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Amending the Civil Code

It has been nearly a century since the establishment of the Japanese Civil Code, but recently interest in comprehensive amendments to it has steadily increased. Thus, in the September 2009 issue we reported on the publication on March 31 2009 of The Policy Underlying a Proposed Amendment of the Claims Law (the Report) prepared by the Study Committee on the Amendment to the Civil Claims Law. In this article, we discuss three topics addressed in the Report which have received considerable attention: (i) default by a party to a contract (obligor), (ii) cancellation of a contract, and (iii) damage awards for default claims.

One major objective of the Report is to propose some conceptual changes to certain traditional legal theories and concepts. However, the Report does not intend to make substantial changes to current practice.

Default

Under traditional Japanese legal theory, a contractual default has two major aspects. One is that a default can result in damages only if it is attributable to an act or omission on the part of the obligor. The other aspect is the classification of default into three types: (i) delayed performance, (ii) impossibility of performance and (iii) imperfect performance. Delayed performance refers to situations where an obligor fails to timely perform its obligation. Generally speaking, a default will fall under the impossibility of performance when the defaulting obligor is prevented from performing its contractual obligation because of the loss of the subject matter of the contract or other circumstances. All other types of default fall under the general classification of imperfect performance.

In practice, distinction between these three is often difficult because defaults do not clearly fall into one of three categories. In addition, the ambiguity of the definition of default causes confusion. While traditional legal theory narrowly construes default to require an affirmative act or omission by the obligor, others construe it more broadly to mean the mere failure to satisfy a contractual obligation, even if that failure cannot be attributed to the obligor. To address these concerns, the Report proposes to define default as simply, "cases where obligors of their own will fail to perform their duties". The classification of default into three types is no longer maintained, and it is no longer required that the default be attributable to the obligor's action or omission.

Cancellation of contracts

The Report also proposes changes that affect a non-breaching party's (obligee's) right to seek a cancellation of contract in a default. The Civil Code treats defaults due to delayed performance differently from defaults due to impossibility of performance. For the former, in order for an obligee to cancel a contract, it must first demand that the obligor perform the obligation and allow for a reasonable period to cure the default, and only upon the obligor's failure will the obligee be permitted to cancel the contract. For the latter, prior notice and opportunity to cure is not required and the obligee may immediately cancel the contract. The Report proposes to eliminate this discrepancy by permitting cancellation of contracts for any "significant failure to perform a contractual obligation".

Damages

The Report also proposes conceptual changes that affect damage awards. As mentioned above, traditional legal theory requires a breach to be attributable to an obligors' action or omission to be recognised as a default for which damages can be assessed (the fault liability principle). However the Report argues that the fault liability principle, which is typically applied in tort cases, should not be applied in contract cases. Under the basic concept of the principle, a party may be held liable only if it is negligent with respect to certain duties. The basic concept assures people to act freely without the threat of being liable to another under most circumstances. However, in a contractual relationship parties voluntarily choose to owe certain specified duties to each other and accordingly be bound by the contract's terms and conditions. This is why the Report proposes that parties to a contract be held liable for damages to the extent of their respective risks under a contract.

Mayu Yamaguchi and Akira Matsuda

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