Legal Framework for Brokerage Business in Japanese Commercial Law: Duties and Rights of Intermediaries

In the realm of Japanese commercial transactions, specialized intermediaries play a crucial role across various sectors such as real estate, insurance, M&A, and maritime services. These professionals, known as “nakadachi” or brokers, are indispensable for facilitating smooth transactions. However, brokers are not merely introducers or negotiation assistants. Under Japanese Commercial Law, the activities of brokers are legally defined as “brokerage business,” with detailed provisions regarding their status, obligations, and rights. This legal framework is designed to ensure the transparency and fairness of transactions, protecting the interests of all parties involved. Particularly when utilizing brokers in the Japanese market for international business expansion, understanding their unique legal status is key to avoiding unforeseen risks and leading transactions to success. It is crucial to accurately grasp who brokers are accountable to, what responsibilities they bear, and under what conditions they can claim remuneration, as this knowledge is vital for devising contract strategies. This article begins with the definition of brokers under Japanese Commercial Law, clarifying the differences between brokers and other commercial agents such as sales representatives. We will then delve into the legal nature of brokerage contracts, the specific obligations imposed on brokers, the conditions for claiming remuneration, and the restrictions on self-contracting, discussing the core legal issues of brokerage business with reference to specific statutes and case law.

Intermediaries Under Japanese Commercial Law

Article 543 of the Japanese Commercial Code clearly defines an “intermediary” as “a person who makes a business of mediating commercial transactions between others” . This definition includes several important elements for understanding the legal status of an intermediary. First, an intermediary mediates transactions “between others,” indicating that they do not become a party to the contract themselves but rather work as a neutral third party to facilitate the conclusion of a contract between two parties. Second, the mediation must concern “commercial transactions.” For instance, if the content of the mediation is not a commercial transaction, such as in the case of marriage brokering, the individual would not be considered a commercial intermediary but a civil intermediary, and the strict provisions related to commercial brokerage under Japanese commercial law would not apply directly .

In addition to intermediaries, Japanese commercial law defines various roles that assist in transactions, and understanding the differences between them, especially “agents” and “wholesalers,” is extremely important in practice.

An agent is a person who continuously acts on behalf of a specific merchant to mediate or represent transactions that fall within the category of that merchant’s business . Unlike an intermediary, who works for unspecified parties on individual transactions, an agent has a fundamental difference in that they maintain a continuous relationship with a specific merchant .

On the other hand, a wholesaler is a person who makes a business of selling or purchasing goods on behalf of others in their own name . While an intermediary does not become a party to the transaction, a wholesaler differs significantly in that they conclude contracts in their own name, and the legal effects of the contract accrue to them.

Understanding these differences clearly is essential for selecting the appropriate intermediary when conducting business in Japan and for accurately grasping the scope of their authority and responsibilities.

The Legal Nature and Formation of Brokerage Contracts Under Japanese Law

Brokerage contracts, which are concluded when utilizing an intermediary in Japan, are commonly classified under Japanese Civil Law as “quasi-mandate contracts” . While a mandate contract involves entrusting legal acts such as contract conclusion, a quasi-mandate contract aims to entrust non-legal acts, known as “factual acts” . Since the main task of an intermediary is to facilitate negotiations between parties and assist in the formation of a contract, which are factual acts, it falls under the category of a quasi-mandate contract.

Being a quasi-mandate contract means that the most fundamental duty borne by the intermediary is the “duty of care of a prudent manager” (due diligence obligation), which originates from Article 644 of the Japanese Civil Code . This duty requires the intermediary to perform mediation services with the level of care that is objectively expected, according to their profession or expert status.

The legal nature of this contract holds significant importance in practice. A quasi-mandate contract does not guarantee the completion of a specific ‘result’; instead, it aims for the proper execution of a ‘process’. Therefore, the intermediary is not obligated to ensure the establishment of a transaction. Rather, they are expected to make sincere efforts towards the formation of a contract, using their expertise and abilities. This is distinctly different from a contract for work, where payment is made upon the completion of a deliverable. Consequently, when concluding a brokerage contract, it is extremely important to clearly define in the contract the scope of the intermediary’s duties, the frequency of reporting obligations, and the conditions for remuneration (for example, whether it is a success fee contingent upon the transaction’s completion or a fee based on activity time) to avoid disputes later on.

Unique Obligations Imposed on Intermediaries Under Japanese Commercial Law

In addition to the general duty of care, Japanese Commercial Law imposes several unique obligations on intermediaries to ensure the clarity of transactions and the protection of the parties involved. These obligations are crucial provisions for maintaining the integrity of intermediary business operations.

Firstly, there is the “duty to retain samples.” If an intermediary receives a sample related to the transaction they are mediating, they are obligated to keep that sample until the transaction is completed (Article 545 of the Japanese Commercial Law). This serves as evidence in case of any disputes regarding the quality of the goods later on.

Secondly, one of the most important obligations is the “duty to provide a contract document” (Article 546 of the Japanese Commercial Law). When a contract is established through the mediation of an intermediary, they must promptly create a written document (contract document) detailing the names or titles of the contracting parties, the date of the contract, and the main points of the contract, and deliver it to each party after signing or affixing their seal. This contract document serves as an official record proving the establishment of the contract and plays a central role in clarifying the details of the transaction.

Thirdly, there is the “duty related to the ledger” (Article 547 of the Japanese Commercial Law). Intermediaries must record the contents of the mediated contract in a ledger based on the contract document and keep this record. Furthermore, the contracting parties have the right to request a copy of the ledger entries related to their transaction at any time.

Lastly, the “duty to maintain confidentiality of names and other details” and the associated “duty to intervene” arise in special circumstances. If one of the parties requests the intermediary to keep their name or title confidential from the other party, the intermediary must comply with this instruction (Article 548 of the Japanese Commercial Law). However, when the anonymity of one party is maintained in this way, as a legal consequence, the intermediary assumes the responsibility to perform the contract on behalf of the anonymous party towards the other contracting party (Article 549 of the Japanese Commercial Law). This is known as the “duty to intervene” or “performance liability” and represents a significant risk that the intermediary takes on in exchange for allowing anonymity. The intermediary is not only obliged to keep the information secret but also to guarantee the performance of the transaction itself.

The Right to Claim Remuneration for Intermediaries Under Japanese Commercial Law

As businesspeople, intermediaries perform acts on behalf of others within the scope of their business operations. Based on Article 512 of the Japanese Commercial Code, they have a general right to claim appropriate remuneration. However, when it comes to intermediary business, Article 550 of the Japanese Commercial Code sets out more specific requirements for the right to claim remuneration.

The most crucial requirement is that the right to claim remuneration is closely linked to the fulfillment of the intermediary’s obligations. Article 550, Paragraph 1 of the Japanese Commercial Code stipulates that an intermediary can claim remuneration only after completing the procedures related to the obligation to deliver the contract document (as per Article 546 of the Japanese Commercial Code). This indicates that an intermediary earns the right to compensation only after fulfilling their significant public role of clarifying the establishment and content of a transaction. An intermediary who neglects procedural obligations may legally lose the right to claim remuneration, even if their efforts have led to the conclusion of a contract.

Furthermore, Article 550, Paragraph 2 of the Japanese Commercial Code states that, unless there is a separate agreement between the parties, both parties to the contract are to bear the remuneration equally. This provision reflects the legal principle that an intermediary should mediate from a neutral position without bias towards either party.

In addition, Japanese case law requires that for an intermediary’s right to claim remuneration to be recognized, there must be a “substantial causal relationship” between the intermediary’s mediation and the conclusion of the contract. An important case in this regard is the Supreme Court decision dated October 22, 1970 (1970). In this case, a real estate broker who was advancing the mediation of a property transaction was intentionally excluded by the parties during the final contract negotiations, and a direct contract was concluded between the parties. The Supreme Court ruled that even if the intermediary was not present at the conclusion of the contract, if their mediation activities formed the basis for the conclusion of the contract and the parties excluded the intermediary with the intention of evading payment of remuneration, the intermediary’s right to claim remuneration should still be recognized. This case demonstrates the judiciary’s stance that an intermediary’s contribution should be fairly valued and their rights protected.

Restrictions on Self-Dealing and Dual Agency Under Japanese Commercial Law

The legal status of an intermediary is fundamentally rooted in neutrality and fairness. From this principle, significant restrictions on self-dealing and dual agency are derived.

While there is no explicit provision in Japanese Commercial Law that directly prohibits self-dealing by an intermediary, this prohibition is logically inferred from the definition of an intermediary in Article 543 of the Japanese Commercial Code. An intermediary is defined as someone who mediates commercial transactions ‘between others,’ making it inherently impossible for them to be one of those ‘others’ and a party to the contract. An intermediary participating in a transaction they facilitate is an act of completely abandoning their neutral stance and is a classic example of a conflict of interest. Therefore, self-dealing is naturally not permitted as it is incompatible with the essential role of an intermediary.

The term ‘dual agency’ can often lead to misunderstandings. The dual agency that Japanese Civil Law generally prohibits refers to a situation where one agent represents both parties in a contract. However, the role of an intermediary is essentially to mediate the transaction between both parties. Unlike an agent who acts solely to maximize the interests of one party, an intermediary has the role of balancing the interests of both parties towards the fair and smooth completion of the transaction.

This distinction becomes clearer when comparing the roles of advisors in modern M&A transactions. An ‘intermediary firm’ in M&A is similar to an intermediary under Japanese Commercial Law, standing between the seller and the buyer, maintaining a neutral position while facilitating the transmission of information and negotiation, aiming for the completion of the transaction. In contrast, a ‘Financial Advisor (FA)’ contracts only with either the seller or the buyer and is tasked with maximizing the interests of that client. The FA is akin to an agent, with duties directed solely towards one party.

Therefore, when a company employs an intermediary in Japan, it is essential to clarify its purpose. If a neutral coordinator is sought, an intermediary (or intermediary firm) is suitable. However, if a negotiating agent is needed to pursue the company’s interests to the fullest, an advisor such as an agent or FA, who serves only one party, should be appointed. This choice is a crucial legal decision directly connected to the nature and strategy of the transaction.

Summary

The system of intermediary business under Japanese Commercial Law provides a sophisticated framework that legally clarifies the role of intermediaries in commercial transactions, ensuring fairness and safety in dealings. An intermediary is not merely an introducer but a professional with strict procedural obligations such as the duty to deliver contracts and maintain accounting records. The fulfillment of these duties in good faith is a prerequisite for claiming remuneration. Furthermore, the principle of neutrality derived from their definition disciplines the actions of intermediaries, such as prohibiting self-contracting, and prevents conflicts of interest. Understanding these legal disciplines is essential for all companies engaging in intermediary-mediated transactions in Japan to protect their rights and promote smooth business operations.

Our firm, Monolith Law Office, has a proven track record of providing extensive advice on transactions involving Japanese Commercial Law, including intermediary business, to a multitude of clients both domestically and internationally. With several English-speaking attorneys qualified in foreign jurisdictions as well as in Japan, we are capable of accurately understanding complex legal issues in international commercial transactions and proposing optimal solutions for our clients’ businesses. From drafting and reviewing intermediary and agency contracts to resolving transactional disputes, we offer specialized legal support.