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Amending the Civil Code

On March 31 2009, the Study Committee on the Amendment to the Civil Claims Law published a report entitled The Policy Underlying a Proposed Amendment of the Claims Law, which proposes model statutory text and explanatory commentary intended to stimulate and assist the Diet in amending Japan's Civil Code. The Committee, formed on October 7 2006 with the aim of making a new Civil Code model that integrates case law, established practices, contemporary legal theories and insightful legal commentary with the existing statutory code, is comprised of Japanese civil law scholars.

The necessity for amending the Civil Code has been widely discussed by civil law scholars. They argue that a comprehensive amendment is overdue as there has been no substantial amendment in over 100 years, in spite of the changes in Japan's economy and society. With the needs of modern Japan, the Committee's aim is to prepare a new law that would be more easily understood by non-lawyers and would serve as a model to which other nations may refer when contemplating changes to their laws.

Since some of the proposed changes will significantly affect finance-related practices, the contents of the report have been heavily debated by experts in finance, particularly in the banking sector. Some of the main suggestions in the report are below.

Assignment of claims

There are currently three approved methods by which a claim holder (assignee) that obtained its rights to the claim through an assignment from the original claim holder (assignor) may assert priority over a third-party that claims rights to the same claim. The three methods are (i) the assignor's issuance of a written notice bearing a fixed date to the obligor of the assignment, (ii) the obligor's consent using an instrument bearing a fixed date to the assignment, and (iii) the registration of the assignment with the Legal Affairs Bureau. The report proposes that registration of an assignment of a claim be the only permissible method by which an assignee claim holder may assert its priority against all third parties other than the obligor. For those in finance, this proposal is favourable as it should clarify who may assert the priority of a claim and allow for easy resolution of disputes over the rightful ownership of rights to a claim.

In addition, under the current law, the effect of assignment of a claim that violates contractual provisions that prohibit an assignment is unclear. The report proposes that claims may be assignable to third parties even if there are such contractual provisions, but the obligor may refuse to perform its obligation and that if the claim holder becomes subject to a ruling for commencement of bankruptcy procedures, the obligor may not refuse to perform its obligation. Some of those in the finance sector, especially banks, oppose this proposal because the change would invalidate non-assignment provisions that are the standard feature of their financing arrangements.

Set-offs

A claim holder is only permitted to set-off its claim that has matured and is then due against the claim of the counterparty (the obligor). There have been disputes over whether a claim holder may set-off its claim, if a claim of the counterparty is attached, and such attachment falls into the acceleration event for the claimholder's claim, which makes that claim due and accordingly both claims are suitable for set-off. Under the current Civil Code, whether such set-off prevails against the attachment to the counter claim is not clearly prescribed and there has been case law regarding this matter. The report propses to clearly prescribe new rules by reference to the case law in the provisions, but there are arguments for and against case law – and the interpretation of the case law is not consistent.

The next phase

Although the report is one of the primary sources for recommendations to help guide the Diet in its amendment of the Civil Code, it is yet to be determined whether any or all of the proposals will be incorporated into the future amendment of the Civil Code. The official proposed amendment to the Civil Code is expected to be submitted to the Diet in 2011 at the earliest.

Masayo Furukawa, Akira Matsuda and Akihiro Ishikawa

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