Laws and Judicial Cases Related to the Differentiation of Dispatching and Service-contracting in the IT Industry in Japan

In IT projects in Japan, it is common for talent from numerous companies to be mobilized for a single project. In such cases, the workplace of the technicians participating in the project often becomes separate from the location of the company to which they belong. This includes so-called on-site residency and SES. The ambiguity of the employment and contract status of the technicians working on-site not only carries the risk of developing into a dispute over workers’ rights later on but may also become a flaming risk for the project itself. In this article, we will clarify the often vague distinction between dispatching and service-contracting and explain how these contractual issues may affect the smooth progress of the entire project.

The Difference between Dispatching and Service-contracting

When the vendor (or subcontractor) accepting the work and the company placing the order are different, it is common for personnel to be sent to the site based on a service-contracting agreement. In other words, the ordering side/vendor intervenes, and technicians are sent to the site.
We explain that The obligation of ‘completion of work’ is the essential characteristic of a service-contracting agreement in Japan. We also emphasize the importance of clearly defining the acceptance criteria at the time of contract conclusion to prevent trouble. In the case of stationing people on-site based on a service-contracting agreement, it remains a business transaction between companies, so there is no obligation for the ordering/client side to comply with labor laws. However, they are also not legally permitted to exert direct control over the technician. If these aspects are not considered, even if a service-contracting agreement was ostensibly concluded, there is a risk of being treated as an illegal labor supply business, or “disguised service-contracting.”

Cases that Led to Disputes Due to the Ambiguity between Dispatching and Service-contracting

Regarding general theories about “service-contracting agreements” and “disguised service-contracting,” we defer to the content above, and below, we address cases where a project flamed out due to the ambiguity in the distinction between dispatching and service-contracting. Such ambiguity may not only lead to infringement of individual workers’ rights and labor-management disputes but may also become a flaming risk for the entire project, as can be understood from the following.

The Requirements for Fulfilling Obligations Differ Significantly Between Dispatching and Service-contracting

Dispatching and service-contracting are quite similar in that a company intervenes and sends personnel to a development site. However, as previously mentioned, in the case of service-contracting, the fulfillment of obligation is not recognized unless the “completion of work” is acknowledged. In the judgment cited below, whether or not the claim for compensation was accepted became a point of contention in a case where the project ultimately failed. If it’s service-contracting, the “completion of work” is set as a requirement, whereas with dispatch, it’s possible to justify labor compensation based solely on actual working hours, etc.
The ordering party/vendor (plaintiff) argued that the dispatching contract was concluded post facto and that personnel were sent in the form of dispatch, and that the obligation for “completion of work” was not imposed. However, the court denied this claim (the underlined and bold parts were added by the author).

The plaintiff, after it was confirmed that the development of the program for the Japanese system in question was unfeasible, argued that an agreement was reached between the plaintiff and the defendant on April 1, Showa 61 (1986), to reduce the development cost to 5.5 million yen from the total of 7,106,000 yen for two terms plus training allowance, for the defendant to promptly pay it to the plaintiff, and from the same date, the defendant would take over the plaintiff’s work and develop the text information system by sending personnel in the form of labor dispatch, agreeing to dispatch three people at a unit price of 550,000 yen for two people and 300,000 yen for one person. However, the defendant denies that such an agreement was made, claiming that the plaintiff had originally undertaken to create the program for the Japanese system and was obligated to complete it, and that it was unreasonable for the defendant, the client, to exempt the plaintiff from its obligation to create it afterward or to pay the expenses the plaintiff had incurred up to that point. Indeed, if the plaintiff was obligated to complete the program, the defendant’s claim would be valid. Therefore, first, we will examine whether or not the plaintiff was obligated to complete it in the contract related to the development of the program for the Japanese system. (Excerpt) Based on the evidence, it is not possible to find evidence to recognize that the plaintiff did not have the obligation to complete the program in the right contract. (Excerpt) And even in the results of the plaintiff’s representative’s examination, the right contract is described as a bulk order, and the program is to be developed within the plaintiff’s company, with the assumption that the plaintiff undertook the obligation to complete the program, and it is clear that the obligation was never denied. Even when looking at the documentary evidence, the undisputed (excerpt) schedule recognizes that the plaintiff undertook the obligation to complete the right program, so conversely, it can be recognized that the plaintiff had the contractual obligation to complete the program. (Excerpt) There is no evidence to contradict the recognition that the plaintiff had the obligation to complete the right program. If that is the case, it is only natural that a person who did not create a program that had the obligation to complete would bear the responsibility for non-performance of obligations, and cannot demand payment of the service-contract fee unless there are special circumstances, and the client should not agree to unconditionally exempt the person from his contractual obligations, let alone pay the expenses incurred up to that point. The plaintiff’s representative stated in the results of his examination that even if the program was not completed, if he had been working according to the client’s instructions, he had kept his promise to work within the specified range within the deadline, so he could claim the computer software fee for the work done, but this statement contradicts the general common sense regarding service-contracting agreements, and in the industry of the plaintiff and defendant who develop software, it is different from general common sense, and there is no fact that can be recognized as having a custom of paying remuneration even without the completion of work, as it is a service-contracting agreement, according to the testimony of the witnesses, so the result of the right plaintiff’s representative’s examination can only be considered his unique view, and cannot be adopted. Tokyo District Judgment, February 22, Heisei 23 (2011)

What Can Be Derived from the Above Legal Precedents?

What is particularly noteworthy in the aforementioned legal precedents in Japan can be considered the following two points.

1. Instead of exempting the vendor’s obligation to “complete the work” on the basis of superficial or formal outsourcing contracts, it’s based on the specific promise of “completion of work” between both parties, and is expected to bring fair dispute resolution in substance as well.
2. Since “completion of work” is imposed as a requirement for fulfilling the obligation, the service-contract is determined to be a service-contracting agreement, and judgments should be made based on the trade customs related to service-contracting agreements within the industry for other issues as well.

In summary, these two points concisely indicate that in the court, the alignment of substantial intentions between the parties is emphasized more than the mere titles of superficial contracts. Moreover, once the substance of the contract is determined as a service-contracting agreement, resolutions are sought based on the commercial customs within the industry related to service-contracting contracts. Phrases like “remarks contrary to general common sense concerning service-contracting agreements” and “unique perspectives” when rejecting the contractor/vendor’s arguments are also very characteristic, concisely indicating such matters. The reflection of social common sense and norms in legal interpretation and its potential impact on legal practice is another point worth noting. Given that service-contracting agreements are commonly used in system development projects, understanding this deeply is essential.

Understanding Project Management Obligations Is Also Required

Furthermore, this judgment deeply relates to the “project management obligations” that the vendor side, as experts in system development, must bear.
The responsibility of a vendor who accepts work in the capacity of a system development expert in Japan is certainly not a trivial matter. Indeed, it’s needless to say that there are many scenes where user-side cooperation is needed for smooth project progress. However, it’s usually unlikely that such an obligation would be exempted without making efforts like appropriately calling for necessary cooperation from the user. It is apparent that attributing the responsibility of project failure to the user-side has a very high hurdle. Perhaps the validity of the above judgment becomes more tangible when understanding project management is a prerequisite. Conversely, there may have been not a few aspects that made it easier to adopt a theoretical structure that identifies the reality of transactions as contracting rather than dispatching from these perspectives.

Conclusion: Consult Lawyers Regarding the Differentiation between Dispatching and Service-contracting

We have explained the disputes of projects that may arise when the distinction between dispatching and service-contracting is vague. In the case, it is clear that the substance, such as specific promises exchanged mutually and trade customs within the industry in Japan, is emphasized more than the formal title of the contract. Furthermore, not only legal discussions in detail about whether the type of individual contract concluded is dispatching or contracting but also insights into something fundamental, such as “project management obligations,” seem important.
Not only the difference between dispatching and service-contracting, but various variations of disputes stemming from the ambiguity of contract types can be anticipated. However, even if the case to deal with is unknown, what should be valued there is still the insight into fundamental matters, such as “project management obligations,” isn’t it?