What Does the 'Japanese Business Outsourcing Contract' Determine?

I believe that a business consignment contract, or in Japanese, a ‘業務委託契約書’, is one of the contracts you often come across in conducting business. However, because it is so commonly seen, there may be people who think they understand what a business consignment contract is, but only have a vague idea. As business consignment contracts are frequently concluded in business, if you do not fully understand what the contract is deciding, you may unwittingly become involved in a dispute. Therefore, in this article, I will explain what a business consignment contract, or ‘業務委託契約書’, is deciding.

What is a Business Consignment Contract?

First, let’s explain what a business consignment contract is. A “Business Consignment Contract” is a contract in which the consignor, who entrusts the work, delegates the execution of some business to another party (the contractor). The contractor accepts the consignment from the consignor and carries out the entrusted work at their own discretion and responsibility, without being subject to the direction and supervision of the consignor.

A contract similar to this business consignment contract is a labor contract. A “Labor Contract” is a contract between a worker and an employer, in which the worker works for the employer and the employer pays wages in return. While a labor contract is similar to a business consignment contract in that it involves having someone else perform work, there is a difference in whether the person performing the work is subject to the direction and supervision of the requester.

Even if the name of the contract is “Business Consignment Contract,” if the substantive content of the contract is a labor contract, it may be judged as a labor contract, not a business consignment contract. In such a case, the application of labor law becomes an issue, so caution is necessary.

Legal Nature of Business Outsourcing Contracts

Even though it’s called a “business outsourcing contract,” in reality, due to differences in their legal nature, they can be broadly classified into two categories: subcontracting and delegation (quasi-delegation).

Related article: Distinguishing Between Subcontracting and Quasi-Delegation Contracts in System Development[ja]

Related article: Can Quasi-Delegation and Subcontracting Contracts be Re-Subcontracted? Explained with System Development as an Example[ja]

Business Outsourcing Contracts with the Nature of Subcontracting

Subcontracting is defined in Article 632 of the Japanese Civil Code as follows:

Article 632 (Subcontracting)
Subcontracting takes effect when one party agrees to complete a certain job and the other party agrees to pay for the result of that job.

The key point of subcontracting is that the payment is made for the result of the work performed, not for the performance of the work itself. Therefore, the contractor aims to complete the job.

Related article: Points to Note When Entering into a Subcontracting Contract in System Development[ja]

Business Outsourcing Contracts with the Nature of Delegation (Quasi-Delegation)

Delegation is defined in Article 643 of the Japanese Civil Code as follows:

Article 643 (Delegation)
Delegation takes effect when one party entrusts the other party to perform a legal act and the other party accepts this.

Quasi-delegation is defined in Article 656 of the Japanese Civil Code as follows:

Article 656 (Quasi-Delegation)
The provisions of this section apply mutatis mutandis to the entrustment of non-legal acts.

The key point of delegation (quasi-delegation) is that the purpose of the contract is to perform the task. In other words, unlike subcontracting where the completion of the job is the purpose of the contract, the performance of the task becomes the purpose of the contract.

Common Clauses in Outsourcing Agreements

In the following, we will explain the common clauses stipulated in outsourcing agreements.

Clause on the Scope of Outsourced Work

Firstly, it is necessary to clearly define the scope of the outsourced work. If the scope is not clearly defined, there may be disagreements between the parties involved in the contract about what is included in the scope of the outsourced work, which could potentially lead to disputes.

Contract Period

The contract period also needs to be clearly defined. If the contract period is not specified, it is impossible to determine for how long the contract is valid.

Clause on Outsourcing Fees

The contractor performs the work with the purpose of receiving the outsourcing fee, so the clause regarding the outsourcing fee is important. If it is not clearly defined, it is likely to cause disputes, so it is important to make the content clear.

Clause on Subcontracting

It is also necessary to stipulate whether subcontracting is allowed. If the contractor, who was entrusted with the work because the client trusted their abilities, subcontracts the work, the quality of the work performed may decrease, potentially leading to disputes.

Confidentiality Clause

When concluding an outsourcing agreement, it is common for some kind of information exchange to occur between the client and the contractor. If the exchanged information includes information that you do not want to leak to the outside or be used improperly, it is necessary to stipulate a confidentiality clause.

Clause on Intellectual Property Ownership

As a result of the contractor’s work, intellectual property rights may be generated. If the ownership of the generated intellectual property rights is not clearly defined, it may cause disputes between the parties. Therefore, it is necessary to stipulate this in a clause.

Clause on Contract Non-Performance Liability

Previously called warranty liability, it has been renamed contract non-performance liability due to the revision of the Civil Code. The current Civil Code will be applied until March 31, 2020 (Heisei 32), but from April 1, 2020 (Reiwa 2), the revised Civil Code will be applied, so it is necessary to stipulate it in accordance with the revised Civil Code.

Clause on Contract Termination

If the other party to the contract commits a breach of contract, it may become difficult to trust them, and you may want to terminate the contract. Therefore, a clause on contract termination may be stipulated. It is common to specify certain breaches and stipulate that if such breaches occur, the other party has the right to terminate the contract.

Damage Compensation Clause

There may be cases where one party to the contract suffers damage due to a breach of contract. The clause on damage compensation stipulates the range of damages and the extent of compensation to be recognized in such cases. The amount that can be claimed from the other party may greatly change depending on this clause, so it is necessary to carefully consider the content of the clause.

Summary

We have explained what a “business outsourcing contract” is and what it determines. Business outsourcing contracts are important documents that are often concluded in business, but surprisingly, many people do not check them thoroughly.
To avoid regret later, make sure to carefully review the contents of the business outsourcing contract. Also, if there are individual contracts, make sure to thoroughly check their contents as well. If you are unsure about checking the business outsourcing contract yourself, please consult with a professional lawyer.

Guidance on Contract Creation and Review by Our Firm

At Monolis Law Firm, as a law firm with strengths in IT, Internet, and business, we offer services such as the creation and review of various contracts, not limited to business consignment, to our advisory and client companies. If you are interested, please see the details below.