Legal Commentary on Warehouse Operations and Deposit Contracts in Japanese Commercial Law

In the global supply chain, Japan functions as an extremely important hub. Regardless of the industry—be it manufacturing, retail, or trade—many companies store their valuable assets, such as products and raw materials, in Japanese warehouses as part of their business operations. This act goes beyond mere physical storage and gives rise to a legal contractual relationship known as “deposit.” Understanding the legal framework that governs this deposit relationship, especially with warehouse operators who store goods as a business, is not merely an academic pursuit. It is an essential management requirement for asset preservation, ensuring smooth transactions, and managing risks in the event of unforeseen circumstances. The Japanese legal system has established two main pillars in this field. One is the “Japanese Commercial Code,” which defines the private rights and obligations between the depositor and the warehouse operator. The other is the “Japanese Warehouse Business Act,” a public regulatory law designed to ensure the proper operation of the warehouse industry and protect the interests of users. This article will elucidate how these two laws work together to form a framework for protecting corporate assets. Specifically, we will provide a detailed explanation of the stringent duty of care and the burden of proof imposed on warehouse operators, the unique legal effects of warehouse receipts that embody ownership of goods and can also serve as financial instruments, the powerful lien rights held by warehouse operators, and the rights and obligations to be aware of at the termination of the deposit contract, including the short-term statute of limitations, all discussed with concrete legal provisions and case law.

The Legal Framework Governing Warehouse Operations in Japan

The Japanese legal system provides a comprehensive set of regulations for warehouse operations from both private and public law perspectives. Understanding this dual legal structure is the first step when utilizing warehouse services in Japan.

The first pillar is the Japanese Commercial Code. This law establishes the basic rights and obligations of the depositor (the party entrusting goods) and the warehouse operator (the business entity storing the goods) in their private law contractual relationship, namely the deposit contract. Specific legal issues between the parties, such as the interpretation of contract terms and liability for damages in case of loss or damage to the deposited goods, are primarily resolved based on this Japanese Commercial Code.

The second pillar is the Japanese Warehouse Business Act. This act supervises the business of warehousing itself, aiming for its sound development and the protection of users through public law, which is administrative regulatory law. Article 1 of the Japanese Warehouse Business Act clearly states its purpose as “to ensure the proper operation of warehouse businesses, protect the interests of warehouse users, and secure the smooth circulation of warehouse receipts.” Considering the public nature of warehousing, which involves the custody of other people’s valuable property, this law imposes various obligations on operators.

At the heart of this public regulation is the registration system with the Minister of Land, Infrastructure, Transport and Tourism. Not just anyone can start a warehouse business; one must meet strict standards set by the law and be officially registered. These registration requirements serve not merely as formal procedures but as substantial barriers to protect users’ assets. For example, warehouse facilities and equipment must meet stricter standards than general buildings, such as fire resistance, waterproofing, and security measures, in accordance with the Building Standards Act and the Fire Service Act, depending on the type of goods stored. Furthermore, each warehouse is also required to have a dedicated ‘warehouse manager’ with specialized knowledge and skills in warehouse management.

The relationship between these two laws is not merely parallel. The registration standards and operational obligations set by the public Japanese Warehouse Business Act also influence the private law contractual relationships governed by the Japanese Commercial Code. For instance, if deposited goods are destroyed in a fire, the depositor may claim damages from the warehouse operator based on the Japanese Commercial Code. In such a case, the fact that the warehouse operator did not meet the fire prevention standards set by the Japanese Warehouse Business Act can be a very powerful piece of evidence in proving a breach of duty of care under the Japanese Commercial Code. Thus, the regulatory standards of public law serve as objective criteria in determining the specific content of the duty of care under private law. Therefore, the first risk management step that a company should take when selecting a warehouse is to verify whether the warehouse is legally registered according to the Japanese Warehouse Business Act and whether it is certified as the appropriate type of warehouse for their products, even before scrutinizing the terms of the contract. This public law verification process can be considered fundamental due diligence that lays the foundation for securing private law rights in the future.

Warehouse Operators and Bailment Contracts Under Japanese Commercial Law

To understand the concept of warehouse operations in Japanese Commercial Law, it is essential to accurately grasp the central concepts of “warehouse operator” and “business bailment.”

Article 599 of the Japanese Commercial Law defines a “warehouse operator” as a person who stores goods in a warehouse for others as a business . The key point here is “as a business.” This refers to an operator who provides storage services repeatedly and continuously and profits from it. The contract concluded between a warehouse operator and a customer for the storage of goods is a business bailment contract.

This business bailment differs significantly from the general bailment contract defined by the Japanese Civil Code, especially in terms of the level of care duty imposed on the bailee (the person who takes custody of the goods). Under the Japanese Civil Code, a bailment contract is, in principle, gratuitous (without compensation), and the bailee’s duty of care is sufficient if it is the same as for their own property. The higher standard of “due care of a prudent manager” (diligent management duty) is only required in the case of a paid bailment where compensation is received.

In contrast, the Japanese Commercial Law applies stricter discipline to bailments conducted by warehouse operators, who are merchants. Article 595 of the Japanese Commercial Law stipulates that “even if no compensation is received, a merchant who accepts a bailment within the scope of their business must store the bailed goods with the due care of a prudent manager” . This is based on the idea that warehouse operators, as professionals entrusted with other people’s goods, should always bear a high level of duty of care expected of professionals, regardless of whether they are paid. This provision allows the bailor to receive significantly more protection than under the general bailment of the Japanese Civil Code, even if the storage fee becomes gratuitous under special circumstances.

To clarify this difference, the following table compares the two types of bailment.

As the table shows, when a company entrusts its products or goods to a warehouse operator, it automatically falls under the discipline of Japanese Commercial Law, creating a legal environment favorable to the bailor. Recognizing this point is a fundamental premise in building a relationship with warehouse operators.

The Most Crucial Obligation of Warehouse Operators: The Duty of Care in the Custody of Deposited Goods Under Japanese Law

Among the numerous obligations that warehouse operators assume under a deposit contract, the most central and significant is the duty to store the deposited goods with the care of a prudent manager, known as the “duty of due diligence.”

This duty of due diligence is a concept derived from Article 400 of the Japanese Civil Code and is an obligation imposed on trustees in various types of contracts. According to Article 595 of the Japanese Commercial Code, this duty also applies to warehouse operators. Specifically, warehouse operators must manage the deposited goods with the level of care generally required in transactions, according to their profession and social status. This goes beyond simply “treating the goods as if they were their own” and means that as professionals in storage, they must maintain the optimal environment for the nature and personalityistics of the deposited goods, taking all reasonable measures to prevent loss, damage, or deterioration in quality.

Regarding the fulfillment of this duty of due diligence, the Japanese Commercial Code provides a provision that is extremely advantageous for depositors. Article 610 of the Japanese Commercial Code stipulates that “warehouse operators cannot be exempt from liability for damages due to loss or damage of the deposited goods unless they prove that they did not neglect the care required in their custody.”

The practical significance of this provision is substantial. In typical breach of contract litigation, the damaged party (the plaintiff, in this case, the depositor) must specifically prove that the other party (the defendant, the warehouse operator) committed a breach of contract, namely a violation of the duty of care (negligence). However, it is virtually impossible for an external depositor to grasp the details of what happened in the warehouse and gather evidence to prove it. Information is predominantly on the side of the warehouse operator. Article 610 of the Japanese Commercial Code reverses the rules of burden of proof to correct this information disparity.

Under this rule, depositors need only assert and prove two points in litigation: that they entrusted the goods in sound condition and that the goods were returned damaged (or not returned at all). Thereafter, unless the warehouse operators actively prove that “they did everything they should have done as professionals and did not neglect their duty of care,” they cannot escape liability. This represents a very high hurdle for warehouse operators and, as a result, strongly protects the rights of depositors. This legal mechanism motivates warehouse operators to maintain high operational standards and to keep detailed records of management conditions in preparation for any eventualities.

The content of this stringent duty of care can be understood more concretely through actual court cases.

For example, in the litigation related to the “Askul warehouse fire” that occurred in 2017 and took about two weeks to extinguish, the Tokyo District Court pointed out on April 26, 2023, the possibility that the improper use of a forklift by a contractor entering and exiting the warehouse caused the fire. The court also referred to the warehouse’s management system and ultimately ordered the contractor to pay approximately 5.1 billion yen in damages. In this incident, it was also revealed that despite the fire alarm going off, an employee deemed it a false alarm and shut it down, suggesting that the duty of care extends not only to the maintenance of facilities but also to the establishment and adherence to appropriate emergency response procedures.

There are also cases where a special duty of care is required according to the personalityistics of the deposited goods. In a judgment handed down by the Sapporo District Court on June 7, 2012, a warehouse operator who had received wine for storage was found to have failed to maintain the temperature (around 14 degrees Celsius) and humidity (around 75%) stipulated in the contract. Although no physical damage to the wine itself was recognized, the court ruled that the failure to provide the storage environment as per the contract constituted a breach of obligation and ordered the warehouse operator to compensate the depositor for the full amount of the storage fee paid as damages. Similarly, in the storage of items like frozen tuna, where temperature control is essential, warehouse operators are required to have advanced expertise and facility management capabilities to maintain quality, and failure to do so will immediately lead to liability.

These cases clearly demonstrate that the duty of due diligence for warehouse operators is not uniform but is a dynamic obligation that is concretized based on the individual contract content, the nature of the deposited goods, and the professional standards of the industry to which the business operator belongs.

Warehouse Receipts: Valuable Securities Supporting the Circulation of Goods and Finance in Japan

In a deposit contract, the depositor can request the issuance of a “warehouse receipt” from the warehouse operator as proof of the goods deposited. Article 600 of the Japanese Commercial Code stipulates that, upon the depositor’s request, the warehouse operator is obligated to issue a warehouse receipt. This warehouse receipt is not merely a deposit certificate; it is a “valuable security” endowed with special legal effects by Japanese law, playing an extremely important role in the circulation of goods and finance.

Firstly, not all warehouse operators can issue warehouse receipts. Under Article 13 of the Japanese Warehouse Business Act, only businesses that have received special permission from the Minister of Land, Infrastructure, Transport and Tourism, and are recognized as having creditworthiness and operational capability, are allowed to issue them. This permission system is the first barrier to ensure the credibility of the warehouse receipts. The issued securities must contain statutory items as defined by the Japanese Commercial Code, such as the type, quality, and quantity of the deposited goods, the name or trade name of the depositor, the storage location, and the storage fee.

The most powerful legal effect of warehouse receipts lies in their negotiability, that is, the possibility of transfer by endorsement. Like bills of exchange and checks, warehouse receipts can be transferred to others one after another through a simple method called “endorsement,” which involves writing the intent to transfer on the back of the security and signing it.

The first effect of this endorsement transfer is the “property right effect.” Transferring a warehouse receipt has the same legal effect as transferring the ownership of the goods stored in the warehouse. This allows companies to buy and sell or transfer ownership without physically moving bulky goods, by simply moving a piece of paper, the security. This contributes significantly to the speed and cost reduction of transactions in international trade and domestic bulk trading.

The second effect is the protection of the “bona fide possessor.” A person who has acquired a warehouse receipt through a legitimate endorsement, without knowing of any defects in the cause of acquisition (in good faith), can fully acquire the rights as stated in the security, even if the previous transferor had no legitimate rights. Furthermore, Article 604 of the Japanese Commercial Code states that the warehouse operator cannot oppose a bona fide possessor with the fact that the contents of the warehouse receipt differ from the truth. For example, if a warehouse operator mistakenly records that they received a high-quality product “A+” instead of product “A,” they cannot refuse to deliver by claiming “the actual product is A” against a person who acquired the receipt in good faith. They must either deliver “A+” or compensate for the difference. This provision ensures absolute trust in the contents of the security and enhances its negotiability.

When these legal effects are combined, warehouse receipts transcend from mere vouchers for goods to assets with financial value. Companies can bring warehouse receipts, which embody their inventory stored in the warehouse, to banks and obtain loans using them as collateral (supply chain finance). Banks can confidently execute loans because they acquire a secure lien on the goods through the endorsement transfer of the security and are protected as bona fide possessors. Thus, physically fixed inventory (stock) is transformed into a fluid financial asset (flow) through the medium of warehouse receipts. For foreign companies operating in Japan, understanding and utilizing this warehouse receipt system can be a crucial strategy not only for optimizing inventory management but also for diversifying means of working capital procurement and optimizing capital efficiency.

Warehouse Operators’ Rights: The Right of Retention for Storage Fees in Japan

While warehouse operators in Japan have various obligations towards depositors, they also possess powerful rights to secure their claims. A prime example is the “Commercial Right of Retention” as stipulated under Japanese Commercial Law.

The right of retention allows the possessor of someone else’s property to refuse to surrender that property until they have been compensated for claims arising from it. Warehouse operators can retain goods deposited by clients to secure unpaid storage fees, handling charges, and advanced payments, refusing their return.

It is crucial to understand that the Commercial Right of Retention under Japanese Commercial Law has significantly more relaxed requirements for its establishment than the general right of retention (civil right of retention) under Japanese Civil Law. For the civil right of retention to be established, a “direct connection (contiguity)” between the claim and the retained property is required. For example, if the payment for watch repairs is outstanding, the repairer can retain the watch but cannot retain an unrelated bag that the customer happened to leave behind.

However, for the Commercial Right of Retention, which applies to transactions between merchants (business operators), this requirement of contiguity is not necessary. In other words, if both the creditor (warehouse operator) and the debtor (depositor) are merchants, and the claim arises from their commercial transactions, the right of retention can be exercised even without a direct connection to the retained goods.

The practical consequences of this difference are profound. Suppose a company has deposited three different lots of goods, A, B, and C, with the same warehouse operator. The company disputes the invoice for the storage fees of lot A and temporarily withholds payment. In this case, it is natural that the warehouse operator can retain the goods of lot A for the unpaid storage fees. However, the power of the Commercial Right of Retention does not stop there. Legally, the warehouse operator can also retain the goods of lots B and C, even though their storage fees have been fully paid, to secure the claim related to lot A, refusing their delivery.

This rule provides warehouse operators with an extremely powerful means of debt collection, but it can pose an unexpected risk for depositors. A dispute over a single small claim can halt the shipment of the entire inventory stored with that warehouse operator, potentially paralyzing the entire supply chain. This grants warehouse operators tremendous leverage in negotiations during disputes. Therefore, companies utilizing warehouse services in Japan must always keep in mind the extensive power of this Commercial Right of Retention, ensuring accurate and prompt management and payment of invoices, which is crucial from a business continuity perspective. The legal and accounting departments must deeply recognize that a casual deferral of payment for some claims could have serious implications for the entire business.

Termination of Deposit Contracts and Return of Deposited Items Under Japanese Law

The primary purpose of a deposit contract is achieved with the return of the deposited items, leading to the contract’s termination. Understanding the rights and obligations at this final stage, especially the legal deadlines that require careful attention, is essential for the smooth completion of transactions.

Under Japanese law, depositors, or those legitimately holding warehouse receipts, have the right to demand the return of deposited items at any time. According to the provisions of the Japanese Civil Code, even if a storage period has been agreed upon between the parties, the depositor may request the return before the end of that period. However, if such an early return request causes damage to the warehouse operator—for instance, if discounted storage fees were set based on a long-term contract—the depositor may be obligated to compensate for the damages.

The procedures for retrieving deposited items (withdrawal procedures) are typically stipulated in the terms and conditions set by the warehouse operator, such as the Standard Warehouse Deposit Terms. If a warehouse receipt has been issued, presenting this document to the warehouse operator is a condition for the return. If no receipt has been issued, the depositor must submit the documents specified by the warehouse operator to request the withdrawal.

While the most common cause for the termination of a deposit contract is the complete return of the deposited items, other causes include the expiration of the contract term or termination by either party. The warehouse operator may terminate the contract if the deposited items become unsuitable for storage or pose a risk of damage to other items. Similarly, the depositor may also have the option to terminate the contract prematurely by following the procedures specified in the contract, such as providing a notice of cancellation a certain period in advance.

In the process of contract termination, depositors must be particularly vigilant about the “short-term statute of limitations” for damage claims. The Japanese Commercial Code sets a much shorter period of one year for the liability of warehouse operators, compared to the general statute of limitations for claims, which is typically five years. Specifically, the right to claim damages from the warehouse operator for the loss or damage of deposited items generally expires if not exercised within one year from the date the items were delivered from the warehouse (withdrawal date). If all the deposited items are lost, the one-year period starts from the date the warehouse operator notifies the depositor of the loss. This short-term limitation is intended to stabilize legal relations in commercial transactions quickly, but it is a critical deadline that could result in the loss of rights for the depositor.

This brief one-year period can be a practical trap that is easily overlooked. When a company retrieves a large quantity of goods from a warehouse, it may not immediately conduct a detailed inspection of the entire quantity. The goods might be sent directly to another distribution point or stored in their packaging until just before sale. It is not uncommon for issues such as damage, shortages, or deterioration in quality to be discovered only when the products are about to be used or sold, months later. However, if one year has passed since the withdrawal date at that point, even if the warehouse operator’s responsibility is clear, the right to claim damages legally no longer exists.

To avoid this risk, companies must coordinate between their legal and logistics/inventory management departments to establish internal regulations. Specifically, when retrieving goods from a warehouse in Japan, it is crucial to establish a process for conducting a prompt and thorough inspection wherever possible. Should any irregularities be discovered, the company must immediately notify the warehouse operator and complete preparations for exercising legal rights, such as negotiations or initiating litigation, before the one-year statute of limitations expires. The existence of this short-term statute of limitations is not just a matter of legal knowledge; it is a highly practical rule that dictates the specific workflow and internal control within a company.

Conclusion

As detailed in this article, the legal framework for warehouse business operations under Japanese Commercial Law and the Warehouse Business Law is intricately and multilayeredly constructed. For operators utilizing warehouse services in Japan, it is essential to be constantly aware of several important legal checkpoints to ensure the protection of their assets and rights. Firstly, before entering into contract negotiations, verify that the counterparty’s warehouse is legally registered under the Japanese Warehouse Business Law. Secondly, understand the advantageous rule for depositors that warehouse operators are subject to a high degree of care known as the “duty of due diligence,” which shifts the burden of proof in the event of damage. Thirdly, strategically utilize the negotiability and financial functions of “warehouse receipts,” which hold value beyond mere storage certificates. Fourthly, recognize the potential risks that the powerful “commercial lien” held by warehouse operators may pose to your company’s supply chain and ensure proper payment management. Lastly, to avoid losing the right to claim damages, establish a strict inspection system to comply with the extremely short statute of limitations of “one year.” Grasping these points is key to smooth logistics and reliable risk management in Japan.

Our firm, Monolith Law Office, has a wealth of experience representing a multitude of domestic and international clients in legal matters related to commercial deposits and warehouse operations, as discussed in this article. Our office not only boasts attorneys well-versed in the Japanese legal system but also includes several English-speaking attorneys with foreign legal qualifications. This enables us to provide meticulous legal support that anticipates the unique challenges faced by companies expanding internationally and overcomes language and cultural barriers for smooth communication. From drafting and reviewing contracts to negotiating with warehouse operators and handling litigation in the event of a dispute, we offer comprehensive legal services to protect your business and assets in Japan.