Alternate Calculations in Japanese Commercial Law: Their Unique Legal Effects and Practical Considerations

In the realm of continuous corporate transactions, particularly in cross-border business, the construction of an efficient and secure payment system is essential. Japanese commercial transaction laws encompass unique systems designed to meet such needs. One such system is the ‘mutual account settlement’ stipulated in Chapter 3 of Section 2 of the Japanese Commercial Code. This system aims to periodically offset the repetitive claims and debts between parties, settling only the final balance. At first glance, it may seem similar to current account transactions at banks. However, its legal basis and effects are fundamentally different, and engaging in transactions without understanding this distinction can lead to unexpected legal risks. A mutual account settlement contract is not merely a tool for accounting convenience; it is a legal mechanism that transforms the nature of individual claims arising from transactions and exerts a powerful influence on the legal relationship between the parties. This article will provide a detailed explanation of the establishment requirements for mutual account settlement contracts, their most personalityistic legal effects such as the ‘indivisibility principle’ and the ‘effectiveness of balance acknowledgment,’ and the reasons for contract termination, all based on specific laws and case precedents. Furthermore, by clarifying the clear differences from bank current account transactions, which many businesspeople tend to confuse, the article aims to promote an accurate understanding in practice.
Requirements for the Establishment of a Running Account Contract Under Japanese Commercial Law
To legally establish a running account contract, several requirements set forth by Japanese Commercial Law must be met. These requirements form the foundation that justifies the unique legal effects of this system.
Firstly, there must be an agreement between the parties to engage in a running account. Article 529 of the Japanese Commercial Code stipulates that a running account “arises from the agreement to offset the total amount of claims and debts arising from transactions within a certain period and to pay the balance” . This calls for a clear consensus between both parties to adopt a special settlement method that consolidates individual claims and debts for settlement over a certain period, rather than settling each one as they occur.
Secondly, there are requirements regarding the qualifications of the parties. A running account must be concluded “between merchants or between a merchant and a non-merchant” . In other words, at least one of the parties must be a “merchant” as defined by Japanese Commercial Law, and the system cannot be used between parties who are both non-merchants.
Thirdly, and most fundamentally, there must be a relationship of “ordinary transactions,” that is, a continuous trading relationship between the parties . This factual relationship of “ordinary transactions” is the logical pillar of the running account system. The powerful effects, such as the indivisibility principle that prevents individual claims from being treated as independent rights and disallows third-party seizures, are difficult to explain from ordinary transactional relationships. However, it is precisely because there is a stable and continuous trading relationship between the parties that the law can justify prioritizing the stability and efficiency of internal settlements over the rights of external third parties. This factual foundation of a continuous relationship underpins the legal framework of the running account.
Lastly, it is common to set a calculation period (account settlement period). While the parties are free to agree on this period , according to Article 531 of the Japanese Commercial Code, if no period is stipulated, it is set at six months .
The Legal Effects of Mutual Account Settlement (1): The Principle of Indivisibility and Its External Efficacy
Upon the establishment of a mutual account settlement contract, one of its most powerful and distinctive legal effects, known as the “Principle of Indivisibility,” comes into play. This principle, also referred to as the “negative effect” of mutual account settlement, significantly impacts the rights of both the contracting parties and third parties.
At the heart of the Principle of Indivisibility is the fact that individual claims and debts arising from ordinary transactions and incorporated into the mutual account settlement lose their independence. These claims and debts no longer exist as separate rights and obligations but merge into a single, indivisible entity. As a result, during the accounting period, the contracting parties cannot selectively enforce specific claims, transfer them to others, or use them as collateral.
This principle is particularly significant in its implications for third parties. Japanese case law has clearly recognized that the Principle of Indivisibility extends its effects to third parties beyond the contracting entities. A landmark decision by the Great Court of Cassation (equivalent to the current Supreme Court) on March 11, 1936, serves as a pivotal example. This decision ruled that individual claims incorporated into mutual account settlement could not be seized by third parties. The court interpreted that these claims were not merely restricted from transfer due to a contractual prohibition on assignment between the parties but had transformed into something “inherently non-transferable” due to their incorporation into the mutual account settlement. This legal construction is crucial because it renders any seizure attempt by a third party invalid, regardless of whether they were aware of the mutual account settlement contract. This demonstrates that the mutual account settlement contract acts as a powerful legal barrier, protecting the transactional relationship between the parties from external interference.
However, this strict principle is not without exceptions. Article 530 of the Japanese Commercial Code allows for the exclusion of claims and debts arising from bills of exchange or other commercial papers from mutual account settlement when the debtor of such securities fails to make payment. This provision is designed to prevent unfair situations where one party bears the risk of non-payment by a third party, while their own debts are fully settled through the mutual account settlement.
The Legal Effects of Account Current (Part 2): The Force of Account Closure and Balance Confirmation
Upon the expiration of the accounting period, the account current enters a phase known as “positive effect.” At the heart of this phase are the closure of accounts and the subsequent confirmation of the balance. This act of confirming the balance is not merely an accounting procedure; it carries decisive legal effects that solidify the legal relationship between the parties involved.
On the last day of the accounting period, the parties prepare a statement listing all the claims and debts that have arisen, thereby closing the accounts. Thereafter, the other party reviews the contents of the statement and approves it. This “approval” marks a legally significant turning point.
Japanese commercial law doctrine and case law recognize this balance confirmation as having “novatory effect” . Novation is a contract that extinguishes the original obligation and establishes a new one in its place. In the context of account current, the moment the balance is approved, all individual claims and debts that existed during the accounting period are legally extinguished. In their place, a single new claim (the balance claim) is established, based on the approved net balance .
Closely related to this novatory effect is the limitation on objections set forth in Article 532 of the Japanese Commercial Code. According to this article, once a party has approved the statement, they cannot raise objections to the individual items included in it . For example, even if there was dissatisfaction with the quality of goods in a transaction, once the statement, which includes the claim for payment arising from that transaction, is approved, it is generally not permissible to later refuse payment of the balance claim on the grounds of that quality issue.
This system strongly encourages parties to thoroughly review all transaction details before approving the balance and to resolve any existing disputes. The approval of the balance acts as a legal deadline that settles past complex transaction relationships and converts them into a single, definitive obligation.
Of course, there are exceptions to this strict rule. The proviso to Article 532 of the Japanese Commercial Code allows for objections even after approval if there was “an error or omission” in the statement . This ensures an opportunity to correct clerical mistakes or omissions and does not permit the reopening of substantive disputes regarding the original transaction content.
Termination Grounds for Current Account Contracts Under Japanese Commercial Law
Current account contracts, by their nature, are based on a continuous relationship of trust between the parties. Therefore, Japanese Commercial Law provides clear means to terminate the contract when this trust is lost or when the continuation of the contract becomes difficult. The grounds for termination are mainly divided into two categories: termination by the will of the parties and automatic termination by the provisions of the law.
The first is voluntary termination by the parties. Article 534 of the Japanese Commercial Code states, “Each party may terminate the current account at any time” . This grants a powerful right, in contrast to many ongoing contracts that require specific reasons or notice periods for termination, allowing one party to end the contract at any time without cause, solely based on their declaration of intent. This provision is underpinned by the understanding that current accounts are contracts based on a high level of personal relationship (trust) between the parties . If one party feels uncertain about the other party’s credit status or trading attitude, the law enables them to quickly disengage from complex settlement relations. This right of termination functions as an important means to manage risks when the trading relationship deteriorates. Upon termination of the contract, the account is immediately closed, and the confirmed balance can be claimed for payment .
The second is statutory termination grounds. Regardless of the will of the contracting parties, the current account contract automatically terminates when certain facts stipulated by law occur. The most significant example is the initiation of bankruptcy proceedings for one of the parties. Article 59, Paragraph 1 of the Japanese Bankruptcy Law explicitly states that the current account ends when bankruptcy proceedings are initiated against one of the parties . This, too, is a provision to quickly settle the liquidation relationship and ensure fair distribution among all creditors when serious doubts arise about one party’s ability to pay.
Differences Between Current Accounts (General Current Transactions) and Mutual Accounts Under Japanese Commercial Law
In Japan, mutual accounts as defined by the Japanese Commercial Code are often confused with ‘current accounts’ or ‘demand deposits’ established with banks due to similarities in their names and functions. However, they fundamentally differ in their legal nature. Understanding these differences is extremely important for risk management in business.
Mutual accounts under Articles 529 and subsequent of the Japanese Commercial Code are based on the ‘classical mutual account’ model. In this model, individual claims and debts lose their independence until a predetermined accounting period has elapsed, and payment is deferred. Only upon the expiration of this period are all claims and debts offset in a lump sum, and the remaining balance is determined. During this period, the aforementioned principle of indivisibility applies, preventing individual claims from being seized by third parties.
On the other hand, bank current account transactions are explained by a model called ‘progressive mutual accounting.’ In this model, each individual transaction, such as depositing funds or issuing checks, immediately affects a single balance claim. There is no concept of an ‘accounting period’ or ‘final settlement at the end of the period’ as in the classical model. Each transaction is instantly reflected in the balance, and there is always a single fluctuating balance claim. Therefore, the principle of indivisibility does not apply here, and the depositor’s creditors can seize the current balance at any time.
Furthermore, the basis of regulation for both also differs. Mutual accounts under commercial law are directly regulated by the provisions of the Japanese Commercial Code. In contrast, bank current account transactions are primarily governed by contracts (terms and conditions) such as ‘bank current account agreements’ concluded between the bank and the customer.
The following table summarizes these differences.
Feature | Mutual Accounts under Japanese Commercial Law | Bank Current Accounts |
Legal Basis | Japanese Commercial Code | Terms and Conditions between Parties |
Settlement Model | Classical Model | Progressive Model |
Settlement Timing | Lump Sum at Period End | Continuously with Each Transaction |
Nature of Claims During Period | Indivisible and Combined | Always a Single Fluctuating Balance Claim |
Application of Indivisibility Principle | Applies | Does Not Apply |
Seizure by Third Parties | Individual Claims Cannot Be Seized During Period | Current Balance Claim Can Be Seized |
Main Purpose | Simplification and Security of Claims and Debts Settlement | Provision of Payment Settlement Means |
As such, mutual accounts under commercial law and bank current accounts are similar yet fundamentally different systems. In particular, the application or non-application of the indivisibility principle represents a decisive difference for third parties considering the preservation of claims.
Summary
The mutual account settlement system under Japanese Commercial Law is a sophisticated legal mechanism designed to streamline settlements in ongoing commercial transactions and to secure trust between parties. However, its effectiveness is based on a deep understanding of its unique legal effects. In particular, the ‘indivisibility principle,’ which eliminates the independence of individual claims and prevents third-party seizures, and the ‘novatory effect of balance recognition,’ which clears disputes over past transactions and creates new balance claims, are powerful effects that form the core of mutual account settlement contracts. These effects provide contracting parties with a stable trading environment, but without accurate understanding and management, they can lead to unintended loss of rights or cause disputes. Therefore, careful consideration from both accounting and legal perspectives is essential when entering into and operating under a mutual account settlement contract.
Monolith Law Office has a wealth of experience in providing services related to Japanese Commercial Law and Corporate Law matters, including the mutual account settlement system discussed in this article, to numerous clients within Japan. Our firm employs several English-speaking attorneys with foreign legal qualifications, enabling us to provide accurate and strategic advice on complex legal issues that arise in the context of international business. If you require specialized support for the introduction of mutual account settlement contracts, contract review, or resolution of related disputes, please do not hesitate to consult with our office.
Category: General Corporate