Ministry, the momentum for the enactment of a comprehensive law was lost. In the wake of the financial crisis, discussions on the comprehensive law almost ceased. While the financial system in Japan was dwindling, in the UK the 1986 Financial Services Act was replaced by the Financial Services and Markets Act (FSMA) 2000, which covers securities, banking, and insurance. ⁹ Forum on the New Developments of Finance (Atarashii Kinyū no Nagare ni kansuru Kondankai), Identification of Issues (Ronten Seiri), 17 June 1998.

298

Business-related Laws

The proposal in the late 1990s for a comprehensive law resulted in a law of a much reduced scale in comparison with the UK Financial Services Act of 1986—the Financial Instruments Sales Law in 2000. This Law is primarily of a civil law nature as contrasted to administrative/regulatory law. It limited itself to imposing the duty of the seller of financial instruments to provide information regarding the risks involved in the financial product to investors. The information required of disclosure was merely the risk of losing the amount of investment (capital). Sellers are liable for damages for the failure to provide information and a provision on the presumption of loss was introduced. The coverage of this Law was insufficient in that, for example, the area of commodity futures trading was exempted. Nevertheless, there is a body of case law that developed under this law and which contributed to the protection of investors.¹⁰ When the financial crisis more or less settled, the discussion regarding a new comprehensive law was resuscitated. The 2003 report of the Financial System Council (hereinafter, the ‘FSC’), which is an advisory body to the FSA, proposed the replacement of the SEL by a new ‘Investment Services Law’.¹¹ The intention was to provide a comprehensive and across-the-board framework for the protection of investors regarding a wide range of financial instruments, filling the gaps of the existing laws. Fragmented rules applicable to segmented businesses were to be unified and similar rules were to be made applicable to financial instruments of an identical nature with a similar level of risk, which was not necessarily the case at that time. The goal of the law was not limited to investor protection; the creation of a fair, efficient, transparent, and vibrant financial market was the ultimate goal. The government policy of reinvigorating the securities market, which was slow to recover from the financial crisis, was behind this move. In Japan, a large portion of household savings are not invested in the financial market; instead, they are deposited as postal savings. The overall intention of the government was to induce the general public to invest in the financial market, but to achieve this goal a comprehensive and developed legal framework such as the UK FSMA was needed. The revamping of the SEL was also necessary for other reasons. Firstly, the need for strengthening the corporate audit system had come on the agenda as a result of incidents of window dressing by banks and business companies, and the failure of accountants to prevent them in the early 2000s. In line with the US Sarbanes-Oxley Act, it was felt necessary to introduce the system of listed companies producing a document confirming the accuracy of securities report and other disclosure documents and the internal control report. Secondly, in 2005, the celebrated takeover of the Nippon Broadcasting System by a company called Live Door took place. Flaws in the SEL regarding the TOB ¹⁰ T. Ueyanagi and Y. Ishidoya, Shin Kinyū-shōhin-torihiki-hō Handbook (Handbook on the New FIEL) (Tokyo, 2006), pp. 48–54. ¹¹ (in English).

Securities Law (the Financial Instruments and Exchange Law)

299

system became apparent through this case and subsequent takeover cases (see Chapter 11). Thirdly, as a result of the series of incidents involving insider trading and false reporting, the fairness and transparency of the financial market came to be questioned in 2005/2006. In the light of the internationalisation of the financial and capital markets, in order to increase the credibility of the Japanese market, improvement of the regulatory system was thought to be necessary. Against this background, the bill on the amendments to the SEL and other laws was submitted to Parliament in March 2006. It became law in June of the same year. As for the title of the Law, the FSA’s ‘Programme for the Future Financial System’ of 2004 and the FSC First Sub-Committee’s report of 2005 referred to the ‘Investment Services Act’ with the hope of including banking and insurance businesses. Clearly they had the UK FSMA in view. Presumably since the new law in the end did not cover banking and insurance transactions, the legislature stopped short of using the title of ‘Financial Services Law’. On the other hand, replacing the term ‘securities’ with ‘financial instruments’ was understood to symbolise the broadening of the coverage of financial products covered by the new Law. The actual bill took the form of a law amending the SEL and other laws covering some financial instruments. Concerning the SEL per se, the amendments comprised three steps and have been taking effect ‘in the order of urgency’. Firstly, penalties provided by the SEL were strengthened. The investigative power of the Securities and Exchange Surveillance Commission was marginally strengthened. This part of the amendment took effect in July 2006. Secondly, the insufficiency in the regulations on takeover bids (TOB), which came to light in the course of a series of rather distorted takeover attempts in 2005/2006, was addressed. Concerning the disclosure system, the reporting requirements for large shareholdings went through a reform. The existing system was thought to be insufficient, since it allowed an excessively lax regime for investment funds and the like. The disclosure requirement for large shareholdings was strengthened in this respect. This part of the Law came into effect in December 2006. Finally, the SEL was replaced by the Financial Instruments and Exchange Law (hereinafter, ‘FIEL’). This took effect in September 2007. The arrangement of the chapters of the FIEL is identical to that of the SEL. Many provisions of the SEL were inherited by the FIEL without significant changes. However, substantial changes regarding the scope of the law and basic concepts have taken place in the FIEL. The changes can be summarised as follows: • Broadening of the range of financial instruments and services covered by the law: – the concept of securities expanded; collective investment schemes are now covered by the FIEL; – expansion of the coverage of derivatives.

300

Business-related Laws

• Replacement of the concept of ‘securities businesses’ by the concept of ‘financial instruments businesses’: – business hitherto covered by laws other than the SEL came to be covered by the FIEL. • Introduction and determination of the organisational structure of a selfregulatory body of the exchanges. • Flexibilisation of regulations, depending on whether the customer is a professional investor or not. • Enhancement of disclosure: – introduction of quarterly reporting for listed companies; – introduction of the internal control report. The FIEL was further amended in 2008. A market for professional investors where the disclosure requirements do not apply was set up. An investment advisory service is now allowed to the banks. The level of surcharges (kachōkin) has been increased and the scope of application has been expanded.¹²

3. The Goal of the FIEL The declared goal of the SEL was to ensure the fairness of the issue, sale, and other transactions involving securities and the smooth circulation of securities and thus contribute to the adequate management of the national economy and the protection of investors (SEL, Art. 1). The interpretation of this provision varied. There was a view that the protection of investors was the primary goal of the SEL, but there was another school of thought which contended that the goal of the law should be ensuring the functioning of the securities market for the fair price formulation.¹³ In contrast, the provision regarding the goal of the FIEL reads as follows: This Law aims at ensuring the fairness of the issue of securities and transactions involving financial instruments etc., making the circulation of securities smooth, and also at the fair price formulation of financial instruments etc. by sufficient functioning of the capital market through the development of the disclosure system of corporate information etc., setting out requirements to those who are involved in financial instruments business, and ensuring of the adequate management of the financial instrument exchanges, and thus contributing to the sound development of national economy and the protection of investors. (FIEL Art. 1)

The novelty here is that the ‘fair price formulation of financial instruments via the sufficient functioning of the capital market’ was added. Although the ¹² . According to the FSA translation, ‘administrative monetary penalties’. ¹³ T. Uemura, in Kigyō-Kaikei vol. 53, No. 4, p.135.

Securities Law (the Financial Instruments and Exchange Law)

301

SEL was regarded as a capital market law as well as the law regulating securities transactions and business, this aspect was not reflected in the wording of the SEL. In contrast, the corresponding provision of the FIEL stresses the nature of the law not only as a law regulating the issuing and trading of securities, but also as a law which provides for the infrastructure of an efficient and fair capital market. The concept of the capital market itself has been widened, since this is not only the securities market, but also the market in a broader sense where transactions involving a wider range of financial instruments take place.¹⁴

4. The Scope of the FIEL As mentioned above, the SEL was not the only law which regulated financial instruments. The legislation in the area has been fragmented, divided along the line of financial products and agencies in charge of implementing relevant laws. SEL could be characterised as a law which regulated securities, the securities industry and the securities market. Banking and insurance businesses were, and still are, regulated by the Banking Law and Insurance Business Law respectively. Commodity funds came under the scope of the Law on the Regulation of Business involving Investment in Commodities. Commodity futures are covered by the Law on Commodities Exchange. Agencies responsible for these businesses ranged from the Ministry of Finance (later FSA) to the METI, the Ministry of Land and Transportation, and the Ministry of Agriculture and Fishery. While the SEL had a fairly well developed system of rules, other laws simply regulated the given type of business and were insufficient in the protection of investors. It was thought that there should be a law which encompasses all these areas of business, regulating financial products and services of a similar nature in the same manner, and with a single agency to implement it. The absence of such a comprehensive law was felt in recent years when investors suffered losses by investing in financial instruments which did not fall within the scope of the SEL or any other law, or were insufficiently regulated by law. These included variable (equities) insurance, commodity futures, overseas commodity futures, commodity futures options, and foreign exchange margin transactions. Remedies were not readily available in many of these cases. Foreign exchange margin transactions claimed many victims until 2004, when the then Financial Futures Trade Law was amended in order to cover such transactions.¹⁵

¹⁴ See also S. Osaki, Kaisetsu Kinyū-shōhin-torihiki-hō (Commentary to the FIEL) (Tokyo, 2006), pp. 16–17; E. Kuronuma, Kinyū-shōhin-torihiki-hō Ny-mon (Introduction to the FIEL) (Tokyo, 2006), pp. 34–35. ¹⁵ Ueyanagi and Ishidoya, supra, pp. 48–54.

302

Business-related Laws

The FSA had expressed its intention to ‘strive for establishing overall uniform rules for transactions regarding financial products and services’ in 2004. The underlying idea was that financial instruments of a similar nature and risk should be subject to the same level of regulation by the new Law regardless of the agencies in charge. The FSC Sub-Committee report did not precisely define financial instruments (it used the term investment products), but listed three characteristics of them: • financial instruments involve monetary investment with the possible return of monetary value; • the investment is related to assets or indexes; • it involves the taking of a risk with a view to economic benefit. It was proposed that the products, including collective investment schemes, should be listed in a broad and comprehensive manner insofar as it is necessary for the protection of investors. On the other hand, it was added that exemptions and designations of financial instruments should be available in order to respond to changing circumstances. However, whether or not the new Law should be as comprehensive as the UK FSMA which encompasses banking and insurance businesses was not decided. The Sub-Committee report was rather cautious on the scope of the new law. In order to facilitate the enactment of the Law, it was proposed that the new Law cover ‘financial instruments which involve risk’ that have been agreed so far. A view was expressed at the last session of the Sub-Committee that the proposed Law should include bank deposits and insurance as the UK FSMA does. It was pointed out that although it was inevitable that the new Law would be enacted with reduced scope at this stage, the future direction of the legislation should be made clear to the general public.¹⁶ Views varied within the government on the coverage of the new Law. For example, while the FSA proposed to accommodate commodity derivatives trade including futures trade regardless of whether it takes place within or outside Japan, the Ministry of Economy, Trade and Industry and the Ministry of Agriculture and Fishery were strongly opposed to this. As a result, the Law on Commodities Exchanges, which is not specifically designed to cover commodity futures, remains to regulate them.¹⁷ Thus, for various reasons, some separate laws concerning financial instruments remain together with the FIEL. These include the following: • Law on Banks; • Law on Insurance; • Law on Commodities Exchanges; ¹⁶ Summary of the First Sub-Committee meeting of 22 December 2005, . ¹⁷ Ueyanagi and Ishidoya, supra, pp. 262–263.

Securities Law (the Financial Instruments and Exchange Law)

303

• Law on Specific Joint Businesses on Real Estate; • Law on the Futures Trade in Overseas Commodity Market. While the FIEL failed to cover some financial instruments, by the amendment to the relevant laws, the same rules as the FIEL contains are applicable to the following: • • • • • •

foreign currency denominated deposits (Banking Law); derivatives deposits (ibid.); foreign currency denominated insurance (Insurance Business Law); variable insurance and annuity (ibid.); commodity futures (Commodity and Exchange Law); real estate syndication business (Law on Specific Joint Businesses on Real Estate).

Banking Law and Insurance Business Law were amended, and as a result, structured deposits and variable insurances came under the same level of regulation as the FIEL. Concerning commodity futures in the domestic market, the Law on Commodities Exchange was amended in order to align it with the FIEL. However, although there have been a large number of troubles involving investors, the much needed prohibition of uninvited solicitation was not made applicable. For overseas commodity futures, the relevant law, which is not sufficient, has not been amended.¹⁸ The Financial Instruments Sales Law of 2000 also remains in force. The SubCommittee report proposed to incorporate this Law into the FIEL, but this was rejected in the end, primarily because the coverage of this Law differed from that of the FIEL. The Law, however, was amended on this occasion. The duty to provide information to the customer was expanded in order to incorporate information not only on the possible deficit of the capital, but also the fact that loss may exceed the capital. The substantial part of the transaction scheme now needs to be explained too.

5. The Concepts of Securities and Financial Instruments The key concept in the SEL was ‘securities’. Once a financial product fell within the scope of securities listed in the SEL, various rules, including the prohibition of financial institutions to handle them, became applicable. The FSC SubCommittee report used the term ‘investment products’ to denote products which are to be regulated by the prospective ‘Investment Services Law’. However, the FIEL retained the concept of securities, although its coverage was significantly ¹⁸ Ibid., pp. 50–51.

304

Business-related Laws

broadened. Despite the name of the Law, still, ‘securities’, and not financial instruments, is the key concept in the FIEL. It would be misleading to say that the FIEL regulates financial instruments in the same way as the SEL covered securities. The FIEL covers ‘securities’ and ‘derivatives trade’. ‘Financial instruments’ are by no means a higher concept than those. It neither demarcates the scope of the FIEL nor the scope of business of the Financial Instruments Firms (FIFs). The FIEL sets out a list of securities as is the case with the SEL. Although various rights have since come to be covered by the FIEL, the structure of the provision defining securities has not changed. The list of securities which has been expanded by the successive amendments to the SEL has been further expanded by the FIEL. At the end of paragraph 1 of Article 2—which lists more than 20 securities including treasury bonds, corporate bonds, share certificates, and certificate of beneficiary rights for investment trusts—there is a general clause which enables other financial products to be designated as securities by a cabinet order, in consideration of their circulation and the need to protect the public interest or investors (Art. 2, para. 1). Paragraph 1, which covers securities with high liquidity, has been expanded as compared to the SEL in that mortgage securities as well as securities embodying options in derivatives transactions were added. Accordingly, the Law on Mortgage Securities Business was abolished. Paragraph 2 of Article 2 provides for (i) securities without a certificate (paperless securities) and (ii) rights which are not represented in securities or certificates, but are listed in this paragraph. The second category covers securities with low liquidity, including beneficiary rights in investment trusts (‘investment trusts (tōshi-shintaku’) in Japan covers both contractual and corporate type trusts) and rights emanating from collective investment schemes. Category (ii) rights are denoted as ‘deemed securities’. The scope of deemed securities has been substantially broadened. There are two major additions— (a) beneficiary rights of trust and (b) interests in collective investment schemes. The consequence of a particular financial instrument qualifying as securities is that firstly, the financial instrument can in principle only be handled by Financial Instruments Firms (FIFs: previously securities dealers etc.). Another outcome of a product being qualified as securities is that requirements for disclosure as well as market regulations become applicable. However, deemed securities, including collective investment schemes which do not invest in securities, are in general not subject to disclosure requirements under the FIEL. Thirdly, the prohibition of unjust trading becomes applicable. Finally, securities will be able to be traded in financial instrument exchanges.¹⁹ Together with securities, the other pillar of the FIEL is derivatives transactions. The Sub-Committee report had pointed out that derivatives transactions should be covered by the FIEL, regardless of the underlying assets. ¹⁹ Matsuo (ed.), Ichimon Ittō: Kinyū- shōhin-torihiki-hō (Q&A; FIEL) (Tokyo, 2006), pp. 84–85.

Securities Law (the Financial Instruments and Exchange Law)

305

Embryonic forms of the derivatives trade existed in Japan for many years, but it has widely developed since 1985 when government bond futures trade was introduced at the Tokyo Stock Exchange. In 1988, stock index (TOPIX) futures trade started. Since then, various kinds of futures and options trading have developed in Japan.²⁰ The SEL regulated derivatives transactions involving securities, whereas a separate law—the Law on Financial Futures Trade—regulated financial futures transactions. This latter Law was integrated into the FIEL and the original Law was abolished. According to the FIEL, derivatives transactions can be categorised into three types: • derivatives transactions in the financial instruments market; • over-the-counter transactions; • transactions in the foreign financial instruments market. In order to specify various types of derivatives transactions, the FIEL used the term ‘fi nancial instruments’. Th is is where the concept of fi nancial instruments is given a functional meaning. The FIEL has a provision which defi nes fi nancial instruments. Th is provision actually sets out the underlying assets of derivatives transactions under the heading of ‘fi nancial instruments’ (Art. 2, para. 24). These are: • securities; • claims and other rights based upon a contract of deposit or securities or certificates listed in a cabinet order and representing such rights; • currency; • assets, a similar kind of which exist in multiples and are subject to substantial price fluctuation and designated to be in need of investor protection; • standard products set by financial instruments exchanges in relation to the above (except for currencies) by standardising interest rate, redemption date, and other terms in order to facilitate transactions in derivatives. In addition to the concept of financial instruments, the FIEL also accommodates a provision which defines financial indexes (ibid., para. 25). These are: • price or interest rate of financial instruments; • indexes regarding the result of the observation by the meteorological office; • indexes whose fluctuation is impossible or extremely difficult to influence or control and which significantly affects the business activities of an entrepreneur, or statistical indexes regarding the state of society or the economy where the protection of investors is required in derivatives transaction involving them and designated as such by a cabinet order.

²⁰ Securities Market in Japan 2006, supra, pp. 124–144.

306

Business-related Laws

Specific types of derivatives transaction are listed. These include: • futures transaction, forward transaction, option transaction; • index futures transaction, index forward transaction, index option transaction, swap transaction; • credit derivatives transaction. Derivatives transactions which were not regulated before, such as currency and interest rate swaps, credit derivatives, and climate derivatives are included. In addition, the FIEL provides for the possibility of adding new types of derivatives transactions by way of a cabinet order. On the other hand, commodities and commodities indices which fall within the framework of the Law on the Commodities Exchanges are excluded from the coverage of the FIEL, although this Law was amended in order to have the same level of regulation as the FIEL applicable. The effect of derivatives being covered by the FIEL is that only registered FIFs can handle such transactions, and as a result, rules of the FIEL regarding conducts of FIFs become applicable. On the other hand, unlike securities, the disclosure requirements are not applicable.

6. Collective Investment Schemes Collective investment schemes are often called ‘funds’ in Japanese. They were not fully regulated under the SEL regime, since the SEL only covered investment trusts and schemes which invest in securities. Schemes investing in real estate, commodities, and commodity futures were regulated by separate laws.²¹ Funds investing in other objects were not regulated at all, unless a limited partnership for investment (LPS) was used as a vehicle. Many funds which took the form of associations under the Civil Code, or anonymous associations under the Commercial Code, were not subject to supervision by any administrative agency.²² The necessity of improved regulation of collective investment schemes was already felt in the 1990s. Whereas in the UK, the law covered ‘units of collective investment schemes’, the then existing system of regulations regarding financial instruments was highly segmented in Japan. These laws included the Civil Code, the Commercial Code, the Law on Trust Business, the Law on Securitisation of Assets through Special Purpose Companies and the Law on Unit Trusts and Investment Corporations. However, as various new and complex schemes emerged, these segmented regulations were unable to cover them adequately. Furthermore, these schemes encompass diverse stages such as structuring the scheme, asset ²¹ Ueyanagi and Ishidoya, supra, p. 130. ²² FSA, Summary of Regulations on Funds, .

Securities Law (the Financial Instruments and Exchange Law)

307

management, advisory business, custodianship, and sale. Again, they were regulated by different laws, if any. Concerning the types of funds, the report of the study group of the METI listed the following: (i) securities/real estate investment funds structured on the basis of the Law on Unit Trusts and Investment Corporations; (ii) investment funds organised as a partnership; (iii) commodity funds investing in commodities and commodity futures regulated by the Law Regulating the Commodity Investment Business; (iv) real estate joint business funds structured on the basis of the Law on Specific Joint Business on Real Estate; (v) trust type funds structured on the basis of Law on Trust Business; (vi) other funds investing in businesses other than the above and which are not subject to any law. Category (ii) includes ‘activist’ funds, mezzanine funds, and private equity funds. In recent years, funds investing in diverse businesses such as investment in IT contents, leisure, hotels, and food have emerged.²³ The common thread was that these were the schemes in which the sponsor pools the invested fund and the fund manager manages and administers it. Common denominators are the ‘passiveness’ and ‘collectiveness’ of the scheme. Passiveness means that participants are not involved in the day-to-day management of the assets, and that they leave it to someone else. Collectiveness means that the investment of the participants and the profits or income to be distributed to the participants are pooled. This was in line with the UK FSMA and the US Howey doctrine.²⁴ In the final report of the FSC Sub-Committee in 2005, it was proposed that effective and comprehensive, across-the-board rules for collective investment schemes should be introduced insofar as non-professional investors are involved. On the other hand, the financial industry and METI were against the strengthening of regulation on collective investment schemes. It was argued that stringent regulation would reduce the international competitiveness of the Japanese market. A collective investment scheme is defined in the FIEL as follows: Rights based upon a contract of association (the Civil Code), contract of silent partnership (the Commercial Code), contract of limited liability partnership for investment (Law of 1998), and contract of limited liability partnership (LLP Law of 2005), rights as a member of an association in which the rightholder (investor) is entitled to receive ²³ METI, Keizai-seichō ni muketa Fando no Yakuwari to Hatten ni kansuru Hōkokusho (Report of the Research Group on the Role and Development of Funds Towards the Economic Growth), December 2005. ²⁴ SEC v. W. J. Howey Co. 328 U.S. 293, 66 S.Ct.1100.

Business-related Laws

308

dividends or distribution of assets from the business in which the investor has contributed by way of investment or monetary payment . (Art. 2, para. 2, subpara. 5)

Exemptions include the following: (i) schemes designated by the cabinet order in which all investors take part in the business; (ii) contracts in which the dividend or the amount of distribution does not exceed the investment. Furthermore, insurance contracts, certain types of contracts of mutual aid, and rights based upon real estate specific joint venture contracts are excluded. Commodity funds are exempted as well. Exemption (i) reflects the view that the scheme should be intended to profit from the efforts of another person. Partnerships of lawyers and accountants are examples of this exception. If the investor does not intend to make a profit, such as in cases of housing cooperatives, it is not a collective investment scheme. In this context, a US Supreme Court judgment of 1946 was referred to in the drafting stage. According to this judgment, an ‘investment contract’ in the US Securities Act is a ‘contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party’.²⁵ Exemption (ii) includes NPO banks, i.e. funds investing in non-profit business for public interest. The consequence of collective investment schemes as a whole included in the list of deemed securities is that (i) as a rule, only FIFs can be involved in this business, and (ii) various conduct and management rules become applicable. Thus, rules regarding the soliciting and sale of the share of collective investment schemes, as well as rules regarding the management of investments are applicable. On the other hand, collective investment schemes are exempted from the application of the disclosure rules unless the scheme invests in securities. Collecting investment in business based upon a silent association contract from the general public does not require a securities registration statement or the handing out of a prospectus. As the solicitation of investment to this kind of a scheme is a category II financial instruments business (FI business), the advertisement regulation and the duty to provide documents before the conclusion of the contract apply. However, this is questionable, since regardless of whether or not the object of investment is securities, information about the funds is relevant when making investment decisions for investors.²⁶ Even in schemes investing in securities, due to the narrow definition of ‘offers’, disclosure requirements will seldom be applied. Recently there was an incident whereby a fund investing in a business collapsed (Heisei Denden case). The fund itself was closely involved in the invested ²⁵ Ibid.

²⁶ Ueyanagi and Ishidoya, supra, pp. 143–144.

Securities Law (the Financial Instruments and Exchange Law)

309

business. The total amount of loss to more than 19 thousand investors is reported to be around 49 billion yen.²⁷

7. Financial Instruments Business and Firms The FIEL has introduced a new concept of ‘financial instruments businesses’ and ‘financial instrument firms’ (hereinafter, ‘FIFs’). FIFs are defined as entities which are involved, as a business, in one of the financial instruments businesses listed in the FIEL. The list contains businesses involved in securities and derivatives transactions (but the term ‘financial instruments’ is not used). Financial instruments business covers securities business under the previous SEL and the Law on Foreign Securities Dealers (now abolished), but goes much further and is in addition to the core securities business. It can be summarised as ‘sale and solicitation’, assets management and investment advice, and administration of monies and securities.²⁸ The scope of the financial instruments business is broader than the securities business under the SEL. This is due, firstly, to the expansion of the concept of securities such as mortgage securities and collective investment schemes, and that businesses involving them are now financial instruments businesses. Secondly, the expansion of the coverage of derivatives resulted in businesses involving various types of derivatives included in the financial instruments business. Thirdly, investment advisory business and investment management business have come to be included in the FI businesses.²⁹ Securities companies, dealers in financial futures, dealers in commodities investment, securities investment advisers, commissioners of unit trusts, and mortgage securities dealers are now FIFs. Under the SEL, securities business was subject to a licence. In 1998, as part of the financial deregulation, with the intention of liberalising entry into the market, this was replaced by a registration system. However, due to the risks involved and the expertise needed in the business, certain categories of business were subject to the licence of the Prime Minister. These included the over-the-counter trade of derivatives and the underwriting of securities (direct from the issuer) as well as the management of the private trading system (PTS)/multiple trading facilities (MTF). Under the FIEL, in contrast, only businesses involving PTS/ MTF are subject to government approval. To this extent, the FIEL has deregulated these businesses.³⁰ Thus, the scope of FI business has been expanded with the broadening of the coverage of the law, and at the same time, the registration system became the rule. ²⁷ M. Yoshida et al., Guidance Kinyū-shōhin-torihiki-hō (Guidance to the FIEL) (Tokyo, 2006), pp. 87–88. ²⁸ Ueyanagi and Ishidoya, supra, p. 57. ²⁹ Matsuo, supra, pp. 108–109. ³⁰ Osaki, supra, p. 40.

310

Business-related Laws

The expansion of the scope of the financial instruments business has created a ‘one stop shopping system’. Under the previous system, for example, if securities companies were to provide ‘wrap accounts’, various licences and registration were required, but under the FIEL, a single registration would suffice.³¹ There are four types of financial instruments businesses: (i) category I FI businesses, (ii) category II FI businesses, (iii) investment advisory and agency businesses, and (iv) investment management businesses. There are requirements common to all types of businesses. Eligible entities should not have had their registration revoked in the past five years, should not have other businesses which are against the public interest, and should have sufficient personnel to carry out the business properly. Other requirements for the entry into the business differ for those categories. Category I financial instruments business involves trading in high liquidity securities (i.e. securities other than deemed securities), but extends to the following: • intermediary, brokerage, agency of the trading in high liquidity securities and derivatives transactions; • intermediary, brokerage, agency of the commissioning of the above; • brokerage of clearing of securities; • public offer and private placement of securities and their handling; • over-the-counter trade of derivatives, or its brokerage, intermediation, and agency; • underwriting of securities; • PTS business; • custody of securities. FIFs involved in category I financial instruments business must be companies limited by shares and are subject to requirements including: • • • •

the capital adequacy rule; minimum capital requirement; minimum net assets requirements; requirements to major shareholders.

The minimum capital for the category I financial instruments business is set by cabinet order at 50 million yen. However, for underwriting business in category I, the requirement is 3 billion yen or 500 million yen, depending on the size of the offer. Category II financial instruments business covers sales and solicitation of securities with lower liquidity (deemed securities) and market derivatives as well as the following:

³¹ Matsuo, supra, p. 170.

Securities Law (the Financial Instruments and Exchange Law)

311

• trading in deemed securities; • derivatives transactions not related to securities in the market or in a foreign market; their brokerage, agency, and intermediation. The basic requirement for this category of business is the minimum capital requirement at 10 million yen. Even individuals are allowed to conduct category II FI business with the placement of security for operation. The other two categories of financial instruments business are investment advisory/agency business and investment management business (including discretionary investment business). Investment advisory and agency business covers the provision of advice based upon an advisory contract, acting as an intermediary or agent for the conclusion of investment advisory contracts as well as discretionary investment contracts. The management of a collective investment scheme is investment management business and is regulated as such. Investment management business is subject to a net assets requirement and a minimum capital requirement. As mentioned above, Japan has followed the US Glass-Steagall Act which strictly segregated banking business from securities business. Article 65 of the SEL prohibited banks from engaging in securities business. When the FIEL was enacted, some people expected that the demarcation of banking and securities businesses would be further relaxed. However, the system of segregation as previously provided by Article 65 of the SEL is maintained in the FIEL. The FIEL provides that banks, financial institutions with a cooperative structure, and other financial institutions, in principle, shall not conduct securities-related business or investment management business (Art. 33, para. 1). If these entities effect purchase and sale of securities for the purpose of investment, or by entrustment, they are exempted. ‘Securities related business’ as defined in the FIEL covers not only securities business, but also businesses involving derivatives transactions concerning securities (Art. 28, para. 8). This concept, which corresponds to the ‘securities business’ under the SEL, demarcates the boundary between FI businesses and banking businesses. Again, the concept of FI is not relevant here. Instead, another concept, ‘securities related business’, is used. The segregation of the securities and banking business was substantially eased in the United States in 1999. It is coming under scrutiny in Japan. The FSC began the review of the firewall between businesses within the same financial group in the autumn of 2007.³² However, there is a concern that in light of the lax compliance system of financial conglomerates in Japan, namely their low level of awareness of the conflict of interests, the abolition of the segregation may result in ‘tragedies for customers’.³³ ³² Nikkei, 13 June 2007. ³³ ‘Tonari no shibafu wa aokunai (The Neighbour’s Turf is Not Green)’, Nikkei, 12 June 2007.

312

Business-related Laws

What is important in this part of the FIEL is that the sale and its solicitation of interests in the collective investment scheme by the scheme arranger itself have now become regulated as category II financial instruments business.³⁴ Under the SEL, the offer of securities by the issuer itself was not regulated. However, in recent years, problems have occurred in cases involving such ‘self-offers’. In the above-mentioned Heisei Denden case, a fund (silent association) offered shares in its scheme, which invested in a certain business company, to a number of investors. This business company was related to the fund and was the recipient of finance from the latter. Then the business company collapsed, causing investors a huge loss. The FSC Sub-Committee report had recommended that ‘self-offer’ and ‘selfmanagement’ by the scheme arranger should be regulated by the FIEL. Under the FIEL, the offer falls within category II FI business, and the management of the scheme is categorised as investment advisory business and, thus, is regulated. FIFs are prohibited from: • • • •

transaction with the FIF itself, its directors, or officers; transaction between the assets which the FIF manages; transfer of profit from one fund to another under the same management; transaction without justifiable grounds for the pursuit of profit of the FIF or a third party; • transactions under terms which are not normal and which would harm contributors; • usage of information obtained through investment management for securities transaction on their own account; • compensation of loss. An FIF, when managing investment, is under an obligation to segregate the assets from its own assets and the assets which it is managing for other entities.

8. Conduct Rules Applicable to FIFs FIFs are subject to a broad range of conduct rules. To FIFs in categories I and II businesses, the following duties apply: • General duties: – duty of sincerity and fairness; – duty to display signs. • Conduct rules: – observation of rules regarding advertisement; – duty to explain the form of transaction in advance; ³⁴ Ueyanagi and Ishidoya, supra, p. 53. Osaki, supra, pp. 42–44.

Securities Law (the Financial Instruments and Exchange Law)

313

– duty to provide information in writing before the conclusion of the contract; – duty to provide documents at the time of the conclusion of the contract; – requirement of adequate handling of customer information; – duty of defining the best execution policy. • Prohibitions: – ‘name lending’; – provision of false information, conclusive judgment; – uninvited solicitation regarding certain products; – uninvited visits; – compensation of loss on the part of customers. • Suitability principle in relation to potential customers. • Duty to carry out the business in the best possible manner. Many cases have reached the court regarding the suitability principle. The suitability principle means that customers should be solicited only in accordance with their knowledge, experience, financial state, and the goal of their investment (Art. 40, para. 1). In a case where a director who was in charge of finance at a company made a huge loss and his company sued a securities company, claiming that solicitation of options trading was against the suitability principle, the Supreme Court ruled that if a representative of the securities company solicits securities transactions in substantial breach of the suitability principle—e.g. actively solicits transactions which obviously involve excessive risk—against the intention and the actual status of the client, this would constitute a tort. However, in this particular case, the court, by taking into account the experience of the client in securities investment, denied that this was substantially in excess of the suitability principle.³⁵ The Law also lists activities prohibited to securities companies and their directors and employees. Soliciting customers by providing a conclusive opinion as to the price fluctuation of securities is prohibited (Art. 50). In general, securities companies (or their directors and employees) are obliged to deal with customers in a fair and honest way (Art. 49). There have been cases where a customer sued a securities company for unlawful soliciting. In several cases, where a sales representative of a securities company solicited investment by giving a conclusive opinion, the courts have ruled in favour of customers.³⁶

9. Professional and Non-professional Investors While in the SEL, conduct rules were generally applicable without distinguishing professional investors from ordinary investors, the FIEL has introduced the ³⁵ Judgment of the Supreme Court, 14 July 2005, Minshū 59-6-1323. ³⁶ Judgment of the Tokyo District Court, 4 February 1994, Hanta, 841–271.

314

Business-related Laws

distinction between professional and ordinary investors. Rules designed to place the FIF and the investor on an equal footing—such as the duty of the FIF to explain and provide documents before and on the occasion of the conclusion of the contract, rules on advertisement, and the principle of the suitability—are applicable in relation to ordinary investors only. However, various prohibitions, e.g. the prohibition of compensation of loss, are still generally applicable to professional investors. The cabinet order provides for details. What is important is that these categories are interchangeable to a certain extent, i.e. some professional investors may opt to be treated as non-professionals and vice versa. However, there are some professionals who cannot choose to do so. The same applies to certain categories of non-professionals. • Professional investors who cannot opt to become non-professional investors: – qualified institutional investors; – the State; – Bank of Japan. • Professional investors who can opt to become non-professional investors: – local governments; – government corporations and institutions; – listed companies; – companies with a capital of 500 million yen or more. • Non-professional investors who may opt to become professional investors: – juridical persons other than those above; – individuals with one year or more of trading experience who can be reasonably assumed to have more than 300 million yen of net assets and financial assets; – individuals who manage a partnership (if the partnership has more than 300 million yen of investment, consent of all members is required). Qualified institutional investors—a concept which originated under the SEL— include securities companies, banks, insurance companies, credit unions and cooperatives, and investment corporations. If an individual opts to be treated as a professional, he can propose this to the FIF for each category of contracts. The FIF must verify that this individual is indeed qualified, and must provide him with details of exemptions and the risk involved in writing.

10. Reforms Concerning the Self-regulatory System The FIEL has replaced the concept of the stock exchange with that of financial instruments exchange. At the moment, there are stock exchanges and a financial futures exchange (Tokyo Financial Exchange) which are organised as joint

Securities Law (the Financial Instruments and Exchange Law)

315

stock companies. They come under the same category of financial instruments exchange under the FIEL and are subject to the same set of rules. The FIEL does not obligate these exchanges to use the name ‘financial instruments exchange’, but merely requires that the term ‘exchange’ is used in their name. Therefore, they can continue to operate as a stock exchange or a financial exchange. On the other hand, in light of the conversion of the exchanges into joint stock companies since 2001, the FIEL has introduced novelties regarding self-regulation of financial instruments exchanges. FIEs may set up a self-regulatory entity (juridical person) and entrust it with ‘self-regulatory businesses’. These are: • Listing and delisting of financial products, financial indexes, and options. • Review of compliance of law, regulations, and rules by the members. There is an option of setting up a self-regulatory committee within the exchange, instead of a self-regulatory juridical person. This seems to be an easy-going option, but to what extent this can be effective is questionable.

11. Rules against Unfair Trading (1) The general clause The FIEL has more or less inherited the provisions regarding unfair trading from the SEL. It provides for safeguards against unfair and fraudulent trading practices.³⁷ There is a general provision against fraudulent transactions which prohibits employing a fraudulent device, scheme, or artifice with respect to sale and purchase and other trading involving securities and derivatives transactions (Art. 157, subpara. 1). Th is provision has its origin in the US Securities Exchange Act Section 10-b and Rule 10-b (5). Whereas in the United States this provision has been duly enforced, in Japan there are few cases where this provision was applied. Before 1988, when strict regulations were introduced, insider trading was supposed to be covered by this provision, but no one was prosecuted for insider trading under it. In the United States court judgments and the decisions of the Securities and Exchange Commission have produced a body of precedent that has helped to clarify this somewhat vague provision. In contrast, the principle of nulla crimen sine lege is strictly applied in Japan, and it was thought to be difficult to sustain a prosecution on the basis of this provision. In addition to this general provision, there are specific provisions that cover acts such as market manipulation, insider trading, and the spreading of rumours.

³⁷ For the regulation of unfair trading, see I. Kawamoto and Y. Otake, Shōken-torihiki-hō Tokuhon (Thesis on the Securities and Exchange Law), 7th edn (Tokyo, 2006), p. 311ff.

316

Business-related Laws

Earning profits through the false presentation of significant facts or a failure to disclose such facts in the documents is also prohibited (Art. 157, subpara. 2).

(2) Market manipulation It is prohibited to effect sale and purchase of securities or derivatives transactions without the intention of transferring rights, or monetary instruments with the purpose of misleading people into the belief that there is heavy trading in securities, market, or over-the-counter derivatives trade (Art. 159, para. 1). A sham transaction that involves no change in the ownership of securities, and false active trading in collusion with another person are both banned. Neither shall one trade in securities or offer commission, or be commissioned for trade which misleads people into believing that the there is heavy trading in securities market, or over-the-counter derivatives trade with the purpose of soliciting them into transactions. It is also unlawful to spread the rumour that the market will fluctuate as a result of the manipulation by oneself or a third party, or to intentionally make a false or misleading presentation for the same purpose (Art. 159, para. 2). Those who are in breach are liable for the losses resulting from the manipulation (Art. 160, para. 1). Criminal penalties are also available (Art. 197). Until the 1980s there had been no case where a company or individual was found guilty of manipulating the market, although there had been instances where such an act was suspected. However, in the mid-1980s several cases reached the court. In one case, directors of a company that offered shares to the public at market price collaborated with executives of a securities company and purchased shares in the market in order to raise the price at the time of the offer, using funds provided by the company and its affiliates. Those involved were prosecuted and the district court, relying on circumstantial evidence, found the defendants guilty. The judgment in this case was upheld by the Supreme Court.³⁸ In another case, an investor in collusion with a managing director of a real estate financing company, repeatedly sold and bought shares of the same company through 28 securities companies within six months and raised the market price of those shares. This was found to be a sham transaction with no transfer of rights, and the defendants were convicted.³⁹ It is not easy to prove the existence of market manipulation. There must have been an intention to solicit trading, but this is often difficult to substantiate. In the above-mentioned Kyōdō-Shiryō case, the Supreme Court ruled that the ‘purpose of soliciting trading’ in the context of market manipulation means the purpose of misleading investors to believe that the artificial price level resulting ³⁸ Judgment of the Tokyo High Court, 20 July 1988, Hanji 1305–52. Decision of the Supreme Court, 20 July 1994, Hanji 1507–51 (Kyōdō-Shiryō case). ³⁹ Judgment of the Tokyo District Court, 3 October 1994, Shiryō-ban Shōji-Hōmu 128–166 ( Japan Unysis case).

Securities Law (the Financial Instruments and Exchange Law)

317

from manipulation was formulated by real supply and demand in the market, and soliciting them to trade in these securities.⁴⁰ In the 1980s major securities companies often resorted to a ‘campaign method’ of marketing securities. Customers were advised by a securities company in a systematic manner to purchase or sell shares of a specific company. If this is practised on a large scale it can have the same effect as market manipulation. In one case, a major securities company advised customers to purchase shares of a railway company, and at the same time repeatedly traded in these shares. The share price went up as a result. By coincidence, a favoured customer of the company had been holding these shares.⁴¹ The SEL was duly amended and the soliciting of specific and limited kinds of securities to unspecified and numerous customers in a systematic and excessive way for a certain period which may affect fair price formulation is now prohibited (Art. 38, para. 6).

(3) Compensation of losses In 1991, it came to light that a number of securities companies compensated the loss which their favoured customers incurred in the securities market. About three-quarters of compensation involved losses incurred via discretionary fund management accounts which were entrusted to the brokerage department of such companies.⁴² Some securities companies were suspected of guaranteeing a certain level of return from investment to major customers. Before these incidents scandals in 1991, the SEL prohibited promises to compensate losses, but actual compensation without a prior promise was arguably not unlawful, although a circular from the securities bureau director prohibited such an act. With the amendment in 1992, not only the promise to compensate losses or the difference between the guaranteed and the actual profit, but also the compensation of losses and supplementing profits are prohibited by law (Art. 39, para. 1). Customers are also prohibited from receiving compensation or supplementary payment and from demanding such payments. These acts are subject to criminal penalties (Arts 198-3 and 207). Discretionary accounts, i.e. accounts in which the fund manager has discretion over whether to sell or purchase securities, which securities to deal with, and the amount or price without specific instruction from the account holder, were prohibited. It was also prohibited to conclude an agreement with another person to let this person act on behalf of the principal in instructing trust companies without receiving specific instructions from the principal. This ban was introduced in 1991 in the aftermath of the securities scandals. Despite these amendments, compensation of losses still occurred. In 1997 major securities companies were again found to have paid compensation to their ⁴⁰ See Kawamoto and Ōtake, supra, pp. 312–322. ⁴² Financial Times, 5 August 1991.

⁴¹ Ibid., p. 322.

318

Business-related Laws

favoured customers. The directors involved were prosecuted for violation of the SEL.⁴³ However, in the FIEL, as part of deregulation, the general prohibition on discretionary accounts was lifted, and in principle, they are allowed.⁴⁴

(4) Insider trading Until 1988, at the height of the ‘bubble economy’, the SEL was unable to cope with insider trading in an effective way. Insider trading was seldom exposed. This is not to say that insider trading seldom happens in Japan. Because of the absence of an explicit provision banning insider dealing, it was pointed out that people fail to perceive insider trading as being unlawful and often engage in such practices. There have been cases where the price of shares soars immediately before a company increases its capital or announces a new product. Insider dealing was suspected in such cases, but it was difficult to prove, and most cases ended up with a warning from the stock exchange to the company concerned. In 1987, a medium-sized chemical company, which was heavily involved in ‘financial technique’, i.e. the practice of business companies investing surplus funds in the securities market in order to bolster profits, fell into financial difficulties. It lost 20 billion yen in the sharp fall of the Japanese bond market. One of the banks which held shares in the company sold its holdings one day before this company announced its losses. Furthermore, a large number of shares was sold on that day. The Ministry of Finance and the Osaka Stock Exchange investigated the case. Both failed to prove the existence of insider trading, but the former found that the bank had acted against the informal guidance of the Ministry issued to listed companies, and was ‘morally responsible’.⁴⁵ There is a provision which regulates short-swing trading. This provides for the recovery of unfair profits obtained by directors or major shareholders of a company by using information available to them because of their positions. If such persons make a profit by purchasing shares within six months after the sale, or selling shares within the same period after the purchase, the company may require the surrender of such profits to the company (Art. 164). This provision was applied even while insider trading was not explicitly prohibited by law. There was a case where a director of a company contested the constitutionality of the ban on short-swing trading and the surrendering of the profit. The Supreme Court found that this provision entitles the company to require a director or a major shareholder to surrender the profit, regardless of whether that person has utilised confidential information or not, or whether the interests of investors have actually been harmed or not. The Court denied that this was against Article 29 of the Constitution which provides for economic freedom.⁴⁶ ⁴³ Securities Surveillance Commission (ed.), Shōken-torihiki-kanshi-iinkai no Katsudō Jōkyō Heisei 10 nen (Activities of the Securities Surveillance Commission 1998) (Tokyo, 1998), pp. 8–21. ⁴⁴ Kuronuma, supra, 2nd edn (2008), p. 165. ⁴⁵ Nikkei, 7 October 1987. ⁴⁶ Judgment of the Supreme Court, 13 February 2002, Minshū 56-2-331.

Securities Law (the Financial Instruments and Exchange Law)

319

The move for strengthening control over insider trading was accelerated by the internationalisation of stock markets. With the close links which developed between the stock markets of the United States, Europe, and Japan, concerted international efforts to prevent insider trading across the border became indispensable. The above incident involving a bank accelerated this move. Finally, amendments were made to the SEL in 1988 in order to strengthen controls over insider trading. A new provision on insider trading carried out by ‘people connected to the company’ was introduced. Those who come to be aware of material facts concerning the business of listed companies are not allowed to sell or purchase securities of the company or otherwise trade in them for profit, or effect derivatives transactions until these facts have been announced to the public (Art. 166, para. 1). Public announcement is deemed to have been made if the information is notified to the stock exchange and is put on its website. ‘People connected to the company’ include board members or employees of a listed company, its major shareholders holding more than three per cent of the issued shares of the company or 3 per cent of the entire vote, those who have statutory power over that company (e.g. ministerial officials responsible for supervising the industry), and those who are in contractual relations or in the process of concluding a contract are insiders. If the above person is a juridical person, its board members and employees are considered to be insiders. Furthermore, those who have received the information from the above persons, or are officers etc. of the juridical person to which the person who received the information belongs, are under the same obligation before the public announcement of material facts (quasi-insiders). There is an extensive list of ‘material facts’. These include the decision by the executive body of the company relating to the offering of shares, reduction of capital and/or reserves, share buy-back, the exchange or transfer of shares, mergers, splitting of the company, or a decision refraining from the above. Losses arising from natural disasters as well as the change of major shareholders are also material facts. In addition, a ‘catch-all’ clause covers ‘material facts concerning the management, business, or the assets of the company, which substantially affect the decision-making of investors’ (Art. 166, para. 2, subparas 4 and 8). The first case where the Supreme Court ruled on insider trading involved a pharmaceutical company. This company, Nihon Shōji, produced a new antiviral medicine and marketed it. The share price went up sharply. Then, the company discovered that this product had side effects that could be fatal in some cases. In fact, some people died from taking the medicine. It was reported to the government agency, but was not disclosed to investors nor to the public. In the meantime, directors and some employees sold the shares they held. The defendant in this case was a doctor (a dermatologist) who ran a private practice. He was informed by a sales company marketing the products of Nihon Shōji of the side effects which had led to the death of some users. The defendant acted on this information and sold the shares before this material fact was made public.

320

Business-related Laws

The Supreme Court ruled that the occurrence of side effects meant that the given product—the first which the company themselves had developed with a significant amount of investment—had serious problems, and its future sales would be affected. As a result, this might have a significant effect on the business and the financial state of the company. Therefore, the above catch-all clause should be applicable.⁴⁷ Concerning material facts, there is another Supreme Court judgment that is relevant. In this case, a representative director of a company consulted an attorney on the increase of capital and issue of shares to a third party. The attorney bought shares of this company before this was announced. He was prosecuted for insider trading. His defence was that the decision of the third party issue had not been formally taken by the executive body of the company when he traded in the shares. The High Court accepted this argument, but the Supreme Court overruled this, pointing out that the ‘executive body’ in this context is not limited to the formal decision-making body as provided for in the Commercial Code, but that it is sufficient if this is a body which can make a decision substantially equivalent to the decision of the company. In order for a decision to be made, there has to be an intention to issue shares, but it is not necessary that the shares are expected to be definitely issued.⁴⁸

(5) Spreading of rumours The spreading of rumours for the purpose of influencing prices is banned (Art. 158). In 1992, a software company announced that they had found a vaccine to cure HIV and were testing it in Thailand. This announcement had no substance, but the share price of this company sharply increased. The president of the company was prosecuted and found guilty. In another case, a fortune teller who had a column in a newspaper purchased shares in a company, and then, in order to sell them at a high price, spread some rumour regarding the company. The fortune teller was prosecuted and found guilty.⁴⁹ Also in late 1997, when there was a series of corporate failures, rumours of the imminent collapse of some companies spread, and as a result share prices fluctuated and the Securities Exchange Surveillance Commission launched an investigation.

(6) Sanctions for unfair trading Penalties for the breach of regulations on unfair trading were previously rather lenient. However, in the past decade, penalties have become harsher. At present, for market manipulation and the spreading of rumours, the maximum penalty ⁴⁷ Judgment of the Supreme Court, 16 February 1999, Jurist, 1999, vol. 1154, pp. 88–89. ⁴⁸ Judgment of the Supreme Court, 10 June 1999, Keishū 53-5-415. ⁴⁹ Kawamoto and Otake, supra, p. 341.

Securities Law (the Financial Instruments and Exchange Law)

321

for individuals is 10 years’ imprisonment or a 10 million yen fine; on the basis of vicarious liability, juridical persons are fined up to a maximum of 700 million yen (Art. 197, para. 1 and Art. 207, para. 1). For insider trading, the maximum penalty for individuals is five years’ imprisonment or a five million yen fine, and the vicarious liability of juridical persons is a maximum 500 million yen fine (Art. 197-2 and Art. 207, para. 1). The number of applications by the Securities and Exchange Surveillance Commission to the Public Prosecutor’s Office for criminal prosecution was highest in 2006. There were thirteen such cases, of which three involved market manipulation and nine involved insider trading.⁵⁰ In 2005, a system of surcharge was introduced. The scope of its application has since been expanded and it now applies to market manipulation, insider trading, the spreading of rumours and resorting to schemes, and false reporting. The Securities and Exchange Surveillance Commission conducts an investigation and makes a recommendation for the imposition of a surcharge. The Chairman of the FSA makes the decision to commence the hearing procedure. The case is heard by an administrative judge. The amount of surcharges has been further increased by the 2008 amendment to the FIEL.

12. Disclosure The disclosure system has been improving in recent years through successive amendments to the SEL and later the FIEL. Disclosure has become even more important as the system moved from paternalistic supervision to self-responsibility. This presupposes appropriate access to information for investors. There are three types of disclosure requirement: disclosure at the time of issuing securities, periodic disclosure, and disclosure on the occasion of a TOB. There is also a requirement for disclosing a large shareholding. As a rule, in order to offer newly issued securities or to sell outstanding securities, a securities registration statement has to be filed with the Prime Minister (delegated to the Chairman of the FSA, Art. 4, para. 1). An offer of securities in this context means the soliciting of offers for purchasing newly issued securities to an unspecified number of investors, i.e. fifty or more investors. If the solicitation is made to ‘qualified institutional investors’ who, by cabinet order, are regarded as not having an intention to resell them, this is not an offer in terms of this provision (Art. 2, para. 3). Selling shares means offering to sell, or soliciting the purchase of outstanding shares, effected on uniform terms to an unspecified number of investors (ibid., para. 4). It should be noted that the allocation of ⁵⁰ J. Naito, ‘Kinyū-Shōhin-Shijō • Shijō-Kanshi-Tōkyoku no Genjō to Kongo no Kadai (The State and the Future Tasks of the Financial Products Market and the Market Supervisor Authority)’, Shōji-Hōmu, No. 1812, p. 17. .

322

Business-related Laws

new shares of listed companies to a selected third party does not qualify for this exception and the disclosure requirement applies. The securities registration statement contains information such as the state of business operations, the fi nancial state of the company, and other matters relevant to the nature of the business (Art. 5, para. 1). The scope of information covered by the report has been constantly expanding and includes information such as the current price of securities, futures, and options held by the company, and the state of foreign exchange hedging. In addition to the securities registration statement, at the time of offer or sale, a prospectus must be provided to the investors. The prospectus must contain the information relevant for protecting investors included in the registration statement (Art. 13, para. 1). Issuers of securities which are listed on the stock exchange, non-listed companies which have filed a securities registration statement, and companies with more than 500 shareholders and a capital of 500 million yen or more, must file an annual securities report each business year (Art. 24, para. 1). This is designed to provide investors with updated corporate information on a continual basis. Interim or ad hoc disclosure is required when a fact having material relevance to the business of the issuer becomes known. Under the timely disclosure policy, this is effected via TDNET (Timely Disclosure Network) run by the FSA. In 2006, a further reform of disclosure was made. Firstly, the quarterly disclosure system which was in operation by the self-regulatory rules of the stock exchange was accommodated in the Law. The quarterly report is audited by the accountant/accounting firm, and a false statement is subject to criminal penalties (Arts 24-4-7 and 193-2). In line with the US Sarbanes-Oxley Act, listed companies are now required to submit an ‘internal control report’ regarding financial statements and have it audited. Furthermore, the management must submit a document confirming that the content of the securities registration report and the quarterly report is appropriate in accordance with FIEL and other laws (Arts 24-4-2, 24-4-8, and 24-4-4). Disclosure is also required when a TOB is made. A tender offer notification must be filed with the Prime Minister by the person offering to purchase shares. A copy must be sent to the issuing company (Art. 27-3, paras 2 and 4). The tender offerer is also obliged to place a public notice in a daily newspaper and disclose information such as the purpose of the tender offer, and the price and number of shares to be purchased (Art. 27-3, para. 1). In 1990 a new disclosure requirement for large shareholdings was introduced in order to provide investors with information concerning the percentage of the holding, sources of finance, the purpose of acquisition, etc. This covers those who, in their own name or in another person’s name, came to hold more than 5 per cent of the outstanding shares of a listed company or a company whose shares are traded over the counter. They are required to file a report within five days of

Securities Law (the Financial Instruments and Exchange Law)

323

their acquisition of the shares (Art. 27-23, para. 1). A report is needed for the subsequent change of 1 per cent in the holding. However, in a takeover case in 2005, it was found that this system was not functioning well, since, for investment funds, the time limit for disclosure was fairly lax. This was tightened by the amendment to the SEL in 2006. Another recent change was the requirement of the report on the state of share buy-back, following the liberalisation of share buy-back by the amendment to the Commercial Code in 2001 (Art. 24-6).

13. Tender Offer (Takeover Bids, TOB) A TOB is defined as an offer or solicitation of an offer of sale or purchase of shares and other securities (e.g. share options) to an unspecified large number of people via public announcement and by purchasing shares off the stock exchange (Art. 27-2, para. 6). In fact, this was not because there was a real need for it, but was because the legislature simply wanted to be prepared for potential takeovers.⁵¹ The system was more favourable to the defending company rather than the bidder, since it was feared that Japanese companies might be taken over by large foreign companies. However, this came under criticism at the US–Japan Structural Impediments Initiatives Talk in 1989/1990, and the system was streamlined. For example, under the previous system, an advance reporting to the Ministry of Finance was required in order to initiate the bid, and the reporting of the TOB took effect after ten days. Only then could the bidder publicise the bid. Th is requirement was dropped. The period for the purchase was a maximum of thirty days. Th is was extended to a maximum of sixty days. Unlike in the US, the TOB was seldom used for hostile takeovers in the 1990s. It was primarily used for the reorganisation of corporate groups. However, since the late 1990s, the number of TOB and the amount involved have steadily increased (see chapter 11). Around the same time, cases of TOB for hostile takeovers began to emerge. The first case of a hostile takeover involved the takeover of a Japanese company by Cable and Wireless in 1999.⁵² The next year, a German company, Beringer Ingelheim, made a successful takeover of a Japanese pharmaceutical company, but this was not necessarily hostile in nature. The number of TOB for hostile takeovers increased in the 2000s, including the celebrated Bulldog Sauce case which reached the Supreme Court. However, as late as 2008, there has not been a successful takeover of a listed company by TOB. ⁵¹ Kawamoto and Otake, supra, p. 197. ⁵² The target company was not a listed company.

Business-related Laws

324 Number of Cases

40000 35000 Total Amount

30000

Number of Cases

25000 20000 15000 10000

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

5000 1972 ~1990 1991

110 100 90 80 70 60 50 40 30 20 10 –

Amount (100 million yen)

0

Figure 13.1 Reported TOB cases and published amounts involved Source: RECOF⁵³

If, via off-the-exchange purchase of shares, a person in conjunction with a special related person is to come to hold more than 5 per cent, this purchase must go through the TOB procedure. If the purchase is by the over-the-counter trade, or from a very small number of persons, the TOB is not mandatory. However, even if the purchase is from a very small number of people, if the shares held after the purchase will exceed one third, this has to go through the TOB procedure (Art. 27-2, para. 1, subpara. 2). By the 2006 amendment, ‘expedient purchase’ became subject to the TOB procedure. ‘Expedient purchase’ means, (i) within three months, (ii) off the exchange purchase exceeding 5 per cent, and (iii) in conjunction with on the exchange purchase, purchase off the exchange, or via new issue of more than 10 per cent, and as a result, the shareholding exceeds one third (Art. 27-2, para. 1, subpara. 4). If there is a bid taking place, and a shareholder who holds more than one third of the shares is to further purchase more than 5 per cent of shares, even if the shares are to be purchased on exchange, the purchase must go through the TOB procedure. The period of TOB is set by the bidder, but has to be within 20 to 60 working days from the public announcement of the bid (Art. 27-2, para. 2). During this period, the bidder is not allowed to purchase shares by means other than the TOB procedure (Art. 27-5). The target company is entitled to ask for an extension. Some terms of purchase can be modified, but for example, the purchase price or the number of shares to be purchased cannot be reduced once the bid has been made. As a rule, the bidder is not allowed to withdraw the bid. By the 2006 ⁵³ .

Securities Law (the Financial Instruments and Exchange Law)

325

amendment, some new exceptions to this rule were added. If the target company resorted to defensive measures and issued new shares or share options, the bidder may withdraw the bid. The same applies if the target companies borrowed a substantial amount of money or disposed of significant assets after the bid. The 2006 amendment introduced a system akin to the mandatory bid in the UK. If, after the bid, the shareholding of the bidder exceeds two-thirds, the bidder is under an obligation to purchase all the shares offered (Art. 27-13, para. 4). In the UK, the threshold is one third. Presumably, the possibility of being de-listed was taken into account when setting the threshold at two-thirds in Japan. There is an extensive disclosure requirement in the TOB procedure. Commencement of the TOB must be publicly announced by providing various information, and an explanatory document needs to be handed to the offerors. The target company must submit their opinion on the bid to the Prime Minister (delegated to the Director of the Financial Bureau) within ten working days from the public announcement of the bid (Art. 27-10, para. 1). It must disclose the defensive measure in place also. In the opinion, the target company is entitled to put questions to the bidder. The response by the bidder must be submitted to the Director of the Financial Bureau within five working days (Art. 27-10, para. 11). The bidder may refuse to answer a particular question by giving a reason. On the day after the end of the TOB period, the bidder must publicly announce or notify the outcome of the bid (Art. 27-13, para. 1).

14. Supervision of the Market The Ministry of Finance was in charge of supervising banks, securities companies, and insurance companies until June 1998, when a new agency—the Financial Supervisory Agency (now the Financial Services Agency)—came into operation. This lack of transparency and accountability in the financial system was highlighted in 1991 in the wake of the incidents involving securities companies. Major securities companies were found to have compensated losses suffered by favoured customers through their discretionary accounts. The Ministry had encouraged securities companies to close these accounts earlier. Securities companies were of the view that the Ministry had tacitly allowed compensation when closing these accounts, which was denied by the Ministry. In 1997, when Yamaichi Securities, one of the then ‘Big Four’, was found to have concealed losses in overseas companies and failed to disclose them, it was alleged that the company had acted upon the advice of the Ministry.⁵⁴ In the same year, another series of scandals broke out. It was revealed that a major bank had financed an obscure businessman who proceeded to purchase shares of the ‘Big Four’ securities ⁵⁴ Nikkei, 30 January 1999.

326

Business-related Laws

companies. These securities companies unlawfully compensated the losses of this businessman.⁵⁵ This cast further doubt on the ability of the Ministry to supervise the industry. In the aftermath of the incidents in 1991, the possibility of setting up an agency to supervise the securities industry was discussed. There was a proposal to establish an independent administrative commission in charge of regulating financial institutions such as the US SEC. After heated political debate, eventually instead of an independent agency overseeing the whole range of financial institutions, the Securities and Exchange Surveillance Commission was set up as a watchdog over the securities and financial futures market. It was made part of the then Ministry of Finance. In the course of the financial Big Bang which was announced in 1996, a new agency—the Financial Supervisory Agency—was founded in June 1997 and started operation in June 1998. The Securities and Exchange Surveillance Commission became part of this Agency. However, with the deepening of the banking crisis in 1999, soon after the Agency came into operation another agency, the Financial Reconstruction Commission, had to be set up. The Financial Supervisory Agency was made part of this commission, which had ministerial status, in 2000. When the Financial Reconstruction Commission was abolished in 2001, the Agency, which was re-named the Financial Services Agency, became part of the Prime Minister’s Office. The Law on the Establishment of the Financial Services Agency provides that the Agency’s primary task is to inspect and supervise banks, securities companies, insurance companies, and stock exchanges in order to ensure that these entities carry out their business in an appropriate way and are soundly managed. The Agency also carries out surveillance of trading in securities in order to ensure fairness of transactions. The Agency’s Financial Intelligence Unit handles matters concerning the prevention of money laundering.

⁵⁵ Shōken-torihiki-kanshi-iinkai no Katsudō Jōkyō, supra, pp. 6–25.

14 Anti-Monopoly Law 1. Historical Background The industrialisation of Japan, which started in the late nineteenth century, was initiated and promoted by the government from above, rather than by the spontaneous growth of entrepreneurs from below. Initially the government created and managed key industries and then handed them over to companies in the private sector at extremely low prices. This eventually led to the domination of the economy by a handful of giant business conglomerates called zaibatsus. Monopolisation of the economy was reinforced in the 1930s when the government adopted measures to facilitate the military build-up. In 1931 the Law on the Control over Key Industries, which encouraged the forming of cartels, was enacted. Following the enactment of the National General Mobilisation Law in 1938, in the early 1940s in almost every key industry an association of companies called tōsei-kai (controlling associations) was formed under the auspices of the government to implement government industrial policy. Thus, concentration of economic power was not regarded as a negative phenomenon. There is an influential view which maintains that the ‘uniquely Japanese system’, such as the close government–industry relationship, the main bank system, and the lifelong employment system can be traced back to this period, but not to an earlier period.¹ After the Second World War democratisation of the economy was one of the primary goals of the Allied Forces. This included the dissolution of zaibatsus and the elimination of the excessive concentration of economic power. Zaibatsus were dismantled and their shares sold to the public. By virtue of the Law against Excessive Concentration of Economic Power, especially large companies were split into smaller companies. It was against this background that the Law on Prohibition of Private Monopoly and Ensuring of Fair Trade (hereafter the Anti-Monopoly Law) was enacted in 1947.² In the same year, the Fair Trade Commission was established as the agency in charge of implementing this law. The Commission ¹ Y. Noguchi, 1940 Nendai Taisei (The 1940s Regime) (Tokyo, 1995), pp. 20–62. ² Law No. 54, 1947. An unofficial English translation of this Law can be found at .

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

328

Business-related Laws

(hereinafter the FTC) is organisationally attached to the Cabinet Office, but is guaranteed independence and has quasi-judicial and quasi-legislative powers. The Anti-Monopoly Law was heavily influenced by the antitrust legislation of the United States. It was even stricter than the US law in some respects, since US advisers to Japan were inclined to support the precepts of the New Deal policy, and they intended to introduce a system which they had failed to implement fully in the United States. For example, business companies were completely forbidden from holding other companies’ shares. However, this Law was considered to be too stringent for Japan, where the idea of regulating the concentration of economic power had previously been alien. Therefore the restrictions introduced by the 1947 Anti-Monopoly Law were relaxed by an amendment in 1953, soon after the end of the Allied occupation. Exemptions to the prohibition of cartels were introduced by this amendment and later expanded by separate laws. In 1995 over a hundred laws provided for exemptions. These exempted cartels were remnants of the 1950s when Japan was in the process of recovering from the war, and were not in operation any more. Some exemptions were still in place, but towards the end of the 1990s, their number was greatly reduced.³ In reality, the Anti-Monopoly Law was not strictly enforced in the first two decades of its existence. A report published in the late 1950s pointed out that nowhere in the industry was the price unaffected by cartels. There were some mergers in the 1950s and 1960s in which the FTC failed to act despite the potential effects of the merger on the market structure.⁴ The first major reform of the Anti-Monopoly Law since 1952 took place in 1977. At this time there was considerable public criticism of the behaviour of some large companies during the oil crisis in 1973. The celebrated Petroleum Cartel case was exposed and participants were prosecuted. For the first time in the history of the Anti-Monopoly Law, the Law was strengthened. This amendment introduced, inter alia, surcharges for operating cartels, the new concept of ‘monopolistic situation’, and the mandatory submission of reports to the FTC in cases of simultaneous price rise by several leading entrepreneurs of the same product or service, if it had taken place within three months. Despite these changes, the Anti-Monopoly Law was still not implemented at its full strength until the late 1980s. In terms of substance, the Anti-Monopoly Law was no less stringent than its counterparts in the United States and Europe in its scope. Its lax enforcement was criticised by other countries.⁵ The US–Japan Structural Impediments Initiatives Talks which started in 1989 resulted in an overall review of the Anti-Monopoly Law and its implementation. ³ Annual Report of the FTC for 1997: . ⁴ K. Sato et al. (eds), Text Dokusen-kinshi-hō (Text: Anti-Monopoly Law), revised edn (Tokyo, 2006), pp. 17–18, 208–210. ⁵ T. Kanai et al. (eds), Dokusen-kinshi-hō (Anti-Monopoly Law), 2nd revised edn (Tokyo, 2008), p. 411.

Anti-Monopoly Law

329

The US side argued that unfair and restrictive trade practices in Japan were impeding the entry of foreign companies into the Japanese market. Practices such as cross shareholding and the keiretsu (business affiliation) system had made it difficult for foreign companies to enter the Japanese market. The Japanese government undertook to strengthen the Anti-Monopoly Law and to reinforce its implementation.⁶ In 1991, the level of surcharge for illegal cartels was increased by four times and the maximum fine was raised from one million to 100 million yen. As agreed in the SII Talks, a guideline on the distribution system and business practices was published in the same year. Concerning implementation, while the FTC used to rely on informal measures rather than formal proceedings before, since the early 1990s it has come to rely more on the latter. The number of criminal prosecutions for cartels has also increased. In 1991, for the first time since the oil crisis in the 1970s, criminal proceedings were initiated against a cartel. The FTC announced that it would resort to criminal prosecution in cases of cartels (including bidriggings) which are malicious and significant in effect, and also where the act has been repeated.⁷ Since then there has been a prosecution every few years. The policy of strengthening enforcement has continued in the 2000s. In 2005, there was a major amendment to the Anti-Monopoly Law:⁸ (i) the scope of the application of surcharges was extended and the amount of surcharges was substantially raised; (ii) whereas previously, the decision of the FTC was based upon the acceptance of the informal recommendation by the party involved, or the hearing procedure of the preceding cease and desist order, the FTC is now empowered to issue a cease and desist order straight away; (iii) previously payment of the surcharge could be ordered only after the hearing procedure, but now a surcharge order can be issued at the same time as the cease and desist order; (iv) the investigative power of the FTC was strengthened; (v) penalties for failure to cooperate or obstructing the investigation were introduced; (vi) the hearing procedure was totally revised—the hearing procedure previously preceded the formal decision of the FTC, but now it has become a procedure to review the decision of the FTC. On the other hand, the drive for deregulation since the mid-1990s has also had effects on the Anti-Monopoly Law. Before the Second World War, business conglomerates controlled groups of companies through holding companies. As part ⁶ Nichibei-kōzō-kyōgi Saishū-hōkoku (The Final Report of the US-Japan Structural Impediments Initiative) (Tokyo, 1990), pp. 86–97. ⁷ Sato et al.(eds), supra, p. 332. ⁸ A. Tamaki, Atarashii Dokusen-kinshi-hō (Th e New Anti-Monopoly Law) (Tokyo, 2006), pp. 94–103.

330

Business-related Laws

of the post-war reform, holding companies came to be totally prohibited after the Second World War in order to prevent the re-emergence of such conglomerates. Companies had always been against the total prohibition of holding companies. It was repeatedly pointed out that Japan was one of the very few countries in which holding companies were totally banned. The proposal for liberalisation gained support in the mid-1990s as part of the drive for deregulation. Proponents of liberalisation argued that holding companies were needed to make business more efficient and competitive. It was also hoped that holding companies could be instrumental in reshaping the financial system, which was in the process of dismantling the segregation of banking, securities, and insurance business. The FTC was initially cautious, but eventually changed its stance, and in 1997, the Anti-Monopoly Law was amended in order to liberalise holding companies in principle, despite some doubts about its potential negative effects on competition.⁹

2. Outline of the Anti-Monopoly Law The Anti-Monopoly Law declares that its goals are to ‘promote free and fair competition, to stimulate creative initiatives by entrepreneurs, to enhance business activities, to increase the level of employment and the real income of the people, and thereby to ensure the interests of consumers and to promote the democratic and sound development of the national economy’. In order to achieve these goals, the Law prohibits private monopolisation, unfair restraint on trade, and unfair trade practices as well as the excessive concentration of economic power (Art. 1). The prohibition on excessive concentration of economic power involves merger control as well as controls over holding shares. While these measures address specific actions or the behaviour of entrepreneurs and others, in 1977 measures aimed at the market structure per se—control over ‘monopolistic situations’—were introduced. In an extreme case, the splitting of a major company is possible under this new system. The agency in charge of implementing the Anti-Monopoly Law is the FTC. The FTC is attached to the Cabinet Office (Art. 27). The Chairman and four commissioners are appointed by the Prime Minister with the consent of both Houses of the Diet, and the Chairman is attested by the Emperor. They are required to be over 35 years old and to have sufficient knowledge of either economics or law. Once appointed they may not be removed against their will, except in cases specified by law (Art. 31). They are guaranteed independence in the exercise of their duties (Art. 28).¹⁰ 9 See O. Tanihara, Dokukin-hō 9 jō no Mondai-ten (Problems of Article 9 of the Anti-Monopoly Law) (Tokyo, 1997). ¹⁰ Judgment of the Tokyo High Court, 26 September 1980, Hanji 983–22.

Anti-Monopoly Law

331

The FTC was modelled on the US system of administrative commissions. It is vested with quasi-legislative and quasi-judicial power. An example of the quasilegislative power is the designation of unfair trade practices (Art. 2, para. 9). The current designations can be found in the FTC Notice 1 18 June 1982. The FTC may also adopt administrative rules concerning procedural matters (Art. 76). The FTC’s quasi-judicial power is reflected in its procedure to decide upon violations of the Anti-Monopoly Law. This procedure is equivalent to the procedure at the first instance court, and can be appealed to the second instance court (the Tokyo High Court). The Anti-Monopoly Law covers the activities of entrepreneurs as well as trade associations. The Law defines an entrepreneur as a person who carries on commercial, industrial, or financial business (Art. 2, para. 1). They can be either individuals or juridical persons. Central government agencies as well as local governments may also qualify if they are in the above-mentioned businesses. The Law also covers trade associations, which are defined as associations of entrepreneurs or a federation of such associations whose primary goal is the promotion of common entrepreneurial interests. In fact, in almost every area of industry there is a trade association where companies in the given area of trade are represented. Many of these associations originate from the 1940s tōsei-kai. Trade associations function as a channel through which policies of the government are conveyed to the industry and the views of the industry are conveyed to the government. Member companies pool and swap information through the trade association. It is also used as a forum in which differences amongst member companies are mitigated. On the other hand, it is not uncommon for trade associations to impose unreasonable restraints on competition in various ways. In the celebrated Petroleum Cartel case, the Japan Petroleum Association was found to have been instrumental in forming a cartel.¹¹ The FTC published revised guidelines on trade associations in 1995 (originally published in 1979) which stated that the collection of information, management consultation, and joint businesses conducted by trade associations are normally not against the Anti-Monopoly Law.¹² Trade associations are prohibited from: (i) substantially restraining competition in a specific area of trade; (ii) entering into international agreements or contracts which involve unreasonable restraint of trade or unfair trade practices; (iii) limiting the present or future number of entrepreneurs in a particular field of business; (iv) unreasonably restricting the functions or activities of member entrepreneurs; and (v) forcing entrepreneurs to employ unfair trade practices (Art. 8, para. 1). ¹¹ ‘Report Concerning the Activities of Japanese Trade Associations from Perspective of Foreign-Owned Enterprises’, FTC Japan Views, April 1997, pp. 3–38. ¹² N. Mukaida in J. Atsuya et al. (eds), Jōkai Dokusen-kinshi-hō (Commentary to the AntiMonopoly Law) (Tokyo, 1997), pp. 32–33.

Business-related Laws

332

Table 14.1 Types of cases handled by the Fair Trade Commission

Private Monopolisation Cartels

Price cartels Bid rigging Other Cartels Sub-total

Unfair trade practices

Resale price maintenance Other exclusive dealings Obstruction of trade Abuse of dominant position Others Sub-total

Others Total

2003

2004

2005

2006

2007

Total

1

2

0

0

0

3

3 14 0 17

2 22 0 24

4 13 0 17

3 6 0 9

6 14 0 20

18 69 0 87

0

1

0

1

0

2

2

1

0

0

0

3

3

0

0

0

0

3

2

5

2

2

0

11

0 7

1 8

0 2

1 4

3 3

5 24

0

1

0

0

1

2

25

35

19

13

24

116

Source: FTC, Nenji-Hōkoku, Heisei 19-nen (Annual Report of the FTC, 2007), .

The FTC is empowered to issue cease and desist orders to trade associations, and even to order dissolution (Art. 8-2).

3. Private Monopolisation The term ‘private monopolisation’ comes from US Sherman Act. The Japanese Anti-Monopoly Law defines private monopolisation as business activities by which any entrepreneur, individually or in combination or collusion with other entrepreneurs, or in any other manner, excludes or controls the business activities of other entrepreneurs, thereby substantially restraining competition against the public interest in a particular field of trade (Art. 2, para. 5). Private monopolisation is prohibited (Art. 3). The core of private monopolisation is the ‘exclusion or control’ of other entrepreneurs’ business activities. Exclusion means acts which make the continuation of business by competitors or entry into the market by newcomers difficult. In the Snow Brand Milk Products case, two dairy companies (at one time a single company which had been split up after the Second World War) were collecting more than 70 per cent of milk supplies in the region. They colluded with an

Anti-Monopoly Law

333

agricultural bank in the region and the regional Credit Federation of Agricultural Co-operatives. The bank held 4 per cent of the shares of Snow Brand as well as 2 per cent of the other company, and was a major lender to these companies. The bank made it a condition of loans to dairy suppliers (farmers) that they must not supply milk to competitors of the two dairy companies. The Federation imposed a similar condition for guaranteeing such loans. This bank was actually the sole source of finance for dairy farmers. For over three years, the bank extended 300 million yen in loans to those suppliers, severely limiting the business of Snow Brand’s competitors. The FTC found this to be an act of exclusion and the company was ordered to cease interference with other companies’ activities.¹³ In the Tōyō-Seikan case, a tin-producing company which had a market share of 74 per cent in conjunction with its subsidiaries forced other companies to give up a plan to produce some types of tin in-house by threatening to supply other types of tin which could not be produced in-house. The FTC also found this to be an exclusion.¹⁴ Control of an entrepreneur’s activity means depriving another entrepreneur of the freedom of decision-making in their business activities. Typical methods include holding the shares of a competitor, sending in directors, and abuse of bargaining power. In the above-mentioned Tōyō-Seikan case, the company held 29 per cent of the shares of another tin-producing company in northern Japan. Tōyō-Seikan imposed various restrictions on the activities of this company, such as confining the market to the northern region and blocking the construction of a plant on the mainland by this company. Construction was allowed only when the other company agreed to accept various restrictions as to the capacity of the plant and the secondment of a representative director from Tōyō-Seikan. The FTC found this to be an exercise of ‘control’ by Tōyō-Seikan. Tōyō-Seikan was ordered to cease and desist from such acts, and specifically ordered to dispose of part of the shares which it held in this company.¹⁵ Until the second half of the 1990s, cases concerning private monopolisation were rare. The reason why there were not many cases of private monopolisation is attributed to the fact that eligible cases were qualified as unfair trade practices, rather than private monopolisation.¹⁶ However, in the recent years, the FTC has become more active in applying this provision. Since 1996, there has been almost one case of private monopolisation every year. The first major case in recent times involved a foundation which was set up to undertake research on hospital food and to improve and disseminate relevant information. The foundation was delegated power to test medical foods by the then Ministry of Public Health. In this market, Nisshin Medical Food and Nax Medical Food were the only wholesalers. These companies, together with ¹³ Hearing Decision of the FTC, 28 July 1956, Shinketsushū 8–12. ¹⁴ Recommendation Decision of the FTC, 18 September 1972, Shinketsushū 19–87 (Tōyō Seikan case). ¹⁵ Ibid. ¹⁶ Kanai et al. (eds), supra, p.135.

334

Business-related Laws

companies within their network, supplied medical foods to virtually all medical institutions in Japan. The foundation and Nisshin colluded to exclude the entry of other companies into the business by introducing a certification system and a registration system of companies supplying medical foods. Nisshin was allowed to take part in the certification and registration process and effectively excluded competitors. When the monopoly by Nisshin came under criticism, the foundation and Nisshin decided to allow Nax to enter the wholesale market. The foundation, based upon the proposal of Nisshin, prepared an agreement with Nax, but Nax’s entry was limited to areas where medical food was not in much demand, and Nax was obliged to cooperate with Nisshin in blocking new entrants into the market. The foundation did not certify other wholesalers unless recommended by either Nisshin or Nax. The FTC ruled that the foundation and Nisshin had excluded the business activities of producers and suppliers of medical food, and controlled supply prices and the territory of producers, and had thus effected private monopolisation.¹⁷ As a result of the 2005 amendment, the surcharge order became available in private monopolisation in the form of controlling other entrepreneurs’ business. In recent years, the private monopolisation provision has been used in Japan to address the situation covered by the essential facilities doctrine in the EU. There have been some cases where the FTC issued a warning to public utilities and privatised companies holding essential facilities who were attempting to exclude competitors.

4. Prevention of Excessive Concentration of Economic Power (1) Prevention of general concentration of economic power The Anti-Monopoly Law regulates various types of combinations of companies in order to prevent the excessive concentration of economic power (control of general concentration of power). First, the establishment of a company which, by means of owning shares in other companies in Japan, comes to have an excessive concentration of power (literally, power to control business) is prohibited (Art. 9, para. 1). No company, including foreign companies, may become a company with an excessive concentration of economic power by acquiring or owning shares of companies in Japan (ibid., para. 2). The core of this provision is holding companies, which are defined as companies whose subsidiaries account for more than half of its total assets.¹⁸ However, the entities covered by this provision extend beyond holding companies. Even if a company group comes to have excessive concentration of ¹⁷ Recommendation decision of the FTC, 8 May, 1996. ¹⁸ K. Sato et al. (eds), supra, p. 225.

Anti-Monopoly Law

335

economic power by means of shareholding without a holding company, it is still prohibited. A company which results in an excessive concentration of economic power denotes a company which is to have a significant influence on the national economy and impedes the promotion of fair and free competition as a result of situations such as (i) the aggregate size of business controlled by the holding company is excessively large and encompasses a significant number of areas, (ii) the influence of those companies emanating from financing other companies’ business is excessively large, and (iii) those companies are leading companies in their respective fields of interrelated business (ibid., para. 3). The FTC published guidelines on the concentration of economic power in 2002.¹⁹ For a company group of category (i) above, the threshold of the total assets is set at 15 trillion yen, and the assets of member companies in more than five areas at 300 billion yen each. Category (ii) is intended to prevent the emergence of a financial holding company group which encompasses business companies. Category (iii) is designed to prevent the emergence of the horizontal keiretsu (business affiliation) system. Regarding financial holding companies, the FTC published other guidelines.²⁰ Secondly, there is a limit for banks and insurance companies that hold business companies’ shares. Banks are not allowed to hold or acquire more than 5 per cent of the vote in a company in Japan. The limit is 10 per cent for insurance companies (Art. 11, para. 1). On the other hand, financial holding companies under the Financial Holding Company Law are exempted from this restriction. If a bank sets up a financial holding company and becomes its subsidiary, this bank may hold up to 15 per cent of the votes. The rationale of this exemption is questionable.²¹ Thirdly, the control of monopolistic situations was introduced by the 1977 amendment. This is expected to deal with the situation where one or a small number of entrepreneurs dominate a particular market and inhibit free competition. This system is unique in the Anti-Monopoly Law in that it addresses the structure of the market itself rather than the acts of entrepreneurs. A situation is regarded as monopolistic: in a market whose volume of trade in a product combined with similar products or volume of trade in service was over 50 billion yen in the previous year in which (i) the market share of an entrepreneur exceeds 50 per cent or the total share of two entrepreneurs exceeds 75 per cent; (ii) entry into the market is extremely difficult; and (iii) there has been a considerable increase in prices, or the decrease in prices has been small for a certain period, and the entrepreneur has either made considerable profits exceeding

¹⁹ (in English). ²⁰ (in English). ²¹ Sato et al. (eds), supra, p. 234.

336

Business-related Laws

the norm set by a cabinet order, or has achieved extremely high sales or incurred administration costs by the standard in the given market (Art. 2, para. 7). If a monopolistic situation is established, the FTC is empowered to order entrepreneurs to take measures to restore competition in the given market. These include the partial transfer of business operations or assets, the sale of shares, a change in business methods, the transfer of technology, and the opening up of the distribution system. There are guidelines by the FTC on this matter in which twenty-seven areas of business, including beer, cigarettes, and colour photographic film, meet or are likely to meet the above criteria are listed. The list is revised every two years.²² It is fairly unlikely that measures to rectify the monopolistic situation will actually be applied, especially the order to transfer part of the operations of a business. The provision is expected to function as a deterrent, especially in relation to a concerted increase in prices led by a dominant entrepreneur. Its actual implementation is considered to be the last resort.

(2) Prevention of market concentration—mergers and other issues Companies are not allowed to acquire or own shares if this results in substantial restraint of competition in a particular field of trade or by unfair means (Art. 10, para. 1). The FTC published criteria for the application of this provision in 2004 (Guidelines on the Application of the Anti-Monopoly Law concerning Business Combination) in 2004 (the last amendment in 2007).²³ In order to qualify as ‘substantial restraint’, the shareholder does not have to be in a position to have effective control over the business activities of the other company. It is sufficient that the company is able to influence the business activities of the other company to a significant extent. According to the Guidelines, the shareholding does not have to be a majority, but can be as small as 25 per cent if the company stands alone as a large shareholder. In an earlier case, a leading musical instrument company acquired shares (24.5 per cent) of a rival company through an intermediary with the intention of controlling its business activities. The FTC found that this action substantially restricted competition in the market of pianos and other products and ordered the company to dispose of shares.²⁴ Directors or employees of a company may not simultaneously hold a directorship of another company if this would result in substantial restraint of competition in a particular field of trade (Interlocking Directorate, Art. 13, para. 1). A company is not allowed to force its competitor to accept its director or an employee to become a director of the latter by resorting to unfair trade practices. ²² . ²³ (in English). ²⁴ Recommendation Decision of the FTC, 30 January 1957, Shinketsushū 8–51 (Nihon Musical Instrument Manufacturing case).

Anti-Monopoly Law

337

Companies may not merge if this would result in a substantial restraint of competition in a particular area of trade or if the merger is effected by unfair means (Art. 15). Companies which intend to merge must notify this intention to the FTC (Art. 15, para. 2). For mergers which are unlikely to affect competition, the notification requirement was lifted by the 1998 amendment. Only if the gross asset of one of the merging companies is above 10 billion yen, and if one of the other company’s assets is one billion yen or more, must the companies notify the FTC. The merger of a company with its subsidiary, or a merger between subsidiaries, does not require notification (Art. 15, para. 2). Where notification is required, the merger cannot be effected until thirty days after the notification is accepted by the FTC (ibid., para. 3). The FTC examines the effect of the proposed merger on the market within this period. If the FTC finds that the proposed merger will substantially restrain competition in a particular area of trade or is to be effected by unfair means, it recommends that the parties refrain from the merger. If the FTC eventually finds that the merger is against the Law, it may prohibit or impose conditions on the merger. If a merger is carried out in breach of the Law, the FTC is empowered to bring the case to court and invalidate the merger (Art. 18). It is established practice that the companies that intend to merge unofficially consult the FTC prior to the notification. The FTC examines the proposed merger plan and, if necessary, advises the parties to modify the plan, or to abandon it. In recent years the FTC has started publishing a summary of its findings at the consultation stage on a no-name basis. The FTC received seventy-four merger notifications, nineteen company split notifications, and 136 acquisition notifications in the Fiscal Year 2006. In the thirty-nine merger cases, the amount involved was 10 billion or more but less than 50 billion yen.²⁵ The definition of ‘substantial restraint on competition’ and the demarcation of the ‘particular area of trade’ are given in the Guidelines on Business Combination of 2004. The Guidelines distinguish between substantial restraint on competition by an action of a single entity and by parallel action in an oligopolistic market. Concerning substantial restraint by an action of a single entity, if the merging companies’ capacity of production or sale is much larger than their competitors’, and if that company raises the price as a result, it is difficult for the competitors to expand the production or sale without a price rise, or the purchasers may not be able to switch to the competitors and the merging companies may be able to control the price rather freely, this constitutes substantial restraint on competition. Factors taken into consideration are: (i) the merging companies’ market share and rank, (ii) difference in market share, (iii) pressure for importation, and (iv) the possibility of new entry into the given market.

²⁵ FTC Annual Report 2006, .

338

Business-related Laws

The Guidelines point out that in an oligopolistic market, there are instances where entrepreneurs become capable of foreseeing competitors’ behaviour with high accuracy, and it becomes beneficial for companies to take parallel action. Companies subsequently raise prices. Thus, the merging companies and their competitors may be able to control the price rather freely, and substantial restraint on competition may emerge. In such cases, the above factors (i) to (iv) would be examined from the viewpoint of whether parallel action with competitors will be facilitated. In addition, the past state of competition in the market would be considered.²⁶ The only case of a merger that the FTC has handled by formal proceedings is the merger of the Fuji Steel Corporation and the Yawata Steel Corporation. In the mid-1960s the Japanese steel industry was dominated by six major companies. The first and the second largest companies decided to merge and accordingly notified the FTC. The FTC found the merger to be impermissible, because it was likely to restrain competition substantially, and recommended that the merger should not go ahead. This was not accepted by the two companies. The FTC applied to the Tokyo High Court for an injunction, which was granted. After blocking the merger, the FTC initiated formal proceedings. Both companies, realising that it was difficult to obtain approval for the merger as proposed, conceded, and a consent decision was rendered. The FTC ruled in this case that if, as a result of a merger, the structure of the market changes to become less competitive, and an entrepreneur obtains a dominant position within the market, it will constitute a substantial restraint on competition. An entrepreneur is considered to hold a dominant position if it monopolises the market, or is capable of influencing the price, quality or quantity, or other conditions of the sale of products above a certain level, and thus deprives the competitors of unrestrained business activities. In this particular case, the FTC acknowledged in principle that the proposed merger would result in a substantial restraint on competition in the market of rails, tin plate, and other items. The projected market share of the new company in certain areas of trade reached almost 100 per cent. Nevertheless, the FTC ruled that if necessary measures to prevent unreasonable restraints were adopted, the merger could go ahead. Thus, various measures, such as the transfer of production facilities including steel mills and technology, as well as the transfer of shares owned by those companies in a tin-producing company to other smaller companies, were recommended.²⁷ The idea underlying this decision was that if an effective competitor is created in the market, the proposed merger will not result in a substantial restraint on competition. However, this approach has been criticised for failing to take into account the effect of the emergence of the oligarchic structure of the market as a result of the merger on competition. Even if there is an effective competitor in the ²⁶ Sato et al. (eds), supra, pp. 210–213. ²⁷ Consent Decision of the FTC, 30 October 1969 (Yawata/Fuji steel case), Shinketsugshū 16–46.

Anti-Monopoly Law

339

market, there is still a possibility that as a result of the high concentration in the market, cartels can be more easily formed and a coordinated price rise may take place. In other words, the FTC primarily focused on the prevention of the emergence of a monopolistic company, and failed to take into account the change of the market structure into an oligarchic one as a result of the merger. The FTC changed its stance in 1998 now takes into consideration the possible changes to the market structure as a result of the merger. This approach was inherited by the 2004 Guidelines. If the market structure is altered in a noncompetitive way by the merger, and if conditions that would allow the company certain latitude to manipulate the price, quality, volume, and other conditions by acting unilaterally or in coordination with other companies are likely to emerge, then the effect of the merger may be a substantial restraint on competition in a particular area of trade. However, even after 1998, there have been cases where the FTC seems to have resorted to the ‘effective competitor’ approach. In the merger of Japan Airlines and Japan Air System in 2003, the largest company and the third largest company proposed to merge. Actually, there were only three sizeable companies in the market, but the FTC allowed the merger to go ahead based upon an approach similar to that in the Yawata/Fuji Steel case.²⁸ There are no fi xed numerical criteria in determining lawful and unlawful mergers. However, the Guidelines refer to HHI (Herfindale Hirschman Index) and indicate that in cases where the market share of the merged companies is less than 10 per cent, or the HHI after the merger is less than 1,000 and the market share of the merged company is 25 per cent or less, there would be no problem under the Anti-Monopoly Law (safe harbour). Previously, only mergers and acquisitions between Japanese companies were regulated by the Anti-Monopoly Law. However, the 1998 amendment extended such regulation to transactions outside Japan. First, if a foreign company with total assets exceeding 10 billion yen intends to hold shares of a Japanese company with total assets exceeding one billion yen, or of a foreign company in Japan with a turnover exceeding one billion yen, and, as a result, the foreign company acquires over 10 per cent, 25 per cent, or 50 per cent of the interest, it should be reported to the FTC. Secondly, mergers between foreign companies are subject to notification requirements, insofar as in the proposed merger, one of the parties has a turnover in Japan exceeding 10 billion yen, and another party has turnover in Japan exceeding one billion yen. The parties may not proceed with the proposed merger for thirty days while the FTC examines the notification. Th irdly, the acquisition of business or fi xed assets of Japanese companies by a foreign company outside Japan is also subject to notification requirements. If a foreign company with total assets exceeding 10 billion yen acquires either ²⁸ Nikkei, 21 April 1999.

Business-related Laws

340

(i) an entire business from a company in Japan with total assets exceeding one billion yen, (ii) a substantial part of a business or an entire or substantial part of a business with more than one billion yen turnover from a company in Japan, (iii) an entire business from a foreign company with a turnover in Japan of more than one billion yen, or (iv) a substantial part of business or an entire or substantial part of assets with turnover of more than one billion yen from a foreign company, a notification requirement is again imposed.

5. Unreasonable Restraint of Trade (1) Cartels—general Unreasonable restraint of trade refers primarily to cartels. The Law defines unreasonable restraint of trade as business activities by which any entrepreneur, by contract, agreement, or other concerted actions with other entrepreneurs, mutually restricts or conducts business activities so as to fi x, maintain, or increase prices, or to limit production, technology, products, facilities, or customers or suppliers, thereby causing, against the public interest, substantial restraint of competition in any particular field of trade (Art. 2, para. 6). Unreasonable restraint of trade is prohibited (Art. 3). Cartels range from price cartels, supply (quota) cartels, and production-capacity limitation cartels to cartels limiting customers, market division, joint sale, and joint boycott. ‘Hard’ cartels such as the price cartel and market division are subject to a surcharge payment. In 2006, the FTC disposed of thirty price cartels, six cases of bid-rigging, and two cases of other types of cartels.²⁹ Probably the most celebrated case of unreasonable restraint on trade in the history of the Anti-Monopoly Law is the Petroleum Cartel case, which involved a price cartel and a cartel on the adjustment of the amount of production at the time of the oil crisis. In the price cartel, directors of fourteen oil companies agreed to raise the price of oil products and enforced this agreement. In the production adjustment cartel, the ‘supply and demand committee’ of the Japan Petroleum Association allocated a quota of crude oil to companies. Bid-rigging, which used to be common in some industries, also falls within this category. Major bid-rigging was exposed in 2005. This involved construction of bridges for the then Japan Highway Corporation (now privatised). 45 construction companies took part in the bid-rigging, which was arranged by directors of the Highway Corporation. A cease and desist order was issued and the payment of surcharge was ordered. Criminal prosecution was brought against the core member companies of the cartel, company directors, and Highway Corporation officials.³⁰ ²⁹ . ³⁰ .

Anti-Monopoly Law

341

Unreasonable restraint of trade must involve collusion between entrepreneurs. A coincidence of action is insufficient; a certain correspondence of will is needed. In practice it is often difficult to prove the existence of an agreement. In an earlier case, the FTC ruled that coincidental bidding prices were not sufficient to prove the existence of concerted action, but in this particular case it acknowledged the existence of such an action.³¹ In a more recent case, elevator maintenance and service companies allegedly colluded in raising the prices of such services. There was an extensive exchange of information and negotiation among the parties, but the actual price increase was different from the allegedly agreed price in four out of six companies. The FTC ruled that although there was suspicion that the companies had colluded, there was no proof as to when and how the companies developed a consensus on the tariff increase, and the content of the agreement. Therefore, the existence of the cartel was denied.³² The agreement to collude between the companies does not have to be explicit. If one entrepreneur is aware of the actions of others and takes similar action with the intention of aligning with the others, the existence of collusion is acknowledged. There was a case where eight companies were found to be involved in a cartel. These companies jointly had an almost 100 per cent share of the market. There was a trade association which had a committee comprising directors of these companies and a sub-committee composed of general managers. The actual negotiation took place at the meetings of the sub-committee. Seven of the eight companies exchanged information and views at the meetings, and at one meeting three leading companies announced their intention to raise prices, while the remaining companies did not object. Accordingly, all eight companies raised their prices. The FTC found this to be a cartel. Seven companies accepted the recommendation of the FTC, while one company contested the case in the High Court. The company argued that the companies were aware of the expected action of other companies, but this company itself never approved of such concerted actions or intended to take part in the joint action. The court ruled that the ‘communication of intention’ required for a cartel does not have to be an explicit agreement of a mutually binding nature. It would suffice if the parties mutually acknowledged or foresaw the acts of the others to raise prices and aligned with the others. If entrepreneurs exchanged information as to price increase and acted in the same or a similar way, it can be presumed that there was ‘communication of intention’.³³ There is a view that if there is concerted action, and if such action is inconceivable without prior arrangement, the existence of such action itself is proof of mutual agreement. However, that remains a minority view. ³¹ Hearing Decision of the FTC, 30 August 30, 1949, Shinketsushū 1–62 (Yuasa Woods case). ³² Hearing Decision of the FTC, July 28, 1994, Shinketsushū 41–46 (Mitsubishi Building Technoservice case). ³³ Judgment of the Tokyo High Court, 25 September 1995, Hanta 906-136.

342

Business-related Laws

Unreasonable restraint of trade is unlawful when it results in substantial restraint of competition in a particular area of trade. A ‘particular area of trade’ is determined first of all by the product or service in question. In the Petroleum Cartel (production adjustment) case, the marketing of oil products in general was regarded as a particular area of trade. The market can also be determined by territory.³⁴ In a case involving film theatres, the FTC found a specific district of Tokyo to be a ‘particular area of trade’.³⁵ Furthermore, the market can be determined by the stage of trade or trade partners. In one case, the final stage of distribution, i.e. ‘direct sale to major end-users’ was found to be included in a particular area of trade.³⁶ As for the concept of ‘substantial restraint’, in the majority of cartels exposed by the FTC, most of the companies in the market are involved. The average share of the participants is said to be between 80 and 90 per cent.³⁷ In such cases, collusion between the companies will more or less automatically result in a substantial restraint on competition.

(2) Government-led cartels In the past, particularly up to the 1970s, it was not uncommon for cartels to be formed as a result of administrative guidance effected by ministries. In some areas of industry, the adjustment of production volume and sales volume was effected by administrative guidance, implemented by the concerted action of companies in the given area of industry. The FTC has long held the view that although entrepreneurs followed administrative guidance, this does not in itself legitimate illegal cartels.³⁸ A case in the early 1950s involved the price of soy sauce, then under government control. The government agency in charge of prices discussed the termination of price control by the government with the trade association of soy sauce producers and its four leading producers. The agency suggested a retail price, but four companies proposed a higher price. Eventually they agreed on a price in between the two in exchange for the abolition of price control. Later, the four companies’ representatives met. A representative of Noda Soy Sauce, the leading company, suggested the price and was followed by the other three. At the FTC proceedings, Noda and the trade association argued that the concerted action in question was effected under the de facto binding request of a government agency. The FTC ruled that the FTC was the sole agency permitted, subject to judicial review, to officially interpret and apply the Anti-Monopoly Law, and that other governmental agencies were not entitled to freely interpret the ³⁴ Judgment of the Tokyo High Court, 19 September 1951, Kōmin 4-14-497. ³⁵ Recommendation Decision of the FTC, 8 January 1992, Shinketsushū 38–150 (Strech Film cartel case). ³⁶ Sato et al., supra, pp. 37–38. ³⁷ FTC Annual Report, supra. ³⁸ (in English).

Anti-Monopoly Law

343

Law. If a government agency effects administrative guidance based on erroneous interpretation of law, entrepreneurs and trade associations have a duty to determine themselves what is lawful and what unlawful. Thus the FTC concluded that the existence of administrative guidance did not affect the unlawfulness of the cartel.³⁹ This problem was at issue again in the above-mentioned Petroleum Cartel case. In the case involving production adjustment, the Petroleum Association and 24 member companies plus one non-member company in 1972 and 1973 formed a cartel which restricted the volume of crude oil to be refined. The then Ministry of International Trade and Industry, the agency in charge of implementing the Law on Petroleum Businesses, was responsible for formulating and implementing policy on the supply and disposal of crude oil. Control was to be effected by restricting the supply of oil products by administrative guidance. In fact, the production adjustment at issue in this case had been practised for many years under the initiative of the Ministry. The Association determined the total amount of crude oil to be refined and made corresponding allocations to member companies. The FTC found this to be an illegal cartel and prosecuted the Association and its executives. The High Court ruled that the restriction on production was against the Anti-Monopoly Law, but acquitted the defendants on the ground that they had believed the act to be legal and had reasonable grounds for believing this. The court referred (obiter) to the relationship between administrative guidance and a cartel, and suggested that if the restraints on production had been a consequence of the Ministry’s guidance, the Association and the companies should not be held responsible. The court accepted that the administrative guidance in this case exceeded the scope of power given to the Ministry, that it would almost inevitably result in concerted actions by entrepreneurs, and that it was therefore impermissible.⁴⁰ In the Petroleum price cartel case which occurred at the same time, 12 oil companies and their directors were prosecuted for operating a price cartel. They argued that the cartel had been effected as a result of administrative guidance. It was established practice for the Ministry officials to require the submission of documents from the companies to serve as a basis for price calculation, and to give consent to price increases when they had been agreed. The Ministry, by way of administrative guidance, urged the companies to obtain consent of the Ministry for the maximum price increases. In this case, the Ministry gave consent to the price. The companies mutually agreed that once the maximum price was set, they should raise the price to the maximum.

³⁹ Hearing Decision of the FTC, 4 April 1952, Shinketushū 4-1 (Noda Soya Sauce case). ⁴⁰ Judgment of the Tokyo High Court, 26 September 1980, Kōkeishū 33-5-359 (Petroleum (Production Adjustment) Cartel case).

344

Business-related Laws

However, the High Court found that the cartel was not an immediate result of the administrative guidance. The court ruled that the defendants were aware of the unlawfulness of the arrangement and found them guilty. On appeal, the Supreme Court denied that the cartel was an outcome of administrative guidance. The companies agreed to raise the price to the maximum which had been approved by the Ministry, and this agreement was found to be a cartel.⁴¹ The Supreme Court stated obiter dicta that administrative guidance which does not have an explicit legal basis can be justified if it is made in a reasonable and socially acceptable way and does not contradict the fundamental purpose of the Anti-Monopoly Law. However, it proceeded to rule that a price cartel which technically contravenes the Anti-Monopoly Law should nevertheless not be considered illegal if it is formed as a consequence of lawful administrative guidance and effected in compliance with the guidance. Scholarly opinion varies on this issue. The majority believe such cartels to be illegal, even though they were formed as a consequence of administrative guidance. After all, administrative guidance is an act of an administrative agency which does not have the power to give an authoritative interpretation of law. If cartels were to be legitimised only because they had been based upon administrative guidance, it would mean that administrative agencies were free to create exceptions to the Anti-Monopoly Law.⁴² On the other hand, a minority view supports the position of the Supreme Court. The FTC published its views on administrative guidance from the viewpoint of the Anti-Monopoly Law in 1994. It maintains its long-held position that the fact that a cartel was a result of administrative guidance does not make an unlawful cartel lawful.⁴³ As can be seen in the Petroleum Cartel case and Japan Highway Corporation case, cartels (namely bid-rigging) are sometimes arranged by local/central government officials. These government officials may now be prosecuted under the Law on Elimination and Prevention of Involvement in Bid Rigging etc. and Punishments for the Acts by Employees that Harm Fairness of Bidding and face a maximum of five years’ imprisonment.⁴⁴

6. Unfair Trade Practices (1) The concept The Anti-Monopoly Law prohibits unfair trade practices (Art. 19, para. 9). An unfair trade practice is defined by the Law as an act which falls within the category ⁴¹ Supra, Petroleum (Production Adjustment) Cartel case. See also Judgment of the Supreme Court, 24 February 1984, Keishū 38-4-1287 (Petroleum (Price) Cartel case). ⁴² Sato et al.(eds), supra, pp. 57–58. ⁴³ (in English) ⁴⁴ Law No.101, 2002, (in English).

Anti-Monopoly Law

345

of acts which are likely to impede fair competition and is designated as such by the FTC. The Law itself lists (i) discrimination against other entrepreneurs; (ii) unfair pricing; (iii) soliciting or forcing customers of competitors to deal with oneself; (iv) trading under restrictive conditions; (v) trading by abusing its own business position; (vi) obstructing business between a competitor and its trading partner or unfairly soliciting, instigating, or forcing a shareholder or director of a competitor to act against the interest of the company (Art. 2. para. 9). The FTC is empowered by its quasi-legislative power to designate unfair trade practices. The 1982 notice designates 16 types of acts likely to inhibit fair competition as unfair trade practices.⁴⁵ The common thread of those designated unfair trade practices is the possible impediment to fair competition. This is explained by the FTC as the lack of one or more of the following conditions: (i) free competition among entrepreneurs is ensured (existence of competition); (ii) free competition exists in price, quality, and service (methods of competition); and (iii) the entrepreneur is able to decide on the deal and its conditions freely on its own initiative (free decision-making in business).⁴⁶ Provisions on unfair trade practices are closely related to the protection of consumers. In this regard, the Law against Unjust Premiums, Advertisement and Labelling, the Law against Unfair Competition, and other laws also play a significant role⁴⁷ Restrictions on unfair trade practice contribute to the protection of entrepreneurs in economically weak positions. Th is applies especially to the prohibition of abuse of a dominant bargaining position. The Law on the Prevention of Delay in Payment for Subcontracted Works is intended to serve a similar purpose.⁴⁸ Incidentally, the Law against Unfair Competition should not be confused with the Anti-Monopoly Law. Th is Law was originally enacted in 1934 in relation to the ratification of the Hague Protocol of the Paris Convention and was totally amended in 1993. The Law covers abuse of trade names; trade marks; origin of products; misleading consumers as to the quality, content, etc. of the product; and dissemination of false information which harms the credibility of competitors. Know-how is also protected by this Law (see Chapter 15). Traditionally, the necessity of controlling unfair trade practices is explained as a set of preventive measures against private monopolisation. This is in a way justifiable, considering the fact that the concept itself came from the US Clayton Act and Sherman Act. However, with the 1991 Guidelines on the Business Practice and Distribution System which, inter alia, addressed the problem of keiretsu dealings by resorting to the concept of both unreasonable restraints and unfair trade practices, the raison d’ être of the control of unfair trade practices seems to ⁴⁵ (in English) ⁴⁶ T. Hienuki in Atsuya (ed.), supra, p. 100. ⁴⁷ Laws No. 134, 1982 and No. 47, 1993. ⁴⁸ Law No. 120, 1956.

Business-related Laws

346

have changed to the elimination of exclusive trade practices and to ensuring the openness and transparency of trade.⁴⁹

(2) Refusal to trade The 1982 FTC Notice lists unreasonable refusal to trade and restrictions on the volume or content of products or services as unfair practices. Causing other entrepreneurs to refuse to deal with a third party also qualifies as refusal. Refusal to deal can be effected by one entrepreneur or jointly by several entrepreneurs. Although it is up to each entrepreneur to decide which partner to deal with, there is a possibility that as a result of refusal, the opposite party will be forced to retire from the market. There is also a possibility that entry of newcomers into the market will be inhibited by such refusals. The Guidelines on Business Practice and Distribution System address both single and joint boycotts. A joint boycott, if effected by entrepreneurs or trade associations to prevent new entry into the market, or to exclude an entrepreneur from the market, is illegal per se. Since a joint boycott is a concerted action, it may qualify as unfair restraint of trade (cartel) if the act meets other requirements— namely that it results in substantial restraint on competition. If entry into the market by the entrepreneur targeted by the joint boycott has become extremely difficult, or the entrepreneur has been effectively excluded from the market, it is likely that there has been substantial restraint on competition. Collusion between wholesalers or retailers whereby a manufacturer is caused to terminate the supply of goods to discount stores is not uncommon. In one case, a trade association of home appliance manufacturers and sellers caused manufacturers to terminate the supply of products to wholesalers and retailers who sold them at a price lower than the designated price. This was found to be an unfair trade practice, since at that time vertical restraints were not regarded as an unreasonable restraint of trade.⁵⁰ There may also be cases of boycott whereby manufacturers collude and refuse to deal with retailers that handle competing imported goods. Even if such boycotts do not result in substantial restraint on competition and do not qualify as an unreasonable restraint of trade, they may constitute an unfair trade practice. Refusal to trade by a single firm represents another problem. The FTC Notice lists unreasonable refusal to deal by a single entrepreneur as an unfair trade practice. An entrepreneur may freely decide with whom to deal by taking into account price, quality, and various other factors. A refusal to deal constitutes an unfair trade practice only if it is effected in order to achieve a purpose—such as the exclusion of a competitor, or to ensure the effectiveness of acts which is against

⁴⁹ Hienuki in Atsuya (ed.), supra, p. 99. FTC Japan Views, 1991, September, pp. 19–39. ⁵⁰ Recommendation Decision of the FTC, 17 October 1957, Shinketsushū 9–11.

Anti-Monopoly Law

347

the Anti-Monopoly Law, e.g. resale price maintenance.⁵¹ The Guidelines refer to examples, such as an influential manufacturer in the market who causes wholesalers and retailers not to deal with its competitor. Manufacturers often refuse to deal with those who defy such arrangements. The guidelines generally regard a manufacturer as influential if it has more than a 10 per cent share of the market or is among the top three companies. In one case, refusal by a grocery wholesaler to deal with a retailer was found to impair fair competition, since there was no easily available alternative source of supply of vegetables for this retailer.⁵² In another case, one of the major pharmaceutical companies banned its designated retailers from joining another pharmaceutical company’s sales network and advertising the competitor’s products. The company refused to supply those retailers which defied the ban. The FTC found this to be unfair trade practice.⁵³ A related matter is that of a selective distribution system. In such a system, the supplier limits the distribution of goods to those wholesalers and retailers who satisfy appropriate criteria and are thus allowed to join the system. This is, in itself, not against the Anti-Monopoly Law. Only when the system is abused to achieve goals which are not allowed by the Anti-Monopoly Law, for example. resale price maintenance, does it become unlawful.

(3) Discriminatory pricing and other discrimination The Notice also addresses unreasonable discrimination in pricing and other matters. Discriminatory pricing means unjustly supplying or purchasing commodities or services at prices that discriminate between regions or parties. Again, prices and other conditions of trade should be freely determined by entrepreneurs. However, there are cases where discriminatory treatment is used to impair competition. An example of price discrimination is a case where an influential entrepreneur sells a product at a low price in areas with a view to excluding the competitor.⁵⁴ In one case, a manufacturer of floorboards encouraged builders to join a cooperative in order to maintain the retail price of floorboards. The builders who did not join the cooperative were forced to buy the boards at a higher price. This was found to be discriminatory by the FTC.⁵⁵

⁵¹ A. Yamada et al. (eds), Ryūtsū-torihiki-kankō ni kansuru Dokusen-kinshi-hō (Guideline of the FTC on Business Practices and Distribution Systems) (Tokyo, 1991), p. 70. ⁵² Hearing Decision of the FTC, 19 April 1967, Shinketsushū 14–64 (Marugame Grocery case). ⁵³ Recommendation Decision of the FTC, 10 December 1955, Shinketsushū 7–99 (Second Taishō Pharmaceutical case). ⁵⁴ Decision of the Tokyo High Court, 18 March 1957, Gyōshū 8-3-443 (Kitaguni News case). ⁵⁵ Recommendation Decision of the FTC, 2 February 1980, Shinketsushū 26–85 (Tokyo Linoleum case).

348

Business-related Laws

Another example of discriminatory treatment is rebate. It is not uncommon for manufacturers to pay a rebate to wholesalers and retailers depending on their performance and other factors. Payment of a rebate is not in itself against the Anti-Monopoly Law. The Guidelines, however, point out that if a rebate is used as an incentive to impose restraints on resale price, sales territory, non-handling of competitors’ products etc., it may violate the Anti-Monopoly Law. The Notice also lists unjust pricing as an unfair trade practice. Naturally, selling a product at a reduced price is not in itself against fair competition, but if the price is unreasonably reduced in order to eliminate competitors, it is against the Law. In practice, however, it is often difficult to demarcate the boundary between reasonable and unreasonable price reduction. The Notice defines sales at an unreasonably low retail price as a continuous supply of goods or services at a price excessively below the cost incurred, or at an unreasonably low price, which is likely to cause difficulties to the competitor’s business. In one case, a newspaper company sold papers at 500 yen for a month’s subscription in certain areas in order to attract new readers. Although the price was nominally the same as cost, the FTC ruled that this cost was inconceivable without a subsidy from a related company. On appeal, the Tokyo High Court ruled that the price must be not just below market price, but below cost to be considered an unreasonably low price. The court acknowledged that 500 yen was unfair, and ordered the newspaper company not to sell the paper for less than 812 yen.⁵⁶

(4) Deceptive soliciting and unfair benefits Deceptive soliciting and soliciting by unreasonable benefits are also unfair trade practices. The Anti-Monopoly Law prohibits sales by deceptive advertisement or labelling, as well as sales by excessive benefits. The Law against Unjust Premiums, Advertisement, and Labelling is also applicable here. The FTC is empowered by this Law to set the maximum benefits which can be offered, and to designate an acceptable form of advertising (Art. 2). Regarding unfair benefits, in the early 1990s, securities companies were found to have compensated losses to favoured customers in order to keep their accounts. This was found by the court to be soliciting customers by unreasonable benefits in several cases.⁵⁷

(5) Restrictive dealings The FTC Notice lists restrictive dealing as another unfair trade practice. The Notice prohibits dealing with others by imposing a condition on the opposite ⁵⁶ Decision of the Tokyo High Court, 30 April 1975, Kōminshū 28-2-174. Consent Decision of the FTC, 24 November 1977, Shinketsushū 24–50. ⁵⁷ Judgment of the Tokyo High Court, 26 September 1995, Hanji 1549-11 (Nomura Securities case).

Anti-Monopoly Law

349

party not to deal with a competitor and thus reduce the business opportunity of competitors. Such acts have been highlighted in recent years when the exclusiveness of the keiretsu relationship came to be criticised. The Guidelines refer to examples such as an influential manufacturer in the market asking influential parts and components suppliers not to supply the manufacturer’s competitors, or asking distributors not to handle products of a manufacturer who intends to enter the market. In a typical case of exclusive dealing, a manufacturer of beds with a market share of 40 per cent concluded an agreement with its designated distributors to the effect that the distributors could not handle similar products of other companies. Breach of this agreement would entail the loss of all privileges to the distributor. The FTC found this to be an unfair trade practice.⁵⁸ Restrictions may be imposed on sales territories, products, choice of trading partners, or resale prices. The Guidelines’ position is that some restrictions are illegal per se, while other restrictions, depending on the position of the entrepreneur in the market, may result in exclusion of entry into the market, or impede fair price competition, and may be unlawful. If an influential manufacturer in the market restricts handling of competing products, and as a result new entrants or existing competitors encounter difficulties in securing an alternative route of distribution, this is illegal. There are also cases where a manufacturer imposes restrictions on wholesalers supplying products to discount retailers. This is likely to result in price maintenance and is an unfair trade practice. In one case, a cooperative purchased fish, ham, and sausage from a wholesaler at a discount price and sold them at a discount price to retailers who were members of the cooperative. The producer asked the wholesaler not to supply products to this cooperative. However, the wholesaler in question kept defying the request. The producer obtained a written undertaking from the wholesaler that it would not supply the cooperative. Nevertheless, the wholesaler continued supplying the cooperative, and the producer informed the wholesaler that it would terminate supply to the wholesaler. The producer proceeded to put a lot number on the packet of the product so that it could trace the supply route to the cooperative. Eventually, the wholesaler gave up supplying the cooperative. The FTC found this to be unfair trade practice.⁵⁹

(6) Resale price maintenance Resale price maintenance is a type of restrictive term, but is treated under a separate heading in the Notice. In principle, prices should be determined by the ⁵⁸ Recommendation Decision of the FTC, 20 February 1976, Shinketsushū 22–127 (France Bed case). ⁵⁹ Recommendation Decision of the FTC, 7 November 1966, Shinketsushū 12–146 (Nihon Suisan case).

350

Business-related Laws

market, and resale price maintenance—restraint on the price set by the seller—is therefore considered to be an unfair trade practice and illegal per se. The AntiMonopoly Law provides for some exceptions, but they do not apply when the control of prices unreasonably infringes the interests of consumers (Art. 24-2). Resale price maintenance occurs not only when the observance of the recommended price asked by the manufacturer is secured by agreement between the manufacturer and distributors, but also where the manufacturer takes measures such as suggesting that distributors may suffer disadvantage by not observing the price. Disadvantages include the termination of supply, a reduction of the volume of supply, a reduction of rebates, etc. In some cases resale prices are monitored by the manufacturer through test purchases, secret lot numbers, and inspection of the records of distributors. It should be noted that since the unlawfulness of resale price maintenance is based primarily on its interference with free price setting, it will still constitute an unfair trade practice if a manufacturer, instead of penalising a retailer for not observing the recommended price, rewards it for observing that price. In one case, a major cosmetics company refused the request by a large retailer to arrange a sales campaign with a 10 per cent discount on the ‘recommended price’ by the cosmetics company. The company asked the retailer not to sell the products at a discount, and in exchange offered assistance in promoting sales of its products at the retailer’s shop. The FTC ruled that this amounted to resale price maintenance.⁶⁰ In a celebrated case, the same cosmetics company was sued by a distributor when the company terminated its supply of products. The ground for the termination of supply was the non-observance by the distributor of the requirement of face-to-face sale. The court of first instance ruled that this restriction on the method of sale was without reasonable grounds and was in fact designed to maintain resale prices, and as such was illegal.⁶¹ However, the High Court reversed the judgment and ruled that a requirement of face-to-face sale has a rationale, and although the requirement in effect results in maintaining the resale price, there was no proof that the restraint on the sales method was used as an instrument to effect resale price maintenance.⁶²

(7) Abuse of dominant position The Anti-Monopoly Law also prohibits the abuse of a dominant position as an unfair trade practice. It is unlawful to force a trading partner to purchase goods or services unrelated to the given transaction, to pay money or offer services or ⁶⁰ Consent decision of the FTC, 30 November 1995, Shinketsushū 42–97 (Shiseidō case). ⁶¹ Judgment of the Tokyo District Court, 18 July 1994, Hanji 1474–25 (Shiseidō case). ⁶² Judgment of the Tokyo High Court, 14 September 1994, Hanji 1507–43 (Shiseidō case).

Anti-Monopoly Law

351

other economic benefits, to impose on the other party disadvantageous terms of trade, or to change those terms to the disadvantage of the other party. It is also unlawful to give instructions to a trading partner regarding the appointment of directors or make it subject to consent. These acts need to be unfair in light of normal trade practices and must be committed through the abuse of a superior position. In one case, a major department store was found to have abused its dominant position against its suppliers. Suppliers had been competing for a place in this prestigious store. The department store virtually forced the suppliers to purchase goods and services from the store and made them pay the cost of refurbishment.⁶³ In another case, a bank made it a condition of a loan that the managing director and executive directors of the borrower be selected on its instructions. This was found to be abuse of its dominant position.⁶⁴ Another example involved a bank’s request for a company, which sought a loan, to borrow more money than it needed. The excess amount was to be deposited at the bank, enabling the bank to gain interest unfairly on the loan. This was also found to be an unfair trade practice.⁶⁵ It is important to note that unlike in EU Law, ‘dominant position’ does not only mean a dominant or monopolistic status in the market; it is sufficient if the party in question is in a position superior to that of the opposite party. The concept is applied in cases where (i) the market is oligarchic and the opposite party is a medium or small company which cannot refuse the terms imposed by a major company, (ii) an entrepreneur is forced to arrange a special production system for the other party, (iii) the market is highly stratified in a keiretsu system, (iv) because of the nature of the products or services, it is impossible to switch trading partners, or (v) the entrepreneur in question is influential in the market and the opposite party conducts business only by continuing transactions with this entrepreneur.⁶⁶ Thus, the prohibition of the abuse of a dominant position is intended to ensure orderly competition, and therefore is applicable in situations where the act involves a large number of counter-parties, is effected in a systematic/ institutional manner, the harm done is significant, or may affect others, and in cases that involve a single counter-party, the harm done is significant, or may affect others.⁶⁷ ⁶³ Consent Decision of the FTC, 17 June 1982, Shinketsushū 29–31 (Mitsukoshi Department Store case). ⁶⁴ Recommendation Decision of the FTC, 6 November 1953, Shinketsushū 5–61 (Industrial Bank of Japan case). ⁶⁵ Judgment of the Supreme Court, 20 June 1977, Minshū 31-4-449 (Gifu Credit Bank case). ⁶⁶ Tanihara in supra; Hienuki in Atsuya (ed.), supra, pp. 208–212. ⁶⁷ Sato et al. (eds), supra, pp. 177–179.

352

Business-related Laws

(8) Sole distributorship and parallel imports It is normal practice for a foreign manufacturer to conclude a sole distributorship (agency) agreement with a Japanese company. It has an economic rationale and is not in itself against the Anti-Monopoly Law, as is selective distribution. However, if the sole distributor is a company which handles competing goods in Japan and is also a sole distributor of this product, there is a possibility that the Japanese company may come to control the market, depending on its position in the market as well as the position of the foreign manufacturer, and the level of competition in the market. The Guidelines take the position that if an entrepreneur who is to become a sole distributor is manufacturing or selling goods identical in kind to those it is to import and sell, and its market share is 10 per cent or more and amongst the top three in the market, then a sole distributor agreement on this product may impede competition. If the entrepreneur who is to be the sole agent has more than 25 per cent of the market share, it is highly likely to affect competition. If there is a likelihood of impediment to competition, such an agreement constitutes unfair trade practice. In addition, if the manufacturer imposes restrictions on the distributor, for example, not to handle competing goods, or to sell the product at a certain price, such an act qualifies as unfair trade practice. If the distributorship agreement contains restrictions on resale price, the handling of competing products, sales territory, etc., it is against the Anti-Monopoly Law on general grounds. Parallel imports have become an issue in recent years. There have been cases where the manufacturer–exporter and/or sole agents have attempted to prevent parallel imports. If a foreign manufacturer or a sole distributor obstructs, in one way or another, the import of the products other than through the sole distributor, this may comprise unfair trade practice as restrictive terms, or obstruction of competitor’s business insofar as they are genuine products. The view of the FTC in the Guidelines is that parallel imports enhance competition, and if parallel imports are obstructed in order to maintain prices, this is against the AntiMonopoly Law. If a sole distributor requests the foreign manufacturer to block supply to parallel importers, or impose restrictions on retailers not to handle goods imported through parallel import for the purpose of maintaining the price, this is also considered to be unfair trade practice (obstruction of a competitor’s business). In one case, the sole distributor of Herend, a manufacturer of Hungarian porcelain, became concerned about its products being imported by other companies through Herend’s sole distributors in third countries and sold at a much lower price in Japan, and asked Herend to block the supply. The FTC ruled that this sole agent unreasonably obstructed the trade between Japanese importers and overseas distributors of Herend products.⁶⁸ ⁶⁸ Recommendation Decision of the FTC, 22 March 1996, Shinketsushū 42–195.

Anti-Monopoly Law

353

A related problem is whether parallel imports can be blocked by resorting to intellectual property rights. In a leading case on trademarks, the parallel import of Parker fountain pens was at issue. Parker was registered as a trademark in Japan. The company sued a parallel importer for trademark infringement. The court ruled that the importation of genuine products does not affect the function of the trademark to identify the product and to ensure its quality, and was not an infringement. As regards patent, a German company which produces and sells tyre wheels sued a parallel importer in Japan for patent infringement. The product was patented in Germany and Japan. While the court of first instance found infringement, on appeal the court ruled that the company had exhausted its rights once it placed the product on the market in Germany. The Supreme Court ruled that if a patent holder had sold the product overseas, unless the patent holder and the purchaser agreed on the restriction of the territory in which the product could be used and clearly publicised this fact, parallel import could not be prevented.⁶⁹

7. Problems of Keiretsu The strengthening of control over unfair trade practices gained momentum in the 1989/1990 US–Japan SII Talks; it was thought to be vital to make the entry of foreign companies into the Japanese market easier. Amongst other issues, the practice of company keiretsu was said to be exclusive and unfair. Keiretsu are companies linked together by continuous business relations. The term is still not precisely defined, but it was generally acknowledged that there are three types of keiretsu: suppliers’ keiretsu, distribution keiretsu, and company groups.⁷⁰ A typical example of suppliers’ keiretsu can be found in the car and home appliances industry, in which major manufacturers have a network of suppliers of parts and components. In order to maintain the quality and timing of supply, most of these suppliers service only one manufacturer. These suppliers are mostly small and medium-sized companies with the exception of some large suppliers for car manufacturers, and are usually not subsidiaries of the manufacturers. The manufacturer often holds a minority share in the supplier companies and sends in directors. This arrangement has the advantage that manufacturers can maintain a constant supply of high-quality parts and components tailor-made to their needs. In addition, Japanese companies have adopted the ‘just in time’ delivery system in order to minimise the stock of parts and components held. Keiretsu was thought to be the most suitable way to meet the requirements for this system. On the other hand, it was argued that this whole network of suppliers has worked against the entry of foreign suppliers. Also the relationship between ⁶⁹ Judgment of the Supreme Court, 1 July 1997, NBL No. 621 (BBS case). ⁷⁰ K. Miyashita and D. Russel, Inside Japan’s Keiretsu (Tokyo, 1996).

354

Business-related Laws

these powerful manufacturers and suppliers can be a problem under the AntiMonopoly Law, since there might be abuses of a dominant bargaining position by manufacturers. As regards distribution keiretsu, again, the car industry and home appliances industry serve as examples. Manufacturers have developed a network of sales companies and dealers in order to maximise the sale of their products. These sales companies and dealers would sign an exclusive agreement with the manufacturer not to deal with other manufacturers’ products. There was a practice of prior consultation if a sales company or a dealer intended to deal in another manufacturer’s products. Therefore, if foreign manufacturers entered the Japanese market, they were unable to use the existing sales network and had to develop their own from scratch. Since the early 1980s such exclusive arrangements have been treated by the FTC as contrary to the Anti-Monopoly Law. On the other hand, it is reported that some car dealers have started to deal with other manufacturers’ cars. As with suppliers’ keiretsu, this system, despite some criticisms, has advantages. However, it is problematic not only from the viewpoint of foreign companies, but also for Japanese consumers. For example, in the home appliances market, large discount shops have mushroomed. Some manufacturers have reacted by putting pressure on the wholesale traders not to supply products to these discount shops. Employees of the manufacturer would constantly monitor prices, and when they found a large discount they would trace the supply route and block it. Such acts are against Anti-Monopoly Law. The third type of keiretsu are company groups. There are six major company groups, some of which originated from the pre-war zaibatsu. Groups of companies usually include banks and a trading house in addition to various companies involved in different areas of industry. They are, to a certain extent, linked by cross shareholding and directorship. These company groups were criticised at the SII Talks for being involved in exclusive practices. In fact, a recent survey demonstrates that these groups are not as exclusive as they seem. Around 20 per cent of the shares of a group company are held within the group. These companies hold shares mutually, but most of their stable shareholders are outside the group. Trade is conducted primarily with companies outside the group. These groups are no more than a loose affiliation of companies on an equal footing and do not represent a threat to free and fair competition. The FTC regularly conducts a survey of the state of such company groups. The 7th Survey of major company groups by the FTC found that the status of six major corporate groups in the Japanese economy has diminished. According to the report, ‘by and large, bonds between these companies such as capital, personnel and business relations that bring affiliated companies together have been weakening’.⁷¹

⁷¹ FTC, Dai 7-Kai Rokudai Kigyō-Shūdan no Genjō (The 7th Survey of the Six Major Company Groups), .

Anti-Monopoly Law

355

The FTC addressed the problem of keiretsu in the Guideline on Distribution Systems and Business Practices. The Guidelines take the position that the keiretsu system is not against competition per se. It has some economic rationale, for instance in the pursuit of efficiency and quality. If a continuous trade relationship is formed through the free choice of the company, based upon commercial considerations such as price, quality, service, etc., such a relationship is not against the Anti-Monopoly Law. However, there are certain keiretsu practices which impede fair competition. The Guidelines are intended to strengthen the enforcement of the Anti-Monopoly Law in such areas.

8. Application of the Anti-Monopoly Law on International Transactions The Anti-Monopoly Law prohibits entrepreneurs from entering into an international agreement or contract which contains elements of unreasonable restraint on trade or unfair trade practice (Art. 6). The FTC is empowered to order entrepreneurs to rescind such agreements or contracts. Entrepreneurs who entered into an international agreement or contract within the category designated by the FTC were in the past required to file a report with the FTC and submit a copy of the agreement or contract. This requirement was dropped altogether in 1997. The Anti-Monopoly Law applies to acts which affect competition in export from or import into Japan.⁷² In one case, four companies which dominate the synthetic ash market agreed on joint importation and a quota system in order to prevent importation of inexpensive natural soda ash from the United States. All natural soda was imported via four trading houses. A joint storage facility was built. This was the sole storage facility of this kind in Japan and was used solely for soda imported for the use of the four companies. The FTC found that the four companies, by determining the amount of importation, allocation of imported products, and the route of importation, substantially restrained competition in the importation of soda ash into Japan.⁷³ On the other hand, this provision does not mean that the Anti-Monopoly Law can be applied extra-territorially. Japanese law acknowledges extra-territorial application only when there is an explicit provision: there is no such provision in this Law. However, there is an influential view that Article 6 has a similar effect to extraterritorial application. Furthermore, if an international agreement or contract involving unfair restraint of trade or unfair trade practices concluded abroad has an effect on the Japanese market, the Japanese Anti-Monopoly Law ⁷² S. Negishi and M. Funada, Dokusen-kinshi-hő Gaisetsu (Outline of the Anti-Monopoly Law), 3rd edn (Tokyo 2006), pp. 160–162. ⁷³ Recommendation Decision of the FTC, 31 March 1983, Shinketsushū 29–104 (Soda Ash Import Cartel case).

356

Business-related Laws

can be applied to such acts insofar as the foreign party has some presence in Japan where documents can be served.⁷⁴ In 1972 the FTC took measures against six international cartels, five involving synthetic textiles. This was preceded by an action of the German Cartel Office which imposed administrative fines on the German companies which took part in the cartel. In one of those cases, three major Japanese producers of rayon (who together controlled an almost 100 per cent share of the domestic market) reached an agreement with the then West German companies not to export goods to the other’s ‘traditional markets’ and mutually limited the amount of exports to their ‘common markets’, i.e. markets other than the respective traditional market and the United States. They also agreed to set minimum sales prices for each country in the ‘common markets’. Meetings took place in Japan and Europe. The FTC found that this agreement substantially restricted competition in the export of rayon by restricting the territory, volume of export, and price in the ‘common market’. On the ground of Article 6, the FTC ordered the companies to rescind the agreement.⁷⁵ It should be noted that the FTC decision did not address the foreign parties, but the Japanese parties only. Some commentators are of the view that if these German companies had some presence in Japan, they too should be made parties to the proceedings. Another problem in this decision is that the market which has been affected by the cartel was not specified. The FTC referred to the ‘common market’ only. However, if the affected market was that of a foreign country, the Japanese Anti-Monopoly Law may not have been applied. Perhaps the FTC should have focused on the effect of this cartel on the importation of rayon into Japan.⁷⁶ In the above case Japanese companies had formed a cartel under the Law on Export-Import Transactions.⁷⁷ This Law provides an exemption to the AntiMonopoly Law: it allows exporters to operate a cartel after notifying the Minister of Trade and Industry. The Minister may order a change, or ban the agreement if it is against a treaty or harms the interests of entrepreneurs at the place of consignment and seriously harms the credibility of Japanese exporters. The FTC took the view that if the export cartel based on this Law is in reality an international cartel, the export cartel does not qualify for exemption and the entire agreement, including the international one, is illegal.⁷⁸ In another of the five cases exposed in 1972, a German trade association required five Japanese exporters of acrylic thread to cap the export to Germany. ⁷⁴ A. Shimizu in Atsuya et al. (eds), supra, pp. 245–246. ⁷⁵ Recommendation Decision of the FTC, 27 December 1972, Shinketsushu 19–124 (International Rayon Cartel case). ⁷⁶ M. Matsushita in Dokusen-kinshi-hō Hanrei Hyakusen (One Hundred Selected Cases on AntiMonopoly Law) 4th edn, special issue of Jurist (Tokyo) p. 75. ⁷⁷ Law No. 299, 1952. ⁷⁸ Matsushita, supra.

Anti-Monopoly Law

357

Japanese exporters got together and agreed on the capping. In this case the FTC did not refer to the German association in the decision. Instead, it ruled that the five companies restrained competition in the area of export of acrylic thread by agreeing on the maximum volume of export to Germany.⁷⁹ This was questionable since there was no formal agreement between the German association and Japanese companies which qualified as a cartel. In addition, whether the agreement reached by the five companies was a cartel in a strict sense or not was questionable, since there seemed to be no mutual obligation. In recent years in Europe and the United States, the participation of Japanese companies in an international cartel has been exposed. For example, in the celebrated EU Vitamin Cartel case, several Japanese companies were involved. In 2005, the Japanese FTC exposed an international cartel involving Japanese and European chemical companies, similar to the one exposed in 1975. In 2007, the FTC issued a cease and desist order against Japanese, Italian, French, and British companies involving an agreement regarding the supply of marine hose pipe to a Japanese user. These companies had agreed to let the company that has the main office in the given country be the successful bidder for the supply of the product to the users in that country. They were found to have substantially restrained competition in the Japanese market of marine hose pipe.⁸⁰ In relation to this cartel, the US Justice Department arrested eight company executives, including one from a Japanese company.⁸¹ There have been several cases concerning international agreements and contracts which comprise unfair trade practice. In one case, a Danish pharmaceutical company Novo Industry concluded an agreement with the Amano Pharmaceutical Company in Japan to supply biotechnology products. The agreement contained provisions which prohibited Amano from selling or producing products similar to the Novo product for three years after the expiration of the agreement and from handling competing products in Japan and other Asian markets, and additionally included a provision on resale price maintenance. After its expiration, Amano belatedly notified this agreement to the FTC which found the restrictions to be an unfair trade practice. The FTC recommended Amano to annul the relevant provisions.⁸² In this case Novo was not made a party to the FTC proceedings. Novo therefore appealed against the FTC decision to the Tokyo High Court and subsequently to the Supreme Court, arguing that since the outcome of the proceedings affected their rights they should have been granted standing in the FTC proceedings. The claim was rejected by both the High Court and the Supreme Court.⁸³ In a way ⁷⁹ Recommendation Decision of the FTC, 27 December 1972, Shinketsushū 19–140. ⁸⁰ Annual Report of the FTC, 2007 . ⁸¹ . ⁸² Recommendation Decision of the FTC, 12 January 1970, Shinketsushū 16–134 (Amano Pharmaceutical case). ⁸³ Judgment of the Supreme Court, 28 November 1975, Minshū 29-10-1592.

Business-related Laws

358

Article 6 is useful, since it enables the FTC to take measures without reaching the foreign party which is beyond the jurisdiction. Several years later, in another case involving a Japanese company and a US company, the US party imposed onerous terms, including a prohibition on handling competing products and an extensive obligation to disclose improved technology. In this case the US company was made a party to FTC proceedings.⁸⁴

9. Procedures and Sanctions (1) An overview The Anti-Monopoly Law empowers the FTC to take measures such as issuing cease and desist orders and in certain categories of cases, orders to pay surcharges. In addition criminal sanctions are available. The FTC is empowered to order entrepreneurs to cease and desist breaches of the Anti-Monopoly Law and to take necessary measures to eliminate such violations (Arts 7, 20, and 49). Such measures include partial transfers of business operations, transfers of shares, termination of merger plans, deletion of clauses from contracts, rescission of agreements, and dissolution of cartels. In urgent Table 14.2 Outcomes of cases examined by the Fair Trade Commission

Cases disposed of Recommendation / cease and desist order Surcharge order w/o recommendation / cease and desist order Caution/warning Proceedings terminated Surcharge orders

Number of cases Amount of surcharge (ten thousand yen)

Criminal charges

2003

2004

2005

2006

2007

161

139

107

159

160

25

35

19

12

22

0

0

0

1

2

88 10

69 10

54 16

83 35

98 20

24

26

20

13

20

1,115,029 1,887,014 926,367

1,129,686

386,712 1

0

2

2

1

Source: FTC, Heisei 19-nen Nenji-Hōkoku (Annual Report of the FTC 2007), .

⁸⁴ Decision of the FTC to terminate the proceedings, 26 October 1981, Shinketsushū 28–79.

Anti-Monopoly Law

359

cases, the FTC may apply to the Tokyo High Court for an emergency injunction (Art. 70-13). Before 1990, the FTC resorted mostly to informal measures such as warnings, but in recent years it has come to rely increasingly on formal measures.

(2) The procedure Any person who considers that there was a violation of the Anti-Monopoly Law may report it to the FTC and request that appropriate action be taken. The FTC’s Investigation Department is required to conduct an investigation on the receipt of such a report. The FTC may also initiate investigation ex officio. In the course of an investigation, the FTC may require persons involved to appear for questioning, invite experts to give evidence, and request the submission of accounting and other documents. The FTC may enter any place of business or other premises in order to investigate the state of business and assets, and inspect accounting records (Art. 47, para. 1). Those who do not comply with a request of the FTC are subject to a maximum of one year’s imprisonment or fines up to a maximum of 3,000,000 yen (Art. 94). If a violation is found as a result of an investigation, the FTC may issue a cease and desist order and surcharge order, but before issuing such orders, must give an opportunity to the entities and individuals to whom these orders are to be addressed to give an opinion and present evidence (Art. 49, para. 5). These entities and individuals may appoint legal counsel (ibid., para. 49). Following this procedure, the FTC issues a cease and desist order, and if applicable, a surcharge payment order. These orders can be contested in a hearing procedure conducted by the FTC by filing a complaint within sixty days of receiving these orders (ibid., para. 6 and Art. 50, para. 4). The hearing procedure was substantially revamped as a result of the 2005 amendment. Previously, a hearing procedure preceded the cease and desist order, but now, the hearing is characterised as a review of the order which has already been issued. Hearings can be conducted either by the Commission itself or by administrative law judges (shinpan-kan). Most cases are handled by administrative law judges (normally by three of them). The hearing is conducted on an adversarial basis in public unless otherwise required by public interest or the necessity of protecting business secrets (Art. 61, para. 1). An official from the investigation department is entrusted with the task of pursuing the charge brought against the respondent. The respondent has a right to a defence including the right to be represented by legal counsel (attorney) (Art. 59). There is a set of procedural rules for the hearing (shinpan kisoku) adopted by the FTC. Administrative judges do not have the power to render a final decision. When the hearing is completed, the hearing commissioner drafts a decision, and sends it to the Commission and a copy to the respondent and the investigation officer.

360

Business-related Laws

They are entitled to file an objection to the draft. The respondent is also entitled to present their views direct to the FTC (Art. 63). The chairman and the commissioners of the FTC jointly adopt the decision (Art. 69). The FTC may dismiss the claim of the respondent, or, if it finds the claim valid, it may rescind all or part of the original order, or alter it (Art. 66, para. 3).

(3) Surcharges The system of surcharges was introduced in 1977 for cartels affecting prices in order to ensure the effectiveness of the prohibition on cartels by making those involved in cartels surrender the profit from the cartel. This system has been expanded and reinforced over the years. As a result of the 2005 amendments, the scope of acts subject to the payment of surcharges was expanded. In addition to cartels involving price (including cartels regarding the purchase of goods), substantial restraints on the volume of supply or purchase, market share, or the counter-party of trade in goods or services that affect the price, are subject to a surcharge payment. The same applies to private monopolisation that controls another entity’s business activities (Art. 7-2, paras 1 and 2 and Art. 8-3). The amount of surcharge has been increased by successive amendments to the Anti-Monopoly Law. It is calculated on the basis of a fixed percentage of the amount of turnover or purchase during the period in which the cartel or private monopolisation was in operation. The maximum period is three years. The percentage differs, depending on whether the company in question is a large company or a small or medium-sized company, and also on whether it operates in wholesale, retail, or other areas. For large companies in areas other than retail or wholesale, the percentage is set at 10 per cent (for retailers, 3 per cent, and for wholesalers, 2 per cent). If the company terminated the cartel more than one month before the inspection for criminal prosecution or before notice of the cease and desist order, the amount of surcharge may be reduced by up to 20 per cent. On the other hand, in cartels and private monopolisation, if the company has been repeatedly in breach within the last 10 years, the amount of surcharge can be raised by 50 per cent. The leniency system for cartels was also introduced in Japan in 2005. Decisions of the FTC are subject to judicial review. The Tokyo High Court has exclusive jurisdiction over such cases. When the court reviews a decision of the FTC, if it finds that the facts as determined by the Commission are based on substantial evidence, then it is bound by these facts (Art. 80, para. 1). The court merely reviews the case on points of law.

(4) Criminal sanctions Criminal penalties are available, inter alia, in private monopolisation and for unfair restraints on trade, but not for unfair trade practices. The maximum

Anti-Monopoly Law

361

penalty is three years’ imprisonment or a five million yen fine (Art. 89). If a representative of a juridical person, an agent, employee etc. of a physical or juridical person has effected private monopolisation or unfair restraint of trade in the course of business or in relation to its assets, this physical or juridical person has a maximum fine of 500 million yen imposed upon them as vicarious liability (Art. 95). If a representative of a company failed to take preventive measures knowing that a violation of the Anti-Monopoly Law was planned, or to take corrective measures after he found that such a violation had taken place, this representative may also be fined (Art. 95-2). For juridical persons, if they are ordered to pay surcharges, half the amount of fines imposed may be deducted from the amount of surcharge. This is in response to the criticism by companies that the combined system of a fine and surcharges constitutes double jeopardy. While earlier, the FTC seldom resorted to criminal penalties, since 1990 it has become more active in resorting to criminal sanctions. The position of the FTC is that if either (i) the act is in serious violation of the Anti-Monopoly Law and has a widespread impact on society as a whole; or (ii) the act was committed by firms or industries that have repeatedly been in breach of law, or have failed to take appropriate measures to eliminate such acts, and where administrative sanctions are regarded as insufficient to meet the goals of the Anti-Monopoly Law, then criminal sanctions will be imposed.⁸⁵ This does not apply when the leniency system is applicable. The FTC does not have the power of prosecution. Instead, it has an exclusive power to file a complaint with the Public Prosecutor’s Office (Art. 96). Designated officers of the FTC are now given the power of criminal investigation (Arts 101 and 102).

(5) Remedies available to individuals The Law also provides that an entrepreneur who was involved in private monopolisation, unreasonable restraint of trade, or unfair trade practice is liable for damages. For instance, where consumers have purchased goods or services at a high price maintained by a cartel, they are entitled to claim damages. This is an absolute liability—entrepreneurs are not exempted from liability by the absence of intention or negligence (Art. 25). This provision in the Anti-Monopoly Law is considered to be a special arrangement in relation to tort law, which is based on the fault principle. Claims on the basis of this provision can only be made after a decision has been rendered by the FTC as to the legality of the entrepreneur’s actions and has taken effect. The Tokyo High Court has exclusive jurisdiction over such claims for damages.

⁸⁵ FTC, The Policy regarding Criminal Accusation of Off ences against the Anti-Monopoly Law, 1990, as amended.

362

Business-related Laws

Unlike in the United States, where a body of case law developed out of litigation brought by citizens, in Japan litigation for damages involving breach of the Anti-Monopoly Law has been rare. There are various reasons for this. First, such claims presuppose a decision of the FTC in force, confirming a violation of the Anti-Monopoly Law. However, since the FTC relied more upon informal measures in the past, a decision was not necessarily available. Secondly, it is always difficult to prove causation between the violation of the Anti-Monopoly Law and the loss. The scope of loss is also often difficult to prove. Thirdly, information and evidence concerning the violation are usually not in the hands of the plaintiff. In a celebrated case, a group of consumers filed a claim for damages for the loss caused by a cartel of petroleum companies during the oil crisis on the basis of general tort liability. While the lower courts upheld the claim, the Supreme Court reversed the judgment on the ground that there was insufficient proof of the causal links between the cartel and the increase in prices.⁸⁶ The Supreme Court also dismissed the claim in a similar case where the plaintiffs resorted to Article 25 of the Anti-Monopoly Law.⁸⁷ There was a public outcry against these judgments, and the FTC started reviewing the system in order to make litigation easier. This issue was also raised in the Structural Impediments Initiatives Talks. There was a proposal by the United States to introduce punitive damages, but this was turned down as being alien to the Japanese criminal and civil law system. As a result of the amendment of 2000, remedies available to individuals were expanded and a system of injunctions was introduced. Concerning civil remedies, the scope of the application of absolute liability was expanded to international agreements in breach of the Anti-Monopoly Law. If a cease and desist order or a surcharge payment order is issued, it is possible to proceed with a court action for damages. There have been cases recently where regional governments took an action against participants of bid-rigging, subrogating the local government. In some cases, the court acknowledged the claim of the plaintiffs.⁸⁸ A system of injunctions was made available to those whose interests had been harmed or are likely to be harmed by unfair trade practices and who suffer substantial damage or are likely to suffer such damage (Art. 24). However, no injunction has so far been granted. ⁸⁶ Judgment of the Supreme Court, 8 December 1989, Minshū 43-11-1259 (Tsuruoka Paraffin Oil case). ⁸⁷ Judgment of the Supreme Court, 2 July 1987, Minsū vol. 41, No. 5, p. 785. ⁸⁸ .

15 Intellectual Property Law 1. ‘An Intellectual Property Based Nation’ In 2002, concerned by the declining international competitiveness of the economy, the government set up the Intellectual Property Strategic Forum. The intention was to transform Japan into an ‘intellectual property based nation’ in order to reinvigorate the economy and regain international competitiveness. Following the Programme for the Intellectual Property Strategy, a law which set the basic strategy—the Basic Law on Intellectual Property—was enacted in the same year. The Law, inter alia, listed as policy goals expedition of the application procedure for patents; facilitation of intellectual property related litigation with closer involvement of experts; and strengthening the protection of intellectual property rights against infringements. In 2003, the first annual Intellectual Property Promotion Programme was adopted.¹ Since then, most laws in the area of intellectual property were amended in line with the proposals in this Programme. Naturally, this policy of the government facilitated the reform, but the real driving force behind it was the rapid development and spread of information technology, e.g. the Internet. Probably the first and foremost achievement since then has been the creation of the Intellectual High Court in 2005 (see Chapter 3). The time needed for settling disputes involving intellectual property has been substantially reduced. The length of time needed for the procedure contesting the decision of the Patent Office in court has fallen from an average of 21.4 months in 1994 to 9.4 months in 2005.² The court has quickly established its authority in this field. Secondly, the examination of patent application has been streamlined and expedited. The previous notoriously slow patent procedure has become much quicker.

¹ . See also N. Nakayama, ‘Chitekizaisan-Seido Kaikaku no Keii to Kadai (The Process of the Reform of the Intellectual Property System and the Future Tasks)’, Jurist, No. 1326, pp. 2–4. ² T. Tsukahara, ‘Chizai-Kōsai niokeru Soshō-Unei no Jōkyō to Chizai Kōsai niokeru Senmonka no Katuyō no Jissai (Actual State of Process Management and the Use of Experts in the Intellectual Property High Court)’, Jurist No. 1326, p. 10.

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

364

Business-related Laws

Thirdly, criminal penalties for infringement of intellectual property rights were strengthened by the amendment to the Copyright Law, the Patent Law, the Law against Unfair Competition, and the Seeds and Plants Law.³ Fourthly, in most of the laws throughout the area of intellectual property, presumption of the amount of loss is now available. The court is empowered to order the submission of documents required for proving infringement and the calculation of loss.⁴ Finally, also in most laws in this area, a system of orders for the protection of confidentiality has been introduced. If a trade secret is disclosed in an infringement action, the party may ask the court to order the other party not to use this trade secret for purposes other than the pursuit of litigation, or to disclose it to a third party (e.g. Patent Law, Art. 105-4).

2. Patent Law5 (1) An overview An embryonic form of the patent system emerged in Japan in 1871 in the form of the Summary Rules of Monopoly. These were replaced by the Patent Monopoly Ordinance of 1885, influenced by French and US law. A new Patent Law was enacted in 1899, together with the Design Law and the Trade Mark Law, in order to pave the way for accession to the Paris Convention on the Protection of Industrial Property. Japan became a signatory to the Convention in the same year. The 1899 Patent Law was superseded by a new Law in 1922. This laid the basis of the present patent system, and marked a shift away from the previous system where priority of invention was determined by the date of invention. The new Law introduced the ‘first to file’ system. The present Patent Law was adopted in 1959 together with the Law on Utility Models.⁶ Some provisions of the Patent Law apply with necessary modifications to utility models. The Patent Law has undergone various amendments since then. The 1970 amendments introduced an early disclosure system and an examination-on-requirement system. In 1975 product patent was recognised and pharmaceutical products came to be covered by the Patent Law. By the 1987 amendments, a multi-item claim system, similar to those of English and French ³ ‘Chitekizaisan Kihon-Hō no Shikō Jōkyō oyobi Kongo no Hōshin ni tsuite (The Implementation of the Basic Law on Intellectual Property and the Future Policies)’, . ⁴ K. Tawara, ‘Chosakuken-Hō no Ichibu o Kaiseisuru Hōritsu (Law on the Partial Amendment of the Copyright Law)’, Jurist, No. 1251, p. 33. ⁵ For an overview of the Japanese Patent Law in English, see H. Kawaguchi, The Essentials of Japanese Patent Law (Alphen aan den Rijn, 2007). ⁶ Laws No. 121 and 123, 1959.

Intellectual Property Law

365

law, was adopted. In 1994 the Law was amended in order to bring it into line with TRIPs (Treaty on Trade Related Aspects of Intellectual Property Rights).⁷ There were further amendments in the 2000s. In 2003, there was a major amendment regarding the procedure for contesting the validity of a patent. Measures to expedite the patent examination procedure was introduced in 2004. In the same year, it was made possible for the application for a utility model to be converted to an application for a patent. Amendment on employees’ invention was also made in that year. Japan ratified the Stockholm Amendments to the Paris Convention in 1975. Japan has also ratified the World Intellectual Property Organisation Treaty, the Patent Co-operation Treaty (hereinafter, the ‘PCT’), and the Strasbourg Treaty on the Classification of Patents.

(2) Patentability Invention is defined by the Patent Law as a highly advanced creation of technical ideas by utilising the law of nature (Art. 2, para. 1). It must be a result of the application of the ‘law of nature’. Therefore mathematical theories, methods of ciphering, and computer programmes are not patentable. Whether it is a ‘highly advanced’ creation or not is relevant when distinguishing a patentable invention from an invention suitable for protection as a utility model. There are three basic requirements for an invention to be patentable: novelty, inventive step, and industrial applicability (Art. 29). In addition, it should not be an invention identical to an earlier application (Art. 39). The Law does not define novelty. Instead, it lists grounds by which novelty is lost (Art. 29. para. 1). Thus, if the invention was publicly known or implemented in Japan, published in Japan or abroad, or had become available to the public via telecommunication channels before the application, it is not patentable. In one case, the invention was disclosed in the specification for a utility model in Germany. Copies of the specification were available on request. The Supreme Court denied the novelty of the invention.⁸ There are some exceptions to this provision. For example, if the inventor tests the invention and discloses it in a publication or at a research conference, the invention is still patentable provided that the patent application is filed within six months from the date of disclosure (Art. 30, para. 1). Evident abuse is also an exception. Novelty is not lost where the invention was exhibited in an international exhibition organised in a member country of WTO or the Paris Convention (ibid., para. 3). Concerning inventive steps, the Law provides that if a person with standard knowledge in the given area of technology (a person skilled in the art) before the ⁷ Protocol C, World Trade Organisation Treaty. ⁸ Judgment of the Supreme Court, 4 July 1980, Minshū 34-5-570.

366

Business-related Laws

application could have easily made such an invention, it is not patentable (Art. 29, para. 2). A mere aggregation of known technologies, easily accomplished conversion of the existing technology, a mere replacement of a known technology, etc. are not considered to have made an inventive step.⁹ On the other hand, an inventive step may be acknowledged in an invention on the use of a known technology. A well-known example is the insecticide DDT, which had previously been used for a different purpose. Th is kind of invention is said to be common in the pharmaceutical industry. The third requirement of patentability is industrial applicability. Methods of curing a disease or making a diagnosis fail to meet this requirement and are not patentable. However, inventions concerning a gene or cell line may have industrial applicability. Business method invention is also patentable as software related patents in Japan, but in a reduced manner as compared to the United States.¹⁰ An invention which is likely to harm public order, good morals, or public health is not patentable (Art. 32). Chemical substances, food, and medicine became patentable in 1975. The invention of a substance produced by nuclear conversion was made patentable in 1994. Patents subsist for twenty years from the date of application (Art. 67, para. 1).

(3) Patent application procedure¹¹ Japan has adopted a system in which the first applicant, not the first inventor, is granted a patent in cases where there are competing inventions (Art. 39, para. 1). If another person made the same invention independently and is exploiting the invention as a business or preparing to do so, he may continue exploiting the invention on a non-exclusive basis even after a patent has been granted to the first applicant (Art. 79). At present, only a limited number of countries including the United States maintain the first-to-invent system. Any person who has made an invention is entitled to apply for a patent. Foreign individuals who do not have an address or a place of sojourn in Japan are also entitled to patents and other related rights, provided that their home country treats Japanese nationals without discrimination, has a reciprocal arrangement with the home country of these persons, or international treaties to such an effect exist (Art. 25). With the establishment of the WTO, almost all countries meet this requirement. The Patent Office introduced an online application system for patents and utility models in 1990. From 2000, applications for design rights, trade marks, 9 Judgment of the Tokyo High Court, 17 October 1967, Gyōsai-Reishū 18-10-1307. ¹⁰ J. Sfekas, ‘Controlling Business Method Patents: How the Japanese Standard for Patenting Software Could Bring Reasonable Limitations to Business Method Patents in the United States’, Pacific Rim Law and Policy Journal, January 2007, p. 203ff. ¹¹ For the patent procedure in English, see .

Intellectual Property Law

367

and the national part of the PCT application can be made online. As of 2001, 97 per cent of patent and utility model applications are made online.¹² The applicant may claim priority based upon Article 4 of the Paris Convention. If a person applies for a patent in a second country within 12 months of his application in the first country, he retains priority. The Director General of the Patent Office must be informed of the date and country of the first application in writing simultaneously with the patent application in Japan (Art. 43, para. 1). The applicant is also obliged to submit a copy of the priority document within sixteen months (Art. 43, para. 2). Additionally, applications are granted priority if they are made by the following: Japanese nationals or nationals of member countries of the Paris Convention, made in a member country of the WTO; and nationals of WTO member countries in a member country of either the WTO or Paris Convention (Art. 43-2, para.1). By virtue of the PCT, residents and nationals of member countries are entitled to international patent application. The application has the same effect as an application within the designated countries. Thus, if there is an international application for a patent in the UK, which is a signatory to the PCT, and Japan is one of the countries designated by the applicant, the date of international application is regarded also as the date of application in Japan (Art. 184–3, para. 1). This also applies to utility models. Patent Offices of countries concerned may not proceed with examination for twenty months after this date, while the matter proceeds at international level. Patent applications are filed with the Director General of the Patent Office. The Patent Office is an agency attached to the Ministry of Economy, Trade and Industry (hereinafter, the ‘METI’). Its activities cover the examination of patent applications and the registration of utility models, industrial designs, and trade marks. Application can be filed via patent attorneys (benrishi), but this is not mandatory. However, individuals who do not have an address or a place of sojourn, and juridical persons which have no office in Japan, must apply via an agent who is either domiciled or resident in Japan (Art. 8, para. 1). The application must be accompanied by a specification, drawings, and a summary (Art. 36, para. 2). Previously, an application was needed for each invention. The scope of the claim used to be narrow compared with that of other industrialised countries. In order to join the PCT, a multiple claims system was introduced in 1975 and expanded in 1987 (Art. 36, paras 4 and 6 and Art. 37). Application in a foreign language is now possible. Previously, when foreign applicants applied for patents overseas in a foreign language or claimed priority in Japan under the Paris Convention, they had to translate the documentation into Japanese within a fairly short period of time. It was not possible to correct translation errors, and in some cases priority was lost. This was an issue ¹² .

368

Business-related Laws

in the US–Japan SII Talks in the early 1990s. TRIPs also require the adoption of patent application in the language of the home country. The 1994 amendment to the Patent Law has made it possible to apply in foreign languages designated by the Ordinance of METI (Art. 36-2). At present, only applications in English are possible, but in the future applications in other languages will be permitted. The applicant has to submit a Japanese translation of the documents within two months. Errors in translation can now be corrected (Art. 126, para. 1). After applications are made they are disclosed to the public. Previously, applications were disclosed only when it was confi rmed that there was no ground for refusal to grant a patent. However, since it takes time to reach that stage, it was considered appropriate to disclose the application earlier. Without knowing other persons’ applications there might be overlap of research and investment. Under the current system, after one and a half years from the date of application, the Director General of the Patent Office publishes the specification and the drawings in the Patent Gazette (Art. 65-2, paras 1 and 2). If someone exploits the invention as a business on the basis of information published in the Patent Gazette while the patent application is pending, the applicant is entitled to compensation, provided that he has issued a warning (Art. 65-3, para. 1). Until 1970 all patent applications were fully examined by the Patent Office. In fact, not all applicants want full examination. For example, there are those who do not want to obtain a patent, although their inventions are patentable. They simply apply in order to prevent others from obtaining a patent on the same invention. Some people are not certain whether the invention is patentable, but just to make sure that others do not obtain a patent, they apply for a patent. As the number of applications steadily increased it was thought better to reverse the principle and the exception. Under the current system, only applications for which the applicant or any other person requests examination are examined (Art. 48-2). Thus, any person may demand examination within three years of the patent application. An examination fee is payable. If there is no request for examination within this period the patent application is deemed to be withdrawn (Art. 48-3, para. 4). Patent applications are examined by a patent examiner (shinsakan). Examiners are guaranteed independence in the same way as administrative judges (shinpankan) of the Patent Office. They can be excluded on grounds provided by law, but they cannot be challenged by the applicant (Arts 139 and 48). Applications are normally examined by a single examiner without a hearing. The Patent Law lists grounds for refusal to grant a patent (Art. 49). These include instances where the invention does not meet the requirements of patentability; where the invention is identical to another invention which has been filed earlier and was disclosed before examination or published upon examination; or when another person filed an application earlier. When the applicant is not the inventor and has not been assigned the right to apply by the inventor, the

Intellectual Property Law

369

application will also be turned down. If the examiner finds grounds for refusal, the applicant is informed of the decision and the reason for refusal. When the examiner comes to the conclusion that a patent should be granted, he renders a decision in writing. Upon payment of the patent fee, a patent is granted by registration (Arts 51 and 66, para. 2). A refusal by the examiner to grant a patent can be appealed within thirty days (Art. 121). The appeal is considered by the administrative judge, whose decision is subject to judicial review. Until the 1994 amendment, there was a system enabling objection before granting patents. If there was no ground for refusal, the application was published in the Patent Gazette. Documents were available for public inspection at the Patent Office for two months. Any person was entitled to file an objection to the application published in the Gazette within three months of publication. At the same time, the applicant was given an exclusive right to exploit the invention as a business. This right was extinguished retrospectively if eventually a patent was not granted. In practice, only 2 per cent of publicised patent applications were rejected by this procedure. In the light of criticisms of the delay in processing patent applications, it was considered to be inappropriate to wait three months before the granting patents. Therefore, following the trade negotiations with the United States, this system was replaced by a system of objection after the grant of the patent. The validity of a patent can be contested by filing a complaint with the Patent Office in cases where a patent was granted to an application for which a patent should not have been granted (Art. 123). The complaint is examined by administrative judges. There is no time-limit for claiming invalidity. The validity of a patent can only be contested via this procedure. Defendants in an infringement action cannot claim invalidity in court, unless the patent is invalidated by the Patent Office. The decision of the Patent Office is subject to appeal to the Intellectual Property High Court.

(4) Employee’s invention An invention which by its nature falls within the scope of business of the employer is an employee’s invention if the acts which led to the invention belong to the present or past work under this employer. If the employee is granted a patent for such an invention, the employer is entitled to a non-exclusive licence to exploit this invention. An employee, who, by contract or office rules, assigns the right to obtain a patent, or the patent itself, or grants a non-exclusive licence to the employer, is entitled to a reasonable payment (Art. 35, paras 1 and 3). In 2003, the Supreme Court ruled on the payment by the employer for the employee’s invention. In this case, Olympus Optical had a regulation on employees’ inventions by which the employer was entitled to have the right to

Business-related Laws

370

apply for a patent from the employee, and in return, was to pay a reward to the employee. In this case, the amount paid by the company was 210,000 yen. The employee brought an action against the company, arguing that his contribution was worth at least 900 million yen. The Supreme Court ruled that if the reward paid by the company in accordance with the company’s rules is short of the reasonable amount as provided by the Patent Law, the employee is entitled to the difference.¹³ In another case, an ex-employee was granted 20 billion yen at the district court, but the parties settled at 900 million yen in the High Court. There was a concern among the companies of the substantial amount of rewards claimed by employees. The Patent Law was subsequently amended in order to provide for the procedure of determining the ‘reasonable amount’ and to expand the list of elements which should be taken into account in the determination.

(5) Infringement A patent confers rights to prevent third parties who are not authorised by the patent holder from exploiting the patent which includes producing; using; offering to sell; selling or importing for the purpose of production, use, offering for sale, or sale (Art. 2, para. 3). A patent holder as well as those who have an exclusive licence are protected against infringements. Infringements also include indirect infringements (deemed infringements). Thus, the production, assignment, importation, or offer of assignment or importation of an item that is (i) solely used for the production of an item that comprises infringement and indispensable for the solution of the task of the invention, (ii) done as a business, and (iii) knowing that the invention is patented and the item is to be used for the exploitation of the invention are infringements (Art. 101, para. 2). Those who infringed a patent or an exclusive licence of another person are presumed to have been at fault (Art. 103). Infringement litigation used to be time-consuming and costly. It was sometimes difficult to demarcate the boundary of a particular invention, and a ‘grey zone’ was left. Therefore, people often settled out of court.¹⁴ However, with the reform of the dispute settlement procedure in the 2000s, this may change. An injunction is available if a patent or an exclusive licence is infringed, or there is a likelihood of infringement (Art. 100, para. 1). Fault is not a prerequisite for an injunction. Demands can be made to destroy objects which constituted infringement, to demolish the equipment used for the infringement, and to take other measures to prevent infringement (ibid., para. 2). Damages are claimed on the basis of general tort law (Civil Code, Art. 709). Fault on the part of the infringer is presumed by the Patent Law (Art. 103). The amount of loss is also presumed. In cases where the infringer has sold products ¹³ Judgment of the Supreme Court, 22 April 2003, Minshū 57-4-477. ¹⁴ Y. Hashimoto, Tokkyo-hō (Patent Law), 4th edn (Tokyo 1994) p. 271.

Intellectual Property Law

371

which constitute infringement, the amount of loss is presumed to be the number of products sold multiplied by the profit which the patent holder or a licensee could have made per unit. This amount, however, should not exceed the amount compatible with their production capacity. In other cases, the profit which the infringer has made is presumed to be the loss of the patent holder or licensee (Art. 102, paras 1 and 2). Patentees and licensees may also claim damages equivalent to the amount that they would normally have received for the exploitation of the invention if the infringer made a profit (ibid., para. 2). If, by infringement, the reputation (business goodwill) of the patentee or licensee was harmed, the court may order the infringer to take necessary measures to restore their reputation (Art. 106). This is normally done by publishing a statement of apology in a newspaper. Infringement is subject to criminal penalties (Art. 196). Penalties have been strengthened over the years. The maximum penalty is ten years’ imprisonment and/or a fine of 10 million yen (Art. 196). The Patent Law also provides for vicarious liability. If a representative, agent, or employee of a juridical person infringes a patent or an exclusive licence in the course of the business, the juridical person is subject to a maximum fine of 300 million yen (Art. 201).

3. Copyright Law15 (1) An overview The first Copyright Law in Japan was enacted in 1899, when Japan was about to sign the Berne Convention for the Protection of Literary and Artistic Works. Japan signed the Convention in 1899, and since then has ratified the Brussels Act and Paris Act of the Berne Convention. Under the 1899 Law, copyright subsisted for thirty years after the death of the author. No formality was required for the copyright to take effect. The 1899 law was replaced by the present Copyright Law in 1970.¹⁶ The term of subsistence was extended to fifty years. Furthermore, the moral rights of the author were expanded and neighbouring rights came under the protection of the Copyright Law. The Law has undergone various amendments. Major amendments took place in 1985 and 1986, when copyright protection was extended to computer programmes and databases.¹⁷ In the 2000s, the Copyright Law has gone through various amendments. In 2002, moral rights for performers were introduced. In 2003, the period of subsistence for cinematographic works was extended to seventy years and ¹⁵ For an overview in English, see P. Ganea et al. (eds), Japanese Copyright Law (The Hague, 2005). ¹⁶ Law No. 48, 1970. ¹⁷ Ganea et al. (eds), supra, pp. 2–18.

372

Business-related Laws

the judicial remedy for infringement was expanded. In 2006, penalties for infringement were further strengthened. In addition to the Berne Convention, Japan ratified the Universal Copyright Convention in 1956. Other international treaties to which Japan is a signatory include the Rome Convention on the Protection of Performers, Producers of Phonograms and Broadcasting Organisations (1989) and the Geneva Convention on the Protection of Phonogram Producers from Unlicensed Copying (1978). Japan has yet to sign the Vienna Treaty on the Protection of Typeface and the Brussels Treaty on Satellite Broadcasting.

(2) The scope of copyright protection Works which are entitled to copyright protection are defined by the Law as creative expression of thoughts or sentiments in the literary, scientific, artistic, or musical domain (Art. 2, para. 1). This includes literary and musical works, choreographic and pantomimic works, artistic works and works of applied art, architectural works, maps and drawings, cinematographic works, and photographs as well as computer programmes (Art. 10, para. 1). However, copyright protection does not extend to programming languages, rules, or algorithms. Layouts of semi-conductor circuits are separately protected by the Law on the Layout of Semi-Conductor Circuits of 1985.¹⁸ Derivative (secondary) works are protected independently of the original work, but this should not affect the protection of the original work (Art. 11). A derivative work is defined as a work created by translating, arranging musically, modifying, dramatising, cinematising, or otherwise adapting an existing work (Art. 2, para. 1, subpara. 11). Edited works are also protected, insofar as the selection or the arrangement of materials is original (Art. 12, para. 1). Databases are protected provided that the selection or systematic organisation of the information is original. This does not affect the copyright over individual works which comprise the database (Art. 12-2).

(3) The protection of computer programmes The means of protection for computer programmes has been a focus of debate since the 1970s. At one stage, the then Ministry of International Trade and Industry considered enacting a special sui generis law for the protection of computer programmes, with a shorter subsistence (fifteen years) and a fairly broad compulsory licence system. However, the United States, Germany, and France chose to protect computer programmes by copyright law. Also Japanese courts acknowledged that computer programmes were ‘creative expressions of an original scientific thought of the author’ and should therefore be protected by ¹⁸ Law No. 43, 1985.

Intellectual Property Law

373

copyright.¹⁹ The Copyright Law was amended in 1985 in order to extend protection to computer programmes. A system of registration of the date of creation of computer programmes was introduced in the same year. However, in recent years there has been a growing awareness that the protection of computer programmes solely by copyright was insufficient. Therefore, in addition to protection by copyright, protection by patent is now available to software-related inventions.²⁰ The Guidelines for the Implementation of Patent Law published by the Patent Office in 1997 acknowledge the patentability of software-related inventions.²¹ Thus, when a software-related invention is expressed in a sequence of processes or operations connected in a time series, or a procedure, the invention can be defined as a process invention by specifying the procedure. In addition, ‘a storage medium having a programme recorded thereon’ or ‘a storage medium having structured data recorded thereon’ can be regarded as a product invention. Since 2002, the Patent Law categorises computer programmes as ‘product inventions’. According to the Patent Law, the Internet transmission of a protected computer programme is regarded as equivalent to the ownership transfer/rental of a tangible product incorporating a patented invention and is subject to the permission of the patent holder (Art. 2, para. 3, subpara. 1).²²

(4) Rights of the author Authors in the context of the Copyright Law include juridical persons and associations without juridical personality. A person identified in the work as an author is presumed to be the author (Art. 14). Works created by an employee in the course of business on the initiative of the employer and published in the name of the employer belong to the latter (Art. 15, para. 1). The author is entitled to a copyright and to moral rights. In the previous Copyright Law, all manner of use of the work was regarded as a ‘copying’. However, under the current Law, ‘copying’ is defined as a reproduction by means of printing, photographing, photocopying, recording etc. in a tangible manner (Art. 2, para. 1, subpara. 15). Reproduction in a non-tangible manner is covered as separate specific rights such as the right to reproduce, perform, broadcast or diff use by cable network, recite, exhibit the work, show a cinematographic work to the public, and distribute copies of the work (Arts 21–26). The author also has a right to present the work to the public by lending copies (Art. 26-2) and to

¹⁹ Decision of the Tokyo District Court, 28 September 1984, Hanta 534-246 (Pacman case). ²⁰ N. Nakayama, Kōgyō-shoyūken-hō (Industrial Property Rights), vol. 1, Tokkyo-hō (Patent Law), 2nd edn (Tokyo, 1998), pp. 155–158. ²¹ . ²² P. Ganea, in Ganea et al. (eds), supra, p. 27.

374

Business-related Laws

translate, musically arrange, modify, dramatise, cinematise, or otherwise adapt the work (Art. 27).²³ The Copyright Law protects the moral rights of the author. Thus, an author has the right to publish the work, the right to be identified as the author, and the right to integrity, i.e. to object to derogatory treatment of the work (Arts 18–20). As regards the right of integrity, the Law provides that authors have the right to maintain the identity of the work and its title, and these should not be altered, cut, or otherwise modified against his will (Art. 20, para. 1). In one case, a parody was produced out of a photograph. The author added a photograph of a huge car tyre to the original photograph, which featured snowy mountains. This was found to be an infringement of the moral rights of the original photographer.²⁴ There was controversy over the authorship of cinematographic works. This covers films as well as videos. The Copyright Law explicitly provides that the author of a film is the person who, by producing, supervising, directing, filming, or art-directing the work, contributed to its overall creation (Art. 16). Usually, the director, producer, cameraman, and art director are co-authors of a film. However, if the film was produced by employees in the course of business on the initiative of a juridical person, this juridical person is the author (Art. 15, para. 1). Authors of the original novel, scenario, music, etc. have copyright, but are not regarded as co-authors of the film itself. The copyright of a film belongs to the person (usually a juridical person) who has taken the initiative and was in charge of producing the film, provided that the author has agreed to take part in the production (Art. 29, para. 1). The copyright holder of a cinematographic work has a right to present the work publicly, to distribute copies, and to offer copies to the public for rent (Arts 26 and 26–2). Copyright takes effect when the work was created. As a rule, copyright subsists for fifty years after the death of the author (Art. 51). If the author is not known or used a pseudonym, the copyright subsists for fifty years after publication. If the author is known despite using a pseudonym, then the general rule applies. Works of a juridical person or any other organisation subsist for fifty years after publication (Art. 53). The same rule applies to cinematographic works and photographs. If these works are not published within fifty years of their creation, copyright ceases to exist (Arts 54 and 55). Works of foreign individuals are also protected under the Copyright Law. Such works which are first published in Japan are protected as a work originating in Japan. If the work was first published abroad, it is not regarded as a work under the Japanese Copyright Law, but by virtue of international treaties it qualifies for protection in Japan. If the work was first published abroad, but was published in Japan within thirty days thereafter, it is treated as a work originating in Japan (Art. 6). ²³ N. Nakayama, Chosakuken-hō (Copyright Law) (Tokyo, 2007), pp. 210–249. ²⁴ Judgment of the Supreme Court, 28 March 1980, Minshū 34-3-244.

Intellectual Property Law

375

(5) The protection of neighbouring rights As regards neighbouring rights, Japan has ratified the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organisations. The present Law covers the rights of performers, producers of phonograms, broadcasting companies, and cable broadcasting companies. Performers have an exclusive right to have their performance recorded or fi xtured, and to broadcast their performance either by wireless or cable (Arts 91 and 92). If a broadcasting organisation (either wireless or cable) uses for broadcasting a phonogram on which the performance was recorded, the performer is entitled to fees for secondary use (Art. 95, para. 1). Performers also have a lending right, i.e. a right to present their performance to the public by lending phonograms (Art. 95–2, para. 1). On the other hand, producers of phonograms have a right to reproduce a phonogram and the right to fees for secondary use of the phonogram in broadcasting (Arts 96 and 97, para. 1). Broadcasting organisations are given a right to reproduce the broadcast by sound or visual recordings and by photographs. They also have a right to rebroadcast, to diff use by cable, and to communicate television broadcasts to the public (Arts 98–100). The duration of the protection of neighbouring rights is fifty years from the year following the date of the performance for performances, the first fi xation of sounds for phonograms, and the broadcast for broadcasts (Art. 101).

(6) Infringement In cases of infringement, injunctive relief is available. The destruction of the object which constituted the infringement, objects produced by the infringement, and machinery and equipment used solely for infringement can also be demanded (Art. 112). Infringement includes importation into Japan, for distribution, of articles made by an act which would have constituted an infringement if it was committed in Japan at the time of importation. Knowingly distributing items produced by an act of infringement, possessing them for distribution, exporting them for business, or possessing them for exportation as a business also constitutes infringement (Art. 113, para. 1). As regards moral rights, after the death of the author relatives are entitled to claim an injunction (Art. 116, para. 1). Damages can be claimed on the basis of general tort law. ‘Deemed infringements’ are also covered as is the case with patents (Art. 113). There is a provision on the presumption of the amount of loss, similar to that in the Patent Law (Art. 114). The Copyright Law provides for twenty-five categories of permissible use of a work without constituting infringement. These include copying for private use, copying of part of the work in libraries, copying at educational institutions, quotations, reproduction in school textbooks, reproduction as examination

376

Business-related Laws

questions, etc. In the last two instances a fee must be paid (Art. 30–Art. 47-4). Published works can be performed, recited, and presented to the public on a nonprofit making basis (Art. 38). The government is currently planning to introduce a general provision on ‘fair use’.²⁵ There is a system of compensation for private recording. Manufacturers of digital equipment such as DAT, MD, CD recorders, CD-R, and CD-RW are mandated to contribute to a fund, which, in turn, pays compensation to copyright holders. Criminal sanctions are also provided for infringement and other violations (Art. 119–Art. 122-2). The maximum penalty for infringement is ten years’ imprisonment or 10 million yen fine (Art. 119). As vicarious liability, juridical persons may be imposed a maximum 300 million yen fine for the act of a representative, an agent, or an employee (Art. 124).

4. Protection of Trade Marks The first Trade Mark Law of Japan was enacted in 1899 together with the Patent Law. It was replaced by the present Trade Mark Law in 1959.²⁶ The Law initially covered only trade marks, while service marks were protected by the Law against Unfair Competition. By the 1991 amendment, service marks also came to be covered by the Trade Mark Law. A further change was introduced in 1994 following TRIPs. Another amendment took place in 1996, when, inter alia, the protection of well-known marks was introduced. The Law against Unjust Competition had already introduced some protection for such marks. The amended Trade Mark Law prohibits the registration of trade marks identical or similar to a well-known mark, regardless of whether the original mark is registered or not.²⁷ In 2005, trade marks for regional organisations were introduced, followed by retail trade marks in 2006. A trade mark is defined by the Law as characters, letters, figures, signs, a combination of these, or a combination of these with colours which are used on merchandise or for services in business (Art. 2, para. 1). The exclusive right to use a trade mark is created by its registration with the Patent Office (Art. 18, para. 3). The duration of the registration is ten years, but it can be renewed. Trade marks which lack distinctiveness cannot be registered. For example, a trade mark which primarily consists of the common name of the goods or services expressed in an ordinary way, or a trade mark which is extremely simple and common, cannot be registered. In addition, marks which resemble the ²⁵ Nikkei, 23 October 2008. ²⁶ Law No. 127, 1959. ²⁷ K. Matsuo, ‘Shōhyō-hō no 1996 nen kaisei (The 1996 Amendments to the Trade Mark Law)’, Jiyū to Seigi 1997, No. 11, pp. 48–51.

Intellectual Property Law

377

well-known mark of an entity such as the Red Cross, or the United Nations, may not be registered (Art. 4). Furthermore, a mark which resembles a trade mark broadly recognised by consumers as representing another entrepreneur’s goods or service is not registrable for use with similar goods or services (Art. 4, subpara. 10). The same applies to trade marks which may mislead as to the quality of the goods or services (ibid., para. 16). In addition, trade marks similar to a trade mark already registered cannot be registered (ibid., subpara. 11). Applications for registration are filed with the Patent Office. The goods or services to which the trade mark is attached must be designated. A document which exhibits the trade mark with an explanation must be submitted with the application. The application is examined by an examiner of the Patent Office and is published in the Patent Gazette if there is no ground for refusal. Any person may file an objection to the trade mark within two months of the publication. If there is no objection or objections turn out to be groundless, the final decision to register the trade mark is rendered. The decision of the examiner is subject to appeal to the Intellectual Property High Court. In addition to direct infringement of trade marks, the Law provides for acts which are deemed to be infringements. These include the use of a trade mark similar to the registered mark on designated goods or services; the use of a registered trade mark or a similar mark on goods or services similar to designated goods or services; the production and importation of items which incorporate a registered trade mark, or a similar mark on them for the purpose of using such a trade mark on designated goods or services or similar goods or services. Furthermore, importation of items solely used for producing things which incorporate a registered trade mark or a similar mark as business constitutes an infringement (Art. 37). It should be noted that the Customs Tariff Law lists as items prohibited from importation, amongst other items: goods that infringe patents, utility model rights, design rights, trade mark rights, and copyright (Art. 21). As is the case with patent and copyright infringement, an injunction is available and damages can be claimed. Arrangements are made concerning ‘deemed infringement’ and the presumption of the amount of loss (Arts 36–38). Criminal sanctions are also provided for (Arts 78–82).

5. Protection of Trade Secrets The basic law which protects trade secrets is the Law against Unfair Competition.²⁸ This Law, which should not be confused with the Anti-Monopoly Law (Competition Law) of 1947, emanates from the Paris Convention. It was originally enacted in 1934 when Japan ratified the Amsterdam Act of the Paris ²⁸ For an overview of this Law in English, see C. Heath, The System of Unfair Competition Prevention in Japan (London, 2001).

378

Business-related Laws

Convention which was designed to control ‘all kinds of acts which are against unfair practice in commerce and industry’. The 1934 Law was replaced by a new Law in 1993. Although the German Unfair Competition Act of 1896 served as a model, provisions on trade secrets contained in the German Act were dropped at the drafting stage. It was only in 1990 that the Law in Japan was amended to provide protection to trade secrets.²⁹ The Law lists various types of acts which comprise unjust competition and are subject to injunction. These include the use of a name, trade name, trade mark, or package, identical or similar to those which are widely recognised amongst consumers as another person’s; the use as one’s own of a name, trade name, trade mark, or package identical or similar to those well-known as another person’s; false statements of origin, and misrepresentations about quality, methods of production, or content of the merchandise (Art. 1, para. 1). By the 1990 amendments infringement of trade secrets was added to this list. The actual scope of protected trade secrets is expected to become clearer with the accumulation of case law. The information must not be known publicly if it is to be protected as a trade secret. This means that the information should not be available to unspecified persons save by unfair means. The information must have an economic value and be treated as a secret by the holder. The holder must have made sufficient efforts to keep the information secret. Therefore, access to the information must have been limited to a certain number of people. Furthermore, the holder must make clear that the information is restricted, for example by designating it as ‘secret’ or ‘restricted’. The Law basically covers two types of unjust competition involving trade secrets. The first is the unauthorised acquisition of trade secrets by unlawful means, and the use or disclosure of trade secrets thus obtained (Art. 2, subpara. 4). If a person acquires, uses, or discloses trade secrets knowing that they had been obtained by such means, or was at serious fault in not knowing it, this is also unlawful competition (ibid., subpara. 5). If a person who has obtained trade secrets by legitimate means later becomes aware of the fact that the secrets had been obtained in an unlawful manner, he may not use or disclose such information. Otherwise, it constitutes unlawful competition (ibid., subpara. 6). The second type of unjust competition involving trade secrets is the use or disclosure, for the purpose of unfair competition or of harming the interests of the original holder of trade secrets, which were disclosed to this person by the original holder (ibid., subpara. 7). Knowingly obtaining, using, or disclosing trade secrets which were disclosed in an unlawful manner, or being at serious fault in not knowing this, also constitutes unjust competition (ibid., subpara. 8). Holders of trade secrets (entrepreneurs) whose interests are, or are likely to be affected, are entitled to seek an injunction. In addition, they may require the ²⁹ Law No. 47, 1993.

Intellectual Property Law

379

destruction of items incorporating trade secrets, as well as end-products and any equipment used for infringement (Art. 3). They are also entitled to damages and other measures to restore their credibility (Arts 4 and 7). In 2003, as part of the drive to strengthen protection of intellectual property, a criminal penalty was introduced for the infringement of trade secrets. Those by deceit or by the infringement of the management of trade secrets such as the theft of the document or recording media on which the trade secret is recorded, invasion of the premises where the trade secret is kept, or unlawful access to a computer are punishable by a maximum of ten years’ imprisonment or a 10 million yen fine (Art. 21). There is vicarious liability for juridical persons—maximum 300 million yen fine (Art. 22, para. 1). It is not uncommon for companies to sign an agreement with employees for protecting trade secrets. Employees are often bound by agreements not to work in a competing company for a certain period. Such agreements are considered to be valid if the restriction is reasonable and arrangements are made to compensate the employees for the restrictions on their choice of workplace.³⁰ This Law also covers the payment of bribes to foreign public officials in line with the OECD Convention. This is subject to criminal penalties. There have been some prosecutions in the last couple of years.

6. Other Types of Intellectual Property (1) Utility models Japan has a two-tier system of patent and utility models. The Law on Utility Models of 1959 protects ‘petit inventions’ (devices) which concern the shape, structure, or combination of things (Art. 1). Invention in this context means a creation based on technical ideas by using the law of nature. A person who has made such a petit invention which is industrially applicable may register it as a utility model. Novelty, industrial applicability, and nonobviousness are required. An application for registration is filed with the Patent Office. The registration takes effect without examination.

(2) Designs The Design Law of 1959 is the primary law protecting designs.³¹ Design is defined as the shape, pattern, colour, or combination of these which is visually perceived as aesthetic (Art. 2, para. 1). There are three basic requirements for registration: novelty, industrial utility, and creativeness (Art. 3). Applications for ³⁰ Judgment of the Nara District Court, 23 October 1970, Kaminshū 21–9/10–1369. ³¹ Law No. 125, 1959.

380

Business-related Laws

registration are filed with the Patent Office. If there are competing applications, the first applicant is entitled to registration (Art. 9, para. 1). Rules concerning an employee’s invention are applied with modification to designs. The Design Law has a peculiar system of registration under seal (secret registration). Thus, an applicant may require the Patent Office to keep the design secret for a maximum of three years after registration. Drawings and other materials are kept under seal. Once registered, the holder of the design right has an exclusive right to exploit the design and similar designs in a business. The duration of the right is 20 years (Art. 21).

(3) New plant varieties and biotechnological products Japan ratified the Paris Convention on the Protection of New Plant Varieties in 1981. Accordingly, the Seeds and Plants Law was amended. New plant varieties are protected for twenty-five years after registration. With the advance of technology, some new species which may fulfil the requirements of patent protection have emerged. Remedies for infringement are available. Criminal penalties are provided in the Law for infringement. As regards bacteria, patents are available. Japan is a signatory to the Budapest Convention on the International Recognition of the Depositing of Bacteria in the Patent Procedure.

16 Labour Law 1. The Development of Labour Legislation The Civil Code accommodates provisions on employment as one of the ‘typical contracts’ provided in the Code, together with contracts of sale, lease, gift, etc. However, the Code presupposes that the parties in contracts are on an equal footing. This naturally does not reflect the true state of affairs in labour relations. Therefore, it was recognised that laws which would supplement the Civil Code and provide better protection to workers were needed. The necessity of protecting the interests of workers was acutely felt in the course of the rapid modernisation which began in the late nineteenth century. However, the government was slow in reacting to such needs. It was only in 1911 that the government finally enacted the Factory Law against strong resistance from industry. This Law set forth restrictions on the employment of women and children, the main restriction being a twelve-hour day, which was far below the international standard of the time. An embryonic trade union was formed at the end of the nineteenth century. In 1897 an association aimed at establishing trade unions (Rōdō-Kumiai Kisei-Kai) was established. Under the auspices of this association, several trade unions, such as the steel workers’ union, the railway workers’ union, and the printers’ union were set up. The government reacted by promulgating the Public Security and Police Law (Chian-keisatsu-hō) in 1900. This punished the promotion and instigation of strikes, as well as ‘acts of assault and intimidation’ carried out to induce workers to join a trade union. It was actively enforced and served as an instrument to suppress labour movements, which aimed primarily to improve working conditions. Although the relevant provision in the Public Security and Police Law was repealed in 1926, other acts such as the Law on the Maintenance of Public Security of 1925 were available to suppress labour movements. Thus, until the end of the Second World War, the Japanese labour movement was subject to strict restrictions by the government. A watershed in the development of Japanese labour law came with the occupation by the Allied Forces. In October 1945, as one of the five major democratic reforms, the creation of trade unions was encouraged. In the twenty months

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

382

Business-related Laws

following the end of the war around 17,000 trade unions were formed.¹ The Trade Union Law was enacted in December 1945. This Law, however, was considered by US advisers to be ‘unduly restrictive’, because it provided an insufficient guarantee of the autonomy of trade unions. The Law was totally amended in 1949.² In 1946 the Labour Relations Adjustment Law, which set out institutions and procedures for settling labour disputes, was enacted.³ The next year, following the adoption of the Constitution which provided for the protection of workers’ rights, the Labour Standards Law was adopted.⁴ This sets standards for wages, hours of work, annual paid holidays, safety of work, minors and female workers, skills training, rules of employment, etc. It was aimed at raising labour protection to the level of ILO standards. The policy of encouraging trade union movements by the Allied Forces underwent a change in late 1947. The change involved the status of public sector workers. The post-war labour movement had been primarily led by trade unions in the public sector. The Allied Forces became concerned at the growing power of trade unions in the public sector and opted to curb their power. In 1948 a ban was introduced and government workers were prohibited from conducting collective bargaining and organising strikes. In the same year, the Law on Labour Relations in Public Corporations was adopted (currently the Law on Labour Relations in Designated Independent Administrative Juridical Persons).⁵ This Law prohibited workers of such organisations from taking industrial action. Thus, basic laws concerning labour relations were all adopted in the years shortly after the end of the Second World War, and basically remained unchanged until the 1990s, although some new laws have been enacted in recent years, including the Law on Measures for Employment, the Law on Equal Opportunity of Employment for Men and Women, and the Workers Dispatch Law.⁶ The drive for deregulation which started in the mid-1990s had significant influence on labour legislation. Deregulation regarding working hours which began in 1987 by the introduction of variable working hours and flexible working hours went even further in the 1993, 1997, 1998, 2002, and 2003 amendments to the Labour Standard Law. The Workers Dispatch Law and the Job Security Law were deregulated. As for the latter, private job centres that charge fees have been liberalised since 1997.⁷ Concerning the working hours, Keidanren (the Japan Business Federation) proposed to introduce an equivalent of the US white collar exemption, but the bill failed to be adopted by Parliament.

¹ For the history of post-war reforms in labour law, see W. G. Gould IV, Japan’s Reshaping of American Labour Law (Cambridge, Mass., 1984), pp. 23–28. See also H. Marutschke, ‘Labour Law’ in W. Röhl (ed.), History of Law in Japan since 1868 (Leiden, 2005), p. 544ff. ² Law No. 174, 1949. ³ Law No. 25, 1946. ⁴ Law No. 49, 1947. ⁵ Law No. 257, 1948. ⁶ Laws No. 132, 1966; No. 113, 1972; and No. 88, 1985. ⁷ F. Yanagisawa, ‘Saikin 10 nenkan niokeru Rōdōhō no Kisei-Kanwa (Deregulation of Labour Law in the past Decade)’, Reference, 2008, April, pp. 88–98.

Labour Law

383

The regulatory reform meant that there should be clear rules understandable to the public. The problem with labour law was that the rules on individual employment relationships were primarily covered by the Labour Standard Law and other labour legislation designed for the protection of workers that were not really comprehensive. For instance, rules on dismissal, transfer, etc. were not covered by them. In order to supplement these laws, rules often developed out of case law, but they were not necessarily accessible to the public or clearly understandable. When the Labour Standards Law was amended in 2003, there was a parliamentary resolution referring to the enactment of a comprehensive law covering labour contracts. The preparation of the new law started in 2004, but the employers and the workers failed to reach an agreement on various points. Therefore, the final outcome, the Labour Contract Law of 2007, was substantially reduced in scope.⁸ The justice system reform that started in 2001 also affected labour law. It was held as a target that the time needed to dispose of labour cases in court should be reduced by half. In response to this requirement, a new system of settling labour disputes between individual workers and the employer—the labour adjudication system (rōdō-shinpan-seido)—started operation in 2006. Such disputes can be heard by a panel of a judge, plus two labour commissioners. In the first eight months, 877 cases were accepted through this procedure.⁹ On the other hand, in the last decade or so some negative outcomes of the ‘restructuring’ of business by companies in response to the slow recovery from the bursting of the bubble economy became evident. The number of non-regular workers increased from a quarter to a third of employed workers, and the number of those workers with very low wages (the ‘working poor’) has increased. The long working hours of middle-aged male workers caused concern for the work/life balance. Some amendments to the labour legislation, for example, the Minimum Wage Law, addressed these problems.¹⁰

2. Constitutional Guarantees The Constitution has two provisions directly concerning the rights of workers. Article 27 provides that all people have the right and duty to work. This mandates 8 T. Muranaka, ‘Rōdō-keiyaku-hō Seitei no Igi to Kadai (The Significance of the Enactment of the Labour Contract Law and its Task)’, Jurist, No. 1351, pp. 42–43. An English translation of the Law is available at: . 9 A. Otake, ‘Rōdō-Shinpan-Seido no Shikō-Jōkyō to Saibansho niokeru Torikumi (the State of Implementation of the Labour Adjudication System and the Approach of the Court)’, Jurist, No. 1331, p. 32. ¹⁰ K. Sugeno, ‘Koyō-system no Henka to Rōdō-hō no Kadai (Changes in the Employment System and the Task of Labour Law)’, Jurist, No. 1347, pp. 3–6. For the general information on the state of labour in Japan, see Japanese Working Life Profile 2007/2008 Statistics, and Labour Situation in Japan and Analysis: General Overview 2006, , both edited by Japan Institute for Labour Policy and Training.

384

Business-related Laws

the government to take adequate legislative and administrative measures to provide opportunities to work. The government has responsibility to provide assistance to those who do not have a job. At present, laws such as the Law on Measures for Employment and the Law on Employment Insurance are designed to assist the unemployed.¹¹ The former provides for job arrangement and recruitment, training, and employment agencies. Public employment offices run by the Ministry of Health, Labour, and Welfare are responsible for the implementation of this Law. Another relevant provision in the Constitution is Article 28 which guarantees the rights of workers to organise and to act collectively. It prohibits unjust interference with the activities of trade unions by government agencies. This provision has its origin in the Constitution of the Weimar Republic of 1919. The Weimar Constitution, which remained in force until the Republic was superseded by the Third Reich, provided that all agreements and measures intended to restrict or obstruct freedom of organisation were void. Article 28 of the Japanese Constitution is constructed in a similar manner. Article 28 guarantees three fundamental workers’ rights. First, the right to organise and to join an organisation for negotiating with the employer on an equal footing is guaranteed. Organisation in this context includes not only trade unions, but also other temporary organisations of workers. Both the government and employers are prohibited from interfering with the internal matters of trade unions. Discriminatory treatment due to membership of a trade union is an unfair labour practice and therefore null and void (Trade Union Law, Art. 7, para. 1). The second right guaranteed by Article 28 is the right to collective bargaining. Workers are entitled to collectively negotiate labour conditions with their employers. Employers may not refuse to negotiate with the representatives of the workers without a justifiable reason. Unjustified refusal constitutes an unfair labour practice (Trade Union Law, Art. 7, subpara. 2). Agreements made through collective bargaining invalidate employment contracts which contravene the agreement. Finally, Article 28 guarantees the right of workers to act collectively. This includes the right to strike and to take other actions in the course of a dispute. Such actions are exempted from civil and criminal liability (Trade Union Law, Art. 1, para. 2 and Art. 8). Agreements between employers and workers which violate rights guaranteed by the Constitution are null and void. Technically, such acts are invalidated on the basis of Article 90 of the Civil Code, which provides for public order and good morals. A problem is the scope of industrial actions guaranteed by the Constitution. In practice, it is sometimes difficult to delineate the boundary between political ¹¹ Laws No. 132, 1966; No. 116, 1974.

Labour Law

385

and economic industrial action. In some cases the demands of workers are political but also have a bearing on their economic welfare. The courts deny the legitimacy of strikes with purely political demands that are beyond the power of the employer.¹² This view is supported by the majority of labour law specialists who contend that the scope of industrial action has to be limited to issues which can be solved through collective bargaining. In cases where a political demand is combined with economic demands, if the political demand was of less significance than the economic demands, the action may be eligible for protection under the Constitution.¹³ Although the Constitution does not explicitly exclude government workers and workers in the public sector from the protection extended by Article 28, statutes restrict their rights. First, certain categories of government workers, such as policemen, firemen, and members of the Self Defence Force, are denied all three fundamental rights. Government workers engaged in non-manual work are not allowed to bargain or act collectively. Other government workers, such as post office workers and workers of public corporations, are not allowed to act collectively, i.e. they may organise and bargain collectively, but may not take industrial action. The constitutionality of these restrictions has been contested in courts on various occasions. At one stage, the Supreme Court acknowledged the unconstitutionality of the restrictions imposed on government workers by applying the ‘less restrictive alternative’ test, which had been developed in the United States. However, in 1973 the Supreme Court changed track and gave a broad discretion to the legislature to limit the rights of government workers and workers of government corporations.¹⁴ Scholarly opinion is mostly against the position of the Supreme Court, which virtually gives the government carte blanche to restrict the rights of these workers and workers.¹⁵ Japan has ratified most of the treaties prepared by the ILO, including Treaty No. 87 on the Freedom of Association and the Right to Organise, and Treaty 98 on the Application of Principles of the Rights to Organise and Collective Bargaining. Some lawyers argue that the restrictions on the right to organise and to act collectively imposed on government workers and workers in public corporations fail to meet international standards. The UN Commission on Human Rights has repeatedly criticised the restrictions.¹⁶ ¹² Judgment of the Supreme Court, 26 October 1966, Keishū 20-8-901. Judgment of the Nagoya High Court, 10 April 1971, Rōmin 22-2-453. ¹³ T. Shimoi, Rōdō-hō (Labour Law) (Tokyo, 1998), p. 194. ¹⁴ Judgment of the Supreme Court, 25 April 1973, Keishū 27-4-547. ¹⁵ N. Ashibe, Ken pō (Constitutional Law), 4th edn (supplemented by K.Takahashi) (Tokyo, 2004), pp. 263–265. ¹⁶ See K. Nakayama, ILO Jōyaku to Nihon (ILO Treaties and Japan) (Tokyo, 1983). UN High Commissioner for Human Rights, Concluding Observations of the Human Rights Committee: Japan, 19/11/98 CCPR/C/79/Add.102.

386

Business-related Laws

3. Employment Relations (1) An overview Since the post-war reforms, labour contracts have not been left to the autonomy of the parties, as is the case with other civil law contracts, but have come to be subject to various laws that extend protection to workers, and that set forth rules concerning collective agreements and working conditions. Provisions of the Civil Code concerning labour contracts are still applicable, but are supplementary to the provisions of labour legislation. Before the enactment of the Labour Contract Law in 2007, the basic law regulating the relationship between employer and worker was the Labour Standards Law. This Law sets the standards for the working conditions of all workers except seamen and certain groups of government workers. It provides for employment contracts, wages, working hours, work safety, rules of employment, compensation, etc. Employment contracts that are against the Labour Standards Law are null and void and are replaced by the terms provided in the Law (Art. 13). Foreign companies are subject to this Law insofar as they operate in Japan. On the other hand, Japanese companies operating overseas are not subject to the provisions of this Law. However, the Labour Standards Law did not cover matters such as unfair dismissal and transfer/secondment of workers. Therefore, it had to be supplemented by case law. Significant doctrines concerning the equal treatment of men and women, unfair dismissal, and the right to discipline workers have developed out of court rulings. Also the permissibility of revising the rules of employment to the disadvantage of workers was addressed by the court in the absence of rules in the statutes. Overall, case law has helped to broaden the protection of workers by the law. The newly enacted Labour Contract Law provides for matters such as (i) the permissible extent of the unilateral revision of the rules of employment by the employer (Arts 9 and 10), (ii) secondment (Art. 14), and (iii) dismissal (Art. 16). Since the views of those representing labour and the employers were so diverse, the coverage of the Labour Contract Law became much more limited than was originally envisaged. Therefore, rules accommodated in the Law are restatements of case law which both sides could agree.¹⁷ Together with the laws, collective agreements and rules of employment play a significant role. Collective agreement is concluded between a worker’s organisation or trade union on one hand, and the employer on the other hand. When a contract of employment conflicts with the standards set by the collective agreement, the offending provision is void, and standards set by the agreement are read into the contract (Trade Union Law, Art. 16,). ¹⁷ Muranaka, supra, p. 46.

Labour Law

387

(2) Full-time and part-time workers The Labour Standards Law defines ‘workers’ as those employed in business or the workplace who are paid (Art. 9). Part-time and temporary workers also fall within the definition of ‘workers’. Even when there was no formal employment contract between the parties, the court has acknowledged that the Labour Standards Law was applicable. Individuals such as an electricity meter reader and a cabaret band member, both of whom were on an annual contract, were found to be covered by this Law. In another case, a truck driver who worked for a company driving his own truck was found to be a worker in the context of the Labour Standards Law.¹⁸ The court takes into account the actual relationship—the existence of subordinate employment relations—between the company and the worker, rather than legal formalities.¹⁹ Differential treatment between full-time and part-time workers is not in itself against the law. In one case, an employer paid 80 per cent of the wage of full-time workers to a part-time worker for the same hours of work. The latter sued the company for discrimination. The court ruled that this did not amount to discrimination on the ground of social status as prohibited by the Labour Standards Law, but in this particular case it took into account that the content of the work, length of employment, working hours, etc. were identical to those of full-time workers, and upheld the claim.²⁰ The percentage of non-regular workers has been rising recently. In 1995, the share of employees who work less than 35 hours a week was 17.4 per cent of the total number of employees. In 2006, the percentage was 22.5 per cent. In the same year, the number of regular employees was 34.1 million, while there were 11.25 million part-time and temporary employees, plus 5.52 million other nonregular employees.²¹ There is a widening gap between full-time employees and part-time employees. The government has adopted some measures to ensure ‘balanced treatment’ of them, including the amendment to the Law on Part-Time Work.²²

(3) Rules of employment Rules of employment are prepared by the employer after consulting the workers. The rules cover shop rules and rules on working conditions. Typical rules of employment include working hours, wages, methods of payment, retirement, ¹⁸ Judgment of the Kanazawa District Court, 27 November 1987, Hanji 1268–143 (Kitahama Doboku-Saiseki case). ¹⁹ Judgment of the Supreme Court, 18 May 1962, Minshū 16-5-1108 (Ohira Silk Reeling case). ²⁰ Judgment of the Nagano District Court, Ueda Division, 15 March 1996, Hanta 905–276 (Marukō Alarm case). ²¹ Japanese Working Life Profile, supra, pp. 33–34. ²² Labour Situation in Japan, supra, p. 110.

388

Business-related Laws

etc. If the contract of employment conflicts with the standards set by the rules of employment, the relevant clause is void (Labour Standards Law, Art. 93). Rules of employment may not contradict collective agreements (Labour Standards Law, Art. 92).²³ Employers of more than ten workers are required to submit their rules of employment to the Director of the Labour Standards Supervisory Office. When preparing the rules, the employer has to consult the trade union to which more than half of the workers of the workplace belong. If no such trade union exists, the employer is required to consult a representative of the majority of the workers (Labour Standards Law, Art. 90, para. 1). The Law merely provides for prior consultation with the trade union, not a joint decision. Therefore, the employer may theoretically enact rules of employment against the will of a majority of workers, once he has consulted them. This differs from the co-determination system in Germany. Whether or not the rules of employment can be unilaterally altered to the disadvantage of the workers was at issue in a case where a bus company introduced, via such rules, retirement at the age of 55. A manager who was dismissed after reaching that age sued the company on the ground that the changes to the regulation did not affect him, since it was a disadvantageous change unilaterally introduced by the company. There was no explicit provision applicable in the labour legislation. The Supreme Court ruled that (i) rules of employment acquire legal force by Article 92 of the Civil Code, which provides for the effect of custom, insofar as their content is reasonable, and is therefore binding upon all workers regardless of whether they agreed to the rules, or whether the rules were known to them individually; (ii) in principle, a unilateral change in the rules against the interests of workers which deprives them of their vested interests or imposes unfavourable working conditions is not permissible; (iii) however, individual workers are not eligible to claim that the rules do not apply to them if the rules are reasonable, and should then settle the matter through the collective bargaining procedure. In this particular case, the retirement age of 55 was not considered to be unreasonable, when taking into account that the retirement age for ordinary workers in the company was set at 50, and that there was the possibility of employing this person on a part-time basis afterwards.²⁴ This doctrine was incorporated in the new Labour Contract Law (Arts 9 and 10).

(4) Equal treatment Equal treatment of workers as regards wages, hours of work, etc. regardless of their nationality, religion, or social status is required by the Labour Standards ²³ K. Sugeno, Shin-Koyō-Shakai to Hō (The Employment System and the Law), new supplemented edn (Tokyo, 2006), pp. 54–60. ²⁴ Judgment of the Supreme Court, 25 December 1968, Minshū 22-13-3459 (Shūhoku Bus case).

Labour Law

389

Law (Art. 3). Dismissal on the grounds that a worker was a Communist was ruled by the court to contravene this provision insofar as he did not participate in activities such as sabotage.²⁵ On the other hand, when deciding whether to employ a particular person, the Supreme Court ruled that employers are basically free to set the standards and terms of employment. The Supreme Court is of the view that refusal to employ a person with certain political or religious beliefs is not necessarily against the law. In one case, a company was sued for rejecting a person who had taken part in a students’ political movement while he was a student and failed to disclose this fact during the interview.²⁶ Generally, when an applicant fails to disclose significant information or provides false information at the interview, he bears the risk of dismissal when the fact becomes known to the company. On the other hand, when the information in question is insignificant, the dismissal may be regarded as an abuse of rights by the company.²⁷ Another problem is gender discrimination. The Labour Standards Law did not specifically refer to gender discrimination in its equal treatment provision. Instead, it prohibited gender discrimination only as regards wages (Art. 4). Since this provision is understood to require equal pay for equal work, it is not against the Labour Standards Law if female workers are not given positions as high as those of male workers and therefore receive a lower salary. Despite this rule of equal pay for equal work, there may be cases where the difference of wages comes from discrimination in promotion between men and women. Under the newly amended Law on Equal Opportunities in Employment for Men and Women, such differences in wages are unlawful.²⁸ In the absence of an explicit provision in the Labour Standards Law, the court has endeavoured to eliminate gender discrimination. For instance, in a case where a company provided in its rules of employment for retirement ages of 60 for male workers and 55 for female workers, the Supreme Court upheld the judgment of the High Court, which had found the regulations to be unreasonable and against public order and good morals as provided in the Civil Code.²⁹ The equal treatment clause in the Constitution (Art. 14) was also cited in this judgment. In Japan female workers were often forced to leave the company once they were married. This practice, which was written into rules of employment, was found to be unjust discrimination. The compulsory retirement of female workers for reason of marriage and childbirth was found to be illegal by the court.³⁰ In ²⁵ Judgment of the Kōbe District Court, 20 July 1956, Rōmin 7-4-838 (Bōki Seizō case); see also Judgment of the Supreme Court, 22 November 1955, Minshū 9-12-1739 (Dai-Nippon Bōseki case). ²⁶ Judgment of the Supreme Court, 12 December 1973, Minshū 27-11-1536 (Mitsubishi Plastic case). ²⁷ Sugeno, supra, pp. 65–69. ²⁸ Shimoi. supra, pp. 30–31. ²⁹ Judgment of the Supreme Court, 24 March 1981, Minshū 35-2-300 (Nissan Motors case). ³⁰ Judgment of the Tokyo District Court, 20 December 1966, Rōmin 17-6-1408 (Sumitomo Cement case); Judgment of the Osaka District Court, 10 December 1971, Rōmin 22-6-1163 (Mistui Shipbuilding case).

390

Business-related Laws

another case a company set the retirement age for female workers at 30—this was found to be unreasonable discrimination.³¹ Such practices now contravene the amended Law on Equal Opportunities in Employment for Men and Women. This Law was prepared as an amendment to the then existing Law on the Welfare of Working Women after International Women’s Year in 1975.³² The amended Law is aimed at ensuring equal opportunities and treatment of men and women. Discrimination by gender in training, welfare, retirement, and dismissal are explicitly prohibited (Arts 9–11). In the same year, Japan ratified the Treaty on Abolition of Gender Discrimination. However, the amendment did not necessarily meet the requirements of the Treaty. The elimination of discrimination in employment, position, and promotion was presented as a target, rather than a legally binding requirement. Effective means of ensuring the implementation of this legislation were also lacking. Therefore, the Law underwent a major change in 1997, effective from 1999. According to the amended Law, the employer may not discriminate between men and women in advertising for a position or recruitment (Art. 5). Similarly, there is to be no discrimination concerning posting, promotion, or training (Art. 6) or in the provision of benefits such as housing subsidies (Arts 9 and 10). Employers are also obliged to take measures against sexual harassment (Art. 21, para. 1).³³ The Law was further amended in 2006. Anti-discrimination regulations were strengthened, and the prohibition of indirect discrimination was introduced.

(5) Minimum wages Minimum wages are regulated by the Minimum Wages Law.³⁴ Agreements between the employer and the worker regarding wages less than the minimum wage are void, and are replaced by the minimum wage (Minimum Wages Law, Art. 5, para. 2,). The Law does not in itself provide minimum wages, but provides for the procedure to determine minimum wages. At present, minimum wages are determined in each prefecture by the Director of the Labour Standards Bureau on the recommendation of the Minimum Wages Advisory Board. The Director, following this area’s minimum wages, determines minimum wages for the individual industry. Employers must pay wages in ‘currency’, not in kind, directly to the workers, and on a regular basis (Art. 24, para. 1).

(6) Working hours The Labour Standards Law provides for a forty-hour week (Art. 32. para. 1). Working hours were reduced from forty-eight hours to forty hours per week in ³¹ Judgment of the Tokyo District Court, 1 July 1969, Rōmin 20-4-715 (Tōkyū Kikan Kōgyō case). ³² Law No. 113, 1972. ³³ Shimoi, supra, pp. 27–31. ³⁴ Law No. 137, 1959.

Labour Law

391

1987. Employers may not require workers to work more than eight hours a day, or forty hours a week. Employers must give workers at least one day off a week (Art. 35, para. 1). Employers may ask workers to work longer than eight hours a day or forty hours a week on a particular day or week, provided that the rules of employment or an agreement with a majority of workers provide for average working hours which do not exceed the limit set forth by the Law (Art. 32-2). If the employer concludes a written agreement with a trade union which is composed of a majority of workers and submits the agreement to the Director of the Labour Standards Supervisory Bureau, the employer may extend the working hours and also make the workers work on Sundays and holidays (Art. 36). If no trade union composed of a majority of the workers exists, the agreement should be concluded with a person representing a majority of the workers. There is no formal limit on the extension of working hours under this provision except for work especially harmful to health, such as mining. The government has been promoting variable working hours and discretionary working hours which allow for more flexibility. In 2006, 58.5 per cent of companies had a variable working hours system in place.³⁵ The working hours in Japan are the highest amongst the industrialised countries. In 1989, the total actual working hours of Japanese workers were 2,159 hours, in contrast to 1,957 hours in the United States and 1.638 hours in the then West Germany. However, the total amount of working hours has been in constant decline, reflecting the changes in the law and patterns of life. In the Financial Year 2004, the total working hours per year in Japan were 1,996 hours, as compared to 1,948 hours in the United States, 1,525 hours in Germany, 1,538 hours in France and 1,888 hours in the UK.³⁶ Overtime work is common in Japan. In 1989 average overtime hours were 254 per annum, but have been in decline since then. In 2002, the average was around 171 hours.³⁷ In general working hours in Japan have been declining. However, it is has been noted that the percentage of people who are working less than thirty-five hours a week, and those working more than sixty hours per week have both increased. The primary reason of the decrease in working hours is the increase in the number of people who work less than thirty-five hours per week.³⁸ The Labour Standards Law also guarantees annual holidays. It provides that those who have been employed for one year without interruption and have worked on more than 80 per cent of the working days in that year should be given ten days’ annual paid holidays. Those who have been employed for more than two years are given one extra day’s holiday per year in addition to the six days (Art. 39). Thus, annual holidays are regarded as a reward for uninterrupted employment.

³⁵ Japanese Working Life Profile, supra, p. 59. ³⁶ Ibid., p. 61. ³⁷ JETRO, supra, p. 125. Labour Situation in Japan, supra, p. 46. ³⁸ Labour Situation in Japan, ibid.

392

Business-related Laws

In 2004, workers in a company with more than 1,000 workers were eligible for 19.2 days’ paid holidays; actual holidays taken were 8.5 days.³⁹ Special provisions in the Labour Standards Law govern working hours of minors and women. As for minors, i.e. those below 15 years of age, there is a general prohibition against employment (Art. 56, para. 1). There are restrictions on working hours for those under age 18. Employers are prohibited from making a female worker who is more than three months pregnant work if she asks for leave. Employers must also give women eight weeks’ maternity leave. However, if a woman asks to return to work more than six weeks after giving birth, the employer may let her do so provided that a doctor certifies that the work will not be harmful to her health (Art. 65, paras 1 and 2). There used to be fairly strict restrictions on working hours for women provided by the Labour Standard Law. However, in recent years it has been argued that some protection for women, especially restrictions on working hours, actually narrowed their opportunity to work and therefore, except for restrictions related to pregnancy and birth, women should be protected in the same way as men but not more. Thus the amendments to the Labour Standards Law in 1985 and 1997 relaxed the restrictions on the working hours of women.

(7) Disciplinary actions Most companies have their own disciplinary rules. Workers become subject to such rules by entering into an employment contract with the employer. Employers may dismiss, ask for the resignation of, suspend, reduce the remuneration of, or give severe or ordinary reprimands to workers who violate the rules. Normally, the grounds for taking disciplinary action and the sanctions available are specified in the rules of employment. When disciplinary measures are taken without reasonable grounds, or administered in an unjust manner by reference to the principles of proportionality and due process, the court regards it as an abuse of disciplinary power and therefore void.⁴⁰ It should be added that even when there are grounds for taking disciplinary action, if the misconduct is not likely to affect the internal order of the company, then disciplinary action cannot be justified.⁴¹ The grounds for taking disciplinary action include neglect of duty, breach of duty, private misconduct, and political activity. As regards political activity, there was a case where a worker in a government corporation (later privatised) wore a badge with a political slogan on it during office hours. When he was ordered by his supervisor to take off this badge, he distributed leaflets of protest. He was ³⁹ Ibid., p. 46. ⁴⁰ Judgment of the Supreme Court, 16 September 1983, Rōhan 415–16 (Daihatsu-Kōgyō case). ⁴¹ Judgment of the Supreme Court, 1 November 1983, Hanji 1100–151 (Meiji Dairly case).

Labour Law

393

reprimanded for violations of the disciplinary rules. The district court and the High Court found the worker’s case to be substantiated and the reprimand void. However, the Supreme Court overruled the judgment of the High Court. According to the majority opinion of the Supreme Court, political activity within a company may generate political conflict among workers, and eventually obstruct the management of the company. It is probable that such activity could affect the stability of the workplace. Therefore, the Court found that it was reasonable for the employer to prohibit political activity by office regulations. A dissenting opinion indicated that political activity only covers those specifically related to a particular political party or group, and thus suggested that the activity of the worker in this case was merely an expression of his beliefs and had no political content.⁴² As regards misconduct of workers in private, in one case dismissal of a factory worker on the ground of his arrest for a minor crime was contested. The Supreme Court ruled that as the misconduct was committed in his private time and the crime was not significant, and his position was not of a supervisory nature, his act could not be regarded as having seriously discredited the company.⁴³ However, in general, the Supreme Court tends to acknowledge that misconduct in the private life of a worker justifies disciplinary action by the employer in cases where the company is seriously discredited, even though it had no actual effect on the business.⁴⁴ Restating the case law, the Labour Contract Law provides that if the disciplinary measure objectively lacks reasonable grounds, and cannot be recognised as acceptable from the common sense perspective of society in the light of the nature of the act, mode of the act, and other circumstances, it is void as an abuse of rights (Art. 15).

(8) The life-long employment system The Civil Code provides that the maximum term of a contract of employment is five years (Art. 626, para. 1). According to the Labour Standards Law, the term may not exceed three years (Art. 14). It was the view of the legislature that contracts of employment which were excessively long might result in forced labour and thus constitute unjust restraints on workers. Naturally, if both parties agree the contract can be renewed. If a contract for a longer period is concluded, workers are entitled to rescind the contract after a year. If the labour relationship continues after the expiration of the contract and the employer does not object, it is deemed to have been renewed (Civil Code, Art. 629). ⁴² Judgment of the Supreme Court, 13 December 1977, Minshū 31-7-974 (Meguro Telegram and Telephone Office case). ⁴³ Judgment of the Supreme Court, 28 July 1970, Minshū 24-7-1220 (Yokohama Rubber case). ⁴⁴ Judgment of the Supreme Court, 15 March 1974, (Minshū 28-2-265).

394

Business-related Laws

In reality, the majority of people work in the same company from the time they left school until retirement. A person will find a job in a particular company, receive training, and stay there: job mobility is low in Japan. The contract is usually for an indefinite period. Workers are of course free to quit and move to another company, but they seldom do so. Companies rarely dismiss workers, even in times of economic recession. Instead, they take measures such as reducing working hours, reducing recruitment, and transferring workers to other sections or other companies within the group or to subsidiaries. Dismissal is the last resort. In the United States or the UK, if a company suffers a heavy loss the first thing the management does is to reduce the workforce. In contrast, in Japan the management prefers to cut the dividend rather than reducing the workforce. Also in cases of technological innovation and structural changes in the industry, Japanese companies transfer workers to other sections and companies, but they seldom dismiss those who have become redundant.⁴⁵ The dwindling economy since 1990 has given rise to reconsideration of this system. It was argued that this system raised the labour cost as employees get older, and that the number of those who are unable to adapt to new technologies was increasing. Therefore, this system, together with the seniority-based wage system, should be reconsidered. Nevertheless, there are not that many companies that are reviewing the life-long employment system. Instead, there is an increasing number of companies reducing the number of regular staff to whom the life-long employment system applies, and resorting to part-time workers.⁴⁶

(9) Unfair dismissal The Civil Code provides that even if an employment contract is for a fi xed term, the employer may dismiss the worker when there is a compelling reason (Art. 628). If the contract is not for a fi xed term the employer may propose termination of the contract at any time. The determination takes effect in two weeks (Art. 627, para. 1). Since this system may produce unfairness against workers, labour legislation, namely the Labour Standards Law, has introduced limitations on the right of dismissal by employers. Firstly, an employer may not dismiss a worker during the statutory pre- and post-natal leave, or within thirty days of the end of the latter. Secondly, workers cannot be dismissed during the leave arising out of a work-related injury or disease or for thirty days thereafter (Labour Standards Law, Art. 19, para. 1). Thirdly, the employer must give the worker at least thirty days’ notice of dismissal, or thirty days’ pay in lieu (Art. 20, para. 1). Collective agreements often include provisions ⁴⁵ R. Onodera, ‘Arbeitsverhaeltnisse in Japan’, in P. Hanau et al. (eds) Die Arbeitswelt in Japan und in der Bundesrepublik Deutschland: ein Vergleich (Cologne, 1984), pp. 6–9. ⁴⁶ Labour Situation in Japan, supra, pp. 33–34.

Labour Law

395

limiting the dismissal of workers, such as an obligation on the employer to consult the trade union. Rules of employment often include additional requirements. Further restrictions on the dismissal of workers have developed out of judicial precedents. The court has found dismissals to be an abuse of rights under various circumstances. The doctrine of unfair dismissal has thus emerged from case law.⁴⁷ In a leading case, the Supreme Court ruled that the employer’s right to dismiss a worker constitutes an abuse of rights, and is therefore null and void, if no objective and reasonable ground for dismissal exists, and the dismissal cannot be justified by socially acceptable standards.⁴⁸ In another case, a broadcaster was dismissed for failing to broadcast the news twice as a result of oversleeping. However, he did not act intentionally or out of malice, his work record had been satisfactory, he expressed remorse, and there had been no precedent of dismissal in such cases. Besides, another worker who should have woken up the announcer had also overslept, but he was merely reprimanded. The Supreme Court ruled that even when there is a formal ground for dismissal, an employer is not always free to dismiss the worker. In this particular case the Supreme Court found the dismissal unreasonable and void.⁴⁹This doctrine is now incorporated in the Labour Contract Law which was enacted in 2007 (Art. 16). Another problem is dismissal for redundancy. Since the oil crisis in 1973, some industries have undergone contraction. As the life-long employment system had already become established at that time, Japanese companies endeavoured to avoid dismissals. However, dismissal was not always avoidable, and in some cases was contested before the courts. The court has been fairly strict in judging the necessity of redundancy dismissal. One judgment stated that in order for such a dismissal to be valid, there has to be a serious crisis in business and efforts should be made to transfer and absorb redundant personnel within the company.⁵⁰ A leading case is the Tōyō Oxygen case, where a chemical company dismissed forty-seven workers of a section producing acetylene gas because of market deterioration. Thirteen workers applied to the court for redress. The district court found the dismissals to be void, but the High Court overruled this judgment. The latter set three standards for judging whether the dismissal was really unavoidable. Firstly, the closure of the section had to be unavoidable and necessary for reasonable business management. Secondly, there must have been no possibility of transferring workers to similar sections or workplaces and the dismissal must not have been arbitrary. Thirdly, workers to be dismissed must have been selected ⁴⁷ Sugeno, supra, pp. 65–66. ⁴⁸ Judgment of the Supreme Court, 25 April 1975, Minshū 29-4-456 (Nihon Shokuen Seizō case). ⁴⁹ Judgment of the Supreme Court, 31 January 1977, Saikōsai-saibanshū 120–23 (Kōchi Broadcasting Co. case). ⁵⁰ Judgment of the Okayama District Court, 31 July 1979, Rōhan 326–44 (Sumitomo Heavy Industries case).

396

Business-related Laws

in accordance with objective and reasonable criteria. The High Court ruled in this case that the company had met these standards. This judgment was upheld by the Supreme Court.⁵¹ It is generally acknowledged that when dismissing workers by reason of redundancy, according to the doctrine of good faith and fair dealing, the employer must make efforts to avoid dismissal. When a company dismisses workers without trying alternative measures such as a transfer within the company, encouraging voluntary retirement, etc., such dismissal is usually found void by the court. Procedural fairness is also required in redundancy dismissals, as in dismissals on other grounds. The employer must explain the situation to the trade union or the workers and conscientiously discuss the matter with them.

(10) Transfer and secondment In the 1970s, in order to cope with recession, instead of making redundancy dismissals many companies resorted to measures such as transferring workers to sections or workplaces within the company and secondment to another company within the group, or to subsidiaries. Initially, companies were thought to have a free hand in transferring personnel within the company. However, in recent years it has been acknowledged that the company’s right to order transfer is not unlimited. If there was an explicit or tacit agreement between employer and worker to the effect that the latter must accept transfer, transfer is valid without specific consent by the worker. If this is not the case, the worker is entitled to refuse transfer. Whether there was such an agreement is to be judged from the employment contract, collective agreement, rules of employment, and practice within the company. Transfers which involve the worker moving house must be handled prudently.⁵² The court has adopted a two-step approach. Firstly, the court ascertains whether any limitation on transfer can be found in the contract, collective agreement, or rules of employment. If there is no explicit or tacit agreement to accept the transfer, the court will find the transfer order to be null and void. In fact, the rules of employment in most companies in Japan do provide for the right of the employer to transfer the worker within the company. Secondly, even when the transfer was explicitly or tacitly agreed to by the parties, the courts often find such orders to constitute an abuse of rights on the part of the employer. The Supreme Court ruled on a case concerning the transfer of a worker from Osaka to Nagoya. The court acknowledged that if the collective agreement and rules of employment provide for transfer, and the workplace was not specified at the beginning of employment, the employer has discretion ⁵¹ Judgment of Tokyo High Court, 29 October 1979 (Rōmin 30-5-1002: Tōyō Sanso case). ⁵² Sugeno, supra, pp. 142–143.

Labour Law

397

to decide on the workplace. This does not constitute an abuse of power unless the transfer is unnecessary for the business, is made out of inappropriate motives or purposes, or is excessively onerous for the worker. In this particular case, the Supreme Court ruled that even if the transfer results in the worker’s living separately from his family, it is not necessarily an abuse of rights.⁵³ In another case, the Supreme Court ruled that the transfer of a school teacher to another secondary school in the same city was appropriate, since it did not involve any disadvantage as regards remuneration, workplace, or work.⁵⁴ On the other hand, the court has acknowledged that the consent of the worker is necessary in cases where the transfer entails a substantial reduction in wages, or significantly inhibits the career development of the worker.⁵⁵ The transfer of a broadcaster with twenty years’ experience, who had been employed specifically as a broadcaster, to another section was found to be unreasonable.⁵⁶ Secondments of workers to another company within the company group, a subsidiary, or a subcontracting company are not uncommon in Japan. The practice became widespread in the 1990s with the continuing recession. The courts have come to treat such secondments similarly to transfers within a company as this practice became common. In some cases, workers seconded to another company retain their position in the original company (shukkō); in other cases they leave the first company (tenseki). These two kinds of secondment require different considerations, since the latter involves a change of identity in the parties to the contract of employment, whereas in the former the original contract between employer and worker remains intact. It is generally considered that, in the former case, the worker’s general or tacit consent will suffice, while in the latter case more specific consent is necessary. In the aftermath of the privatisation of the Japanese National Railway, secondments of workers—particularly those opposed to privatisation—to related companies were common. In one case, the court acknowledged the existence of a tacit agreement to accept secondment to another company, but suspended the order on the ground that the work after secondment was quite different and that the selection of workers to be seconded was not reasonable.⁵⁷ Previously, the court generally took the view that the consent of the worker was needed in secondment in the form of shukkō, but in recent years they have been more flexible if certain conditions are met. It is required that the seconded company is in a close relationship with the original company, and measures ⁵³ Judgment of the Supreme Court, 14 July 1986, Rōhan 477–6 (Tōa Paint case). ⁵⁴ Judgment of the Supreme Court, 23 October 1986, Rōhan 484–7 (Osaká Prefectural Committee for Education case). ⁵⁵ Judgment of the Wakayama District Court, 14 March 1959, Rōmin 10-2-127 (Wakayama Pile Orimino case). ⁵⁶ Decision of the Tokyo District Court, 23 July 1976, Hanji No. 820, p. 54 (Nippon Television Network Co. case). ⁵⁷ Judgment of the Osaka District Court, 30 November 1987, Hanji 1269–147.

398

Business-related Laws

are taken to avoid changes of working conditions to the disadvantage of the worker.⁵⁸ In one case, a worker in a steel company was seconded to another company as part of the restructuring programme. At that time the steel industry was in serious difficulties. The worker contested the validity of the secondment order. The court ruled that although the worker had never given comprehensive consent to accept secondment, considering the fact that there were many such secondments occurring with the consent of the trade union, and that the measures were taken to improve working conditions for the secondees, the secondment was valid.⁵⁹ The Labour Contract Law restates the case law. If the secondment order by the employer can be regarded as an abuse of rights and void in the light of the necessity of the secondment and the circumstances regarding the choice of a particular worker etc. (Art. 14).

(11) Mandatory retirement In most companies a mandatory retirement age is provided in the rules of employment. According to a survey of the Ministry of Health, Labour and Welfare, in 2005, 95.3 per cent of companies had a mandatory retirement system. In 91.1 per cent of the companies, the mandatory retirement age was 60.⁶⁰ The 2004 amendment to the Elderly Persons Employment Security Law⁶¹ introduced a provision to the effect that employers must take measures to secure employment until the age of 65. Employers are under the obligation to take one of three measures: raising the mandatory retirement age, continuation of employment after retirement if the worker so desires, or the abolition of the mandatory retirement age (Art. 9).

4. Collective Labour Relations (1) Trade unions The basic statute on trade unions is the Trade Union Law. It deals with the effects of collective agreements and remedies for unfair labour practices. It also provides for criminal and civil law immunity for the legitimate actions of a trade union. Trade unions under this Law are organisations and their federations voluntarily formed by workers primarily in order to improve working conditions and the workers’ economic situation. Organisations which allow the participation of ⁵⁸ Shimoi, supra, pp. 51–53. ⁵⁹ Judgment of the Fukuoka District Court, Kokura Division, 26 March 1996, Rōhan 703–80 (Nippon Steel Corporation case). ⁶⁰ Labour Situation in Japan, supra, pp. 58–59. ⁶¹ Law No. 68, 1971 as amended.

Labour Law

399

supervisors or others representing the interest of the employer, which are subsidised by the employer, or which have primarily charitable, political, or social aims are not regarded as trade unions under this Law (Art. 2). One of the main characteristics of Japanese trade unions is that they are organised in each company, instead of across an industry as a whole or in accordance with particular skills. Workers of a company usually belong to the same trade union, regardless of the kind of work they do. Trade unions of companies form a regional federation and also industrial or occupational federations. These federations in turn form national organisations. The percentage of workers who are trade union members has been decreasing in recent years. In 1975 it was 34.4 per cent, while in 1998 the rate fell further to 22.4 per cent.⁶² In 2005, it fell even further to 18.7 per cent.⁶³ Trade unions are required to prove that they meet the above conditions, and must submit their rules to the Labour Commission in order to take part in dispute settlement procedures and have recourse to the remedies provided by the Trade Union Law (Art. 5, para. 1). Labour commissions, which are administrative commissions established at a central and prefectural level, have the power to determine the eligibility of a trade union. Most trade unions have union shop agreements with the employer. However, these agreements merely provide that those who are not members of the trade union should, ‘in principle’ be dismissed, or stipulate that ‘when this worker is needed by the company, the company may employ him (or her)’. In this way, union shop agreements are made to be flexible in Japan.⁶⁴

(2) Collective bargaining Collective bargaining is guaranteed by the Constitution. Trade unions are exempted from criminal or civil liability when engaging in collective bargaining. Employers are not allowed to refuse to enter into collective bargaining without justifiable reason (Trade Union Law, Art. 7, para. 2). In practice, collective bargaining at the company level is the most common form of negotiation. Since this type of collective bargaining can be disadvantageous to workers who are generally in a weaker bargaining position than the company, other methods of collective bargaining have emerged. In some cases, a trade union federation of an industry bargains with a particular company on behalf of the trade union of that company. In other cases, the federation jointly negotiates with the company’s trade union, or sends a representative to take part in the negotiations between the trade union and the company. ⁶² Mainichi Daily, 28 December 1998. ⁶³ . ⁶⁴ K. Hokao, Rōdō-hō Nyūmon (Introduction to Labour Law), 3rd edn (Tokyo, 1994), pp. 261– 262. See also Sugeno, supra, pp. 318–320.

Business-related Laws

400

The scope of issues which can be handled via the collective bargaining process is fairly broad. Employers are not free to decide terms and conditions of employment unilaterally. They are to be discussed in the collective bargaining process. The transfer and dismissal of trade union members as well as the imposition of disciplinary measures are matters regarded as being subject to collective bargaining. Issues concerning management and production, such as the introduction of new machinery, changes in production methods, and the reorganisation of a company may also have to be discussed in collective bargaining if they affect work conditions and employment.⁶⁵ If the employer refuses to bargain without justifiable grounds, the trade union may apply to the Labour Commission for remedies (Trade Union Law, Art. 27). The Commission reviews the application and, if it is substantiated, will order the employer to take part in collective bargaining. Workers may also apply for mediation by the Labour Commission (Art. 12). Employers are not allowed to deal directly with individual workers when there is a trade union within the company. Unlike the United States, where a system of exclusive representation is adopted, in Japan if there are several trade unions within a company each trade union is entitled to represent its members. In some cases there is an agreement between the employer and the trade union that the company will recognise a particular trade union as the only one with whom it will negotiate. This kind of agreement infringes the rights of other trade unions within the company and is considered to be void.⁶⁶

(3) Collective agreements Collective bargaining is primarily aimed at concluding or revising collective agreements, which set forth rules concerning the relationship between the employer and workers. Collective agreements also set standards of welfare and working conditions of the workers, and provide for the extent of participation or involvement of the trade union in the management of a company. In some countries collective agreements are treated as non-binding agreements, while in other countries they are regarded as binding contracts. In the former case collective agreements do not necessarily affect individual contracts of employment. In Germany collective agreements have a stronger effect. Collective agreements have effects on individual contracts, and are even binding on those who are not members of the trade union. Japanese law has adopted this German system. Collective agreements are concluded in almost all companies with more than 1,000 workers in Japan. Most are concluded on a company basis, i.e. agreements ⁶⁵ Sugeno, ibid., pp. 336–337. ⁶⁶ Shimoi, supra, p. 169.

Labour Law

401

between the company and the trade union. General agreements applicable to a whole industry or profession are exceptions. The content of collective agreements varies. Generally, they begin with general provisions concerning trade union membership, union shop agreement, etc. There follow provisions regarding trade union activities, personnel management, working conditions, worker’s rights and duties, and safety arrangements. They may also deal with the following: procedures for collective bargaining, the scope of issues on which and the procedure by which the trade union is to be consulted by the company, the complaints procedure, and the dispute settlement clause.⁶⁷ Provisions of a contract of employment that conflict with the collective agreement concerning terms and conditions of employment and other matters affecting workers’ rights and duties are void (Trade Union Law, Art. 14). This is termed the ‘normative effect’ of the collective agreement. The invalidated part is replaced by the standards set out in the collective agreement. This applies regardless of whether the standard set by a contract of employment falls short of the collective agreement, or whether the former exceeds the latter. This is similar to US law, but different from German and French law.⁶⁸ When there is no provision in the contract of employment, the provision of the collective agreement directly regulates the relationship between employer and worker. The Law provides that the maximum term of agreement is three years (Art. 15, para. 1). A provision often found in collective agreements requires that both parties refrain from industrial action in order to revise or delete the provisions of the agreement while the agreement is in force. This obligation is referred to as an ‘obligation of peace’. Sometimes the parties agree to refrain from industrial action altogether: breach may result in civil liability. Other common provisions define the rules and procedures for disputes, such as those requiring the party to try to settle the dispute through negotiation, requiring advance notice of industrial action, and providing procedures for conciliation and mediation. The effect of a collective agreement extends to those who are not party to the agreement nor members of the trade union that is a signatory to the agreement. The Trade Union Law provides that when more than three-quarters of the workers of a factory or office are subject to a collective agreement, this agreement binds other workers engaged in similar work (Art. 17). However, this does not apply when the remaining minority is organised into another trade union, especially when it has concluded its own collective agreement with the employer.⁶⁹ Furthermore, the Law provides that the effect of a collective agreement concluded ⁶⁷ Nippon-Rōdō-Gakkai ed., Rōdō Jōken no Kettei to Henkō (Determination and Revision of the Terms of Employment), (Tokyo 2000), pp. 106–109. ⁶⁸ Sugeno, Rōdō-hō (Labour Law), 5th edn (Tokyo, 1999), pp. 546–554. The first edition of this book is available in English; Japanese Labor Law (Seattle, 1992) (translated by L. Kanowitz). ⁶⁹ Judgment of Tokyo District Court, 19 July 1969, Rōmin 20-4-813 (Katsuragawa Seishi Seisakusho case).

402

Business-related Laws

by a large majority of workers in the workplace extends to other similar workers and employers within the locality (Art. 18, para. 1). Since collective agreements are usually concluded in each company, and not on an industry or area basis, this last provision is seldom applied.

(4) Industrial action The Constitution guarantees the right of workers to act collectively. This includes the right to take industrial action as well as other actions which do not amount to industrial action, such as distributing leaflets, organising meetings, and posting bills and posters. Although the current Criminal Code does not punish industrial action per se, statutory provisions relating to the obstruction of business by force, extortion, trespass, etc. are potentially applicable to industrial action. The Trade Union Law provides explicitly that the legitimate activities of a trade union are ‘justifiable acts’ in the context of Article 35 of the Criminal Code, and are exempted from criminal liability. Employers may not claim damages from the trade union or its members for taking part in a legitimate strike or other industrial action. Both criminal and civil immunity emanate from the Constitution, and the provision of the Trade Union Law is understood merely to confirm this constitutional guarantee. In addition, employers are not allowed to discriminate against workers who have taken part in or organised legitimate industrial action. Industrial action has to be legitimate as regards its subject, purpose, procedure, and methods. Firstly, industrial action has to be pursued by a trade union, although it does not have to meet the standards set by the Trade Union Law. For instance, a group of workers temporarily organised to advance a specific demand is also entitled to criminal and civil immunity, although it is not a trade union in the strict legal sense. On the other hand, wild-cat strikes, initiated by a small number of workers within a trade union, are not legitimate. Secondly, the purpose of the industrial action has to be justifiable. In this regard, the legitimacy of a political strike has been a focus of debate. The courts maintain that purely political strikes which have no direct bearing on improving the economic position of workers are not justified. Since the right to industrial action is guaranteed by the Constitution as a means to facilitate collective bargaining, issues which cannot be disposed of in the collective bargaining process cannot be legitimate aims of industrial action.⁷⁰ Some lawyers are of the opinion that industrial action against laws or policies directly related to economic interests of workers is justified. Thirdly, industrial action has to be procedurally fair. For instance, it is generally not justifiable to resort to industrial action without first making efforts

⁷⁰ Judgment of the Supreme Court, 2 April 1969, Keishū 23-5-685 (Zenshihō Sendai case).

Labour Law

403

to settle the dispute through collective bargaining. Industrial action taken in breach of peace provisions in a collective agreement is also not justifiable. Fourthly, the method of industrial action has to be appropriate. The use of force is not justified. As for picketing, there are conflicting views. In Japan, picketing plays a significant role in industrial disputes. The difference of opinion focuses on the limits of picketing, i.e. whether it should be limited to peaceful persuasion or not. In a leading case, a trade union of a mining company started a strike, demanding changes to the collective agreement. In the course of the dispute, some members withdrew from the trade union. The company employed new personnel and, together with those who had withdrawn from the union, attempted to break the picket line and resume business. Trade union members organised a sit-in at the entrance of the mine, formed a scrum, and prevented a mining car from entering the mine. Organisers of the picket were prosecuted for obstructing business by force. The Supreme Court ruled that the method of strike should be limited to a refusal to work. Preventing the employer from operating his business by force, threat, or obstructing the management of his property is not permissible. The Court added that ‘various factors and circumstances’ should be taken into account when judging the legitimacy of picketing.⁷¹ Since this judgment, the Supreme Court has been stricter in dealing with the breadth of criminal immunity when issues of picketing have arisen.⁷² Employers adopt various measures against industrial action. They are free to continue their business by using executive workers and other workers who do not belong to the trade union. They are also free to employ replacements. The Supreme Court did not accept that lock-outs were a legitimate practice in general, but ruled that in certain circumstances, when the employer is in an extremely disadvantageous position, a lock-out can be justified as a counter-measure to recover the balance of power between the employer and the workers.⁷³ In reality, the number of labour disputes has been substantially decreasing. In 1970, there were 4,511 labour disputes, whereas in 1990, it fell to 2,071, and in 2006, it was 708.⁷⁴

5. Procedure for Settling Labour Disputes Labour commissions settle industrial disputes and provide remedies for unfair labour practices. There are the Central Labour Commission, Central Seamen’s ⁷¹ Judgment of the Supreme Court, 28 May 1958, Keishū 12-8-1694 (Uhoro Coal Mine case). ⁷² Judgment of the Supreme Court, 25 April 1873, Keishū 27-3-418 (Kokurō Kurume Station case). ⁷³ Judgment of the Supreme Court, 25 April 1975, Minshū 29-4-481 (Marushima Suimon case). ⁷⁴ Working Life Profile, supra, p. 75.

404

Business-related Laws

Labour Commission, local labour commissions, and local seamen’s labour commissions (Trade Union Law, Art. 19, para. 2). Labour commissions are composed of representatives of employers, workers, and those who represent the public interest—neutral members. The Central Labour Commission consists of equal numbers (nine each) of members representing employers, workers, and the public interest. Members of the Central Labour Commission are appointed by the Minister of Health, Labour and Welfare. Representatives of workers are recommended by the trade unions. Appointment of those representing the public interest requires the consent of both the employer’s and the workers’ representatives (Art. 19). Labour commissions are responsible for reviewing the eligibility of trade unions for protection under the Trade Union Law (Art. 5, para. 1); reviewing complaints for unfair labour practices and providing remedies (Art. 7); and ‘adjusting’ (settling) industrial disputes (Art. 20). The procedure for the settlement of industrial disputes is regulated by the Labour Relations Adjustment Law.⁷⁵ When industrial action has been taken or is likely to be taken, the dispute can be brought to the labour commission (Art. 6). The first stage of the procedure once the case comes to the commission is mediation. A councillor appointed by the chairman of the labour commission makes efforts to clarify the issues and resolve the differences. This procedure can be initiated by either party to the dispute or by the chairman of the commission (Arts 10, 12, and 13). Parties are free to accept or not to accept the advice of the councillor. The second device provided by the Labour Relations Adjustment Law is conciliation. A conciliation panel set up within a labour commission hears the views of both parties, drafts a settlement, and recommends it to both parties (Art. 17). The conciliation procedure is initiated on joint application by both parties or application by either party if there is a conciliation clause in the collective agreement. In disputes involving public utilities, disputes on a major scale, or disputes which seriously affect the public interest, either party to the dispute, the labour commission, or the governor of a prefecture may initiate this procedure (Art. 18). The third device is arbitration conducted by an arbitration board established within the labour commission (Art. 29). Arbitration procedure is initiated on the joint application of the parties, or the application of one where there is an arbitration clause in the collective agreement. Arbitrators are chosen by the parties from among members of the labour commission representing the public interest (Art. 31-2). The decision has the same effect as a collective agreement and is binding on both parties (Art. 34). As in US law, there is a system designed to cope with a state of emergency. The Prime Minister is empowered to start an emergency adjustment (dispute ⁷⁵ Law No. 25, 1946.

Labour Law

405

settlement) procedure, when (i) the case concerns public utilities, (ii) the dispute is on a large scale, or (iii) the dispute involves an industry with a special nature such that it is likely seriously to affect the normal operation of the economy, or seriously to affect the normal life of people (Art. 35-2). When an emergency adjustment procedure has been triggered, the parties are not allowed to resort to industrial action for 50 days (Art. 38). The Trade Union Law provides for remedies for unfair labour practices. Although the present system was primarily inspired by the US Wagner Act, the definition of such practices differs from that found in the US. Four categories of unfair labour practice are listed. These include discrimination and disadvantageous treatment, such as dismissal, of the trade union members or those who intend to form a trade union, refusal of collective bargaining without reasonable grounds, control of or intervention with the organisation or management by the employer of the trade union, and disadvantageous treatment of those who sought remedies for unfair labour practices with the labour commission (Art. 7). Trade unions and workers may claim damages for unfair labour practices. In addition, they may pursue a remedy before the labour commission. Hearings are conducted by members of the local labour commission representing the public interest. If an act is found to be an unfair labour practice, the commission issues a remedial order to recover the status quo ante (Art. 27). Most cases end in a settlement before any formal decision is reached. If either party is unsatisfied with the outcome of the first instance, the decision can be appealed to the Central Labour Commission, and then to the court. The Administrative Litigation Law applies to such cases. In 2004, the Trade Union Law was amended in order to streamline the procedure for reviewing unfair labour practices.⁷⁶ The system of labour adjudication for disputes between individual workers and the employer was introduced at the district court level in 2006.

⁷⁶ A. Watanabe, ‘Futō-Rōdō-Kōi-Shinsa-Seido to Rōsō-hō no Kaisei (The System of Reviewing Unfair Labour Practice and the Amendment to the Trade Union Law)’, Jurist, No.1355, p. 76ff.

17 Civil Procedure 1. The Code of Civil Procedure The Code of Civil Procedure is the basic law on civil procedure. The Rules of Civil Procedure enacted by the Supreme Court, which is vested with rule-making powers by the Constitution, are also applicable. The first Code of Civil Procedure was promulgated in 1890 during the first period of codification. In 1926, it was substantially amended, using the Austrian Code of Civil Procedure of 1895 as a model. Another major reform of civil procedure took place after the Second World War. Some elements of the US procedure were introduced. Whereas the previous system relied heavily on the initiative of the judge rather than that of the parties, this second reform introduced the adversarial system. Cross-examination of witnesses, in principle, replaced the interrogation of witnesses by the presiding judge. However, the predominantly Austro-German approach to civil procedure still remained. The necessity for a major reform of the 1890 Code of Civil Procedure had been felt for some years. First of all, the Code had remained more or less the same since 1926 despite considerable societal and economic changes. The Code was not suited to cope with the complexity and diversity of some modern types of disputes such as those relating to product liability, medical malpractice, pollution, intellectual property, etc. where there are a number of litigants involved, and often an inequality of information and expertise between the plaintiff and the defendant. Secondly, there is a common perception in Japan that litigation takes too much time and is too expensive. The Ministry of Justice was concerned that the number of lawsuits filed in the courts had fallen in the 1990s even below the level in the 1930s while the number of disputes had certainly increased in the meantime. It was assumed that this symbolised the growing unpopularity of the judicial system amongst the general public. Measures to facilitate the access to the system were therefore sought. Thirdly, in the US–Japan SII Talks in the late 1980s, various flaws of Japanese civil procedure, such as the absence of discovery and insufficient measures to facilitate litigation by multiple parties, were pointed out by the US side. After five years of intensive work, a bill was submitted to Parliament and became law in June 1996. The Code came into force on 1 January 1998. Since

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

410

Other Laws

then, the Code has undergone two major amendments—one in 2003 and the other in 2004—as part of the Justice System Reform.

2. Jurisdiction The plaintiff is required to file a claim in the court which has jurisdiction over the case. The Code provides for a general forum and a special forum (Arts 4–7). These do not contradict one another, but are concurrent. It is common for a single claim to have several fora, and the plaintiff is entitled to choose the most suitable one. The general forum is determined by the place of residence in the case of an individual, and for juridical persons and other entities, the location of its principal office or place of business. If the individual’s place of residence is not in Japan, or is unknown, the forum is identified by the place of temporary residence. If this is not in Japan, or unknown, the last place of residence determines the forum. As for juridical persons and other entities, if there is no principal office or place of business, the place of residence of the representative or other executives is decisive. The general forum of foreign entities is determined by the location of the principal office or place of business in Japan, and if there is no such place in Japan, by the place of residence of the representative or executives in Japan (Art. 4). The Code also provides for various special fora (Art. 5). For proprietary claims, the forum is the place where the obligation is to be performed. In tort cases, the place of the tort is the forum. This can be either the place where the tortious act has taken place, or where the result has emerged.¹ In claims against shipowners and users, the place of registration of the vessel is the forum. As for claims involving real estate, the location of the property serves as the forum. It should be added that proprietary claims against those who are not residing in Japan or whose place of residence is unknown can be filed with the court with jurisdiction over the place where the subject matter of the claim, the collateral, or the attached property is located. In inheritance cases, the court which has jurisdiction over the place of residence of the heir at the time of inheritance serves as a special forum. Territorial jurisdiction can be altered by the agreement of the parties (Art. 11, para. 1). As part of the reform to facilitate the procedure involving intellectual property rights, a provision which acknowledges Tokyo and Osaka district courts as special fora in cases involving patent and utility model rights, and rights in respect of layout of semiconductor circuits and works regarding computer programmes, was introduced. By the 2003 amendment, the Tokyo and Osaka district courts were given exclusive jurisdiction in such cases. These courts have special departments and are equipped with judges and research officials with ¹ Judgment of the Kyoto District Court, 27 May 1965, Kaminshū 16-5-923.

Civil Procedure

411

expertise in such matters. Appeals against judgments of these courts are heard exclusively by the Intellectual High Court, which is a special division of the Tokyo High Court (Art. 6). In copyright cases (other than works on computer programmes), design rights, neighbouring rights, etc., the Tokyo and Osaka District Courts have concurrent jurisdiction with the court which has general jurisdiction (Art. 6-2).²

3. The Capacity to be a Party, Standing, and the Interest to Initiate an Action Both individuals and juridical persons can be parties to litigation. In addition, the Code provides that associations and foundations without juridical personality can sue and be sued in their own name, provided that they have a representative or a manager (Art. 29). The Supreme Court is of the view that such an entity should have a managing body; decide matters by a majority vote; continue to exist despite changes of members; and have established rules concerning representation, administration, and management. It acknowledged that an association (kumiai) which does not have juridical personality also has the capacity to sue.³ Foreign individuals and juridical persons established in accordance with foreign law also have the capacity to be a party. When recognised by law or treaties, they enjoy the same status as Japanese juridical persons. Foreign commercial companies are recognised by the Civil Code (Art. 36, para. 1). The capacity of foreign persons to act is determined by the law of their home country. However, the Code of Civil Procedure provides that even where a person lacks such capacity under the law of their home country, if Japanese law so provides, such a person may be acknowledged to have such capacity (Art. 33). In contrast to German law, Japanese law allows parties to take part in the proceedings without being represented by an attorney. Not only at the summary court level, but even at the district court level, litigation without an attorney is not uncommon. At the district court level, both parties were represented by an attorney in only 56,334 out of 172,975 cases in 2007.⁴ Standing, that is the eligibility to pursue litigation as a party in relation to a specific subject matter and to obtain judicial redress, is determined on a case-bycase basis. Standing is granted to those who have a legitimate interest in the subject matter of litigation. It is generally acknowledged to those who are contesting ² For information on the Intellectual Property High Court in English, see . ³ Judgment of the Supreme Court, 18 December 1962, Minshū 16-12-2422. ⁴ http://www.courts.go.jp/sihotokei/nenpo/pdf/B19DMIN20~25.PDF>.

412

Other Laws

rights under substantive law. In some cases, standing to sue is accorded to those other than the holder of the rights. An example is the derivative action, in which shareholders are entitled to sue directors on behalf of the company. With the increasing awareness on the part of individuals of their rights in areas such as consumer affairs and environmental issues, the insufficiency of the existing system in enabling groups of people to assert such rights came to be realised. It was also pointed out in the US–Japan SII talks that the difficulties faced by individuals in pursuing their rights under the Anti-Monopoly Law or Financial Instruments and Exchange Law have contributed to the lax implementation of these laws. The adoption of the system of class action was suggested by the US side. The 1890 Code did not envisage litigation by a group of individuals. The only system which enables members of a group to avoid a joint action with all members participating is the representative action (sentei-tōjisha-seido), which came from English law. Under this system, a person or persons selected by the parties acts as the litigating party on behalf of all other parties who share a common interest. The parties must have both a claim and a defence in common. The party who is to act on behalf of other parties must be chosen from amongst the parties. Only the selected party (parties) acts in the proceedings and the others cease to be a party (Art. 30, paras 1 and 2). In a representative action, all parties have to be specified. This is in contrast to class action in the United States where, at the time of the action, not all the parties have to be specified, while the effect of the judgment may extend beyond the original plaintiffs. Class action was in fact considered at the drafting stage of the present Code, but little support was given to the introduction of such a uniquely American system. On the other hand, the German system of Verbandsklage, which enables organisations of consumers and the like to sue in order to protect consumer interests, was studied. However, instead of introducing a system akin to the Verbandsklage, in the 1996 Code the representative action system was modified. Now, even after the litigation process has started, those who are not yet party to the proceedings but who share a common interest may subsequently appoint the representative in the ongoing proceeding to also represent their case in court (ibid., para. 3). In order to initiate an action, the plaintiff must have a legitimate interest in having the dispute settled by the court. The Law on Courts provides that the court is to adjudicate upon any legal disputes (Art. 3, para. 1). These disputes must involve specific rights and duties or legal relations. In some cases, the interest which justifies litigation may be lost by lapse of time. For example, the Supreme Court denied such an interest in a case where a shareholder sued the company to seek rescission of a new issue of shares effected in violation of law, since the shares had already been issued.⁵ In another case, litigation against the appointment of directors was found to be without legitimate interest, because, at the time of the litigation, those directors had already completed their term. ⁵ Judgment of the Supreme Court, 29 June 1965, Minshū 19-4-1045.

Civil Procedure

413

4. Preliminary Procedure (1) Interim measures Interim measures which are designed to secure the enforceability of the judgment are provided by the Law on Civil Interim Measures.⁶ There are two types of such measures: provisional attachment and provisional disposition. At the district court level, such measures are used in almost half of all cases. Provisional attachment is used in order to preserve the property at issue which belongs to the debtor for securing a monetary claim. It is available when the enforcement of judgment is likely to be impossible or extremely difficult without attachment (Art. 20, para. 1). An application for provisional attachment must be made to the court where the property is located or the court in which the original claim is pending. The application must specify: the parties and the representatives, the claim on which the attachment is based, the reason why attachment is necessary, and the property to be attached. The court may order provisional attachment without a formal hearing. In most cases, a provisional attachment order is issued on the basis of documentary evidence and the oral questioning of the applicant. The debtor may file an objection against the order, upon which the court may order suspension of the enforcement of attachment provided that the debtor pays a deposit (Arts 26 and 27). In such cases, a hearing has to be held. Provisional depositions are used (i) to preserve disputed property and (ii) to establish an interim legal relationship between the parties. Provisional disposition to preserve disputed property is a remedy for creditors who have a claim against property or rights, and not monetary. This is different from provisional attachment, in which the claim has to be monetary. For example, if the claim is for the transfer of property and there is a possibility that the defendant will dispose of it before the case is settled, the plaintiff may apply for a provisional disposition and obtain an order prohibiting the defendant from disposing of the disputed property. Provisional disposition to establish an interim legal relationship is used to prevent imminent harm to the plaintiff. The court temporarily grants the plaintiff all or part of the relief sought as an interim measure. For example, if the plaintiff is contesting the lawfulness of his dismissal from a company, the court may order the company to let him retain his employment position until the case is finally settled. In libel cases, the plaintiff may seek a provisional disposition to prevent the publication of an allegedly libellous statement.

⁶ Law No. 91, 1989.

414

Other Laws

The procedure for an application for a provisional disposition is basically the same as that for provisional attachment. In the application, the requested form of disposition has to be specified. The major difference from provisional attachment is that in a provisional disposition establishing interim relations, a hearing, or at least oral questioning of the defendant is required (Art. 23, para. 4). Particularly in provisional dispositions establishing interim legal relations, it can be difficult for the defendant to contest the validity of the order once it has been granted. This may mean that until final judgment, which may take several years to obtain, the defendant remains in a disadvantageous position. Therefore, courts are cautious of granting such orders.

(2) Preservation of evidence Before filing a complaint with the court, parties may ask the court to examine evidence, provided that there are grounds to believe that without such action, the prospective use of the evidence would be difficult (Code of Civil Procedure, Art. 234). The possibility of alteration of documentary evidence, such as clinical records, may also serve as a ground for preservation. Preservation of evidence before the submission of the complaint falls within the jurisdiction of the court in the place of residence of the person to be questioned, of the person who holds the document in question, or of the location of the thing to be examined.

(3) Interrogatories Pre-hearing discovery of evidence was very much limited under the 1890 Code. To a certain extent, the procedure for preserving evidence came to be utilised to achieve the same goal as discovery.⁷ The 1996 Code introduced a system similar to that of interrogatories in the United States. Parties are entitled to ask the opposite party in writing to clarify within a reasonable period matters necessary for the contested issues, once the complaint has been submitted to the court. Inquiries which are not specific or concrete, those which are offensive or embarrassing to the opposite party, repetitive inquiries, those asking for an opinion, inquiries which necessitate unreasonable cost and time, as well as those where the opposite party has the right to refuse testimony need not be answered (Art. 163). The opposite party is obliged to respond, but there is no sanction against non-compliance.⁸ This procedure is applicable only after the complaint had been filed with the court. This was perceived to be insufficient, and therefore, as a result of the 2003 amendment to the Code, a new procedure for the obtaining of evidence ⁷ M. Itoh, Minji-soshō-hō (Civil Procedural Law), 3rd edn (Tokyo, 2004), pp. 396–397. ⁸ See also Judgment of the Supreme Court, 11 June 1986, Minshū 40-4-872 (Hoppō Journal case).

Civil Procedure

415

before the complaint has been filed was introduced. This is intended to enable the parties to obtain information obviously needed for the hearing and, ultimately, to facilitate the hearing and to make it focussed. In order for the parties to obtain information needed for contesting the case in court, the prospective plaintiff is entitled to make an inquiry in writing with the prospective defendant on matters which are evidently needed for contesting the case in the proceedings. This has to be preceded by a notice in writing of the intention to file a complaint with the court. The inquiry must be made within four months of the notice (Art. 132-2). The prospective defendant is equally entitled to make inquiries of the prospective plaintiff, provided that he has responded to the inquiry of the prospective plaintiff in writing (Art. 132-3). Either party may refuse to provide information in cases of abusive requests, such as information involving privacy or trade secrets. There is no sanction for non-compliance with the request, but the fact that the given party failed to cooperate without a justifiable ground may be taken into consideration in the procedure.⁹ The prospective plaintiff is also entitled to obtain evidence which is evidently needed for his case and which is difficult to collect on his own via the court, provided that he had notified the counter-party of his intention to sue. Upon the decision of the court, the person who is in possession of the evidence is to submit documents, report the outcome of the entrusted research, or present an opinion in writing (Art. 132-4).

(4) Obtaining of documents One of the major shortcomings of the 1890 Code was the difficulty in obtaining evidence from the opposite party. The court was empowered to order the submission of documents, but its scope was limited. The Code provided that the possessor of a document was under an obligation to submit documents to the court if (i) the party in possession has made reference to it in the pleadings; (ii) the person with whom the burden of proof lies has the right to request a document from the possessor by virtue of substantive law to effect the delivery or inspection of the document; or (iii) the document was prepared for the benefit of the person with whom the burden of proof lies, or the document was prepared in connection with the relationship between the possessor and such party. Lower courts have endeavoured to interpret (iii) broadly.¹⁰ However, in a case involving a claim by residents against the prefectural government for damages resulting from a flood attributed to mismanagement of the river, the plaintiffs applied for the submission of a report commissioned by the local government. ⁹ A. Onose and K. Takechi, Heisei 15 nen Kaisei Minji-soshō-hō (2003 Amendments to the Code of Civil Procedure) (Tokyo, 2004), p. 38. ¹⁰ Decision of the Fukuoka High Court, 13 July 1977, Kōminshū 30-3-175 (Fukuoka Sumon case).

416

Other Laws

While the district court issued the order, the High Court reversed the decision, ruling that the aim of placing the parties on equal footing and ensuring a fair and just result should be weighed and balanced against the prevention of unreasonable harm to the possessor of the document. The court agreed that (iii) should not be interpreted narrowly, but held that the document in question was an internal one which had little relevance to the dispute.¹¹ The 1996 Code, as amended in 2001, introduced a general duty to produce documents. A new paragraph was added which provides that the person holding the document is not entitled to refuse submission of the document, if (i) the party is in possession of a document which he himself quoted in litigation; (ii) the person who owes the burden of proof is entitled to require the possessor to provide or let him inspect the document; or (iii) the document was prepared for the benefit of the person who owes the burden of proof, or was prepared regarding the legal relationship between this person and the possessor of the document. In addition to these grounds inherited from the 1890 Code there is a general duty to produce a document unless (i) the document involves matters regarding which the obligation to refuse testimony in criminal procedure is not exempted; (ii) the document involves official secrets of a government official and by its submission may harm the public interest, or may substantially inhibit the execution of public duties; (iii) the document is solely for the use of the possessor; or (iv) the documents consist of records of criminal and juvenile procedure (Art. 220).¹² If there is an application for the submission order of a document involving official secrets, unless the application was apparently groundless, the court must consult the administrative agency involved. If the agency considers the document to be such that by its submission, the public interest is harmed, or it substantially inhibits the execution of public duties, or the document was solely for the use of the possessor, it has to give reasons. If the administrative agency’s opinion cited (i) potential harm to national security, destruction of trust with a foreign country or an international organisation, or disadvantage in negotiating with them; (ii) obstruction of the prevention, suppression or investigation of crimes, maintenance of prosecution, enforcement of punishment, and other forms of maintenance of public security and public order, the court may order submission of the document only when the opinion lacks a reasonable ground (Art. 223, paras 3 and 4). The Supreme Court acknowledged the submission order of the investigation report of the labour standard inspector in a case involving an industrial accident, but in another case, denied the duty to submit a document containing the calculation of compensation for the reclaiming of the sea.¹³ ¹¹ Decision of the Tokyo High Court, 19 March 1979, Kōminshū 32–9/12–1391. ¹² Itoh, supra, pp. 372–382. ¹³ E. Sugiyama, ‘Bunsho-teishutsu-meirei ni kansuru Hanrei-riron no Tenkai to Tenbō (Development and Perspective of Case Law Doctrine regarding the Order to Produce Documents)’, Jurist, No. 1317, p. 97.

Civil Procedure

417

One of the flaws in the 1890 Code was the difficulty encountered by a party applying for a document submission order in identifying and specifying the document to be produced, particularly in the absence of full discovery. The 1996 Code provides that if the title and content of the document are extremely difficult to specify, it is sufficient for the applicant to present facts which enable the possessor to identify the document. In such cases, unless the application is groundless, the court is empowered to order the possessor to disclose the title and content of the said document (Art. 222, para. 1). When making the decision whether or not to order submission of a document such as one that may involve official secrets, the court may require the possessor of the document to show it to the court in camera. At this stage the opposite party does not have access to the document (Art. 223, para. 6). The 1996 Code has strengthened the available sanctions against refusal to produce a document. As a rule, if a party refuses to comply with a court order to produce a document, the court may accept the assertion of the opposite party concerning the content of the document as true (Art. 224, para. 1). The same applies if the party (possessor) destroys the document or by other means makes it unavailable. In these cases—if it is extremely difficult for the opposite party to make specific assertions concerning the content of the document and to prove the fact that the party intended to prove by this document with other evidence— the court may accept the party’s assertion concerning the facts to be true (ibid., para. 2) . If the possessor of the document is a third party, failure to comply with a court order is punishable by an administrative fine of up to 200, 000 yen (Art. 225, para. 1).

(5) Preparatory procedures The complaint submitted to court by the plaintiff has to specify the substance of the claim and factual grounds for the claim. The judge who is assigned to the case examines the complaint. At the initial stage, the complaint is examined from a formal point of view and investigated to see whether it is properly formulated. Then a copy of the complaint is served on the defendant. At the same time, the defendant is informed of the date of the first hearing and asked to submit a written reply to the claim. Parties are required to submit briefs in advance of the hearing. These should include the matters which the party intends to contest at the hearing. One of the major problems in the civil procedure was the serious delay in proceedings. The delay was partly attributed to the absence of an appropriate procedure to identify contested issues and to sort evidence. New issues were often raised at a very late stage and created further delays. The 1890 Code provided for the possibility of an in camera preparatory procedure in advance of formal hearings in order to clarify issues and identify evidence. Issues not raised or evidence not presented at this stage were not allowed

418

Other Laws

to be presented at the formal hearing. However, it was not possible to hear witness evidence in this procedure, since it was conducted in camera. Therefore, this procedure was rarely used. Influenced by the reforms in Germany and France, the court in Japan made efforts to speed up the procedure and experimented with informal measures in this respect. A practice of pleading-cum-settlement (benron-ken-wakai) developed with the support of the Supreme Court. In this in camera procedure, the judge and the parties get together at an early stage to narrow the issues and evidence and, if appropriate, to explore the possibility of reaching a settlement.¹⁴ The 1996 Code sets out three different procedures for narrowing the contested issues and identifying evidence. Firstly, there is the preparatory oral proceedings (junbiteki-kōtō-benron) (Arts 164–167). This is part of the formal oral proceedings and is conducted in open court if it is needed for identifying the issues and the evidence. At the end of this procedure, the court confirms with the parties the issues which are to be proved in the following proceedings. If a party later seeks to raise issues not raised at this stage, this party is obliged to explain the reason for the failure to raise the issue earlier. Secondly, the Code has a procedure for the preparation of oral proceedings (benron-junbi-tetsuzuki), which is based on a modification of the abovementioned practice developed by the court before 1996 (Arts 168–174). In contrast to the preparatory oral proceedings, this is not part of the formal hearing. The court may conduct a preparatory oral hearing after consulting the parties, if it considers it to be necessary. This proceeding is not entirely held in camera; both parties are entitled to take part, and those persons whom the parties request must be allowed to attend. In this procedure, the court may order the parties to submit their preparatory briefs, decide on the admissibility of evidence, and examine written evidence. It is possible to conduct this procedure via a telephone conference system if the parties live far apart. The parties may agree on settlement in this procedure. As with the preparatory hearing, at the end of this procedure the court confirms the issues which are to be proved in the subsequent proceedings. If a party then seeks to raise issues not raised at the preparatory hearing, this party is obliged to explain the reason for failure to raise that issue. The outcome of the pre-trial hearing is presented by the parties at the formal hearing. The third procedure introduced by the new Code is the preparatory proceedings in writing (shomen niyoru junbi-tetsuzuki) (Arts 175–178). This is available when the parties live far away. In this procedure, the issues are narrowed and evidence sorted by exchange of pleadings and/or by communication via a telephone ¹⁴ N. Iwai, ‘The Judge as Mediator: The Japanese Experience’, Civil Justice Quarterly, 1992, pp. 118–122. There was a fundamental criticism against this practice in that crucial issues are decided in private, and this procedure may pre-empt formal hearings and infringe the right of the parties to a public hearing. H. Inoue in the round-table discussion on the reform of civil procedure in Jurist, 1991, No. 971, pp. 182–183.

Civil Procedure

419

conference system. There is no fi xed date for the session, but the court must set a deadline for the submission of pleadings. After the completion of the successive exchange of documents, the court confirms the issues to be proved in the following proceedings. If a party then seeks to raise issues which were not raised at the preparatory hearing, this party is obliged to explain the reason for failure to raise that issue. As a result of the 2003 amendment to the Code, a new provision which mandates the court and the parties to conduct the proceedings in accordance with a plan was introduced (Art. 147-2). This was designed to achieve fair and speedy examination of the case and was influenced by the UK Woolf Reform. The court is under an obligation to prepare a plan for case management in complicated cases where there are multiple matters to be examined, or where the matters involved are complex (Art. 147-3, para. 1). The plan is to specify the period for the identification of the contested issues and evidence, the period for questioning witnesses and parties, and the timing of the termination of the hearing and the rendering of the judgment (ibid., para. 2). These measures seem to have worked well, and the time needed for the procedure has been substantially reduced (see Chapter 3).

5. Oral Proceedings (1) The role of the court The oral proceedings are conducted in open court, either by a single judge or by three judges. Almost 95 per cent of cases at the district court level are heard by a single judge. Japanese judges often handle more than a hundred cases simultaneously. The hearings are not held consecutively and the time allotted to each session is limited. Usually there is on average one month’s interval between the sessions. Shortages of judges and courtrooms are said to be the main reason for this. The judge is more active in Japan than in Anglo-American jurisdictions. Although the power of the judge has been reduced since the Second World War, the judge still plays a key role in the hearing. The judge is entitled to ask questions of the parties concerning legal as well as factual matters (‘the right of elucidation’: Art. 149, para. 1). The court may encourage the parties to produce evidence (Art. 151). Failure to exercise this power may serve as a ground for appeal. Judges have been fairly active in exercising this power. In one case, the claim of the plaintiff could not be made good unless he changed the legal basis of the claim. The Supreme Court ruled that in cases where had the plaintiff based the claim on different grounds, he would have won the case, but there has been some misunderstanding or carelessness on his part in not doing so, the court should

Other Laws

420

exercise its power to clarify the matter and encourage the plaintiff to reconsider the legal basis of the claim.¹⁵ The parties are free to dispose of the claim. The plaintiff may withdraw the claim, or the defendant may acknowledge the claim. The parties may reach settlement in or out of court. The judge is empowered by the Code to encourage the parties to settle the case at any stage (Art. 89). Around 29 per cent of cases ended with settlement at the district court level. A further 34 per cent were withdrawn; a majority of these cases are presumably settled out of court.¹⁶

(2) Examination of evidence The 1996 Code has introduced a major change to the rules governing the timing of the raising of new issues and production of evidence. The 1890 Code provided that new issues could be raised and evidence produced at any time until the end of the formal hearing. The 1996 Code provides that issues should be raised and evidence produced at an appropriate time in accordance with the progress of the proceedings (Art. 156). If, by intent or serious negligence, an issue is raised or evidence produced belatedly, such issues or evidence may be rejected where delay may be caused to the completion of the proceedings (Arts 157, 157-2). This arrangement derives from the German system after the 1977 amendments to the (German Code of Civil Procedure). Sanctions for non-compliance are provided, but it is reported that the German court interprets this provision narrowly. At the oral proceedings, the principles of oral hearing and directness apply. However, the parties often rely on written pleadings and replies. The judge often studies pleadings and other documents in chambers rather than in the court room. Concerning the principle of directness, the judge who heard the case must render the judgment. A change in the composition of the court is not unusual, given the career judge system in which judges are rotated around different courts. In such cases, the hearing has to start afresh, but the parties usually agree to use the records of testimony prepared by the court. The Code also provides that if the court finds it reasonable it may allow a party to present documents in lieu of an oral testimony, provided that both parties agree (Art. 205). A novelty introduced by the 1996 Code is the testimony and questioning through audio-visual devices. When it is necessary to question witnesses who live far away, the court may use devices such as video conference equipment (Art. 204). Details are to be provided by the Rules of Civil Procedure. Before the post-war reforms, witnesses were examined by the judge and the parties could only ask supplementary questions. As part of the post-war reform, the system of cross-examination was introduced. However, in practice, the parties are not always effective in questioning witnesses because of their lack of training ¹⁵ Judgment of the Supreme Court, 11 June 1970, Minshū 24-6-516. ¹⁶ .

Civil Procedure

421

in cross-examination and their lack of information attributable to the absence of discovery. Examination of evidence overseas is to be entrusted to the competent authority of that country or the ambassador, a minister, or consul of Japan posted in that country. Examination of evidence which is against the law of that country is nevertheless valid, unless it is not in breach of the Code of Civil Procedure in Japan (Art. 184) (see Chapter 19). Evidentiary rules in Japan are not as complex as those in common law countries. There is no restriction on the evidence which can be produced in court. Admissibility of evidence, including hearsay, is left almost entirely to the discretion of the court. This is said to be because in Japan professionally trained judges handle the case instead of a jury. The Code provides a right to refuse to testify if there is a possibility that the witness or a person related to the witness such as a spouse or a relative would be prosecuted or convicted as a result of that testimony. In addition, doctors, dentists, attorneys, patent attorneys, notaries, etc., or those who formerly held such positions, may refuse to testify on facts that they learned in the course of their profession (Art. 196). Concerning the testimony of government officials or former officials, the Code provides that in order to question them on knowledge obtained in the course of their duty, the authorisation of the relevant agency is required (Art. 191). The Code provides that such authorisation shall not be refused unless it is contrary to the public interest or significantly obstructs the carrying out of public duties (ibid.).

(3) Protection of trade secrets at the oral hearing One of the concerns of foreign parties about proceedings in Japan has been the insufficiency of protection of trade secrets at trial. There was a celebrated case involving a dispute between a US and a Japanese company over a breach of trade secrets. In the proceedings in Japan, the US party chose not to specify the information which it had claimed as a trade secret, fearing that once it was disclosed in court it would cease to be protected. The court ruled in favour of the Japanese party, since the US party failed to prove material facts.¹⁷ The Code acknowledges the right to refuse to testify about technical or professional secrets (Art. 197, para. 1). Secrets protected under the Code include secrets whose disclosure would affect the company so seriously and significantly that they have to be protected at the cost of fairness of the proceedings. In 2004, the Patent Law was amended, and the court is now empowered to conduct the questioning of a party regarding the trade secrets that this party holds in camera by the unanimous decision of the judges in cases where an ¹⁷ Decision of the Osaka High Court, 12 July 1973, Kaminshū 24–5/8–455.

422

Other Laws

infringement of a patent is at issue. This applies where the disclosure causes significant obstruction to the business of this party, and without the disclosure, an appropriate judgment regarding infringement cannot be ascertained (Patent Law, Art. 105-7). Furthermore, by virtue of the Patent Law and other acts involving intellectual property rights, the court is empowered to order the parties not to divulge trade secrets disclosed at the hearing. The Code also provides for the possibility of restricting access to a court record which contains significant secrets where third-party access would make it difficult for the affected party to lead a normal social life, or where the record contains trade secrets of a party, as defined by the Law against Unfair Competition (Art. 92).

(4) Burden of proof The burden of proof is often modified by presumptions, particularly in tort cases. In a case where a group of consumers sued oil companies for damages resulting from a cartel, the High Court ruled that if the raising of the wholesale price based upon a cartel and the increase of the retail price within the chronological and geographical scope of the cartel are proved, then the causal links between the cartel and the retail price increase are to be presumed, and the burden of proof shifted to the defendant oil companies to prove that the retail price had gone up for different reasons. However, this judgment was overruled by the Supreme Court.¹⁸ The Code introduced a provision to the effect that where it has been ascertained that loss has occurred, but by its nature it is extremely difficult to determine the amount of damages, the court is entitled to determine its reasonable amount, based on the result of the hearing and examination of all the evidence (Art. 248). This provision is intended to alleviate the burden of proof in such cases. There are similar presumptions of the amount of damage in intellectual property law (see Chapter 15). The principle of free evaluation of evidence, as opposed to the principle of statutory evidence (Prinzip der gesetzlichen Beweisregeln) is accepted in Japan. The court is required to consider the entire hearing and the result of its examination of the evidence, but is not bound by any rule in assessing the evidence. However, the court must follow the rule of reason. The standard of proof does not have to be that of scientific proof. The Supreme Court ruled in a medical malpractice case that causal links do not have to be proved beyond all doubt, but that it will suffice if there is a high probability that a specific result followed a specific fact.¹⁹ ¹⁸ Judgment of the Sendai High Court, Akita Division, 26 March 1985, Hanji 1147–19. Judgment of the Supreme Court, 8 December 1989, Minshū 43-11-1259. ¹⁹ Judgment of the Supreme Court, 24 October 1975, Minshū 299-9-1417.

Civil Procedure

423

(5) Judgments and decisions After the close of the oral proceedings, the court renders a judgment or a decision. Judgments are rendered on the merits of the case, while decisions are given on procedural matters.

6. Appeals Judgments and decisions of the district court can be appealed to the High Court and then to the Supreme Court (see Chapter 3). Concern has been voiced that the Supreme Court is unable to concentrate on matters such as constitutional review and the standardisation of the interpretation of laws due to its excessive caseload. The 1996 Code introduced measures to reduce the burden on the Supreme Court. The Code provides that, as a matter of right, errors in interpretation and other violations of the Constitution are grounds for a second appeal (jōkoku appeal) (Art. 312, para. 1). The same applies when the composition of the court was against the law; a judge who was not lawfully entitled to do so took part in the judgment; there was a violation of rules concerning jurisdiction; representatives lacked necessary authorisation; the hearing was not conducted in public; the judgment lacked reasons or the reasoning contained contradictions (Art. 312, para. 2). In addition, a new system of petitions to the Supreme Court modelled on the US writ of certiorari has been introduced. On petition, the Supreme Court may accept cases in the exercise of its discretion if the judgment is contrary to precedent or contains significant matters concerning the interpretation of laws and ordinances (Art. 318, para. 1). In 2007, 1,786 cases were appealed to the Supreme Court. In addition, the Court accepted 2,083 cases by its discretion.²⁰

7. Enforcement of Judgments The basic law which regulates the enforcement of judgments is the Civil Enforcement Law.²¹ This covers the enforcement of judgments and interim measures, as well as the realisation of real security rights.

²⁰ . ²¹ Law No. 4, 1979.

424

Other Laws

There are different enforcement procedures for monetary and non-monetary claims. Furthermore, procedures for the enforcement of claims differ in accordance with the object of enforcement, such as immovables, movables, and other properties including claims against a third party. Ships are treated as immovables. The first step in the enforcement of monetary claims is attachment of the property. In enforcement over movables, the bailiff takes possession of the object. In enforcement over immovables and claims against a third party, the court declares that the property in question is attached. The judgment debtor is forthwith prohibited from disposing of the property. There is a risk that property which belongs to a third party may be seized together with the judgment debtor’s property. In such cases, the third party may file an objection. The second stage is the procedure to convert the property into money. The primary means of realising the property is sale by tender or auction. Concerning immovables, it is possible to place the property under compulsory administration. The court appoints an administrator who manages the property, while the owner is deprived of the rights to use and profit from it. The profits are paid to the judgment creditor. If the judgment debtor has a claim against a third party which is due, this can be attached. The judgment debtor may not dispose of the claim, while the third party is prohibited from repaying the debt to the judgment debtor. The judgment creditor is entitled to collect the debt or to ask the court to transfer the claim to him. The realisation of non-monetary claims can take various forms. The judgment ordering the party to transfer property can be realised by direct enforcement. The court or bailiff seizes the property in question and hands it to the plaintiff. A judgment which obliges a person to do something can be enforced by substitute performance at the cost of the defendant. An obligation not to do something can be enforced by indirect enforcement, i.e. the imposition of fines until the defendant complies. The agencies in charge of enforcing judgments are the court and the bailiffs. The court has jurisdiction over immovables, claims, and other proprietary rights. It also has jurisdiction over the enforcement of judgments obliging a person to do or not to do something. The bailiff is an independent judicial agency who works at the district court. The bailiff handles enforcement over movables as well as the transfer of the possession of movables and immovables. In order to initiate the enforcement procedure, the creditor must have an enforcement title (saimu meigi). A title is an official document which certifies the existence of a claim that is subject to enforcement. Agencies of civil enforcement must determine the enforceability of the claim solely by its title. A title is usually a court judgment in force. A court judgment which is yet to take effect but has a declaration for provisional enforcement attached to it, as well as other documents such as a notarised document in which the debtor voluntarily accepts

Civil Procedure

425

enforcement, are also titles (Art. 22). Judgments of a foreign court and foreign arbitral awards also serve as title for enforcement (see Chapter 19). In addition to the title, an enforcement clause which certifies the validity and enforceability of the title is needed for enforcement. This is granted by a court clerk or, in some cases, by a notary public. The Civil Enforcement Law also provides for the realisation of real security rights. In such cases, a title is not required for enforcement.

8. Small Claims Procedure At present, summary courts have jurisdiction over proceedings where the contested amount is less than 1,400,000 yen. A simplified procedure is available for summary courts to handle these legal actions, but the procedure still takes time and is seldom used. Moreover, these courts are inundated with claims brought by consumer credit companies against debtors. The 1996 Code introduced a less complicated procedure for claims of 600,000 yen or less handled by the summary court. These disputes are still to be handled by summary courts. Unless special circumstances exist, the hearing has to be completed within one day (Art. 370). Counter-claims cannot be presented (Art. 369). Examination of evidence is simplified; testimony can be given without oath (Art. 372, para. 1). Evidence to be examined is limited to that proof which can be examined immediately (Art. 371). The judgment is to be handed down immediately after the completion of the hearing unless there are reasonable grounds not to do so (Art. 374, para. 1). The court may, in acknowledging the claim, order that payment be made in instalments over a three-year period, based upon the financial status of the debtor and other circumstances (Art. 375, para. 1). No appeal is allowed against a judgment rendered by this procedure (Art. 377). The defendant may opt for the standard summary court procedure, but this choice cannot be exercised once the defendant has appeared in the hearing or the hearing has been completed (Art. 373, para. 1).

18 Criminal Law and Procedure 1. The History of Criminal Law The primary statute on criminal law in Japan is the Criminal Code of 1907. There are also separate laws which provide for specific crimes, generally designated as ‘special criminal laws’, such as the Law on Misdemeanours, the Law on the Prevention of Subversive Activities, the Law on Penalising Hijacking, the Law on the Prohibition of Unlawful Access to Computers, and the Law on the Control of Stalking.¹ There are also a number of laws which provide penalties for their breach. The Company Law, the Financial Instruments and Exchange Law, the Anti-Monopoly Law and many other laws contain penal provisions. The Criminal Code is divided into the General Part and the Special Part. The former lays down the general principles and basic concepts of criminal law such as intention, negligence, attempt, accomplice, etc. The latter lists individual crimes. General rules put forward in the General Part of the Criminal Code also apply to special criminal laws. The first comprehensive criminal code, enacted after the fall of the Tokugawa Shogunate, was the Shinritsu-kōryō of 1869. This was primarily influenced by the Chinese Ming and Ching codes, as well as the law of the Tokugawa Shogunate. This was supplemented by the Kari-keiritsu in 1873. These statutes, however, proved to be unsatisfactory for a country which aspired to achieve equal status with Western European countries. Therefore, attempts to draft another code based on a European model were made in the 1870s. This finally resulted in the enactment of the Criminal Code of 1880. A French adviser, Gustave Boissonnade, who is known for preparing the Civil Code, was in charge of the drafting process, but the content of his draft was watered down in the last stages. Consequently, although the Code was heavily influenced by the French Code, some influences of German law can also be detected. It should be noted that the principle of nulla crimen sine lege was first introduced to Japan by this Code. The Code of 1880 was replaced by the current Criminal Code in 1907. In contrast to the 1880 Code, the new Code was primarily based on German law. A new school of thought in criminal law and criminology promoted by Italian ¹ Laws No. 39, 1948; No. 240, 1952; No. 87, 1974; No. 28, 1999; and No. 81, 2000.

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

Criminal Law and Procedure

427

and German scholars had emerged at this time in Europe and influenced those involved in preparing the Code. This new theory laid emphasis on the sociological factors that generate crimes and substituted the concept of rehabilitation for that of retribution. Ever since the enactment of this Code, the influence of German law and legal theory on the interpretation and study of criminal law has been seminal.² This Criminal Code was partly amended soon after the Second World War in order to bring it into line with the present Constitution. Thus, crimes against the Imperial Family were repealed as a result of the change in the status of the Emperor. Espionage and other crimes which presuppose a state of war were also removed from the Code. The newly endorsed principle of gender equality necessitated the abolition of crimes such as adultery for which only the wife was punished. Furthermore, with the increased guarantee of freedom of expression, the provision which punished disruption of public peace and order was removed and the provision regarding libel was amended. Under the present Code, if a statement concerns a matter of public interest and was made for the benefit of the public, the person who made the statement is not punishable if he proves that the statement is true (Art. 230-2). The move for a total amendment of the present Code began in the 1920s when a programme for the reform of the Criminal Code was published. In 1931, a ‘provisional draft’ of the General Part was completed, followed by the Special Part in 1941. This attempt to reform the Code failed mainly due to the outbreak of the war. In the mid-1950s the Ministry of Justice started work on a new criminal code. A subcommittee on criminal law of the Legislative Advisory Council was commissioned to review the existing Code. It concluded that the Code should be totally amended, and prepared a draft to this effect. This was approved by the Council in 1974.³ The underlying tenor of the draft was the principal target for criticism.⁴ The draft was based on the ‘provisional draft’ and had failed to take into account the democratic changes which had taken place after the Second World War. It was not surprising that the draft which was prepared in the pre-war period gave priority to the maintenance of public security rather than the safeguarding of individual rights. There was excessive emphasis on the ethical nature of criminal law. Criminal law was considered primarily to be an instrument to maintain the ethical standards of the people and to preserve traditional virtues. In contrast, opponents of the draft regarded criminal law primarily as a device to protect citizens against violations and infringements of their rights and interests. In their ² For the history of criminal law, see K-F. Lenz, ‘Penal Law’ in W. Rohl ed., History of Law in Japan since 1868, Leiden 2005, S. 607ff. ³ K. Matsuo, ‘The Development of Criminal Law since 1961’, in D. Foote, Law in Japan: A Turning Point (Tokyo 2007), pp. 312–314. ⁴ R. Hirano, ‘The Draft of the Revised Penal Code: A General Critique’, Law in Japan (1973), vol. 6, pp. 49–64.

428

Other Laws

view, criminal law should refrain from interfering with ethics; after all, in this age of pluralism, it was considered impossible to agree on ethical absolutes. The draft’s overwhelming concern for public security was demonstrated by the introduction of special ‘security measures’ for those who were found by the court to be not guilty or only partly responsible on the ground of insanity. The draft provided explicitly that these measures be applied when needed for the maintenance of public security. They were to be applied not in psychiatric hospitals but in institutions under the jurisdiction of the Ministry of Justice. The term for such measures was three years, renewable twice. For those who are highly likely to commit a crime in respect of which imprisonment for more than two years is applicable, there is no limit to the number of renewals. These measures were also applicable to psychopaths. It was generally agreed that the system of treating these offenders at that time was not immune from flaws. However, the system proposed by the draft was considered to have gone too far towards the maintenance of public security at the cost of the rights of the mentally ill. There was a general trend of overcriminalisation in the draft. In total, the draft added more than twenty new crimes to the present Code, and increased the penalties for a number of crimes. It incorporated various provisions in the chapter on crimes against the interest of the State and increased the penalties for them. Divulging of official secrets covered by the Law on Government Employees was ‘upgraded’ to the Code without due consideration of the effect that increased penalties would have on the right to access to information. Abortion, seldom punished despite the existence of a provision in the Code, still remained in the draft and its scope was extended. The draft was subjected to a crossfire of opposition. In the end, the idea of the criminal law reform based upon this draft was abandoned. In fact, since the 1970s there has not been any attempt to amend the Criminal Code as a whole. The 1907 Code still remains in force. Nevertheless, some changes were needed, so these changes were introduced via piecemeal amendments over the years. After the failure to enact a new Code, instead of partial amendments to the existing Code, separate laws, such as the laws penalising hijacking, the taking of hostages, unlawful organ transplant, child pornography, unlawful access to computers etc. were enacted in order to accommodate new categories of criminal offences.⁵ It should be noted that Japan has ratified the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and accordingly introduced the offence of bribery of foreign public officials by amending the Law against Unfair Competition in 1998. This Law was further amended in 2004 in order to make the offence committed by a Japanese national abroad punishable.

⁵ Laws No. 68, 1970; No. 48, 1978; No. 104, 1997; No. 52, 1999; and No.128, 2006.

Criminal Law and Procedure

429

Table 18.1 Number of reported cases, crime rate, and clearance rate for major offences in five countries (1994–2003)

(1) Reported cases 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 (2) Crime rate 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 (3) Clearance rate 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

France

Germany

3,919,008 3,665,320 3,559,617 3,493,442 3,565,525 3,567,864 3,771,849 4,061,792 4,113,882 3,974,694

6,537,748 6,668,717 6,647,598 6,586,165 6,456,996 6,302,316 6,264,723 6,363,865 6,507,394 6,572,135

5,032,447 4,885,944 4,868,376 4,460,599 5,109,089 5,301,187 5,170,843 5,525,024 5,898,560 5,934,577

13,989,543 13,862,727 13,493,863 13,194,571 12,485,714 11,634,378 11,608,070 11,876,669 11,878,954 11,816,782

1,784,432 1,782,944 1,812,119 1,899,564 2,033,546 2,165,626 2,443,470 2,735,612 2,854,061 2,790,444

6,783 6,317 6,110 5,972 6,072 6,097 6,421 6,880 6,932 6,666

8,038 8,179 8,125 8,031 7,869 7,682 7,625 7,736 7,893 7,963

9,845 9,529 9,470 8,651 9,878 10,208 9,917 10,552 11,220 11,241

5,374 5,275 5,088 4,927 4,620 4,267 4,125 4,163 4,125 4,063

1,425 1,420 1,440 1,506 1,608 1,710 1,925 2,149 2,240 2,187

34.9 32.5 30.2 29.5 28.7 27.6 26.7 24.9 26.3 28.8

44.4 46.0 49.0 50.6 52.3 52.8 53.2 53.1 52.6 53.1

UK

26.4 26.1 26.5 28.2 29.3 25.2 24.4 23.4 23.6 23.5

USA

Japan

21.4 21.2 21.8 21.6 21.3 21.4 20.5 19.6 20.0 19.8

43.0 42.2 40.6 40.0 38.0 33.8 23.6 19.8 20.8 23.2

Notes: 1. Data compiled on fiscal year basis (from April to the next March) instead of calendar year basis for the UK from 1998. Classification of crimes is changed. The new crime reporting standards were adopted in 2002. 2. ‘Major offences’ for the US until 2001 refers to crime index offences excluding arson (estimate). 3. Figures for the US were based on statistics published in 2004, and the number of reported cases for 2002 was changed. 4. Latest demographic data available were used for the calculation of the crime rate. In particular, data for the UK were compiled based on the revised demographical data for the period from 1992 (Annual Abstract of Statistics published in 2005). 5. The clearance rate for ‘Major offences’ for the US in 2003 was estimated based on the clearance rate for violent crime and property crime.

Other Laws

430 Table 18.1 (Continued)

Sources: France: Aspects de la crimitalite et de la delinquasce constatées on France Germany: Folizeiliche Kriminalstatistik UK: Crime in England and Wales (Criminal Statistics England and Wales for data until 2000) USA: Crime in the United States Japan: Annual Report of Criminal Statistics on Police Ministry of Justice, White Paper on Crimes, 2005,

However, since 2001, the Criminal Code began to be amended frequently— almost every year. In that year, the offence of reckless driving resulting in death or injury was newly introduced by an amendment to the Code. In this area, later in 2007, an offence of negligent driving resulting in death or injury was separated from the offence of negligently causing death or injury, with the maximum penalty being twenty years’ imprisonment. In 2004, the maximum penalty for malicious and serious crimes was raised. As seen in the above table, Japan is known for a low crime rate, but these developments reflect the growing intolerance of the general public towards certain types of crimes resulting in the death of the victim. Apart from these changes, an important development regarding criminal law was the total transformation of the language of the Criminal Code in 1996.⁶ Previously, the language of the Code was classical literary Japanese, which has become difficult for the general public to comprehend. Therefore, the Code was totally rewritten in plain modern language. On this occasion, the provision on patricide, which was found by the Supreme Court to be unconstitutional in 1973, was finally removed from the Code.

2. Basic Rules of Criminal Law Japanese criminal law is primarily based upon the German system. For an act to be punishable, three basic requirements need to be met. An act constitutes a crime when it coincides with the definition of a specific crime (Tatbestand), is against the law (rechtswidrig), and is blameworthy (schuldig)7. As in Germany, specialists of criminal law in Japan have endeavoured to work out a systematic theory of criminal law incorporating these three requirements. This theoretical framework is designed to assist judges in deciding whether or not a specific offender is punishable. The doctrine of nulla crimen sine lege is acknowledged in Japanese law. It has its basis in the Constitution, which guarantees due process of law (Art. 31) and prohibits retrospective application of the criminal law (Art. 37). Thus, only laws

⁶ K. Matsuo and S. Shiono (eds) Rippō no Heiika (The Simplification of Legislation) (Tokyo, 1997). ⁷ See N. Nishida, Keihō-sōron (The General part of Criminal Law) (Tokyo, 2006), pp. 58–59.

Criminal Law and Procedure

431

enacted by the Diet (Parliament) may provide for punishment. There are two exceptions to this rule: delegated legislation and local regulations. As a corollary of this principle, the application of criminal law by analogy is not allowed. Nevertheless, there are cases in which the court has interpreted the provisions of the Code rather broadly. There was a celebrated case in the 1900s where a person who had used electricity without permission was found guilty of theft. Before this case, theft had to be of tangible things, but the court in this case ruled that it sufficed if the object was controllable.⁸ Incidentally, when a similar case came before a German court, the court acquitted the defendant.⁹ In a more recent case, the court acknowledged that forgery of a photocopy was punishable in the same way as forgery of the original document, thus extending the meaning of ‘document’ to cover photocopies.¹⁰ A similar development can be seen in cases involving bribery.¹¹ A former prime minister was prosecuted for accepting bribes. The court interpreted the scope of power of the prime minister broadly and found him guilty.¹² To this extent the doctrine of nulla poena sine lege has been modified by case law. Substantive due process requires that the definition of specific crimes should not be vague. At least theoretically, the Supreme Court has recognised this requirement, but there has been no case where it found a provision invalid because of its vagueness.¹³ The fact that a given act coincides with the definition of a specific crime does not necessarily result in punishment. A typical example is self-defence—a defensive act against imminent and unlawful attack on the ‘rights’ of a person (Art. 36). Another exemption is a legitimate act either based on the law or performed as part of a legitimate business (Art. 35). For instance, industrial action may be regarded formally as an obstruction of business by force, but is not punishable, since it is made legitimate by the Trade Union Law insofar as it is carried out without violence (Art. 1, para. 2). An operation by a physician is not punishable as an assault, since it is his legitimate business. An act is punishable only when the person who committed the act had mens rea, i.e. either had an intention to commit the crime or acted negligently. Negligence is punishable only when there is an explicit provision. As a rule, Japanese criminal law does not acknowledge absolute responsibility. There are, however, two exceptions to this rule. First, there are provisions for vicarious responsibility where a juridical person is held liable for the act of its employees. Secondly, where the offender intended a certain act but the result of his action 8

Judgment of the Supreme Tribunal, 21 May 1903, Keiroku 9-14-874. M. Maeda, Keihō kara mita Nihon (Japan Viewed through Criminal Law) (Tokyo, 1997), p. 58. ¹⁰ Judgment of the Supreme Court, 30 April 1976, Keishū 30-3-452. ¹¹ Maeda, supra, pp. 126–134. ¹² Judgment of the Supreme Court, 22 February 1995, Keishū 49-2-1 (Rockheed Marubeni Route case). ¹³ For instance, see the Judgment of the Supreme Court, 23 October 1985, Keishū 39-6-413. 9

432

Other Laws

was more serious than he had expected, he may be held responsible for the result. For instance, if A assaulted B, who died as a result of this attack, although A had not intended to kill B nor had foreseen his death, A is still responsible for B’s death. Such cases do not constitute homicide, but are punishable under another provision (Art. 205). The concept of negligence has been disputed in recent years. Negligence is understood to be a breach of the duty of care. It is the content of this duty of care which is the focus of controversy. One school of thought maintains that negligence is punishable because of the failure to foresee the outcome of an act. Another lays emphasis on the failure to avoid the outcome of the act. Even when the outcome of the act could have been foreseen, this does not necessarily mean that the person was negligent. There must have been a possibility to avoid the outcome of the act, and only when the person proceeded to carry out an act entailing an ‘impermissible risk’ can he be found negligent. In addition to these theories, another theory of negligence has emerged. This was partly a result of the serious pollution and corporate crimes since the mid1960s. This theory claimed that foreseeability of the outcome of one’s act was not always necessary. In certain cases, a mere feeling of anxiety that a harmful result might occur is sufficient to establish negligence. This theory was designed to cope with situations where major corporations and senior executives managed to avoid criminal responsibility while their low-ranking employees were held responsible. In a case decided by a lower court a dairy company produced and sold dried milk tainted with arsenic that resulted in the deaths of several children; the High Court found the director of the plant responsible on the basis of this theory. The court ruled that it was impossible for the employees to foresee that the raw materials were tainted by arsenic, but found the defendant director guilty, since he must have felt ‘anxiety’.¹⁴ However, this theory has been criticised since it may amount to absolute responsibility and is not compatible with the basic idea underlying the present Code. The judgment in the above-mentioned case is somewhat isolated and recent judgments indicate that foreseeability is still required.¹⁵ If a person acted out of extreme necessity, even if the act is against the law, he cannot be blamed and is not punishable insofar as the harm caused by the act does not exceed the harm that he intended to avoid (Art. 37, para. 1). If the person is insane, he cannot be held responsible for his act. Criminal insanity is defined as the inability to distinguish right from wrong and act accordingly (Art. 39, para. 1). The Code also provides for reduced penalties for those whose ability to distinguish right from wrong and to act accordingly has been considerably diminished (Art. 39, para. 2). ¹⁴ Judgement of Takamatsu High Court, 31 March 1963, Kōkeishū 19-2-136. ¹⁵ Nishida, supra, pp. 241–242.

Criminal Law and Procedure

433

Minors under 14 years of age are not held responsible for criminal actions (Art. 41). Offenders who are under the age of 20 are covered by the Juvenile Law and fall within the primary jurisdiction of the family court.¹⁶ The Criminal Code provides that if more than two persons jointly commit a crime, they are joint principals (Art. 60). In addition, the Code provides for instigators and aiders (Arts 61 and 62). Instigators are treated in the same way as the principal, while penalties for aiders are less severe. Whether it is possible to punish as a principal a person who did not actually take part in the commission of a crime, but masterminded it and conspired with the others is a matter of dispute. Originally it was thought that such a person should be punished as an instigator. However, the court has developed case law to the effect that such a person should be punished as a principal. In a case decided in 1958, just such a person was prosecuted. The Supreme Court ruled that he was a principal because he had used the acts of the others as an instrument to commit a crime.¹⁷ The main penalties provided for by the Code are as follows: capital punishment, imprisonment with compulsory labour, imprisonment without compulsory labour, and fines (Art. 9). Imprisonment can be for life, or for a maximum of twenty years. There is controversy as to whether capital punishment should be abolished altogether. Crimes punishable by death in Japan are limited to acts such as homicide or those involving serious risk to human life.¹⁸ Despite criticism from abroad regarding the continuation of capital punishment, the Japanese government has maintained that it should be kept. Indeed, with the increasingly tougher stance of the general public against serious crimes, the number of cases in which defendants are sentenced to capital punishment and the actual rate of execution have increased in recent years. In 2007, twentythree persons were sentenced to death, while there were ninety-four persons on death row.¹⁹

3. Specific Crimes in the Special Part of the Criminal Code and other Laws In total, the Special Part has around 180 provisions. The definition of each crime is not necessarily as specific and descriptive as in the laws of some other countries. For instance, there is only one provision on homicide, which provides that ¹⁶ Law No. 168, 1948. ¹⁷ Judgment of the Supreme Court, 28 May 1958, Keishū 12-8-1718. ¹⁸ Concluding observations of the Human Rights Committee, Japan 2008 ¹⁹ .

434

Other Laws

a person who kills another shall be punished by death, life imprisonment, or imprisonment for more than three years (Art. 199). This is different even from the German Criminal Code that served as a model for the present Japanese Code. It was probably the influence of the new school of thought on criminal law and criminology of the late nineteenth century which resulted in these simplified provisions. Crimes are classified in accordance with the nature of the interests that the law intends to protect, for example, crimes against the interests of the State, crimes against the interests of society, and crimes against the interests of individuals. Originally, the Special Part of the Code began with crimes against the Imperial Family, which were deleted after the War. The present Code starts with crimes against the interests of the State—treason. In recent years there has been a move to provide further protection for State secrets. At present, the Code does not penalise the unauthorised divulgence of such secrets. Instead, the Law on Government Employees and the Law on Local Government Employees cover the unauthorised divulgence of official secrets. As for military secrets, the Law on the Self Defence Force and a special criminal statute based upon the Mutual Security Agreement with the United States contain penal provisions.²⁰ The government considered the present system inadequate and therefore included new provisions in the 1974 draft criminal code. When it seemed unlikely that the draft would be adopted, the government prepared a separate draft on the law for the protection of State secrets. State secrets in this draft cover military secrets as well as secrets touching on international relations which need protection for the defence of the country. Punishable acts include handing over official secrets to a foreign country, searching for and collecting such secrets, and their divulgence. This draft met with criticism from various quarters. First, it was not clear why the present system was considered so inadequate as to warrant new legislation. Secondly, the draft did not give due consideration to freedom of information and the right of access to government information. The collection of information by the media would be hampered by this draft. Thirdly, the definition of State secrets in the draft was vague and likely to lead to an extensive application of penalties. This is in contrast with the German Criminal Code, which has a provision exempting from protection as State secrets information concerning matters fundamental to the tenets of a democratic system (StGB 193). The draft was submitted to the Diet as a bill in 1985 but failed to become law. One of the salient characteristics of the Code is its leniency towards moral crimes. Homosexuality has never been punishable. Abortion is punishable by the Code, but another law enacted after the war made abortion for economic reasons legitimate. Therefore abortion has been virtually decriminalised. ²⁰ Laws No. 120, 1947; No. 261, 1950; and No. 138, 1952.

Criminal Law and Procedure

435

Facilitating prostitution is covered by a separate law, but prostitution per se is not an offence.²¹ Another issue which has been discussed in recent years is the concept of death in criminal law. The Code does not have any provision on this matter. The issue was raised by the first heart transplant operation in Japan in 1968. The donor had been brain-dead for some time and was then declared to be clinically dead. Some people questioned whether the donor was legally dead at the time of the heart transplant. The Public Prosecutor’s Office conducted a thorough investigation and found that there was no basis for prosecuting the physician for causing death by negligence. A government committee has accepted brain death as a sufficient ground for a finding that death has occurred. In 1997 the Law on Organ Transplant was enacted.²² This allows organ transplantation from those who are brain-dead. Protection of trade secrets is another issue which has attracted attention in recent years. The present Code does not have a provision which deals directly with industrial espionage. If an act involves industrial secrets embodied in a document or a product, their transfer to a third party may be punishable as theft or embezzlement. However, when the act involves disembodied information, the applicability of the Code is very limited. In 1988 this issue was raised in the US–Japan bilateral negotiations on intellectual property. A new provision was introduced to the Law against Unjust Competition in 1989 in order to make breaches of trade secrets punishable (see Chapter 15). Pollution has been a serious problem in Japan since modernisation and rapid industrialisation began at the end of the last century. In the mid-1960s, as Japan was achieving high economic growth, environmental pollution became even worse. River pollution caused the deaths of inhabitants in several areas and many people suffered from asthma in areas close to industrial sites. Against this background, the draft criminal code initially included provisions on pollution offences. Later, this part was separated from the draft and was adopted as the Law on the Punishment of Pollution Offences against Human Health in 1970.²³ The Law punishes the intentional or negligent discharge of harmful substances which endanger human life or health in the course of entrepreneurial activities (Arts 2 and 3). The polluting company is punishable together with the actual offender. The Supreme Court denied the applicability of this provision to a case where a person mistakenly unloaded sulphamic acid into the wrong tank, and as a result the local inhabitants suffered from the effects of chlorine gas. The court ruled that this kind of accident should not be regarded as a negligent act in the course of entrepreneurial activities under this Law. The defendant employee was

²¹ The Law on Prevention of Prostitution, Law No. 118, 1956. ²² Law No. 104, 1972. ²³ Law No. 142, 1970.

Other Laws

436

convicted by a provision of the Criminal Code, but the company was found not guilty of violating the Law.²⁴ Organised crimes by gangsters (bōryokudan) are not uncommon in Japan. The Law on the Prevention of Unjust Acts by Members of Gangster Organisations was enacted in 1991, followed by the Law on Punishing Organised Crimes and the Regulation on the Proceeds from Crimes in 1999.²⁵

4. Criminal Procedure (1) Historical background The first systematic Code of Criminal Procedure was the Code of Criminal Instruction of 1880. This was based primarily on the French Code of 1808, but some provisions came from German law. However, the system of courts and the procedures provided by this Code proved to be too cumbersome, and the Code was soon replaced by a new law which followed the German model. This in turn was replaced by another Code in 1922, again patterned on German law.²⁶ Thus, criminal procedure in the pre-war period was entirely based on the civil law system. Radical changes to criminal procedure were introduced after the Second World War at the initiative of the Allied Forces. The Constitution incorporated a provision on due process of law, and guaranteed the right to defence and other related matters in the Bill of Rights. This necessitated a fundamental reform of criminal procedure. US advisers worked on the draft code of criminal procedure together with Japanese academics, judges, attorneys, and officials. This work resulted in the present Code of Criminal Procedure, enacted in 1948, which was basically modelled on the US system. Due process of law is the underlying principle of the present system. While the pre-war system was based upon the German ‘inquisitorial’ system, the current system is based upon the US adversarial system. What is noteworthy is that, despite the overwhelming influence of US law on the Code, some influence of German law can still be seen in its practice. This is particularly evident in the process of investigation and in the reliance at trial on written documents such as dossiers prepared by the police and public prosecutors, rather than the testimony of witnesses in court.

(2) Pre-trial procedure The first stage in the procedure is investigation. Investigation is conducted by the police officers and public prosecutors. The pre-war system of the juge d’instruction was abolished. ²⁴ Judgment of the Supreme Court, 22 September 1987, Keishū 41-6-255 (Daitō Tessen case). ²⁵ Laws No. 77, 1991 and No.136, 1999. ²⁶ S. Takayanagi, Nihon-hōsei-shi (Legal History of Japan), vol. 2, (Tokyo, 1965), pp. 289–293.

Criminal Law and Procedure

437

Under the present Code of Criminal Procedure, the primary responsibility for investigation lies with police officers, while investigation by the public prosecutor is supplementary (Arts 189 and 191, para. 1). When conducting an investigation, public prosecutors and police officials are expected to cooperate. The former may issue general instructions and commands to the latter (Art. 193, para. 1). Public prosecutors actively participate in the investigation stage. Almost all cases investigated by police officers are sent to public prosecutors. In some cases, such as corruption and corporate offences, public prosecutors themselves initiate the investigation. The Constitution provides that no one shall be apprehended except on the basis of a warrant issued by a competent judicial officer (judge) (Art. 33). The same rule applies to search and seizure (Art. 35). This requirement is designed to place the power of police officers and public prosecutors under judicial control. As for arrest, there are two exceptions to this rule. Firstly, no warrant is needed when the suspect is caught red-handed (Art. 212). Secondly, if there is a sufficient ground to believe that someone has committed a crime punishable by death, life imprisonment, or more than three years’ imprisonment, he may be arrested without a warrant, provided that there is no time to obtain one (Art. 210). The suspect must be brought to the Public Prosecutor’s Office with documents and evidence within forty-eight hours of arrest. If the public prosecutor finds that the suspect should be detained, he is required to ask the judge to authorise detention within twenty-four hours (Art. 203, para. 1). Thus, it takes a maximum of seventy-two hours for a suspect to be brought before a judge. Suspects have the right to remain silent, which is guaranteed by the Constitution (Art. 38). The suspect should be notified of this right as well as the right to counsel immediately after his arrest (Art. 203, para. 1). If a defendant cannot afford defence counsel, the State will assign one (Constitution, Art. 37, para. 3). Previously, the latter right was available only after indictment. Since the stage preceding indictment can be crucial, local Bars introduced the system of duty attorneys in the early 1990s. Suspects who were detained were given an opportunity to consult an attorney from a list of volunteer attorneys. As a result of amendments to the Code of Criminal Procedure in 2004, suspects who are detained have also become eligible for a defence counsel assigned by the State. This is limited to those offences to which capital punishment, life imprisonment, or a minimum of one year’s imprisonment are applicable, but its scope is expected to broaden. In 2007, of the 70,610 persons who were sent to trial, 69,515 had a defence counsel, of whom 15,928 had counsel from the pre-indictment stage. 6,257 of them had a counsel assigned by the State.²⁷ The maximum period of detention prior to indictment is 10 days, renewable once (Art. 208). There is no limit to the length of detention after being indicted. Some defendants spend months awaiting trial. In 2007, out of 70,601 defendants, ²⁷ .

Other Laws

438

57,822 were detained. 44,407 were detained for three months or less, but 13,039 were detained for a period of three months to one year. 736 were detained for more than a year. Bail is available only after being indicted, and even then its applicability is fairly limited. Only 8,982 were offered bail.²⁸ In practice, suspects are often detained in police custody, although they are supposed to be detained in a prison. This practice of putting suspects and defendants under the control of the police has been criticised in the UN Human Rights Report. Suspects and defendants held in confinement are guaranteed access to defence counsel. They are entitled to consult a defence counsel or a person who is to be his defence counsel without anyone else being present (Art. 39, para. 1). However, public prosecutors and police officers may designate the time, place, and length of interview for suspects, provided that this is necessary for the investigation (Art. 39, para. 3). In the past, this provision was implemented in such a way that the suspect’s interview with defence counsel depended on the permission of the public prosecutor. Where the suspect did not admit guilt, interviews with defence counsel were limited, sometimes to only twice in twenty days and for ten minutes each time. In 1991 the Supreme Court ruled that the above ‘necessity for investigation’ should be acknowledged, not only when the suspect is currently being interrogated, but also when there is an imminent interrogation session scheduled that would be unable to proceed if the consultation with the defence counsel is allowed. On the other hand, the court pointed out that the prosecutor is obliged to designate an alternative time for a meeting with the suspect and inform the defence counsel. If the designation is excessivly unreasonable and speedy and free access to defence counsel is inhibited, it would be unlawful.²⁹ During detention, suspects are interrogated by the police officers and public prosecutors. Records of statements made before police officials and public prosecutors are prepared for possible use at trial. Thus, detention often turns out to be aimed at obtaining confession from the suspect, rather than being a system designed to ensure that the suspect does not flee. The high rate of suspects and defendants who admit guilt is worth noting: in 2007, only 1,249 defendants contested their cases at trial.³⁰ Arrest and detention of a suspect for a lesser crime in order to interrogate him about a more serious crime is not uncommon. This practice has been criticised by academics and practising lawyers as a breach of Constitutional safeguards, but it has not fully ceased to exist. The Supreme Court ruled that when there are sufficient grounds to arrest and detain a suspect for a certain crime, it is permissible to interrogate him for another crime closely linked to the first one.³¹ However, there ²⁸ ²⁹ ³⁰ ³¹

. Judgment of the Supreme Court, 10 May 1991, Minshū 45-5-919 (Asai case). . Decision of the Supreme Court, 9 August 1977, Keishū 31-5-821 (Sayama case).

Criminal Law and Procedure

439

are lower court decisions which have found such a practice to be illegal in some other circumstances.³²

(3) Prosecution Public prosecutors are the sole agency for prosecution, except in cases of mandatory prosecution proceedings. Japanese law does not allow private prosecution: citizens may bring complaints to the police or public prosecutors, but cannot prosecute on their own. Prosecutors have a broad discretionary power to decide whether to prosecute or not. The Code of Criminal Procedure provides that the prosecutor may refrain from prosecution by taking into account the character of the offender, his age and life history, the seriousness of the crime, other mitigating factors, as well as circumstances after the crime—i.e. whether the offender has repented or paid compensation, etc. (Art. 248). Prosecutors fully utilise this discretionary power. In 2007, of the total 347,625 suspects, 102,993 were indicted. Among those not prosecuted, charges were dropped in relation to 72,379 people on the basis of Article 248.³³ Public prosecutors claim that, from a criminological point of view, their use of this discretionary power contributes to the rehabilitation of the offender and facilitates his correction by liberating him from the procedure at an early stage. However, this also has a negative aspect. Since prosecutors have to collect information to decide whether to prosecute or not, based upon various factors, the investigation tends to be thorough. Furthermore, since the prosecutor may refrain from prosecution, if he is to prosecute he has to be fully convinced that the offender is actually guilty. For this reason, the Japanese system is dubbed ‘minute justice (seimitsu shihō)’, as compared to the Anglo-American system. On the other hand, once a person is prosecuted, there is a high probability that he will in fact be found guilty. Indeed, the acquittal rate at trial is less than 0.1 per cent. In 2007, only ninety-seven defendants out of 100,358 at the district court level were acquitted.³⁴ It is pointed out that this system is neither US nor German, but is uniquely Japanese.³⁵ The need to control the broad discretionary power of the public prosecutor was acknowledged during the judicial reforms after the war. Two devices were introduced. The first is the Prosecution Review Board, designed to review cases in ³² For instance, the Judgment of the Osaka High Court, 19 April 1984, Kōkeishū 37-1-98 (Kōbe Matsuri case). ³³ See also D. H. Johnson, The Japanese Way of Justice: Prosecuting Crime in Japan (Oxford, 2002). ³⁴ . ³⁵ O. Ikeda and M. Maeda, Keiji-Soshō-Hō-Kōgi (Lectures on the Criminal Procedure Law), 2nd edn (Tokyo, 2006), p. 28. The term was first used in K. Matsuo, Keiji-soshō-ho Law of Criminal Procedure) vol. 1 (Tokyo 1979), pp. 15–16.

440

Other Laws

which the prosecutor decided not to prosecute.³⁶ Boards are composed of eleven citizens selected at random, who serve on the board for one year. There are around 160 boards throughout Japan. The board may initiate review proceedings either upon request by citizens or on its own initiative. Prosecution review boards are empowered to require that the prosecutor submit materials and provide explanations. It may also summon the persons who initiated the proceedings and other involved parties. The board may render a decision that the prosecutor should prosecute the offender, or investigate further. The competence of a board is narrower than that of a US grand jury. Boards themselves do not have the power to prosecute, and their decisions are not binding on the prosecutor. Moreover, a board is entitled to review the decision of prosecutors not to prosecute, but has no power to review their decision to prosecute. An amendment to the Law on Prosecution Review Board of 2004, however, grants the board the power to compel the prosecutor to prosecute, if the board had recommended that the case should be prosecuted, but the prosecutor failed to comply, and the board made the recommendation for the second time. This mechanism is to be introduced by 2009. The second device to check the discretionary power of the public prosecutor, though limited in scope, is the proceedings to remand to trial cases involving abuse of power by government officials. If the person who brought a complaint or accusation of abuse of power by government officials is not satisfied with the prosecutor’s decision not to prosecute, he may apply to the court to initiate proceedings to remand the case for trial. If the court finds the application to be valid, the prosecution is deemed to have been initiated without the involvement of the public prosecutor. At the trial, an attorney specially designated by the court performs the function of the public prosecutor (Arts 262–270).

(4) The trial As a result of the indictment, the case is brought to the court of first instance. In most cases this will be a summary court or a district court. No evidence or documents may accompany the indictment, since this could prejudice the impartiality of the judge (Art. 256, para. 6). More than 90 per cent of cases are handled by a single judge. At the beginning of the trial, after the public prosecutor reads out the indictment, the presiding judge asks the defendant whether he admits his guilt or not. Since Japan has not adopted the US arraignment procedure, even if the defendant admits his guilt the evidence has to be examined. Trials are not held in one sitting. There is usually a one-month interval between each hearing. Defendants who admit their guilt are handled in a fairly short period, while in contested and complicated cases, especially where more than one ³⁶ Law No. 147, 1948.

Criminal Law and Procedure

441

defendant is involved, the court can take years to reach a conclusion. On average, it takes three months to go through the procedure at the first instance court. In cases where the defendant has admitted guilt, the average time needed is 2.6 months; but in contested cases, it takes 8.5 months and 6.8 sessions.³⁷ The defendant has a constitutional right to be assisted by counsel. This right can be waived; but in cases where the death penalty, life imprisonment, or imprisonment exceeding three years can be imposed, the presence of defence counsel is mandatory (Art. 289, para. 1). The trial is adversarial in character, in contrast to the ‘inquisitorial’ mode under the previous Code, in which the judge plays a major role. The parties, instead of the judge, take the initiative in producing and examining evidence. Under the pre-war Code, the judge interrogated witnesses; interrogation of defendants by the judge was also allowed. The present Constitution guarantees the right of the defendant to examine all witnesses; as a corollary, hearsay evidence is not allowed in principle (Art. 37, para. 2). Accordingly, the Code has introduced the system of cross-examination (Art. 320, para. 1). However, this new system introduced by the present code did not function exactly as expected. The Code provides for various exceptions to the hearsay rule. The Code provides for various exceptions to the hearsay rule. For example, a statement in the presence of the public prosecutor which in substance contradicts this person’s subsequent statement at trial is permissible, provided that there are circumstances that give the earlier statement more credibility than the latter (Art. 321, para. 1, subpara. 2). Because of the relaxed standards for the admissibility of hearsay evidence, statements made by the defendant and witnesses in the course of the investigation play a crucial role at trial. The trial is conducted mainly on the basis of documentary evidence, rather than on fresh testimony from the witnesses. At the district court level, out of 70,610 defendants, witnesses were heard in relation to 40,464 defendants; but in relation to 33,807 defendants, only one witness gave evidence.³⁸ It is common practice that written statements prepared at the pre-trial stage are not read out in court. Only summaries are given, and even this is often dispensed with. This heavy reliance on documentary evidence is in a way inevitable, since cases are not held in one uninterrupted session and can last more than a year. It is likely that the memories of witnesses will fade. However, this makes the investigation stage the most crucial part of the criminal procedure and pre-empts the significance of trial.³⁹

³⁷ ³⁸ . ³⁹ R. Hirano, ‘The Diagnosis of the Japanese Criminal Procedure’, Law in Japan, vol. 32, 1989, p. 129.

442

Other Laws

The court has a free hand in evaluating evidence (Art. 318). As an exception, a person shall not be convicted if the only evidence against him is his confession: corroborative evidence is then required (Art. 319, paras 2 and 3).

(5) Judgments and sentencing There is no separate procedure for sentencing. Evidence produced to prove guilt is also taken into account by the judge in determining the sentence. The scope of discretion given to the judge in sentencing is broad. For instance, for homicide the judge can impose the death penalty, life imprisonment, or imprisonment of between three and fifteen years.

(6) Appeals Appeal to higher courts is allowed for both the defendant and the prosecution. The first appeal—kōsō—is to the High Court in most cases. The primary grounds for a kōso appeal are: non-compliance with procedural law, errors in the application of the law, errors in fact-finding which apparently affected the judgment, and inappropriate sentencing (Arts 379–382). The kōso appeal is not a de novo procedure: it is designed to review the judgment of first instance, but in exceptional cases it may involve the examination of witnesses and other evidence. The second appeal—jōkoku—is to the Supreme Court. Jōkoku is allowed on the grounds of violation of the Constitution, erroneous interpretation of the Constitution, and conflict with the precedents of the Supreme Court (Art. 405). In addition, the Supreme Court has discretion to accept an appeal if the case involves matters significant to the interpretation of law (Art. 406).

19 International Relations 1. The Law on Nationality The basic law concerning nationality is the Nationality Law of 1950. This law was substantially amended in 1984 in order to meet the requirements of the Convention on the Elimination of All Forms of Discrimination Against Women, which Japan ratified in 1980.¹ A person is a Japanese national if (i) at the time of birth, either of the parents is a Japanese national, (ii) the father who died prior to the birth of the child was a Japanese national, or (iii) the child was born in Japan and both parents are unknown, or are without any nationality (Art. 2). Japanese nationality can be obtained by legitimation or naturalisation. Before the 1984 amendment, the Law provided that if the father was a Japanese national at the time of the birth of the child, the child should be a Japanese national. However, this did not apply to cases where the mother was a Japanese national but the father was not. Therefore, if a Japanese man married a foreign woman the child was entitled to Japanese nationality, while if a Japanese woman married a foreign man the child was not entitled to Japanese nationality. This was considered to be unfair and also inconvenient, since if the father’s home country adopted the principle of jus soli the child would be without nationality. In one case, the child of a Japanese woman who married a US national was refused registration because of the lack of nationality. The district court rejected the argument that the provision of the then applicable Nationality Law was against the equal protection clause of the Constitution.² The Law was amended in 1984 in this respect and the differential treatment of the sexes was abolished. The present Law provides for jus sanguinis for both the paternal and maternal lines (Art. 2). Japanese nationality can be obtained by legitimation. An illegitimate child does not acquire the status of a legitimate child via the marriage of the father and mother. A separate act of recognition by the father is required. When legitimated, a child under the age of 20 acquires Japanese nationality, provided that either the ¹ Law No. 147, 1950. ² Judgment of the Tokyo District Court, 30 March 1981, Hanji 1363–68.

Japanese Law. Third edition. Hiroshi Oda. © Oxford University Press 2009. Published 2009 by Oxford University Press.

444

Other Laws

father or mother who recognised the child was a Japanese national at the time of the birth of the child, and that they are either still a Japanese national, or were a Japanese national at the time of their death (Art. 3, para. 1). In 2008, the Supreme Court found this provision to be in a ‘state of unconstitutionality’. In this case, a child who was born to a Japanese father and a Filipina mother applied for Japanese nationality on the grounds of this provision, but was rejected. The Supreme Court pointed out that this provision in effect was only applicable to a child who was recognised by a Japanese father who did not marry the foreign mother. This is in contrast to a child who was recognised by the Japanese father while in the womb, or an illegitimate child of a Japanese mother, both of whom are entitled to Japanese nationality. The Court found that there had been a reasonable ground for the legislative purpose at the time of the enactment of the Law, but that the reasonable connection with this purpose has been lost in light of the changes of the social environment inside and outside Japan. The differential treatment has caused excessively disadvantageous and discriminatory treatment to such children. The Court found this to be against Article 14, para. 1 of the Constitution as an unreasonable discrimination.³ The Law also provides for naturalisation as a ground for the acquisition of nationality. Naturalisation is subject to the permission of the Minister of Justice. The Law sets out minimum requirements for naturalisation. The applicant must have been resident in Japan for more than five years without interruption, must be twenty years or more of age, and have legal capacity under the law of their home country. The applicant must demonstrate ‘good behaviour and character’; that he or she is able to provide for himself or herself (including the possibility of being supported by the skills or assets of the spouse or relatives who live with him or her); is either of no nationality, or will lose foreign nationality by acquiring Japanese nationality; and has never plotted or advocated the overthrow of the Japanese Constitution or the government formed under it, or taken part in such an organisation (Art. 5, para. 1). For those who have special links with Japan, the requirements are relaxed. Thus, the spouse of a Japanese national who has a residence or a place of sojourn in Japan for not less than three years without interruption and at present has a residence or a place of sojourn in Japan may acquire Japanese nationality. The same applies to a person who has been married to a Japanese national for not less than three years and has been domiciled in Japan for one year or more (Art. 7). Furthermore, a child of a Japanese national who is domiciled in Japan may be naturalised in a similar way (Art. 8). Persons with dual nationality are required to choose one nationality within two years. If this person is under 20, he or she is obliged to choose the nationality before reaching twenty-two (Art. 14, para. 1). The choice is made either by renouncing one nationality, or by declaring the choice of Japanese nationality ³ Judgment of the Supreme Court, 4 June 2008.

International Relations

445

and renouncing the foreign nationality (ibid., para. 2). This declaration is made by filling in a form provided by the civil registration department of the relevant local authority. A Japanese national who was born in a foreign country and has acquired foreign nationality by birth needs to declare to maintain Japanese nationality. Otherwise, the child will lose Japanese nationality. However, this person may recover Japanese nationality if he or she is under twenty and is resident in Japan, by filing a notice with the Minister of Justice (Arts 12 and 17).

2. The Status of Aliens (1) Immigration Law It is generally accepted that the protection of rights and freedoms under the Constitution extends to foreign nationals resident in Japan insofar as the nature of the given right allows it (see Chapter 5).⁴ The legal status of a foreigner depends on whether this person is a permanent resident.⁵ Immigration control is implemented on the basis of the Law on Immigration Control and Recognition of Refugees.⁶ The Law was originally enacted as a cabinet order in 1951, but was granted the status of law the next year.⁷ With the ratification of the Convention on the Status of Refugees in 1981, the title was accordingly changed. Thus, the Law covers both immigration control and the procedure for the recognition of refugees. Registration of aliens is regulated by the Aliens Registration Law of 1952.⁸ Foreign nationals who intend to enter Japan must have a valid passport, and unless exempted, a visa. Japan has a mutual arrangement of exemption for visas with more than 50 countries. Grounds for refusal of entry include those who may be a financial burden to the State, such as those who cannot fend for themselves, those who have been sentenced to a term of imprisonment of one year or more for a breach of law, those convicted of drug offences, those expelled from Japan within the last year, and those who intend to harm the constitutional order of Japan, or are likely to act against the interest of Japan and harm public security (Art. 5). Foreign nationals who intend to stay in Japan are required to obtain a qualified legal status for residency. The Law lists twenty-seven categories of activities ⁴ Judgment of the Supreme Court, 4 October 1978, Minshù 32-7-1223 (McLean case). ⁵ For a comprehensive list of application of Japanese legislation to foreign nationals, see K. Tezuka, Gaikokujin to Hō (Foreigners and the Law), 3rd edn (Tokyo, 2005), pp. 374–378. ⁶ For English translation, see . ⁷ Law No. 268, 1952. ⁸ Law No. 125, 1952.

446

Other Laws

including diplomatic activities, official governmental activities, teaching, study, entertainment, art, religious activities, investment and management, legal and accounting, medical, research, engineering, etc. A short-term stay of fifteen or ninety days is possible. For categories provided in lists Nos. 1 and 2, foreign nationals are entitled to work within the scope of qualification, whereas in cases such as short-term stay or sojourn for study, they are not permitted to work. In cases where a foreign national is entitled to work under this qualification system, this person may apply for a work certificate. Those who intend to enter Japan may apply to the Minister of Justice for a certificate of qualification for sojourn. One of the categories of qualification for a stay is permanent residency. Foreign nationals cannot apply for permanent resident status from overseas. Permanent resident status can only be obtained after foreign nationals enter Japan under a different status. There are around 446,000 Korean and Taiwanese people who have been resident in Japan since before the Second World War and their descendants. The status of these people is determined by the Special Measures Law on the Immigration Control of Those Who Lost Japanese Nationality by Virtue of the San Francisco Peace Treaty (‘special permanent residents’).⁹ In 2007, there were 2,152,973 foreigners registered in Japan (excluding special permanent residents). This comprises 1.69 per cent of the entire population. The highest in number are the Chinese, 606,899, followed by Koreans, 593,487, and Brazilians, 316,967.¹⁰ The Minister of Justice is empowered to grant permanent resident status if the applicant has demonstrated good behaviour and has sufficient assets or skill to lead an independent life. The status is granted only when the permanent residency of the person in question is in the interest of Japan (Art. 22, para. 2). In cases where a child or spouse of a Japanese national, permanent resident, or special permanent resident under the Special Measures Law applies for permanent residency, the requirements of good behaviour and sufficient assets or skills to lead an independent life are waived. Foreign nationals residing in Japan are under an obligation to register. For this, the applicant was previously required to be fingerprinted, except for a sojourn of less than a year. This was not limited to first-time registration, but extended to renewal of previous registration. After a series of court cases contesting the constitutionality and compatibility of this requirement with the Human Rights Convention, the requirement has been gradually relaxed. Fingerprinting was abolished altogether in 1999.¹¹ However, it was reintroduced for entry into Japan in 2007 as part of the amendment to the Immigration Control and Recognition of Refugees Law for the reinforcement of attempts to combat terrorism. 9 Law No. 71, 1991, . ¹⁰ . ¹¹ Nikkei, 21 May 1999.

International Relations

447

The concept of refugees is defined in the Convention on the Status of Refugees. Displaced persons do not qualify as refugees. Foreign nationals who desire to be protected as refugees must apply within sixty days of entry into Japan. It is not possible to apply for refugee status from overseas. The decision is made by the Minister of Justice.

(2) The status of foreign juridical persons and other entities The Civil Code provides that foreign juridical persons except for a State, administrative divisions of a State, and commercial companies are not recognised in Japan (Art. 36, para. 1). As a corollary, foreign companies with juridical personality are recognised in Japan without any specific procedure. Companies recognised by this provision enjoy the same rights as companies of a similar type established in Japan. However, this does not apply where it involves rights which cannot be exercised by foreign entities or in cases where there are special provisions in the law or treaty (Art. 36, para. 2). There are some restrictions on the activities of foreign companies. For example, the Law on Mining provides that no one except a Japanese national or juridical person is eligible for mining rights unless an international treaty provides otherwise (Art. 17).¹² The Japan–US Friendship and Commerce Treaty provides for the national treatment of foreign investors. The Treaty allows restrictions by the host country on the entry of foreign investors into businesses handled by public utilities, as well as in banking, shipping, airline businesses, and the development of natural resources. There may be a problem with partnerships in Anglo-American jurisdictions that do not have juridical personality. The above-mentioned provision of the Civil Code does not make a foreign non-juridical person a juridical person in Japan. They will be treated as associations without juridical personality. As such, they are entitled to sue and be sued and to effect transactions in the name of the partnership. One disadvantage is that they are not entitled to register property in their name. The Company Law defines a foreign company as a foreign juridical person or other organisation established under a foreign law, and which is identical or similar to a company (Company Law, Art. 2, subpara. 2). If a foreign company intends to do business on a continuous basis, it has to appoint representatives in Japan, of which at least one must have an address in Japan. The representative in Japan has the power to effect all judicial and extrajudicial acts regarding the business of the company (Art. 817). Foreign companies are not allowed to do business on a continuous basis in Japan until their registration. If a person effected a transaction without registration, this person is jointly and severally liable with the foreign company ¹² Law No. 289, 1941.

448

Other Laws

(Art. 818). Registered foreign companies must publicise their equivalent of a balance sheet (Art. 819, para. 1). Foreign companies whose main place of business is in Japan, or whose primary purpose is business in Japan, may not effect transactions on a continuous basis in Japan (Art. 821, para. 1).

3. Foreign Exchange and Foreign Trade Law (1) Liberalisation of the foreign exchange control Foreign exchange control in Japan started with the Law on the Prevention of Capital Flight which was enacted in 1932. Movement of capital was strictly regulated under this Law. This was the time of a world-wide depression, when there was large-scale capital flight from Japan. This Law was replaced by the Foreign Exchange Control Law in the following year to cover current transactions in addition to capital transactions. After the Second World War, a new Foreign Exchange and Foreign Trade Control Law was enacted.¹³ The goal of this Law was to ensure the balance of payments and the stabilisation of the currency, and to contribute to the sound development of the Japanese economy. It prohibited international transactions such as payments to overseas recipients and payments between residents and non-residents in principle, but allowed certain transactions as exceptions. These were listed in cabinet orders or ministerial ordinances, and were subject to approval by the then Minister of International Trade and Industry. Liberalisation of the regulations was discussed in multilateral fora such as the IMF and OECD, as well as in some bilateral negotiations in the 1960s. Accordingly restrictions, including those on capital transactions, were gradually lifted. In 1980 the Law was totally amended. While in the past transactions between residents and non-residents were banned in principle and allowed only as exceptions, this was reversed by the 1980 amendment. The amended Law declared that foreign exchange, foreign trade, and capital transactions were basically free from restrictions and that only minimum necessary control and adjustments were to be exercised. Although the 1980 amendment was claimed to be a major step towards liberalisation, there were some doubts. It was pointed out that the amendment fell short of a total restructuring, since broad discretion was given to the ministries in creating specific exceptions to the general permissive principle. Much of its implementation was left to cabinet orders, ministerial ordinances, and circulars and notices. Capital transactions were either subject to approval, or had to be notified in advance. Some of these exceptions have gradually been lifted in recent years. However, overall the Law was still complicated with various exceptions ¹³ Law No. 228, 1949.

International Relations

449

provided by sub-laws, and was regarded as highly restrictive by the business community. This over-regulated system was blamed for the shift of businesses from Japan to foreign financial markets. The Law was substantially amended in 1997 as part of the financial ‘big bang’.¹⁴ The term ‘control’ was dropped from the title of the Law; it is now called the Foreign Exchange and Foreign Trade Law. The overall goal of the amendment was the liberalisation of outward transactions and foreign exchange business. In general, the system of prior approval was replaced by a system of contingency control. This means that the minister in charge may introduce such requirements as a contingency measure, but in normal times post facto reporting is sufficient. The minister is empowered to require, based on a cabinet order, that certain payments by residents to non-residents be subject to approval in cases where it is necessary for enforcing international agreements to which Japan is a party, as well as in cases where it is particularly needed for maintaining the international balance of payments (Art. 16, paras 1 and 2). In capital transactions, such requirements may be introduced by the Minister of Finance if, inter alia, the maintenance of international payment becomes difficult, resulting in extreme fluctuation in the foreign exchange market, or the financial or securities market is to be negatively affected by the flow of funds on a large scale (Art. 21, paras 1 and 2). By the 1997 amendment, the requirement of licences for foreign exchange business and foreign currency exchange was dropped. The system of designated securities companies was totally abolished. It is expected that with the amendment there will be some new entries—mainly by securities companies—into the foreign exchange business. The Foreign Exchange and Foreign Trade Law covers the following transactions; (i) payments, (ii) capital transactions, (iii) direct outward investment, (iv) service trade, (v) direct inward investment, and (vi) foreign trade.

(2) Payments Even before the 1997 amendment, cross-border payment per se was not subject to approval. As an exception, special methods of settlement required approval. These included credit and debit entries between the accounts of residents and non-residents, deferred payment after more than two years of shipment, and setting off. Thus, even if a Japanese importer had a claim against a foreign exporter, there was no possibility of set-off; the importer had to pay for the product, and the exporter had to repay debts by two separate transactions through foreign exchange banks. The same applied to payments between companies and their foreign subsidiaries. ¹⁴ .

450

Other Laws

By the 1997 amendment the entire concept of ‘special methods of settlement’ has been abolished. Except in cases of contingencies, payments are not subject to licence or prior approval. Instead, there is a reporting requirement. A post facto report is required where a resident or non-resident has effected payment from Japan to a foreign country or received payments from overseas, and where a resident effects payment or receives payment from a non-resident in Japan or overseas (Art. 55). On the other hand, banks etc. are now obliged to verify that the payment is made with appropriate permission if it is required (Art. 17). In cases where a customer intends to make payment overseas above 50 million yen, banks, postal offices, and foreign currency exchangers are required to confirm the identity of the customer by asking the customer to present the necessary documents (Art. 18, para. 1). They are obliged to submit a report on the implementation of this requirement to the Minister of Finance every six months (Art. 55-2).

(3) Capital transactions Capital transactions include transactions involving the emergence, transfer, or termination of claims based upon deposit or trust agreements; transactions concerning the emergence of claims based upon loan agreements and guarantee agreements; and transactions related to claims emerging from the sale of instruments of payment or claims between residents and non-residents. Capital transactions are not limited to transactions between residents and non-residents. If the transaction is effected in foreign currency, transactions between residents are also regarded as capital transactions. Furthermore, the purchase of securities by a resident from a non-resident; transfer of securities by a resident to nonresidents; issuing or offering securities overseas or issuing or offering of securities denominated in foreign currency by residents or issuing or offering securities in Japan by non-residents, and issuing or offering of securities denominated or paid in yen by non-residents are also capital transactions (Art. 20). By the 1997 amendment, the requirement of prior notification or approval for capital transactions was abolished. The opening of accounts abroad by residents was dropped from the list of capital transactions, which was thus fully liberalised. Issuing or offering securities abroad and loan transactions between residents and non-residents do not require prior notification either. The 20-day waiting period with the power of the Minister to recommend changes or suspension was abolished too. On the other hand, these transactions are subject to post facto reporting (Art. 55-3). However, contingency control applies to these transactions. Thus, the Minister of Finance may introduce the system of prior approval, inter alia, in cases where the maintenance of the balance of payments becomes difficult, foreign exchange price levels go through excessive fluctuation, or the implementation of international duties owed by Japan becomes difficult (Art. 21, paras 1 and 2).

International Relations

451

(4) Outward direct investment Outward direct investment is defined in the Law as the purchase of securities issued by a juridical person established under foreign law, or the providing of loans to such a juridical person which are aimed at establishing continuing economic relations with this juridical person. Payment for the establishment or expansion of branches, plants, and offices abroad are also regarded as outward direct investment (Art. 23, para. 2). Outward direct investments were subject to the prior notification requirement. In addition, there was a 20-day waiting period, and the Minister of Finance was empowered to recommend change or suspension of the investment. This prior notification system was also replaced by the post facto reporting system by the 1997 amendment (Art. 55-3). However, if such an investment negatively affects the smooth management of the Japanese economy in a significant way, or harms international peace and security or inhibits the maintenance of public order, and is so designated by a cabinet order, then the investment is subject to the prior notification requirement (Art. 23, paras 1 and 4). The 20-day waiting period remains, but the grounds for the exercise of such power became narrower. This power can be invoked if the proposed investment will affect the economy of Japan in a significantly negative way, or if it harms international peace and security or public order (Art. 23, para. 4).

(5) Inward direct investment Inward direct investment includes: (i) the acquisition of shares and quota in companies other than listed companies or companies whose shares are traded over the counter; (ii) the acquisition by assignment, from a non-resident individual, of shares or equity interest in a non-listed company which the non-resident possessed before ceasing to be a resident; (iii) the acquisition of listed shares and shares traded over the counter by a nonresident, which results in a holding of 10 per cent or more of shares when combined with the holding of juridical persons and other entities with a special connection with this non-resident; (iv) giving consent to a substantial alteration of the purpose of business of a company, provided that the non-resident has more than one third of the equity; (v) establishing branches etc., or any changes in the kinds of branches or substantial change to the purpose of business; and (vi) extending loans to a juridical person who has had an office in Japan for over a year, exceeding the amount determined by cabinet order (Art. 26, para. 2). Non-residents in this context means individuals, juridical persons set up in accordance with foreign law, as well as companies in which a non-resident owns

Other Laws

452

directly or indirectly more than 50 per cent of the shares, and juridical persons of which non-residents are the majority of directors or representative directors (Art. 26, para. 1). The prior notification system regarding direct inward investment was replaced by a post facto reporting system (Art. 55-5). In some limited cases prior notification is required and there is a 30-day waiting period combined with the power of the Minister of Finance and the minister in charge of the given business to recommend changes or suspension. There are several grounds for such prior notification requirement. First, if the investment affects national security; obstructs the maintenance of public order or inhibits the protection of the public; or if it is likely to negatively affect the smooth management of the economy in a significant way, and designated by a cabinet order as such, prior notification is needed. Secondly, prior notification can be required on the basis of reciprocity. Thirdly, in cases where inward investment is used as a façade—in the view of the flow of funds, of capital transaction in which prior notification is required on contingency grounds—prior notification is also mandatory. The above ministers are empowered to recommend the investor to modify the content of the investment or terminate it altogether after consulting the Customs and Foreign Exchange Council. If the investor does not accept the recommendation, the ministers may order the modification or termination of investment (Art. 27). In 2008, the acquisition of shares of J-Power, the former Electric Power Development Corporation, by a British investment fund, TCI, became an issue. Eventually, the government issued an order prohibiting the fund from further acquisition of shares.¹⁵

4. Rules on the Conflict of Laws (1) The new law Rules on the conflict of laws were previously accommodated in the Law on the Application of Laws (Hōrei).¹⁶ This Law, which was enacted in 1898 under the influence of German law, remained unchanged since then except for the amendment in 1989 when Japan ratified the Convention on the Elimination of All Forms of Discrimination against Women. The amendment primarily concerned marriage and family. After being in place for more than a century, it was felt that in light of the developments of legislation and treaties abroad, the Law needed to be harmonised with the international standard. In the 1990s, when securitisation started in Japan, it was proposed that the governing law for the assignment of claims ¹⁵ Nikkei, 26 April 2008.

¹⁶ Law No. 10, 1898.

International Relations

453

should be changed. This proposal for a partial amendment soon developed into a call for the review of the entire Law, which was endorsed by the Cabinet in 2005. A new Law—the Law on General Rules for the Application of Laws—was enacted in 2006.¹⁷

(2) Persons Under the previous Law, as a rule, legal capacity of a person was determined by the lex patriae—the law of a person’s home country. If a foreign national did not have legal capacity under the lex patriae, but had capacity under Japanese law, they were still deemed to have full capacity except in cases involving family law, succession law, or real estate located abroad. The new Law made the provision more specific in that the concept of legal capacity was replaced by the concept of the capacity to act. It provides that a person’s capacity to act is governed by the lex patriae (Art. 3, para. 1). To this extent, the provision is the same as before in substance. However, the Law proceeds to provide that a person shall be deemed to have capacity to act even if that person has only limited capacity to act under the lex patriae, provided that this person has the capacity to act under the law of the place where the act took place, and if all parties are located in the same jurisdiction at the time of the act (ibid., para. 2). Concerning juridical persons, it is generally acknowledged that the law of the country which was applied when the entity was established should be applied when determining its legal capacity (Grundungstheorie). In one case, where the capability of a person to sign an agreement on behalf of a company was at issue, the court ruled that the law according to which the company was established—in this case Californian law—should be applied.¹⁸

(3) Juristic acts Private autonomy is acknowledged in the choice of law. Parties are free to determine the applicable law in relation to the formation and the effect of a juristic act. The choice of law in this context has to be made at the time the act was performed (Art.7). Under the previous Law, if the intention of the parties could not be established, the law of the place where the act was performed, the lex loci actus, was the governing law. The new Law, in contrast, provides that if the parties failed to make a choice, then regarding the formation and the effect of the juristic act, the ¹⁷ An English translation of the Law can be found in J. Basedow et al. (eds), Japanese and European Private International Law in Comparative Perspective (Tübingen, 2008), p. 404ff. See also the articles contained in that volume and in The Japanese Annual of International Law, 2007, vol. 50, p. 3ff. ¹⁸ Judgment of the Tokyo District Court, 28 January 1992, Hanji 1437–122.

454

Other Laws

law of the place which is most closely connected to the act shall be the governing law (Art. 8, para. 1). The reason of this change is that (i) the place of the act is often determined by coincidence and does not necessarily have a connection to the act, and (ii) in the era of information technology, parties do not necessarily meet, and in such cases, it is difficult to determine the place where the act was performed.¹⁹ The arrangement of the previous Law was also unreasonable in that if no explicit agreement of the parties is found, then, without considering various connections, the lex loci actus was universally applied. The prevailing view of academics was that before applying the lex loci actus, the implied intention of the parties should be sought.²⁰ The court used to apply the lex loci actus in such cases, but in recent years it has sought to determine the intention of the parties before proceeding to apply the lex loci actus. In a case where a fi xed-term deposit contract concluded between a Japanese branch of a Thai bank and a resident Chinese in Japan was at issue, the Supreme Court ruled that the parties had chosen Japanese law by implication.²¹ The new Law also provides for some presumptions. First, if the characteristic performance of the juristic act is to be made by one of the parties, the law of the habitual residence of this party is presumed to be the governing law (Art. 8. para. 2). The concept of characteristic performance has been derived from the Rome Convention.²² If the party has an establishment which is related to the juristic act, the law of the place of this establishment is applicable. If there are several establishments in different jurisdictions, the law of the place of the principal office is the governing law. The second presumption relates to juristic acts whose subject matter is real property. In such cases, the law of the place of the real property is presumed to be the governing law (ibid., para. 3). The third presumption involves labour (employment) contracts—the law of the place where the labour is provided is the governing law (Art. 12, para. 3). Whether the choice of law by the parties should be overridden when there are mandatory provisions in Japan out of public policy considerations, such as the protection of employees and consumers, has been an issue for some time. For example, under Japanese labour law dismissal of an employee is restricted by the doctrine of unfair dismissal. In one case, an American employee of a company which was established in accordance with New Jersey law sought interim relief against the company that had dismissed this person. The plaintiff was employed in New York as general manager of the Japanese branch of the company, but was ¹⁹ K. Koide (ed.), Atarashii Kokusa-Shihō (the New Private Internatioal Law) (Tokyo, 2006), p. 49. ²⁰ Y. Tameike, Kokusai-Shihō Kōgi (Lectures on International Private Law) (Tokyo, 2005). Y. Sakurada, Kokusai-shihō (International Private Law), 2nd edn (Tokyo, 1998), pp. 210–211. ²¹ Judgment of the Supreme Court, 20 April 1978, Minshū 32-3-616. ²² C. Kessedjian, ‘Party Autonomy and Characteristic Performance in the Rome Convention and the Rome I Proposal’, in J. Basedow et al. (eds), supra, p. 105.

International Relations

455

made redundant. The court ruled that it was the intention of the parties to have New York law applied. Against the argument that this choice of law should be modified and Japanese labour law should be applied, the court found that the consequence of the application of a foreign law should be considered, and only when there is a specific need to enforce Japanese labour law in order to maintain the labour law regime, should the application of foreign law be excluded.²³ In another case, the law applicable to an employment contract between a Californian company and an American employee, who was seconded to a Japanese airline company and worked as a captain of domestic flights, was at issue. The contract was governed by Californian law, but the court ruled that the effect of dismissal was subject to Japanese law, since the employee’s workplace was in Japan.²⁴ The new Law has introduced specific provisions on consumer contracts and labour contracts. Concerning employment contracts, even if the law other than the law of the place with which the employment contract is most closely connected was chosen as the governing law regarding the formation and effect of a labour contract, the employee may express the intention to have mandatory provisions of the law of the place with which the employment contract is most closely connected (Art. 12, para. 1). The place where, according to the labour contract, the labour is to be provided is presumed to be the place with the closest connection with the employment contract (ibid., para. 2). Regarding consumer contracts, even if the law other than the law of the habitual residence of the consumer was chosen as the governing law regarding the formation and effect of a consumer contract, consumers may express the intention to include mandatory provisions of the law of their habitual residence (Art. 11, para. 1). If no such law has been chosen by the parties, the law of the habitual residence of the consumer is the governing law (ibid., para. 2). Rights in rem over movable and immovable property, as well as other rights subject to registration, are governed by the law of the place of the location of the property (Art. 13, para. 1). However, this may not be appropriate for properties such as ships and aircraft. In such cases the court has endeavoured to avoid applying this rule. In one case, the court ruled that the law of the country of registration should be applied.²⁵

(4) Obligations The formation and effect of claims arising from agency by necessity (negotiorum gestia), or unjust enrichment is governed, as a rule, by the law of the place where the fact giving rise to the claim has occurred (Art. 14). However, if there is a place ²³ Judgment of the Tokyo District Court, 9 August 1967, Rōminshù 18-4-872. ²⁴ Judgment of the Tokyo District Court, 26 April 1965, Hanji 408–14. ²⁵ Judgment of the Matsue District Court, 8 November 1994, Hanji 1549–109.

456

Other Laws

that is apparently more closely related to such a fact, by taking into account that the parties had their habitual residence in the same jurisdiction at the time the fact giving rise to the agency by necessity or unjust enrichment occurred, and it has occurred in relation to a contract between these parties, and other circumstances, the law of that place shall be applied (Art. 15). The problem regarding the governing law of the assignment of claims was one of the primary reasons for the enactment of the new Law. The previous Law had provided that the effect of assignment of a claim to a third party should be governed by the law of the habitual residence of the debtor. The rest was left to interpretation. The prevalent view of academics was that in an assignment of a claim, the transaction which is the basis of the assignment must be distinguished from the claim that is to be assigned. The assignment should be governed by the law which governs the claim rather than the contract of assignment. The criticism against the arrangement of the previous Law was that if there is a bundle of contracts which are to be assigned as a whole, and if the debtors live in different countries, different requirements apply to these debtors. This would inhibit securitisation.²⁶ With the development of securitisation, by virtue of two laws enacted in 1991 and 1998, the requirement under the Japanese Civil Code of a notice to the debtor for assignment of the claim has been relaxed. For claims arising from leasing, a public notice in a daily paper was made sufficient, and another law introduced in 1998 replaced notice by registration. The new Law has changed the governing law, and now assignment of claims is governed by the law which is applicable to the claims which are to be assigned (Art. 23).

(5) Torts The previous Law had provided that tort was to be governed by the law of the country where the facts which serve as the basis of claims took place. It was unclear from this provision whether this meant the place where the act that caused the loss took place or the place where the loss/damage has occurred. The application of the lex loci actus may not always be appropriate in tort. The universal application of the lex loci actus has been questioned, particularly in the United States.²⁷ The court in Japan has not gone this far, but within the framework of the previous Law the court has endeavoured to modify the consequence of its strict application. The court has acknowledged that ‘the place where the facts which serve as grounds for tort have taken place’ includes the place where the outcome of the tort materialised.²⁸ ²⁶ Koide, supra, pp. 124–125. ²⁷ Babcock v. Jackson, 12 N.Y. 2d 473 (1963). Sakurada, supra, pp. 219–222. ²⁸ Judgment of the Tokyo District Court, 27 May 1965, Kaminshū 16-5-923.

International Relations

457

The Law now provides that the formation and effect of claims arising from tort should be governed by the law of the place where the results of the tortious act have emerged. However, if the emergence of the result at this place was not normally foreseeable, then the law of the place where the tortious act has taken place is applicable (Art. 17). There are some special rules to this general provision. Firstly, there is a special rule regarding product liability. The idea is that the governing law should be the law of the place of the market, i.e. the place where the product is delivered to the victim. However, if the delivery of the product at that place is not foreseeable under normal circumstances, the law of the place of the principal establishment of the producer and others shall apply (Art. 18). Secondly, for defamation, the law of the place of the habitual residence of the defamed person shall be the governing law (Art.19). The choice of the governing law is limited by public policy. If the act in question does not constitute tort under Japanese law, even if the tort is governed by foreign law, damages or any other remedy shall not be claimed. Furthermore, if the tort is governed by foreign law, the aggrieved party is not entitled to any recovery of damages or remedies than those acknowledged under Japanese law (Art. 22).

5. Marriage and Divorce The formation of marriage is governed by the lex patriae of each party. Thus, the capacity to get married, hindrance to marriage, parental consent, etc. are governed by the lex patriae of each party. Formalities of marriage are governed by the law of the place of the ceremony; but if it is celebrated in Japan and one of the spouses is a Japanese national, the formalities shall be governed by Japanese law (Art. 24). The effect of marriage is determined, first, by the lex patriae which is common to the spouses. If there is no such common law, the common law of the place of their habitual residence is applied. In the absence of a common place of habitual residence, the law which has the closest connection to the spouses is applicable (Art. 25). This provision is also applicable to matrimonial property, but as an exception, spouses may choose the law of the country of either party’s nationality, or the law of the habitual residence of either party as the governing law via a signed document with a fi xed date. Regarding the matrimonial regime of immovables, the law of the location of the immovables can be chosen (Art. 26, paras 1 and 2). Agreements on matrimonial property governed by foreign law cannot be set up against a bona fide third party concerning a juristic act effected in Japan, or in relation to property located in Japan. In such cases, the matrimonial property regime in relation to a third party is governed by Japanese law. However, if such agreements are registered in Japan, they can be set up against a bona fide third party (ibid., paras 3 and 4).

Other Laws

458

The provision on the effect of marriage is applied with modification to divorce. However, if one of the spouses is a Japanese national and has habitual residence in Japan, divorce is governed by Japanese law (Art. 27). Moral damages on the occasion of divorce are governed by the law governing divorce.²⁹ The same applies to the division of assets as a result of divorce.³⁰

(1) Inheritance Inheritance is governed by the lex patriae of the deceased (Art. 36). The formation of a will and its effect are governed by the national law of the testator (Art. 37).

(2) Public policy If the application of foreign law is against public policy, foreign law is not applied (Art. 33). Philippine law which does not allow divorce, Egyptian law which does not allow marriage between people of different religions, Colorado law which does not acknowledge affiliation, etc. have all been found to be against public policy of Japan.³¹

(3) Renvoi As a rule, if one’s lex patriae is to apply and the rules of that law require that Japanese law should be applicable, then, as a rule, Japanese law should apply (Art. 41). This does not include the conflict of law rules of Japanese law.

6. Problems Related to Transnational Disputes (1) Jurisdiction There is no explicit provision in the Code of Civil Procedure concerning the jurisdiction of Japanese courts over transnational disputes. There are three different approaches to this problem. One school of thought relies on the provision of the Code on jurisdiction over domestic cases. For example, the Code provides that a dispute involving tort falls within the jurisdiction of the court where the tortious act has taken place. Although this provision is designed for domestic disputes, proponents of this view maintain that it should be applied to transnational disputes with modifications. The second school of thought also acknowledges that ²⁹ Judgment of the Yokohama District Court, 31 October 1991, Hanji 1418–113. ³⁰ Judgment of the Supreme Court, 20 July 1984, Minshū 38-8-105. ³¹ Judgment of the Tokyo District Court, 27 February 1981, Hanji 1010–85; Judgment of Tokyo District Court, 29 March 1991; Hanji 1424–84, Adjudication of Nagoya Family Court, 2 March 1974, Kagetsu 26-8-94.

International Relations

459

these provisions should be applied, but contends that the availability of just and fair results and the efficiency of the procedure should be taken into account. The third school of thought disregards the provisions of the Code and claims that the jurisdiction should be decided by balancing various interests, i.e. convenience to the parties, the nature of the case, and the proximity of the case with a specific country. The position of the Supreme Court on this matter is not necessarily clear. A leading case involved a plane crash in Malaysia. There was a Japanese passenger on board, and the heir of the deceased sued the Malaysian company at the District Court of Nagoya in Japan for a breach of duty based upon the passenger transport contract. The Supreme Court ruled that since there is no established international rule as to this problem, jurisdiction should be determined by taking into consideration factors such as fairness between the parties and the availability of a just and speedy solution of the case. The Court then indicated that if any provision of the Code of Civil Procedure could be applied, it is reasonable that Japanese courts assume jurisdiction. In this particular case, the Court acknowledged the jurisdiction primarily on the ground that the plaintiff was domiciled in Japan and that the defendant was an international company with an office in Japan which had sufficient resources to contest the case abroad.³² The conclusion of the Court is supported by a majority of lawyers, despite some ambiguities. Lower courts have mostly followed this judgment of the Supreme Court by resorting to the provisions of the Code, and then modifying it by taking into account various factors pertinent to transnational litigation as ‘special circumstances’. In a case where the family of a member of the Self Defence Force claimed damages from a US company for a defect in a helicopter which crashed and killed that person in Japan, the district court ruled that if the jurisdiction can be presumed from the provisions of the Code, the Japanese court should assume jurisdiction, unless there are ‘special circumstances’.³³ The Code provides that the court of the locus acti has jurisdiction over tort cases. Therefore, since the accident occurred in Japan, the Japanese courts assume prima facie jurisdiction. The court in this case took into consideration the fact that the defendant was a major international corporation and had a branch office in Japan, the plaintiff was domiciled in Japan, and that the Self Defence Force had set up an investigation commission on the accident and that it was easier therefore to obtain evidence in Japan. Although the court maintains that provisions of the Code are applicable to transnational disputes, in determining the jurisdiction various factors are taken into account. In a case where heirs of the victims of a plane crash in Taiwan sued a US company that had manufactured the aircraft and the Taiwanese airline company, the court denied jurisdiction on the ground that since there were no ³² Judgment of the Supreme Court, 16 October 1981, Minshū 35-7-1224 (Malaysian Airlines case). ³³ Judgment of the Tokyo District Court, 27 March 1984, Hanji 1113–26.

460

Other Laws

formal diplomatic ties between Japan and Taiwan, it may be difficult to obtain evidence.³⁴

(2) Simultaneous proceedings There are instances where the same case is heard by the court simultaneously in different countries. For example, a Japanese company was sued by a US company in the United States for loss resulting from an alleged fault in the machinery that it had exported. This Japanese company initiated an action in Japan against the US company, asking the court to acknowledge the absence of an obligation to the US company. This was intended to block the enforcement of a US judgment in Japan in case the Japanese company lost the case in the United States. Thus, the same case came to be pending in both countries. In this case, the US company claimed that the proceedings in Japan were unlawful, since the case was already pending in a US court. Under the Japanese Code of Civil Procedure, no person may initiate litigation on a case which is already pending at court. In such cases, the subsequent litigation is unlawful and the court has to dismiss the case (Art. 142). However, the court is of the view that this provision only applies to proceedings in Japan. In this case, and in other similar cases, the court found that the existence of a case pending in a foreign court did not hinder litigation in Japan. In this particular case, the judgment in the United States came into effect and the plaintiff applied for its enforcement in Japan. The court rejected the enforcement on the ground that there was a judgment in Japan in force in respect of the same claim, and enforcement therefore was against public policy.³⁵ Recent views cast doubt on such an approach. Some experts suggest that if there is a likelihood or possibility of a foreign judgment on the same claim being enforced in Japan, then the first litigation should be respected and the second litigation in Japan should be suspended or dismissed. However, the Code lacks provisions to this effect.³⁶

(3) Sovereign immunity A leading case on this issue involved a suit brought against the then Republic of China in the 1920s. A deputy minister at the embassy in Japan issued a promissory note. The assignee of the endorsed promissory note presented it to a bank, which refused to pay upon instruction from the Chinese Government. The assignee sued the Republic of China for payment. The Supreme Tribunal ³⁴ Judgment of the Tokyo District Court, 20 June 1986, Hanji 1196–87. ³⁵ Judgment of the Osaka District Court, 22 December 1977, Hanta 361–127; Interim Judgment of the Tokyo District Court, 30 May 1989, Hanji 1348–91. ³⁶ Y. Honma et al., Kokusai-Minji-tetsuzuki-hō (International Civil Procedure Law), (Tokyo 2005), pp. 85–96.

International Relations

461

ruled that a foreign State is not subject to a foreign jurisdiction, unless the State voluntarily submits itself to foreign jurisdiction³⁷ This ruling did not distinguish between prerogative acts and commercial acts of the State. Since then, no other cases on this issue have reached the Supreme Court, and therefore this ruling is still the precedent. The notion that only prerogative acts of the State are immune from foreign jurisdiction is now widely accepted throughout the world. In bilateral treaties such as the US–Japan Friendship, Commerce and Navigation Treaty, sovereign immunity is limited to prerogative acts. In 2006, the Supreme Court changed its position to the restrictive doctrine of sovereign immunity. In this case, a Japanese company sold a high performance computer to a representative of the Pakistan government. The payment claim was converted to a loan contract. The borrower defaulted, so the Japanese company brought an action against the State of Pakistan. The defendant invoked sovereign immunity. However, the Supreme Court found that a foreign State was not exempted from the jurisdiction of the court of Japan regarding its act in the realm of private law or of a business/managerial nature, unless there are special circumstances such as the possibility of infringement upon the sovereignty of this State as a result of the exercise of the civil jurisdiction of Japan.³⁸

(4) Capacity to sue and to be sued The Code of Civil Procedure has no explicit provision on whether a foreign company has the right to sue or to be sued. This becomes an issue particularly for partnerships or cooperatives which do not have juridical personality. Some bilateral treaties, such as the US–Japan Friendship, Commerce and Navigation Treaty and UK–Japan Commerce and Navigation Treaty, have provisions which acknowledge national treatment of foreign companies. Partnerships are treated in Japan in a similar way to associations under the Civil Code and have the right to sue and to be sued. A Kenyan partnership was acknowledged to have such capacity.³⁹

(5) The application of foreign law in Japanese courts There are instances where a foreign law was chosen or determined as the governing law. In Anglo-American jurisdictions, foreign law is regarded as fact rather than law, and it is up to the parties to present and prove the law. In contrast, in Japan as well as in Germany and Austria, foreign law is seen as a norm on which the judgment should be based, and therefore it is the duty of the court to find the ³⁷ Decision of the Supreme Tribunal, 28 December 1928, Minshū 7–1128. ³⁸ Judgment of the Supreme Court, 21 July 2006, Minshū 60-6-2542. ³⁹ Judgment of the Tokyo District Court, 9 August 1959, Kaminshū 11-8-1647.

462

Other Laws

law and ascertain its substance. The court makes inquiries with experts and an expert witness can be appointed by the court. There are different views as to what law should be applied when the content of foreign law is not known. Some maintain that Japanese law should be applied, while others claim that the case should be decided on the basis of reason. At present, the prevailing view is to apply the law which is most akin to the law in question.⁴⁰

(6) Judicial cooperation with foreign countries Japan is a signatory to two international treaties concerning international judicial cooperation. One is the Convention on the Civil Procedure of 1950 (the Civil Procedure Convention) and the other is the Convention on the Service Abroad of Judicial and Extra-Judicial Documents in Civil or Commercial Matters of 1964 (the Service of Documents Convention). As of 2008, forty-seven countries are parties to the Civil Procedure Convention, but countries such as the US, UK, and Canada had failed to do so. As regards the Service Convention, fifty-eight countries including the US and UK are parties to the Convention. Japan ratified these Conventions in 1970 and accordingly a law on special rules to the Code of Civil Procedure was enacted. Under the Civil Procedure Convention, documents are served at the request of the consular officer of the foreign country (in practice, the ambassador of the given foreign country to Japan) to the Minister of Foreign Affairs in Japan. According to the Service of Documents Convention, it is possible to address the request directly to the Minister of Foreign Affairs.

(7) Enforcement of foreign judgments The Code of Civil Procedure has an explicit provision on the enforcement of foreign judgments. A foreign judgment which has taken effect in the home country is enforceable in Japan, provided that (i) the jurisdiction of the foreign court is acknowledged by law or international treaty; (ii) if the losing party is Japanese, this party has been properly served by a writ or summons, or has voluntarily accepted the jurisdiction of the foreign court; (iii) the judgment is not against public policy or the good morals of Japan; and (iv) there is a reciprocal guarantee of enforcement between the foreign country and Japan (Art. 118). Japan is a party to bilateral judicial cooperation treaties with countries including the UK, Australia, Austria, Brazil, Denmark, Germany, Iran, Iraq, Italy, Kuwait, Norway, Spain, Sri Lanka, Switzerland, Syria. Thailand, and the former USSR. There are consular treaties with the United States and the UK. ⁴⁰ H. Matsuoka, ‘Gaikoku-Hō no Tekiyō to Saibansho (Application of Foreign Law and the Court)’, in A. Takakuwa and M. Dogauchi (eds), Kokusai Minji-soshō-hō (Law on International Civil Procedure) (Tokyo, 2002), pp. 262–264.

International Relations

463

Concerning the requirement of reciprocity, the recent majority view interprets this provision rather flexibly, and unless the foreign country imposes excessive conditions on the enforcement of a Japanese judgment, the requirement of reciprocity is deemed to have been met. This becomes an issue when a foreign country makes it a rule for the court to review foreign judgments on their merit before allowing enforcement. Since the Japanese court does not examine foreign judgments on merit, this is against the requirement of reciprocity. So far, reciprocity has been acknowledged by the court for judgments rendered in the United States (California, Hawaii, New York, Washington DC); Switzerland (Canton of Zurich); the UK; and Germany, but was denied in relation to Belgium and Hong Kong. The Supreme Court has ruled on the enforceability of punitive damages. In that case, the enforcement of a Californian court judgment ordering payment of punitive damages was at issue. The courts of first instance and second instance rejected enforcement on different grounds. The Supreme Court ruled that the mere fact that the judgment contains an institution which does not exist in Japan does not necessarily mean that its enforcement is against public order. However, if the given institution is not compatible with the fundamental principles or ideas of the legal system of Japan, the foreign judgment is against public order. The system of punitive damages in California has a similar meaning to the system of fines and other criminal penalties and is therefore different from the system of compensation in Japan, which aims at the recovery of the status quo ante. The Court found this to be against the basic principles of the system of compensation in Japan and rejected enforcement on the ground of public policy.⁴¹ For cross-border insolvency, see Chapter 12. ⁴¹ Judgment of the Supreme Court, 11 July 1997 Minshū 51-6-2573.

Index Abuse of dominant position, 350–351 Abuse of rights intellectual property 121 overview 121 unfair dismissal 395 Acceptance see Offer and acceptance Access to information 99–100 Accounting disclosure requirements 322 dividends 281–282 general principles 278–279 share capital and reserves 280–281 Acquisitions see Mergers and acquisitions Administrative guidance advantages and disadvantages 48–49 cartels 342 meaning and scope 46–47 Adult guardianship 122–123 Agency apparent agency 134–135 governing law 455 sole distribution rights 352 types 132 general 131–135 Aliens constitutional protection 90–91 immigration law 445–447 foreign companies 447–448 Alternative dispute resolution ADR Law 58 arbitration of industrial disputes 404 civil conciliation 67 family conciliation 66–67 industrial disputes 403–405 overview 66–68 Anti-monopoly law see Competition law Appeals civil procedure 423 criminal procedure 442 Applicable law see Conflict of laws Arbitration see International commercial arbitration Assignment of claims general principles 143–144 governing law 456 subrogation 144–145 Assignment of shares general principles 239 restrictions on assignment 234 Associations

general associations and foundations 123–125 kumiai 221 Attorneys see also Para legals disciplinary procedures 79 foreign attorneys 82–84 general 78–79 Audit see also Accounting corporate auditors 252–253 governance structure 242 large and small companies distinguished 221 Authors’ rights 373–374 Banking see also Securities law ‘Big Bang’ 296 bond managers 273 consumer protection 161 corporate finance 271 crisis of 1997 297 excessive concentrations of economic power 335 market supervision by FSA 324–326 segregation from securities business 294–295 set-off 149 Bankruptcy see also Insolvency 286–288 ‘Big bang’ 24, 295–296 Board of directors (see also Directors) committee system 251–252 executive officers 251 overview 250–251 Boissonnade, G. 114 Bond issues 272–274 Boycotts of trade 346–347 Bribery of foreign public officials 428 Cabinet orders 39 Capacity see Legal capacity Cartels general provisions 340–342 government-led cartels 342–344 international cartels 356–357 Case law development of labour law 386 development of tort 181 equitable approaches 43 importance 42–43 precedent 43–45

466 Censorship 96 Circulars 45 Civil Code anti-positivist approach 8–9 contemporary reforms 24–25 general principles abuse of rights 121 good faith and fair dealing doctrine 119–120 overview 118–119 public policy and good morals 127–128, 363, 463 history and development 113–117 juristic acts agency 131–135 concept 127 defective declarations of will 129–131 definition 127 duress 131 mental reservation 129 mistake 130–131 public policy and good morals 103, 127–128 legal capacity juridical persons 123–126 physical persons 121–123 obligations 136 relationship to Commercial Code 117 sources of contract law 150 strict liability 193 Civil procedure appeals 423 capacity and standing 111–112 disclosure of documents 415–417 enforcement of judgments 423–425 interrogatories 414–415 jurisdiction 410–411 obtaining of documents 415–417 oral proceedings 419–421 overview 409–410 preliminary proceedings 413–419 small claim procedure 425 standing 411–412 Civil rehabilitation procedure, see also Insolvency law 288–289 Collective agreements collective bargaining 399–400 constitutional guarantees 384 general principles 400–402 relationship to rules of employment 388 working hours 391 Collective investment schemes conduct and management rules 308–309

Index defined 307–308 Commercial Code general principles 118 history and development 117, 212 offer and acceptance 153 relationship to Civil Codes 117 sources of contract law 150 Companies limited by shares bond issues 274 governance structure 242 Company law amendments 217–220 characteristics of share ownership 225–226 companies with committees within the board 241–242, 251–252 contemporary reforms 24 corporate governance structure 241–256 corporate auditors 252–253 derivative shareholder actions 253–256 dividends 281–282 directors 247–252 financing of companies bond issues 272–274 characteristics of corporate finance 270–272 new share issues 274–278 general shareholders meetings 242–247 statutory reform 241–242 history and development 217–220 legal capacity 125–126 listed companies 224–225 mergers and acquisitions appraisal rights 259 current trends 256–257 hostile takeovers 261–267 invalidity 261 procedures 257–259 protection of creditors 259 piercing of corporate veil 126 recognition of foreign companies 447–448 setting up of companies 226–230 share buy-backs 282–284 share capital and reserves 280–281 shares assignment of shares 239 classes of shares 232–237 exchange and transfer 231–232 minimum trading units 230–231 pre-emption rights 239–241, 237–238 split-ups and consolidations 231 splitting of companies labour relations 269–270

Index procedure 267–269 types of company new structures 223–225 pre-2005 system 220–221 Compensation see Damages Competition law (Anti-monopoly law) application to international transactions 355–358 concentrations of economic power general concentrations 334–336 mergers and acquisition 336–340 contemporary reforms 22–25 enforcement criminal sanctions 360–361 damages 361–362 overview 358–359 procedure 359–360 surcharges 360 history and development 327–330 keiretsu company groups 354–355 distribution agreements 354 supply networks 353–354 post-war reforms 20–21 private monopolisation 332–334 structure of the Anti-Monopoly Law 330–332 unfair trade practices abuse of dominant position 350–351 deceptive soliciting and unfair benefits 348 discriminatory treatment 347 meaning and scope 344–346 parallel imports 352 refusal to trade 346–347 resale price maintenance 349–350 restrictive dealings 348–349 sole distribution rights 352 unreasonable restraint of trade cartels generally 340–342 government-led cartels 342–344 Computer programmes 372–373 Conflict of laws juristic acts 453–455 legal capacity 453 marriage and divorce 457–458 obligations 455–456 statutory reform 452–453 torts 456–457 Constitution amendment procedure 31–32 Constitution of 1889 15–18 history 28, 86–87 human rights protection due process 105–107 economic rights 107–108

467

equal treatment 100–101 foreign nationals 445 freedom of expression 94–100 history and development 86–87 labour law protection 383–385, 399–400, 402 religious freedom 103 restrictions 92–95 judicial (constitutional) review 32–35, 92–95 judicial independence 43, 75 Popular Rights Movement 14–15 proposals for amendment 29 relationship with international treaties 41–42, 32–35 separation of powers 32 underlying principles 29–30 Constitutional review (judicial) 32–35, 92–95 Consumer protection contemporary reforms 160–161 financial instruments 161 governing law 455 offer and acceptance 153 standard form contracts 161–162 unfair trade practices 345 Contract law see also Obligations culpa in contrahendo 120, 154–155 general rules freedom of contract 152 offer and acceptance 152–153 governing law 455 Japanese approach to contracts 150–152 public order and good morals 128 sale contracts defects and remedies 159–160 liability of the seller 159 transfer of title and risk 158–159 sources 117, 150 termination of continuous contracts 155–158 Contributory negligence 192–193 Copyright authors’ rights 373–374 computer programmes 372–373 history and development of system 371–372 infringement 375–376 neighbouring rights 375 scope of protection 372 Courts district courts 57–58 family courts 61–63 High Courts 58 history and development 53–55

468

Index

Courts (cont.) Intellectual Property High Court 60–61 Justice System Reform 55–57 lay participation 63–65 speeding up of proceedings 66 summary courts 63 Supreme Court 32–35, 58–60, 108–109 Criminal law environmental protection 435–436 history and development 426–430 homicide 433–434 intellectual property infringements copyright 376 patents 371 trade secrets 379 moral crimes 434–435 official secrets 434 organised crime 436 patricide 100–101 protection of trade secrets 435 Criminal procedure appeals 442 hearsay evidence 441 history and development 436 judgments 442 pre-trial procedure 436–439 prosecution 439–440 sentencing 442 trials 440–442 Cross-border disputes application of foreign law 461–462 enforcement of foreign arbitral awards 73–74 enforcement of foreign judgments 462–463 insolvency 290–292 judicial cooperation 462 jurisdiction 458–460 legal capacity 461 simultaneous proceedings 460 sovereign immunity 460–461 Cross-border disputes 458–463 Cross-border payments 449–450 Cross-shareholding 225–226 Culpa in contrahendo 120, 154–155 Customary law 51–52 Defamation enforcement of apologies 141 freedom of expression 97–98 governing law 457 Defective declarations of will 129–131 Delegated legislation 39–40 Deregulation (regulatory reform) 7, 23–24, 218, 295 Derivative (shareholders’) action 253–256 Detention of suspects 106–107, 437–438

Diet (Parliament) composition 36 impeachment of judges 75–76 legislative procedure 36–37 separation of powers 32 Supreme body of state power 29–30, 35–37 Directors see also Board of directors derivative shareholder actions against 253–256 external directors 252 fiduciary duty 248 overview 247–249 representative directors 249 shares with right of appointment 236–237 Discharge of obligations 148–149 Disclosure company law 278–279 Financial Instruments and Exchange Law 321–323 Takeover Bid 325 Discrimination see Equal treatment Distribution agreements keiretsu 354 restrictive dealings 349 sole distribution rights 352 Dividends 281–282 Divorce general principles 204–207 governing law 458 Due process of law 105–106, 431, 436 Duress 131 Duty of care for other person’s safety 138–139 Economic rights 107–108 Electoral system 33–34, 102–103 constitutional review 33–34 equal treatment 102–103 Employer’s liability 193–195 Employment relations see also Labour law disciplinary actions 392–393 equal treatment 388–390 legislative reforms 386 life-long employment system 393–394 mandatory retirement 398 minimum wages 390 part-time and temporary workers 387 rules of employment 387–388 transfers and secondment 396–398 unfair dismissal 394–396 working hours 390–392 Environmental protection criminal sanctions 435–436 delegated legislation 39 tort liability 181, 186–187

Index Equal treatment constitutional guarantees 100–101 constitutional review procedures 34 electoral law 102–103 employment relations 388–390 gender discrimination 25, 101 inheritance law 101 international treaty obligations 110 nationality 102, 443 reasonableness test 101–102 Exclusive dealerships 349, 352 Executive officers (shikkō-yakuin) 251 Executive officers, senior (shikkōyaku) 251–252 Fair Trade Commission, overview 330–332 procedure 359–361 Family law children adoption 208 legitimacy 207–208 parental rights and duties 208–209 conciliation procedures 66–67 Constitutional reforms 201–202 dispute settlement 209–210 divorce 204–207 marriage 203–204 FIEL (Financial Instruments and Exchange Law) background and enactment 297–300 goal 300–301 professional investors distinguished 313–314 scope 301–303 ‘securities’ as key concept 303–306 Financial instruments consumer protection 161 Financial instruments business capital requirements 310–311 categories of business 310–311 effects of regulation 311–312 scope 309 Financial instruments firms conduct rules 312–313 defined 309 Financial supervices agency 325–326 Force majeure 138 Foreign exchange law capital transactions 450 cross-border payments 449–450 inward and outward direct investment 451–452 liberalisation of controls 448–449 Foundations, general 123–125 Freedom of expression, see also Human rights 94–104

469

Freedom of information 99–100 Freedom of thought, conscience and religion constitutional guarantees 103 constitutionality or religious acts 103–105 equal treatment of workers 388 Full partnership companies 223 Funds see Collective investment schemes General rights of personality 91–92 General shareholders meetings convocation procedure 242–243 current practice 244–245 validity of resolutions 245–247 voting 243–244 ‘Golden shares’ 236 Good faith and fair dealing doctrine contractual obligations 154–155 general principles 119–120 obligations 136–137 termination of continuous contracts 155–158 unfair dismissal 396 Governing law see Conflict of laws Habeas corpus 59, 141 Hearsay evidence 441 Holding companies 231–232, 330, 334–336 Hoso see Legal profession Human rights ‘balancing of interests’ approach 90–93 constitutional protection 1889 Constitution 16 1946 Constitution 87–90 history and development 86–87 due process of law constitutional guarantees 105–106 defendants and suspects 106–107 economic rights 107–108 equal treatment constitutional guarantees 90–91, 102–105 electoral law 102–103 gender discrimination 101 inheritance 101 labour relations 388–390 nationality 102 reasonableness test 101–102 treaty ratification against Gender Discrimination 25 freedom of association 385 freedom of expression constitutional guarantees 94 defamation 97–98 interim measures 97 journalistic sources 98 obscenity 95–97 protective judicial interpretation 90–91 restrictions 94–95

470

Index

Human rights (cont.) general rights of personality 91–92 international treaty obligations 109–110 religious freedom constitutional guarantees 103 Shintoism 103–105 role of the Supreme Court 108–109 Hypothec meaning and scope 175–176 rights in bankruptcy 288 Illegitimate children general principles 207–208 inheritance 210 Immigration law 445–447 Immoveables moveables distinguished 170 registration 166–168 types 165–166 Industrial action constitutional guarantees 383–385 dispute settlement procedures 403–405 general principles 402–403 trade union immunity 398 Inheritance equal treatment 101 governing law 458 illegitimate children 210 intestate inheritance 210 joint ownership 211 Renunciation of inheritance 211 Injunctions competition law 362 copyright infringements 375 patent infringements 371–372 tort law 197–198 trade secrets 378 Insider trading 318–320 Insolvency law Bankruptcy procedure 286–288 civil rehabilitation procedure 288–289 contemporary reforms 25 corporate reorganisation procedure 289–290 international insolvency 290–292 overview 285–286 Intellectual Property High Court establishment 60 jurisdiction 61, 410–411 Intellectual property law biotechnology 363–364, 380 copyright authors’ rights 373–374 computer programmes 372–373 history and development of system 371–372 infringement 375–376

neighbouring rights 375 scope of protection 372 design rights 379–380 patents application procedure 366–369 employee inventions 369–370 infringement 370–371 patentability 365–366 plant varieties 380 protection of trade secrets in civil proceedings 421–422 recent development 363–364 trade marks 376–377 trade secrets 377–379, 421–422, 435 utility models 379 Interim measures 413–414 International commercial arbitration contemporary reforms 69 enforcement of foreign arbitral awards 71–72 jurisdiction 70 procedure 70–71 setting aside of awards 71 taking of evidence 70–71 International treaties human rights 25, 109–110 intellectual property law 365 sale of goods 160 sources of law 40–42 workers’ rights 385 Interrogatories 414–415 Intestate inheritance 210 Joint ownership general property law 171–172 inheritance 211 matrimonial property 204 Joint tortfeasor liability 196–197 Judges appointment 74 independence 75 Justice System Reform 56 role in civil cases 419–420 tenure 74–75 transfers and promotions 75 Judgments see also Enforcement civil procedure 423 criminal trials 442 Judicial cooperation with foreign countries 462 Judicial scriveners 80–81 Juridical persons overview 123–126 foreign 447–448 Juristic acts agency 131–135

Index concept 127 defective declarations of will 129–131 duress 131 mental reservation 129 mistake 130–131 null and void acts and voidable acts 131 public policy and good morals 103, 127–128 sham transactions 130 Justice System Reform law school system 86–87 overview 57–59 promotion of ADR 68 recruitment and promotion of judges 75 saiban-in system 65–70 speeding up of proceedings 66, 354 supply keiretsu 353–354 Labour law constitutional guarantees 383–385 employment relations disciplinary actions 392–393 equal treatment 388–390 legislative reforms 386 life-long employment system 393–394 mandatory retirement 398 minimum wages 390 part-time and temporary workers 387 rules of employment 387–388 transfers and secondment 396–398 unfair dismissal 394–396 working hours 390–392 history and development 381–383 splitting of companies 269–270 trade unions collective agreements 400–402 collective bargaining 399–400 dispute settlement procedures 403–405 general principles 398–399 industrial action 402–403 Lawyers see Legal profession Lay judiciary 63–65 Legal capacity civil procedure 411 governing law 453 juridical persons 123–126 physical persons 121–123 Legal profession attorneys 78–80 judges 74–76 Justice System Reform 55–57 para-legals in-house counsel 81–82 judicial scriveners 80–81 patent attorneys 80 tax attorneys 80 public prosecutors 76–78

471

Legitimisati on 207–208, 443–444 Limited liability companies governance structure 242 pre-2005 system 221–222 Limited liability companies (gōdō-kaisha, LLC of US type) 223 Limited liability companies (German GmbH, abolished) 223 Limited liability partnerships 223–224 Limited partnership companies 223 Listed companies 224 Local regulations 49–51 Marriage dissolution and divorce 204–207 general principles 203–205 governing law 457–458 Measure of damages 141–142 ‘Mental reservation’ 129 Mergers and acquisitions appraisal rights 259 Bulldog sauce case 266–267 competition law: excessive concentrations of economic power 336–340 current trends 256–257 defensive measures 263–267, 325 disclosure requirements for takeovers 322–325 hostile takeovers 261–267 invalidity 261 NBS case 264–266 Primary purpose rule 265 procedures 257–259 protection of creditors 259 registration 260 simplified procedures 259 Minimum wages 390 Mistake 130–131 ‘Mothers’ 224–225 Moveables immediate acquisition 170 immoveables distinguished 165 real security rights 177 Nationality equal treatment 102, 388 legitimisation 443–444 naturalisation 444 overview 443–445 Negligence contributory negligence 192–193 criminal negligence 432 standard of care 182–184 Neighbouring rights 375 Non-discrimination see Equal treatment ‘Non-litigiousness’ of the Japanese 4–5 Novation 148

472 Obligations see also Contract law assignment of claims general principles 143–144 subrogation 144–145 enforcement 140–141 extinction of claims 148–149 governing law 455–456 management of another’s affairs without mandate 162–163 multiple parties divisible and indivisible obligations 146–147 suretyship 147–148 performance delayed performance 137 effects 141–143 general principles 141–142 imperfect performance 138 impossibility of performance 137–138 refusal to accept performance 139 Obtaining of documents 415–417 Offer and acceptance 152–153 Official secrets 100, 434 Organised crime 436 Ownership 169–172 Par-value shares 230 Para-legals in-house counsel 81–82 judicial scriveners 80–81 patent attorneys 80 tax attorneys 80 Parallel imports 352 Parliament see Diet Patents application procedure 366–369 computer programmes 373 employee inventions 369–370 infringement 370–371 jurisdiction 410–411 patentability 365–366 Performing rights 375 Piercing of corporate veil 126 Plant varieties 380 Pledges 175 Popular Rights Movement 14–15 Pre-emption rights Bonds with pre-emption rights 272 new shares 239–241, 264–267 Preferential rights meaning and scope 175 moveables 177 Preferred shares 233–234 Prescription

Index acquisitive 170–171 doctrine of good faith and fair dealing 120 extinctive 135 Preservation of evidence 414 Pre-trial procedures criminal justice system 436–439 Privacy, right to 91 Private monopolisation 332–334 governing law 457 new Law 117 overview 198–200 subscription to shares 227 Property law governing law 455 joint ownership 171–172 moveables and immoveables distinguished 165 ownership 134–135 real rights registration 166–168 types 165–166 real security rights atypical rights 177–179 statutory rights 174–177 registration 166–168 rights in rem and in personam rights distinguished 164 rights over another’s property 172–174 Prosecution 439–440 Prosecution review board 439–440 Public companies characteristics of share ownership 225–226 definition 224 governance structure 242 introduction of new structures 224–225 Public policy and good morals enforcement of foreign judgments 463 general 127–129 Public prosecutors discretionary role 434–439 overview 76–78 Public welfare 91–92, 118–119 Redundancy general requirements 395–396 transfers and secondment 396–398 Refugees 445–447 Religious freedom see Freedom of thought, conscience and religion Representative actions 412 Representative directors 249 Resale price maintenance 349–350 Retention rights 174–175 Right to defence constitutional right 107 criminal trial 441

Index suspects in custody 437–438 Rights issues 275 Rule of law 26–27 Saiban-in (lay assessors) system 58, 67 Sale contracts defects and remedies 159–160 liability of the seller 159 transfer of title and risk 158–159 Scholarly opinion 52 Securities 303–306 Separation of powers 32 Set-off bankruptcy debts 287 performance of obligations 148–149 Setting-up of companies by offering shares 229–230 by promotors 227–229 Sham transactions 130 Share buy-backs 282–284 Shareholders appraisal rights 259 derivative shareholder actions 253–256 Shares abolition of par-value shares 230 assignment of shares 239 characteristics of ownership 225–226 classes of shares acquisition by company 235–236 appointment of directors and auditors 236–237 introduction of new classes 232–233 limited voting rights 234–235 preferred and deferred shares 233–234 restrictions on assignment 234 UFJ Bank case 237 ‘veto’ rights 236 minimum trading units 230–231 new share issues general requirements 275 public offerings 277–278 rights issues 275 third party issues 275–277 pre-emption rights 239–241 public and other companies distinguished 224 role of certificates 237–238 split-ups and consolidations 231 SII (Structural Impediments Initiatives) Talks 23, 218, 323, 328–329 Small claims procedure 425 Sovereign immunity 460–461 Standard form contracts 161–162 Stare decisis 43 Statutory laws 35–38 Stock exchanges establishment 224–225

473

financial instruments exchange 314–315 Strict liability defective products 199–200 employer’s liability 193–195 occupiers liability 195–196 road traffic accidents 195 special laws 181 Subrogation 144–145 Substitution 145 Succession, see Inheritance law Superficies 172 Supreme Court constitutional review procedure 32–35 overview 58–60 role in protecting human rights 109–110 Surcharges Anti-Monopoly Law 360 Financial Instruments and Exchange Law 321 Suretyship 147–148 Take-overs see Mergers and acquisitions Tax attorneys 80 Testate inheritance general principles 212–213 Tort liability general rules causation 186–188 fault 182–185 overview 181–182 scope of losses 188–193 unlawfulness 185–186 governing law 456–457 joint liability 196–197 product liability 198–200 remedies 197–198 special laws 181 strict liability 193–196 Trade marks 376–377 Trade secrets 377–379, 421–422, 435 Trade unions collective bargaining and agreements 399–402 constitutional guarantees 384 dispute settlement procedures 403–405, 398–399 history and development 381–383 Transfer of employees splitting of companies 269–270 transfers and secondment to avoid redundancy 396–398 Unfair dismissal 394–396 Unfair trade practices abuse of dominant position 350–351 application of law to international transactions 355

474

Index

Unfair trade practices (cont.) deceptive soliciting and unfair benefits 348 discriminatory treatment 347 intellectual property rights 353 meaning and scope 344–346 parallel imports 352 refusal to trade 346–347 resale price maintenance 349–350 restrictive dealings 348–349 sole distribution rights 352 Unfair trading in the financial market compensation of favoured customers 317–318 enforcement 320–321 general provisions against fraud 315–316 insider trading 318–320 market manipulation 316–317

rumour spreading 320 Uniform state examination 84–85 Unjust enrichment 162–163 governing law 455–456 Unreasonable restraint of trade application of law to international transactions 355 cartels general provisions 340–342 government-led cartels 342–344 Utility models 379, 410–411 Wills general principles 212–213 Working hours 390–392 Zaibatsu 293, 327