10 Major Revisions to the Japanese Civil Code
Part Five – Cancellation of Contracts and Mistake

By Shinya Yoshida and Peter Cassidy

This part in our series on revisions to Japan’s Civil Code looks at two issues concerning contracts – cancellation and mistake. There has been a major change to the principle regarding cancelling a contract. Also, the Code has been revised to change what happens when a party discovers a mistake in a contract; in other words, they find out that they what they have signed is not what they intended.

Cancellation of contracts

The principle regarding cancellation of a contract with notice has been revised, and there are also major revisions to the provisions regarding cancellation without notice. The situations where a contract can be cancelled without notice have been increased and rearranged, as well as new provisions concerning some contracts that can be cancelled without notice. As contract cancellation has an effect on the annulment of contracts and claims for compensation, these revisions are very important.

(1) Fault and minor breaches
Prerequisites for cancellation when the obligor is at fault that are currently in the Code have been removed by the revision. Accordingly, cancellation becomes possible even in situations where performance of a contract is delayed because of a natural disaster. Also, the provisions state that a contract cannot be cancelled due to the fault of the obligee.

The revised Code clarifies the position established by case law that a contract cannot be cancelled if the degree of non-performance is minor in light of the details of the contract and business norms. In practice, there are not many cases where deciding whether a breach is minor is a problem. But since this issue will now be specified in the Code, it seems the number of cases that dispute whether a breach was serious enough to allow cancellation will increase.

(2) Cancellation with or without demand
In principle, if one party has not performed their obligations under a contract, the other party can make a demand for performance within a reasonable period, then cancel the contract if there is no performance during the specified period (revised Article 541). The revised Code (revised Articles 542, 543) specifies that an entire contract can be cancelled without prior demand if:

  1. performance of the entire obligation is impossible;
  2. the obligor has manifested an intention to refuse to perform the whole of their obligation;
  3. performance of a part of the obligation is impossible, or the obligor has manifested an intention to refuse to perform a part of their obligation, and the remaining portion cannot fulfill the purpose of the contract;
  4. due to the nature of the contract or a manifestation of intention by the parties, the purpose of the contract cannot be achieved unless the performance is carried out at a specific time and date or within a certain period, and that specific time or certain period lapses without the obligor performing the obligation;
  5. the obligor does not perform the obligation and it is clear that it is unlikely that there will be sufficient performance to satisfy the purpose of the contract, even if the obligee makes a demand.

The revised Code has also clarified the ability to cancel part of a contract without demand when performance of part of the obligation is impossible or the obligor has manifested an intention to refuse to perform part of their obligation.

Mistake (1) Effect of mistake: from invalidity to rescission

Under the current Civil Code, a mistake in an element of a contract makes the contract invalid, and there are no time limits placed upon being able to assert the invalidity of a contract. However, under the revised provisions, a mistake in an element of a contract will make the contract subject to rescission, similar to cases of fraud or coercion. As a result, if the right to rescind is not exercised within 5 years, the ability to rescind will be lost. Further, the Civil Code provisions concerning statutory ratification will apply to the rescission. Therefore, the ability to rescind a contract will be lost if certain acts are performed that are deemed to be an acceptance of the mistake. This change of the remedy from invalidity to rescission signifies a big change in the effect of a mistake.

(2) Gross negligence and mistake
A person cannot assert that there is a mistake if that person was grossly negligent. This point is consistent in both the current and revised Civil Code. However, under the revised Code it has been specified that a mistake can be asserted in the case of gross negligence, if (1) the other party was aware of that gross negligence, or was unaware due to their own gross negligence, or (2) both parties made the same mistake.

(3) Practical points to consider
Until now, asserting mistake was not subject to any time limits, plus it was easier to assert and prove than fraud or coercion, making it the most common assertion amongst the three. But considering these revisions, it will be necessary to reserve an objection in order to avoid statutory ratification, and it is important to manage the issue carefully to avoid exceeding the time limit.