Commercial Transactions in Japanese Commercial Law: Differences from Civil Law and Key Practical Points

In the Japanese legal system, transactions between companies, especially the sale of goods, are governed by special rules that differ from the general contracts among citizens. These special rules are established by the Japanese Commercial Code. While many business activities are based on the general principles of contract law set forth by the Japanese Civil Code, transactions between merchants, that is, entities operating as businesses, are primarily governed by the Commercial Code. These contracts of sale under the Commercial Code are referred to as “commercial transactions.” The provisions of the Commercial Code are designed with a focus on speed, certainty, and the early stabilization of legal relations, reflecting the realities of commercial transactions. As a result, they significantly differ from the principles of the Civil Code, imposing sometimes stringent obligations on business operators, while conversely granting them powerful rights. For example, buyers are subject to very strict inspection and notification duties upon receipt of goods, while sellers are granted the right to quickly resell the goods and recover damages if the buyer refuses to accept them. Understanding these provisions is not only essential for deepening legal knowledge but also serves as a crucial management strategy for conducting business in the Japanese market, advancing contract negotiations favorably, and avoiding unforeseen risks. This article will explain the unique rules applicable to commercial transactions in Japan, highlighting their practical significance through comparisons with the Civil Code and concrete case examples.

Commercial and Civil Transactions: The Differences in Principles Under Japanese Law

In Japan’s private legal system, the Japanese Civil Code occupies the status of a “general law” that is applicable to all aspects of social life. On the other hand, the Japanese Commercial Code is designated as a “special law” that is limited to the specific domain of business activities conducted by merchants. There is a principle that special laws take precedence over general laws in legal application. Therefore, when a transaction qualifies as a commercial transaction, the rules of the Commercial Code are preferentially applied to matters that are regulated by both the Civil Code and the Commercial Code. Article 1, Paragraph 2 of the Japanese Commercial Code clearly establishes the order of precedence: commercial laws are applied first to commercial matters, followed by commercial customs if there is no provision in the commercial laws, and finally, the Civil Code is applied if there are no relevant commercial customs.

The distinction between the two laws is rooted in their different objectives. While the Civil Code emphasizes the protection of individual rights and allows for relatively flexible and time-consuming resolutions, the Commercial Code prioritizes the personalityistics of transactions between merchants aiming for profit, namely, ensuring speed and certainty. This philosophy is vividly reflected in the specific provisions of the Commercial Code. For example, in the representation of commercial acts, the Commercial Code dispenses with the Civil Code’s principle of “apparent authority,” which requires an agent to act on behalf of the principal, thereby facilitating quicker transactions. Furthermore, when multiple parties incur debts through commercial acts, the principle of joint and several liabilities, which eases the collection of debts, is applied instead of the Civil Code’s principle of divided liabilities. Thus, the provisions of the Commercial Code provide a predictable and rational framework that assumes business operators have a high level of expertise and risk tolerance, promoting their autonomous risk management and swift action.

The Buyer’s Paramount Duty: Inspection and Notification of the Goods

In commercial transactions, one of the most crucial and stringent obligations that a buyer must fulfill is the duty of inspection and notification of the goods, as stipulated in Article 526 of the Japanese Commercial Code. This provision embodies the principles of the Commercial Code, which aim for the swift completion of transactions and the early stabilization of legal relations. If a buyer fails to accurately understand the content of this regulation, they may face significant disadvantages.

The Content and Rationality of Regulations Under Japanese Commercial Law

Article 526, Paragraph 1 of the Japanese Commercial Code stipulates that in transactions between merchants, the buyer must inspect the goods “without delay” upon receipt . Furthermore, Paragraph 2 of the same article states that if the inspection reveals that the goods do not conform to the contract in terms of type, quality, or quantity (non-conformity), the buyer must “immediately” notify the seller. Failure to do so results in the buyer losing the right to rescind the contract, reduce the price, or claim damages . This effect of losing rights is known as “forfeiture of rights” and significantly restricts the buyer’s rights.

Even if the non-conformity is of a nature that cannot be immediately discovered, the buyer is obligated to discover it within six months from the delivery of the goods and to notify the seller immediately . If the discovery and notification do not occur within this six-month period, the buyer similarly loses their rights .

The rationale behind these stringent provisions is to protect the seller and bring about an early settlement in commercial transactions . It frees the seller from the possibility of long-term claims from the buyer, enabling stable business operations. The law expects the buyer, as a merchant with specialized knowledge, to conduct prompt inspections and notifications .

The Stringent Effects of Rights Expiration Under Japanese Commercial Law

The Supreme Court of Japan’s decision on October 20, 1992 (1992), demonstrates just how exhaustive the loss of rights under Article 526 of the Japanese Commercial Code can be. The ruling determined that once a buyer fails to fulfill their inspection and notification obligations, resulting in the loss of their right to rescind the contract or claim damages, they can no longer demand the delivery of goods that fully comply with the contract (a claim for perfect performance) from the seller.

This overturns the naive expectation that even if a buyer is unable to claim damages due to delayed notification, they would still retain the right to demand the goods as originally contracted. This case law highlights the extent to which the Commercial Code values the finality of transactions. If the buyer does not act promptly, the law accepts that the transaction is finalized, leaving the buyer with goods that do not conform to the contract. This underscores the importance for companies to establish rigorous inspection systems for goods upon receipt.

The Seller’s “Malice” and Its Modern Interpretation Under Japanese Commercial Law

It is important to note that there are exceptions to the strict rules of Article 526 of the Japanese Commercial Code. Paragraph 3 of the same article stipulates that if the seller delivers the goods to the buyer with “malice,” that is, knowing the defects but still transferring them to the buyer, the buyer’s obligation to inspect and notify is waived, and no loss of rights occurs.

Recent judicial decisions in Japan have shown a noteworthy trend in the interpretation of this “malice.” The Tokyo High Court’s decision on December 8, 2022 (Reiwa 4), in a case involving a printing error on barcode labels for clothing, ruled that even if the seller was not aware of the defect (malice), if there was “gross negligence” in not knowing about it, it could be regarded as equivalent to malice. This judgment indicates that even if there is no subjective awareness of the defect, sellers cannot receive the protection of Article 526 of the Commercial Code if there is a significant deficiency in their quality control system and they have overlooked a serious error. This can be understood as the judiciary’s attempt to correct the application of overly strict provisions in cases where significant injustice would occur, thus opening an important avenue of relief for buyers.

The Cost of Inaction Illustrated by a Legal Precedent

In a case that demonstrates how the obligation to inspect and notify applies to complex assets like real estate, leading to severe consequences for the buyer, there is the Tokyo District Court decision dated October 28, 1992 (1992). In this case, the buyer, a real estate transaction business operator (merchant), purchased land and discovered a large amount of industrial waste buried underground about a year and a half after the transfer. Although the court recognized the presence of this waste as a non-conformity (defect) in the contract, it denied the buyer’s claim for damages for the cost of waste removal because, despite being a merchant, the buyer had failed to inspect the land promptly and notify the seller. This decision serves as an important warning in practice, showing that the obligation to inspect extends not only to movable property but also to real estate, and how strictly the requirement of “without delay” is interpreted under Japanese law, specifically under Article 526 of the Japanese Commercial Code.

Amending Article 526 of the Japanese Commercial Code Through Contractual Clauses: The Importance of Special Agreements

While Article 526 of the Japanese Commercial Code imposes very strict provisions on buyers, it is possible to modify these provisions through mutual agreement between the parties. In legal terms, such provisions that can be excluded by the will of the parties are referred to as “dispositive provisions.” Therefore, by incorporating special agreements into the sales contract that differ from Article 526, parties can manage their own risks.

The importance of these special agreements was clearly demonstrated in the Tokyo District Court’s decision on January 20, 2011 (2011). In this case, a land buyer discovered soil contamination about 11 months after the transfer and claimed damages of approximately 15 million yen for remediation costs from the seller. The seller refused to pay, invoking the six-month time limit stipulated by Article 526 of the Commercial Code.

However, the sales contract in this case included a clause to the effect that “hidden defects shall be dealt with by the seller in accordance with the provisions of the Civil Code.” The court interpreted this clause as an agreement between the parties to intentionally exclude the strict rules of the Commercial Code (Article 526) and apply the more buyer-friendly rules of the Civil Code (notification within one year after becoming aware of the non-conformity is sufficient). As a result, the seller was held responsible for the soil contamination discovered after the six-month period, and the claim for damages was upheld.

This case illustrates how a single clause in a contract can completely overturn the risk allocation defined by law, potentially leading to financial consequences in the tens of millions of yen. The existence of Article 526 of the Commercial Code shapes the dynamics of contract negotiations themselves. A knowledgeable seller may enjoy the default rules of the law to their advantage by remaining silent on this point. On the other hand, a knowledgeable buyer will strongly demand the inclusion of clauses in the contract that extend the inspection period or explicitly exclude the application of Article 526 of the Commercial Code. This highlights that legal knowledge is not merely a matter of compliance, but a strategic negotiation tool directly linked to a company’s interests.

Seller’s Rights: Resale of Goods When Receipt Is Refused (Self-Help Sale Right) Under Japanese Commercial Law

While the Commercial Code of Japan imposes strict obligations on buyers, it also grants sellers powerful rights to swiftly conclude transactions. A prime example is the “self-help sale right” established under Article 524 of the Japanese Commercial Code. This system allows a seller to dispose of goods on their own accord and recover damages when a buyer unjustifiably refuses to receive the goods or is unable to do so.

Specifically, a seller can auction off the goods after giving the buyer a reasonable period to fulfill their obligations following a formal demand. Furthermore, if the goods are prone to damage or their value is likely to decrease, the seller can proceed directly to auction without this demand.

The strength of this right becomes evident when compared to the rules of the Japanese Civil Code. Under similar circumstances, the Civil Code generally requires a court’s permission for a seller to auction goods. The Commercial Code removes this judicial barrier, enabling the seller to act promptly.

An additional crucial aspect is the handling of the proceeds from the auction. The seller can directly apply these proceeds to the sales price. This spares the seller the trouble of filing a separate lawsuit to recover the debt, allowing for immediate recoupment of funds. The self-help sale right is an extremely practical tool for loss mitigation, freeing sellers from the risk of holding unsold inventory and increasing storage costs. This right complements the buyer’s inspection and notification obligations, both of which serve the purpose of the Commercial Code to quickly resolve commercial transaction deadlocks and promote final resolution.

The Buyer’s Obligations: Storage and Deposit of Goods After Contract Cancellation Under Japanese Commercial Law

In commercial sales transactions, it is crucial to be aware of the specific rules regarding the buyer’s obligations after a contract has been rightfully cancelled, even if it was due to non-conformity of the goods. Articles 527 and 528 of the Japanese Commercial Code impose certain duties on the buyer.

Specifically, the buyer must store or deposit the received goods at the seller’s expense even after cancelling the contract. This obligation also applies in cases where goods different from the order are delivered or when a quantity exceeding the order is excessively supplied. If there is a risk of loss or damage to the goods, the buyer must obtain court permission to auction them off and then store or deposit the proceeds.

This obligation, which may seem counterintuitive at first glance, is established to protect the property rights of sellers in transactions between merchants in distant locations. It prevents the buyer from simply abandoning the goods, which could lead to a decrease in value, and positions the buyer as a temporary custodian until the seller can take appropriate measures, such as retrieval. The purpose of this provision is clear from its scope. Article 527, Paragraph 4 of the Commercial Code stipulates that this obligation to store does not apply if the seller’s and buyer’s places of business are in the same municipality, as the seller can easily retrieve the goods in such cases of close-distance transactions. This provision reflects the Commercial Code’s rational consideration for resolving practical issues in both domestic and international trade.

Comparing Civil Law and Commercial Law in Japan: A Summary of Key Differences

As we have explained, there are many special provisions in commercial transactions that differ from those in civil transactions. Understanding these differences is the first step in risk management for business-to-business (B2B) transactions. Below is a table summarizing the main differences discussed in this article.

This table illustrates that transactions between businesses (B2B) fundamentally differ in risk profile from consumer transactions (B2C) and individual-to-individual transactions (C2C). In particular, the differences in rules regarding the buyer’s obligation to notify after inspection are extremely important in practice.

Summary

The rules of commercial transactions as defined by Japanese Commercial Law prioritize speed and certainty, creating a legal framework specialized for transactions between businesses. This system stands apart from the general principles of civil law, imposing strict obligations and powerful rights on parties to stabilize transactions quickly. In particular, the inspection and notification duties of the buyer, as stipulated in Article 526 of the Japanese Commercial Code, are of utmost importance for all businesses to understand deeply due to their stringency and the significant consequence of losing rights. Failure to fulfill these duties could result in the buyer being unable to receive any legal remedy, even if the goods have apparent defects. However, these provisions can be modified by mutual agreement, and a single clause in a contract can significantly shift the location of risk. Therefore, strategic contract negotiations to protect one’s position, with an understanding of the law’s default rules, are essential in commercial transactions.

Monolith Law Office has a wealth of experience in providing legal services related to commercial transactions, the theme of this article, to numerous clients within Japan. Our firm includes several English-speaking attorneys with foreign legal qualifications, enabling us to offer comprehensive support in both Japanese and English, from drafting and reviewing contracts in international transactions to dispute resolution. We are committed to strongly supporting your business from a legal perspective, so please feel free to consult with us.