10 Major Revisions to the Japanese Civil Code
Part Six – Work Contracts and Leases

By Shinya Yoshida and Peter Cassidy



This penultimate entry in our series on revisions to Japan’s Civil Code looks at two issues that are important to many businesses. Contracts for the performance of work, including subcontracts for construction, do not always go to plan. This column will look at how the Code has been revised to decide issues regarding payment to a contractor when the work cannot be completed, a defect is discovered in the work, or one of the parties enters bankruptcy.

Also worthy of note is some changes that have been made to the Code on leases. In particular, the maximum length of a lease allowed under law and the parties’ responsibilities for repairs to the leased property.

Work contracts

(1) Claim for remuneration when it becomes impossible to complete the work
Unless there is a prior agreement to the contrary, payment under a contract for work is made after the work has been completed (contracts for large projects such as shipbuilding may provide for payment in installments, but even then, the final payment after delivery is normally the largest amount). The nature of this contract for work is that, theoretically, the contractor has no claim for remuneration if the contract is terminated before the work is completed, but court decisions have recognised claims in some situations. Under the revised Civil Code, when a contract for work cannot be completed through no fault of the party that ordered the work, or the contract is cancelled before the work is completed, the contractor can claim remuneration for the proportion of the contract that has been completed if the party that ordered the work can receive a benefit from the completed portion.


(2) Time limit upon ordering party’s rights under warranty (revised Article 637)
The contractor’s warranty against defects is currently defined as being for 1 year after delivery, but in order to achieve balance with sales contracts, it has been changed to 1 year “from the time that the ordering party became aware of the nonconformity” under the revised Civil Code, with the word “defect” being replaced with “nonconformity”. If the ordering party does not give notice during this period, they cannot use the nonconformity as a reason to claim for subsequent performance, a reduction of the remuneration, compensation for loss or cancellation of the contract. However, this provision does not apply if the contractor was aware of the nonconformity at the time of delivery to the ordering party (or upon completion of the work if delivery is not required), or they were unaware due to gross negligence.


(3) Cancellation due to the ordering party commencing bankruptcy procedures (revised Article 642)
The revised Civil Code does not change the contractor’s and bankruptcy administrator’s ability to cancel the contract if the ordering party enters bankruptcy. However, the revised Code specifies that the contractor cannot cancel the contract after the work has been completed. Cancellation of a contract for work in the case of bankruptcy differs to that of civil rehabilitation or corporate reorganisation, so caution is required.

Leases

Several revisions to the Civil Code have been made to codify judicial precedents concerning leases of real estate. On top of this, some important revisions concerning leasing of property other than real estate have also been made. Article 604 of the current Civil Code limits the duration of each lease or renewal to 20 years, but this limit has been increased to 50 years. This responds to the need to be able to make long-term leases that exceed 20 years in situations such as leases relating to large-scale projects, heavy machinery and factory plant equipment.

The lessor’s obligation to repair a leased item has been codified in the revised Article 606. However, the obligation does not apply when the lessee is responsible for the damage. The newly added Article 607-2 allows the lessee to perform required repairs when (1) the lessee notifies the lessor that repairs are required, or the lessor is aware of that fact, but the lessor does not perform the repairs within a reasonable period, and (2) in the case of emergency. Article 621 has been revised in accordance with judicial precedents in order to clarify that normal wear and tear and aging of the leased item is not subject to restoration by the lessee at the end of the lease. Similarly, the lessee is not obliged to restore any damage which is not the fault of the lessee.