Key Points for Family Governance in Spousal Contracts and Partnership Agreements Every Executive Should Know

To ensure smooth progression in business succession and inheritance issues, prior preparation is essential. Particularly as the wealth of business owners grows, the risk of family disputes negatively impacting the business also increases. Spousal and partnership agreements are one of the effective means to mitigate such risks, ensuring family stability and the continuity of the business.

In this article, we will delve into the personalityistics of each type of spousal and partnership agreement in family governance, as well as the legal effects and considerations to be aware of when drafting them, providing a detailed explanation of the points that should be noted.

The Significance of Spousal Agreements for Business Owners

Business owners with assets should establish family governance.

Family governance refers to the set of rules for governance within a family or among relatives, constructed with the aim of preserving and growing assets. To protect their current assets and pass the business on to the next generation, business owners should consider ways to foster harmonious family relationships and avoid disputes.

For a detailed explanation of the significance of family governance for business owners, please refer to the following article.

Related article: The Growing Focus on Business Owners’ Family Governance: Explaining Its Effectiveness by Type[ja]

Within the family relationships governed by family governance, the spousal relationship is the foundation of family formation and serves as the base for daily life and mental activities. A harmonious marriage can lead to a prosperous life and the growth of a business. Conversely, troubles in the spousal relationship can potentially lead to various risks.

To build and maintain a harmonious spousal relationship, and to limit the impact of any potential troubles to a predictable extent, there is significant value in establishing spousal or partnership agreements.

Three Types of Marital Contracts

Marital contracts, as a form of family governance, primarily come in the following three types:

• Marital Property Agreement (Prenuptial Agreement)
• Partnership Agreement
• Postnuptial Agreement

When there is a legal marital relationship, arrangements between spouses typically involve a Marital Property Agreement (Prenuptial Agreement). Although this agreement needs to be made before marriage, there may be a necessity to enter into a contract after marriage as well (Postnuptial Agreement).

Furthermore, even in partnerships that do not form a legal marital relationship, such as de facto marriages, the effectiveness of marital contracts is significant.

It is essential to establish a Partnership Agreement to regulate a marital relationship that differs from one with a legal marriage status.

The Significance and Content of Prenuptial Agreements

This article explains the significance and the regulated content of the “Prenuptial Agreement,” which is the most commonly used contract among spouses.

The Significance of Prenuptial Agreements

A prenuptial agreement is a contract that a couple intending to marry enters into before their wedding.

It establishes various matters related to marital life, but its primary significance lies in setting rules concerning divorce. This is especially important as the more assets involved, the more complex and serious the issues regarding divorce conditions can become.

By entering into a prenuptial agreement, couples can clarify the relationship of rights and obligations in advance, minimize the impact of marital troubles, and resolve issues within a predictable scope.

Content Governed by Prenuptial Agreements

Prenuptial agreements can stipulate provisions related to the statutory property regime (Japanese Civil Code Articles 760 to 762) and various matters related to marital life.

The provisions related to the statutory property regime include the following three:

• Contribution to marital expenses (Japanese Civil Code Article 760)
• Joint liability for debts incurred in the course of daily life (Japanese Civil Code Article 760)
• Attribution of property between spouses (Japanese Civil Code Article 762)

While a wide range of matters related to marital life can be regulated, clauses such as the following are likely to be invalid and must be approached with caution:

• Those denying the obligation to cohabit or provide support
• Those denying joint liability for debts incurred in the course of daily life
• Those allowing for divorce at the request of one party alone
• Those significantly acknowledging gender inequality
• Those unfairly setting a low amount for property division

In the past, there have been court cases where clauses allowing unilateral divorce through payment were deemed invalid as they were contrary to public policy and morals. It is important to understand that, given the legal significance of the marital relationship, one cannot create rules entirely freely.

Registration of Prenuptial Agreements

Registration is not always necessary to validate a prenuptial agreement.

Registration is required when the parties wish to extend the effect of their agreement to third parties or successors. A disadvantage of registration is that the registered content becomes public, allowing third parties to view it. It is crucial to carefully consider the risk of the other party disposing of assets without consent and to determine the necessity of registration accordingly.

If you decide to register a prenuptial agreement, it must be done before the marriage notification or at least simultaneously with it. Furthermore, from the perspective of transaction safety, once the marriage notification is submitted, the registered marital property relations cannot be changed or abolished.

Why Partnership Agreements are Crucial for Business Owners

We will explain the importance of establishing contracts between partners in a partnership relationship, which does not form a legal marital relationship.

Marriage and Partnerships (Common-Law Marriages) Differ in Legal Treatment

One key reason why it is important to have a contract between spouses in a partnership relationship is that the legal treatment of marriage and partnerships differs.

While various rights are protected by law in a legal marriage, it is necessary to understand that these rules do not extend to partnerships.

Examples of how partnerships differ from marriage in legal treatment include:

• Unilateral termination of the relationship is possible
• Assumption of a common surname is not recognized
• Joint parental rights are not recognized
• Spousal inheritance rights are not recognized

Having fewer legal constraints and being able to build a free relationship is a significant advantage of partnerships. However, conversely, it can also be said that the absence of rights that would have automatically arisen in a marriage makes it easier for disputes to occur.

If you do not form a legal marital relationship, it is extremely important to establish your own rules in advance for potential disputes.

The Legal Effects of Partnerships Depend on Individual Circumstances

The legal effects that arise from a partnership depend on individual circumstances, so it is necessary to clarify in advance what legal effects will occur.

Unlike legal marriage, partnerships do not inherently produce legal effects. However, as the economic sharing relationship deepens and the substantive relationship becomes more robust, legal effects similar to those of a legal marriage may be recognized.

The legal effects that arise from a legal marriage include:

• Duty of fidelity
• Prohibition of bigamy
• Joint parental rights
• Spousal inheritance rights
• Obligation to share marital expenses
• Property division

The extent to which these legal effects occur in a partnership is determined on a case-by-case basis, considering circumstances such as:

• The presence or absence of cohabitation and joint finances
• The exclusivity and continuity of the union
• The presence or absence of social and community recognition
• The presence or absence of impediments to marriage

Being influenced by individual circumstances means that if a dispute arises, the final decision must be left to the courts.

Since the court’s decision could lead to unforeseen outcomes, it is important to use a partnership agreement to clearly define the legal effects that will occur in advance.

Partnership Agreements Create a Sense of Security

Entering into a partnership agreement also contributes to a sense of security for both parties.

As mentioned earlier, the legal effects of a partnership depend on individual circumstances, so it is unclear to what extent the rights that would be recognized in a legal marital relationship apply to you. For the partner, this can result in a significantly unstable position. If you are forming a family, it is very important to have a sense of security in the relationship.

Clarifying the rights relationship through a partnership agreement can create a sense of security in your relationship, leading to a harmonious relationship.

Key Considerations When Drafting Partnership Agreements

When drafting partnership agreements, it is crucial to pay attention to certain matters. This article will discuss the key points to consider.

Circumstances When a Partnership Agreement Becomes Invalid

One advantage of partnerships over legal marriages is the greater flexibility in designing the rules of property and contract law. However, if the agreed terms are too far removed from those of a typical marriage or common-law marriage, the effectiveness of the agreement may be denied.

The determination of whether the effectiveness is denied takes into account circumstances such as:

• Whether it is a modification of the legal effects that arise in a common-law marriage
• Whether the modified legal effects contravene public policy and morals
• Whether the effects in question are significant to the parties involved
• The extent to which the legal effects are modified or changed in the contract
• Whether the contract clearly states the terms without leaving any ambiguity

It is important to note that rules cannot be created entirely freely; the legitimacy from a legal perspective must also be considered.

Analogous Application of Legal Marriage Effects

Even without submitting a marriage registration, if the relationship becomes solid, the legal effects that arise from a legal marriage may be analogously applied to govern the partnership. It is essential to consider how to design these legal effects that have room for analogous application.

The legal effects to consider in a partnership contract include the following:

• Fidelity obligation (compensation for infidelity)
• Marital expenses
• Child support
• Presumption of shared ownership for property of unknown attribution
• Division of property

The extent to which the effects of a legal marriage apply depends on individual circumstances. For example, in a state of cohabitation where there is an intention to become a couple in a social sense and live together as husband and wife, it is common for all effects that have room for analogous application to apply.

Factors to consider when determining the presence of marital intent include:

• Whether a wedding ceremony was held
• Continuity of the sexual relationship
• Pregnancy and childbirth
• Unity of livelihood
• Attendance at family ceremonial occasions
• Introduction as husband or wife

In cases of partnerships that do not reach the level of common-law marriage, the application of legal effects is case-by-case. Decisions are made based on the reasons for not submitting a marriage registration and the reality of the cohabitation. Generally, if the intention to marry is clearly denied, it is often determined that legal effects will not arise.

Application of the Property Division System

Whether the property division system applies to a partnership depends more on the actual state of cohabitation than on the intention to be married. Unlike other systems, the intention to be married is not prioritized in property division because this system has a strong settlement nature regarding the assets built up.

In the past, there have been court cases that affirmed the right to claim property division even when one partner refused to file a marriage notification, based on approximately seven years of cohabitation and substantial contributions to a self-employed business.

Furthermore, regarding the attribution of property, sometimes the discipline within the framework of property law, such as ownership or co-ownership rights, is considered rather than the family law system of property division. It is important to understand that disputes over the attribution of property between spouses tend to be regulated by objective factual judgments rather than the parties’ intentions.

The Significance and Considerations of Post-Marital Agreements for Business Owners

While marital property contracts and partnership agreements are typically established before a relationship is formed, business owners may feel the need to enter into agreements after marriage, particularly concerning businesses and assets started post-nuptials.

Here, we will explain the significance and considerations of entering into post-marital agreements.

Why Marital Property Contracts Cannot Be Made After Marriage

In a legal marriage, marital property contracts are generally used, but they must be concluded before marriage (Japanese Civil Code Article 755). After marriage, as a rule, you cannot change the contents related to the statutory property regime (Japanese Civil Code Article 758, Paragraph 1).

The Japanese Civil Code adopts such principles, anticipating the risk of one spouse coercing the other for personal gain.

Furthermore, changes to marital property during marriage could reduce the liable assets for creditors and the inheritable estate for successors. Protecting creditors and successors is also a reason why property regimes cannot be changed after marriage.

It is important to understand that the Japanese Civil Code prohibits the conclusion or modification of marital property contracts that alter the form of the marital property regime after marriage.

Contents Defined in Post-Marital Contracts

However, even after marriage, it is possible to enter into agreements on certain matters.

Various circumstances can arise in a marital relationship, and there is often a desire to establish or clarify rules regarding property relations after marriage. If you feel the need for rules concerning marital relations, including property relations after marriage, consider the availability and methods of using post-marital contracts.

What the Japanese Civil Code prohibits is changing all or part of the statutory property regime after marriage. In other words, you can conclude or modify a post-marital agreement on matters not governed by the statutory property regime, even after marriage.

For example, the following contents do not conflict with the rules of the Japanese Civil Code:

• Confirming the attribution of ownership of specific properties
• Establishing rules for marital relations other than property relations

When considering a post-marital contract, it is necessary to ensure that its contents do not involve matters related to the statutory property regime.

The Significance of Post-Marital Contracts

Post-marital contracts have significance in clarifying the interpretation of legal evaluations governed by the statutory property regime.

Legal evaluations for property division and the allocation of marital expenses can vary even when based on the statutory property regime, as they are determined based on specific facts and certain legal evaluations, rather than a unilateral calculation.

Post-marital contracts play a significant role in resolving issues of proof and legal evaluation.

Predicting how a court will decide in future disputes can be challenging. However, a signed and sealed post-marital contract can serve as effective evidence in such determinations.

Post-marital contracts contribute significantly by establishing certain standards for disputes related to the unpredictable statutory property regime.

The Risk of Contract Cancellation Rights Between Spouses

In the Japanese Civil Code, spouses are granted the right to cancel contracts (Japanese Civil Code Article 754), and post-marital contracts concluded during marriage are subject to this cancellation right.

However, the risk of exercising the right to cancel contracts between spouses is actually quite low.

According to precedents, the right to cancel contracts between spouses cannot be exercised after divorce, nor can it be exercised after the marital relationship has broken down.

Normally, the right to cancel contracts becomes an issue when the marital relationship turns sour, and it is unlikely that the content of the agreement will be contested in a harmonious situation. Therefore, the risk of exercising the right to cancel contracts between spouses for post-marital contracts should not be a major concern.

Key Points to Consider in the Marital Contract Signing Process

We will explain the key points you should know when entering into a marital contract.

Key Considerations in Designing Marital Agreements

When designing the content of a marital agreement, it is crucial to anticipate issues that are likely to cause disputes, such as those arising during a divorce, and to draft accordingly.

If the terms of the agreement are not clearly documented in writing, there is a risk that a spouse may contend that no such agreement was made in the event of a conflict. Furthermore, courts seek to resolve disputes based on objective facts and may not necessarily honor an individual’s intentions.

While it may be challenging to predict every possible future contingency, it is essential to establish clear rules that will not raise doubts in the minds of either the spouse or the court.

Key Points in Communication

When entering into a marital contract, careful attention to communication is essential.

Marital contracts often contain provisions in anticipation of divorce. Therefore, it can be psychologically challenging for couples about to marry to agree on these terms.

Furthermore, postnuptial agreements can lead to the abrupt breakdown of a marriage if not proposed tactfully.

To avoid disputes stemming from communication issues, it is necessary to proceed with cautious communication, considering the involvement of a neutral third party.

The Necessity of Notarization

While there are no legal stipulations on how to create a marital contract, to clarify the terms of the agreement, one of the following types of documents is typically used to draft the contract:

A notarized document reinforces the validity of the contract’s effectiveness and prevents the loss, concealment, or forgery of the contract.

However, it is important to note that if you opt for notarization, you should start the process at least one month before the date of marriage registration.

Furthermore, depending on the content, a notary may point out issues of fairness and refuse to notarize the document. In such cases, it becomes necessary to legally organize your wishes and persuade the notary. Consider the benefits of notarization and the effort required to create it when assessing its necessity.

The Importance of Operational Management

To ensure that the contracts you’ve signed produce the expected effects, it is essential to understand their content accurately and to proceed with the correct operation.

If operational management feels complex or cumbersome, one solution is to seek cooperation from lawyers and certified public accountants. When in doubt whether the operations are in accordance with the content of a marital contract, it is advisable to establish a system that allows for periodic verification.

Related article: What Should Entrepreneurs Design for Family Governance? Detailed Explanation of Construction and Operational Management Methods[ja]

In Summary: Entrepreneurs Should Consult Lawyers for Marital Agreements

For entrepreneurs, reducing marital strife is not only crucial for maintaining economic and emotional stability but also for the continuous success of their businesses. Establishing and maintaining a harmonious marital relationship, and limiting the impact of any potential troubles to a predictable scope, is greatly facilitated by the existence of marital agreements.

To determine what kind of marital agreement is necessary based on one’s circumstances and to construct effective rules, it is essential to understand the significance and nature of each agreement. Moreover, to ensure that a marital agreement is properly enforceable, it is vital to operate it in accordance with its terms.

Therefore, when considering the creation of a marital agreement, we highly recommend seeking professional advice from a lawyer. Consulting a lawyer early on enables you to correctly understand the system and to establish and operate rules that are tailored to your specific needs.

Services Offered by Our Firm

Monolith Law Office is a law firm with high expertise in both IT, particularly the internet, and legal matters. We draft and review contracts for a wide range of clients, from Tokyo Stock Exchange-listed companies to venture businesses. For more information on contract drafting and review, please refer to the article below.

Areas of practice at Monolith Law Office: Contract Drafting & Review, etc.[ja]