Contributed By Pillsbury Winthrop Shaw Pittman LLP
For private construction, the standard form is the General Conditions of Construction Contract (the “General Conditions (Construction)”), produced by a consortium of four professional associations of architects and contractors and last revised in May 2011.
For private construction where a contractor also undertakes design and supervisory services, the standard form is the General Conditions for Design and Build Contract, produced by the Japan Federation of Construction Contractors and last amended in April 2015.
For private construction where the contractor undertakes only construction work but the owner appoints a separate firm for design and supervisory services, the General Conditions for Design Work and Supervision Contract is commonly used.
For public construction (ie the construction of any building or structure where the employer is a governmental agency, municipal authority or other public body), the standard form is the General Conditions of Standard Public Construction Contract (the “General Conditions (Public Construction)”), produced by the Central Council for Construction Contracting Business (within Japan’s Ministry of Land, Infrastructure, Transport, and Tourism) and last amended on 31 October 2003.
The ENAA Model Form of Agreement and General Conditions (the “ENAA Model Form”), produced by the Engineering Advancement Association of Japan, is also widely used in Japan for industrial plant construction.
The Tokyo District Court and Osaka District Court each have a special construction department that handles construction cases. These departments, typically comprised of three to four judges, are one example of many special civil departments situated within the Tokyo and Osaka District Courts, respectively.
They regularly consult with and utilise specialists in the construction field, including lawyers, architects, engineers, building service professionals, land appraisers, and real estate surveyors. In fact, judges in these departments often order cases to be resolved by a conciliation panel comprised of such specialists.
These departments have jurisdiction over all disputes categorised as a construction case (such as a claim by an employer for damages due to a defect or a claim by a contractor for payment under a contract) as well as issues related to land leases.
Japanese courts interpret contracts in accordance with four fundamental principles codified in the Civil Code of Japan (Act No 89 of 27 April 1896, as amended): (i) private rights must conform to the public welfare; (ii) the exercise of rights and the performance of duties must be done in good faith; (iii) no abuse of rights is permitted; and (iv) an act of legal import with any purpose against public policy, public order, and/or morality is void.
Japanese courts will generally adhere to the actual terms and conditions agreed to by the parties and set forth in the written contract. Consideration is given, however, to the parties’ post-contractual conduct and/or pre-contractual documents when a term or provision of the contract is ambiguous and consideration of such conduct or documents is required in order to establish the parties’ intent.
In Japan, parties are generally free to negotiate contract terms. Japanese courts, however, have broad discretion to hold invalid and unenforceable any terms so significantly unfair or reflecting such unequal bargaining power as to be deemed against public policy, public order, and/or morality. Typically, only the particular provision containing such terms will be held invalid and unenforceable.
Under Japanese law, a contractor has five years to claim payment under a contract and an employer has five years to claim damages due to a contractor’s breach of contract (Article 522 of the Commercial Code of Japan).
An employer has one year from the delivery of the works to demand repair of any defect and/or demand compensation for damages because of that defect (Article 637(1) of the Civil Code).
A contractor for a building or other structure on land is liable for a warranty against defects in the building or structure for a period of five years. The warranty period, however, is ten years for structures made of stone, earth, bricks, concrete, steel, and other similar materials.
The parties to a contract may agree to shorten these statutory periods but may not extend them beyond ten years (Article 639 of the Civil Code).
The limitation period for tort claims is the shorter of three years from discovery of the tort and 20 years from the time of the tortious act (Articles 709 and 724 of the Civil Code). Parties have ten years to bring a claim for unjust enrichment (Articles 703 and 704 of the Civil Code).
Whilst Japan adheres to the principle of freedom of contract, Japanese law recognies duties that parties owe to one another in the course of contract negotiations. Specifically, parties that have initiated concrete and detailed negotiations are deemed to have entered into a special relationship governed by the doctrine of good faith and fair dealing.
As a result, they owe each other a duty to engage in good-faith negotiations and to make reasonable efforts to execute a contract. In addition, each party is required to exercise reasonable care so as not to harm the other in the course of the negotiations (decision of the Tokyo District Court, 17 March 1987 (1232 Hanrei Jiho 110)). Thus, even if no contract is entered into, an action may be brought for breach of any of these duties.
Damages in this context may include all negotiation costs, including transportation fees, accommodation fees, communication charges, personnel expenditures, and the cost of materials and supplies purchased in anticipation of an executed contract. To be recoverable, all such damages must be deemed to have been necessary for preparation of the construction works and the losses must have resulted from the dissolution of the contract negotiations.
Under Japanese law, a construction contract is a simple bilateral contract for value and can be either oral or in writing. The only formal requirement for the formation of a construction contract is that the parties make bilateral promises to (i) complete the construction work and (ii) pay remuneration for the work (Article 632 of the Civil Code).
Notably, the Construction Business Act of Japan (the “CBA”) states that the parties to a construction contract are to account for and record in writing 14 specified items (listed below), sign or affix a registered seal to that written document, and exchange all relevant documents when making that written document (Article 19(1) of the CBA). The CBA, however, is an administrative law, not a civil or commercial law. For that reason, a breach of the CBA, Article 19(1) will not necessarily result in the invalidation of the contract. That said, Japanese contractors almost always insist on a written contract that includes, as a minimum, the 14 items specified in the CBA, Article 19(1). The General Conditions (Construction) includes all 14 items. They are:
If a formal contract is not concluded, Japanese courts are unlikely to give effect to pre-contractual documents such as letters of intent.
In Japan, a construction contract does not need to be produced in writing. That said, it is highly unlikely that conduct alone, such as the commencement of work and/or payment for such work, would be deemed to give rise to an enforceable agreement. In such a case, however, even though an enforceable agreement may not exist, a contractor may still be able to recover payment for work performed (see below).
The Commercial Code of Japan (Act No 48 of 9 March 1899) provides that “[w]hen a merchant has conducted any act for another person within the scope of his/her business, he/she may claim [for] a reasonable remuneration” (Article 512).
Based on this statute, Japanese courts generally recognise a contractor’s right to payment for the work performed in anticipation of entering into a construction contract unless the employer can show that the work was performed gratuitously and/or that the contractor did the work against the employer’s will.
Japanese courts classify this right as statutory under the Commercial Code of Japan, as well as equitable under the Japanese law concept of contractual fairness.
Certain terms are implied by Japanese statute. These include:
Entire agreement clauses are rarely used in Japanese construction contracts. If one of the parties is a non-Japanese company and the contract is in the English language, however, sometimes an entire agreement clause will be used, and Japanese courts will give legal effect to such clauses.
Exclusive remedies provisions are rarely used in Japanese construction contracts, but liquidated damages clauses are nevertheless common. If a liquidated damages clause is included in a construction contract, courts will assume that the parties intended that liquidated damages were to be the sole remedy.
Please see the response to 3.5 Failure to Conclude above.
In determining the reasonable value for work performed, the court will consider various factors, including:
Please see the response to 3.2 Formation of the Contract above.
Please see the response to 3.2 Formation of the Contract above.
In Japan, pay-when-paid clauses are generally unenforceable. Under the CBA, the main contractor is to pay a subcontractor within one month of receiving payment from the employer (Article 24-3(1)). In addition, the main contractor is to pay a subcontractor within 50 days of subcontracted works passing inspection and transferring to the main contractor (Article 24-5). Finally, some Japanese courts have held that if an employer becomes insolvent and is unable to pay the main contractor, subcontractor fees become due and the main contractor cannot refuse to pay a subcontractor.
A contractor may suspend performance of the work on the grounds of non-payment by the employer (Article 533 of the Civil Code).
In Japan, a certifier is obliged to act impartially, fairly, and honestly. In addition, a certifier assumes a duty of professional care and a duty of good management. These obligations and duties originate primarily from the Architect Act of Japan (“Architect Act”).
The certifier’s duty of professional care requires the certifier to be familiar with and well informed about customary practice and all relevant laws and regulations within the construction sector. The certifier’s duty of good management requires the certifier to act prudently (Article 2-2 of the Architect Act).
If a certifier has an interest in the result of an assessment or decision, Japanese courts will not automatically invalidate that assessment or decision. A Japanese court will, however, invalidate all or part of a certifier’s assessment or decision if it finds that he or she was partial, unfair, or dishonest in reaching his or her decision.
The court will invalidate a decision of the certifier that has been reached through his or her failure to act impartially, fairly and honestly. Additionally, the certifier him- or herself may be subject to the disciplinary actions set forth in the Architect Act, such as registration revocation, one-year suspension, or official reprimand notice. Generally, an employer is not held liable for a certifier’s failure to act impartially, fairly and honestly, unless the employer was complicit in that failure.
In Japan, parties may agree that, once a certificate has been issued, its contents are conclusive and may not be subsequently reviewed, except in the event that the certifier failed to act impartially, fairly or honestly.
The parties may agree that the opening up, review and/or revision of a certificate may only be performed in a particular forum, such as arbitration. The Japanese courts will enforce such a provision.
In the absence of an express provision, the works must be completed within a reasonable time. In this regard, what constitutes a reasonable period of time will be determined based on a variety of factors, such as the scale and difficulty of the work and the circumstances relevant to procuring materials, equipment and labour (Article 1(2) of the Civil Code and Article 31 of the General Conditions (Construction)).
Japanese law does not generally allow for an extension of time. In the event of delay due to an employer’s breach, however, Japanese courts will grant the contractor a reasonable extension of time to complete (usually equivalent to the period of the employer-caused delay).
In Japan, contract provisions requiring the contractor to pay liquidated or ascertained damages are generally enforceable. Under the Civil Code, “[t]he parties may agree on the amount of the liquidated damages with respect to the failure to perform the obligation. In such case, the court may not increase or decrease the amount thereof” (Article 420, § 1). If liquidated or ascertained damages provisions allow for a disproportionately high amount, however, courts have the power to set aside the liquidated damages amount. In considering whether to do so, courts consider the difference in the negotiating abilities and positions of the parties, the underlying purpose of the parties in agreeing on compensation amounts, and the amount of damages actually incurred. In practice, however, courts will only open up liquidated damages in limited circumstances.
Concurrent delay is not expressly addressed in Japanese law. Also, there do not appear to be any court precedents directly on point. It is thought that courts are likely to apply principles of comparative negligence to cases of concurrent delay. If so, even if the employer is able to claim damages, the amount of damages is likely to be reduced in proportion to the degree of the employer’s fault.
In general, a contractor does not have an obligation to mitigate delays caused by the employer or accept an employer’s request for acceleration (except where expressly required in the contract). When a contractor does mitigate delays caused by the employer or accepts a request for acceleration and causes the work to be completed sooner than the previously agreed deadline, the contractor may make a claim for any additional costs incurred. Under these circumstances, the contractor may do so regardless of whether it was explicitly entitled in the contract to an extension of time and whether or not any such extension of time was granted.
Japanese law does not prohibit global or total loss claims. When bringing a global or total loss claim, however, the claimant will be required to prove the causal relationship between each of the different events or breaches and the single undivided loss (Articles 416(1)-(2) of the Civil Code).
Notice requirement clauses in construction contracts are enforceable and Japanese courts tend to interpret them literally. For example, in a situation where a contractor is required to give notice of circumstances giving rise to a claim but fails to do so, the contractor will typically be excluded from bringing the claim.
Where a breach by an employer causes a delay in the work, and a contractor subsequently fails to give the required notice of claim for an extension of time, the employer is likely to be excused from the consequences of its breach because there is no statute that automatically grants an extension of time in such a situation.
As a general rule, the primary remedy for a breach of contract is an action for damages. Japanese law also allows for specific performance in certain circumstances, such as for a defect in the work and where the cost of repairing that defect is not too high.
In Japan, damages for contractual claims are generally assessed either at the point when the damage occurred or the date the contract was terminated. Damages for non-contractual claims may be assessed up until the point when the oral argument and hearing concludes at the appellate level.
When assessing damages, Japanese courts have broad discretion to consider events occurring after the relevant date, such as whether it was reasonable for the injured party to repair or otherwise mitigate the damage arising from the breach.
Parties may agree to exclude the recoverability of indirect losses, special damages, consequential damages and lost profits, and Japanese courts will typically enforce such agreements, provided that the contract language is clear and unambiguous.
In general, parties may agree to the amount of interest on sums due under a contract and Japanese courts generally enforce such agreements. Japanese courts will invalidate such agreements, however, if the amount of interest is deemed to be excessive.
The rate of interest on judgment debts is 6% per annum, unless parties agree otherwise (Commercial Code, Article 514). Parties may agree to specific compound interest provisions.
A breach of contract entitling termination is allowed under the Civil Code where one party does not perform their obligations, the other party demands performance of the obligations within a reasonable period, and performance is not subsequently tendered during that period (Article 541). Notice of termination may be oral or in writing.
Compliance with the notice provisions of a contract will ordinarily be a condition precedent to the valid exercise of the right to determine. Japanese courts generally apply a high level of scrutiny to the parties’ compliance with these terms.
The Civil Code provides for set-off of amounts due and, accordingly, a contractor will need to consider the amounts it owes to an employer prior to exercising a right to determine, following non-payment by the employer.
Japanese courts have in the past enforced contractual provisions that allow for termination due to a material breach. In Japan, a material breach is generally considered to be a breach that undermines the purpose of the contract or breaks the relationship of trust between the parties.
The majority of construction disputes in Japan are resolved through litigation in court.
Under the Arbitration Act of Japan (the “Arbitration Act”), an arbitral award has the same effect as a final and binding court judgment (Article 45(1)). Furthermore, parties may not subsequently bring a lawsuit as to the same dispute that was the subject of a final arbitral award. To enforce an arbitral award the party that prevailed in arbitration must file an application with the court for an execution order.
Parties are not allowed to divide dispute resolution between various forums. That is, once arbitral proceedings have been initiated, the parties may not apply to the courts for any determination on a point of law. Parties may still apply to the courts for an interim injunction, but the courts may not decide ultimate issues of fact or law.
In Japan, parties may bring claims in a court of law to resolve construction disputes. In addition, Japan has a civil conciliation system whereby courts may resolve disputes by a conciliation committee comprised of a chief conciliator and two or more civil conciliation commissioners (Civil Conciliation Act, Articles 5(1), 6(1)). A final resolution of a dispute by the civil conciliation system has the same effect as a court judgment (Article 16). If the civil conciliation system does not ultimately resolve the dispute, a court may still hear and take as evidence the opinions of the members of the conciliation committee (Article 17).
The CWDCs also offer mediation and conciliation services in addition to arbitration. Resolution of a dispute by mediation or conciliation is treated as an unenforceable settlement agreement, reached out of court, and thus parties must seek a final and binding judgment from the court in order to enforce the resolution. Alternatively, if both parties prepare the settlement agreement in the form of a notarial document, the resolution can be enforced without the need for a separate court judgment.
Japan does not have organised institutions of experts, nor does Japan utilise expert determination or early neutral evaluation. Rather, experts in construction disputes (including architects, professional engineers, licensed technicians, consulting engineers for architectural equipment, construction managing engineers, registered surveyors, licensed electricians, fire protection engineers, and land appraisers) are often used in court or arbitral proceedings to provide expert testimony and professional opinions.
According to national data, Japanese national courts (first instance courts) accepted approximately 2,000 new filings for construction disputes in 2014. In contrast, the CWDC handled approximately 150 cases in 2014 involving arbitration, mediation or conciliation.
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