10 Major Revisions to the Japanese Civil Code
Part Seven – Interest Rates and Set-off

By Shinya Yoshida and Peter Cassidy



This is the final column 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.

Statutory interest rates and late payment charges

Under the current Civil Code, the statutory interest rate is 5%, while under the Commercial Code it is 6%. The revised Civil Code initially lowers the statutory interest rate to 3% and adopts a floating rate system where the rate will be subject to review every 3 years and will consider factors such as changes in market rates. On the other hand, the Commercial Code’s statutory interest rate of 6% that currently applies to commercial transactions between businesses will be repealed with the revision of the Civil Code.

This change to the statutory interest rate will have a large effect on the amount of damages claimed by plaintiffs in personal injury cases. In cases such as traffic and workplace accidents, interest on the amount of compensation can be claimed from the date of the accident, but this will be reduced from the current 5% down to 3%, which means that the amount of compensation payable will decrease. On the other hand, the amount of compensation for the plaintiff’s loss of future income due to death or permanent injury will be increased.

Set-off of property damage

Setting off of property damage claims, for example in the case of a traffic accident, is where the amount of damage suffered by each party is calculated and the party suffering more damage and a claim is made for the difference between the two amounts. Such set-offs are not permitted under the current Civil Code unless both parties agree. Therefore, it is often the case that if one party commences litigation the other party must commence a separate claim for their own damage. This invites unfair results in various situations, such as where both parties obtain court orders for the payment of compensation to each other and one party fails to pay or becomes bankrupt before making the payment. In this case, the non-bankrupt party must pay what they owe, but will be unable to receive the full value of their own claim (if anything at all). The revisions to the Civil Code allow a set-off of opposing amounts of damage and a claim for the difference between the amounts in cases concerning property damage, even if the parties have not reached an agreement concerning such a set-off. This revision differs from case law, which has maintained the position of denying such set-offs. However, bad-faith set-offs are still prohibited, as is the setting off claims involving personal injury (unless the person who suffered the injury agrees).

Conclusion

As mentioned in the introduction to the first column, it will be at least two years before these revisions to the Civil Code come into effect, in the second half of 2019 at the earliest. Some of the points that have been discussed, such as the interest rates and set-off covered in this column, only come into consideration once a problem arises, so all we can do is bare them in mind and be ready to act if necessary. On the other hand, we can start planning in advance for some of the other matters, like the revised laws governing standard terms and conditions forms. The two-year period before the revisions come into force gives everybody in industry the opportunity to plan their response, including updating forms or drafting new ones. We hope this series has given you an insight of what to expect when the revised Code comes into effect.