Legal system

1. Is your jurisdiction primarily a common law, civil law, customary law or theocratic law jurisdiction? Are the laws substantially derived from the laws of another jurisdiction and, if so, which? What instruments have legal force and effect? Who are the lawmaking bodies? How and where are new laws published? Can laws be passed with retrospective effect?

Japan is a civil law jurisdiction. Its laws have been historically influenced by other civil law jurisdictions such as Germany and France. The legal instruments that have legal force and effect in Japan are laws enacted by the National Diet (Japan's bicameral legislature), as well as other measures such as cabinet orders or regulations established by relevant bodies under powers conferred on them by laws enacted by the Diet. Although the executive branch has the power to issue government ordinances, those ordinances may not include penalties unless there is a law conferring such power. Courts do not have the power to "find" laws, and there is no formal principle of stare decisis (although Supreme Court decisions are adhered to in practice). Treaties become effective as law in Japan if ratified by the Cabinet (Japan's administrative branch) with the approval of the National Diet. New laws are published through a monthly official gazette (Kampo). With the exception of criminal laws, laws can be passed with retrospective effect, although it is generally avoided in the interests of predictability and stability in the legal framework and economy.

Contract formation

2. What are the requirements for a construction contract to be formed? When is a "letter of intent" from an employer to a contractor given contractual effect?

A contract is formed by an offer and an acceptance of specified terms. There are no particular formal requirements, although courts do require that key terms (such as price, date, etc) be sufficiently certain and supported by evidence. In principle, there is no requirement of "consideration" for a contract to be formed under Japanese law. The same principles apply to construction contracts.

As long as the above conditions for the formation of a contract are satisfied, a court will construe a 'letter of intent' as a contract regardless of its title. Otherwise, it will not be considered as a binding contract. It is possible for some terms to be found binding even if the whole is not.

Choice of laws, seat, arbitrator and language

3. Are parties free to choose: (a) the governing law of their contract; (b) the law of the arbitration agreement; (c) the seat of the arbitration; (d) any arbitral rules; (e) anyone to act as arbitrator; and (f) the language of the contract and the arbitration? If not, what are the limitations on choice and what happens if the parties act contrary to them?

Yes, under Japanese law, parties are generally free to choose the governing law of the contract and arbitration agreement as well as the arbitral seat, rules and language, and their choice or method of selecting arbitrators. If parties select a city in Japan (such as Tokyo or Osaka) as the seat of arbitration, the Arbitration Act (Act No. 138 of 2003, as amended) will mandatorily apply.

Implied terms

4. How might terms be implied into construction contracts? What terms might be implied?

Contractual terms may be implied where such implication reflects the "true intention" of the parties, which will consider various factors such as industry practices and good faith. In particular, when the court finds the language of the contract is ambiguous, contradictory or unreasonable, the court may take into account extrinsic evidence to fill in gaps or redress the contradiction by seeking to determine the true intention of the parties.

Certifiers

5. When must a certifier under a construction contract act impartially, fairly and honestly? To what extent are the parties bound by certificates (where the contract does not expressly empower a court or arbitral tribunal to open up, review and revise certificates)? Can the contractor bring proceedings directly against the certifier?

Under the Building Standard Act (Act No. 201 of 1950, as amended), an employer of a large-scale construction must retain a certified architect as administrator for the project, whose role includes issuing certificates (and to this extent should be considered as a "certifier" in Japanese-law context). Under the Act on Architects and Building Engineers (Act No. 202 of 1950, as amended), such certifier must immediately inform a contractor of any deviation of construction works from the drawings or specifications and request amendment works. If a contractor fails to respond, the certifier must inform the employer. An architect owes a statutory duty to perform these duties fairly and honestly.

These two Acts are silent on whether the parties to a construction contract are bound by the determinations of the certifier. As to the potential liability of the certifier, in cases of exceptional negligence, a contractor could bring direct tort claims against the certifier.

Competing causes of delay

6. If an employer would cause (eg, by variation) a two-week critical delay to the completion of the works (which by itself would justify an extension of time under the construction contract) but, independently, culpable delay by the contractor (eg, defective work) would cause the same delay, is the contractor entitled to an extension?

A contractor's entitlement to an extension of time in cases of concurrent delay under Japanese law will depend primarily on the interpretation of the clause that confers on a contractor the right to claim the extension.

As a general principle, a contractor can assert a defence that a delay is not attributable to it regardless of being culpable for causing delay if the employer is independently and concurrently responsible for the same delay.

Disruption

7. How does the law view "disruption" to the contractor (as distinct from delay or prolongation to the completion of the works) caused by the employer's breaches of contract and acts of prevention? What must the contractor show for a disruption claim to succeed? If an entitlement in principle can be shown (eg, that a loss has been caused by a breach of contract) must the court or arbitral tribunal do its best to quantify that loss (even if proof of the quantum is lacking or uncertain)?

A contractor can assert a claim based on disruption. In principle, it would be like any other claim under contract or tort and the prospect of success will depend on particular facts and evidence in each case.

For a contractual claim, a contractor must prove the disruption was the result of a breach of contract by the employer, as well as demonstrate loss and the causation between the disruption and the loss. In cases where quantification of the loss is difficult for a contractor to prove, the Code of Civil Procedure (Act No. 109 of 1996, amended) confers on the court's discretion to determine a "reasonable amount" as damages, taking into account the parties' submissions and evidence.

Acceleration

8. How does the law view "constructive acceleration" (where the contractor incurs costs accelerating its works because an extension of time has not been granted that should have been)? What must the contractor show for such a claim to succeed? Does your answer differ if the employer acted unreasonably or in bad faith?

A contractor can assert a claim for 'constructive acceleration'. In principle, it would be like any other claim under contract or tort and the prospect of success will depend on particular facts and evidence in each case.

To succeed on a breach of contract claim, a contractor must prove the 'constructive acceleration' was the result of a breach of contract by the employer as well as demonstrate loss and the causation between the 'constructive acceleration' and the loss. In this context, unreasonableness or bad faith by the employer may help a contractor to establish that the 'constructive acceleration' was a breach of contract by an employer.

In cases where quantification of the loss is difficult for a contractor to prove, the Code of Civil Procedure (Act No. 109 of 1996, amended) confers on the court's discretion to determine a "reasonable amount" as damages taking into account the parties' submissions and evidence.

Force majeure and hardship

9. What events of force majeure give rise to relief? Must they be unforeseeable and to whom? How far does the express or implied allocation of risk under the contract affect whether an event qualifies? Must the event have a permanent effect? Is impossibility in performing required or does a degree of difficulty suffice? Is relief available where only some obligations (eg, to make a single payment or carry out one aspect of the works) are affected or is a greater impact required? What relief is available and does it apply automatically? Can the rules be excluded by agreement?

The concept of force majeure is recognised in the Civil Code (Act No. 89 of 1896, as amended) as a defence to a claim for damages where an event not attributable to the obligor has prevented performance of contractual obligations (other than payment of money). However, as there are very few cases in which the Japanese courts have upheld a force majeure defence, it is difficult to determine the parameters or requirements for whether a certain event constitutes a force majeure event. Rather, force majeure as a ground for release from contractual liability is usually subsumed in the termination of contract due to impossibility (article 542(1)(i) of the Civil Code) or of "no fault" (article 415 of the Civil Code) (ie, that the breach of contract was not attributable to the party who is alleged to be liable for damages).

It is not clear under Japanese law whether parties can contract out of the application of the force majeure principle in the Code as it is considered a core legal principle (although not much used in practice).

10. When is a contractor entitled to relief against a construction contract becoming unduly expensive or otherwise hard to perform and what relief is available? Can the rules be excluded by agreement?

As a derivative of the principle of good faith under the Civil Code (Act No. 89 of 1896, as amended), the legal doctrine of "change in circumstances" is potentially available as a defence to liability for non-performance in cases where there has been a fundamental change to circumstances from the time of entry of contract that strongly affects the fairness of the contract terms. This principle requires (i) a fundamental change was not foreseeable at the entry of the contract, (ii) the cause of which is not attributable to the parties, and (iii) holding the parties to the original contractual terms would be harsh and against the principle of good faith.

It is unlikely that this doctrine could be excluded, as it derives from the principle of good faith, which is considered fundamental and mandatory. However, this doctrine is rarely applied. It could be possible to practically limit the application of the principle by explicitly allocating risks by contract, and thereby limiting the matters that were non-foreseeable.

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Originally published by Global Arbitration Review

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.