First Civil Code Amendment in 120 Years

A major reform in the Civil Code for the first time in the last 120 years

Background

On May 29, 2017, the Diet passed a proposed bill to amend the Civil Code, which was promulgated on June 2, 2017. The new amendment will be effective within three years from the date of the promulgation. It has taken nearly seven and half years since the Minister of Justice started to consider a full reform for the current legislation to be approved.

The Civil Code was enacted in 1898, modelled after French and German civil codes, and has been maintained to date with several partial amendments. This is the first major reform in the last 120 years to overhaul the whole chapter on claims and liabilities.

While many legal issues and mechanisms are not addressed in the Code, the courts and practitioners have established a number of rules to fill in the blanks. For example, the Civil Code does not have provisions governing lease deposits and novation of contracts. However, these concepts are indeed recognized through court precedents and established practices, which have not created confusion to date that necessitates a major legal reform.

In addition, many special pieces of legislation supplement the Civil Code in certain areas where it has become obsolete. For example, the Act on Land and Building Leases contains quite a number of significant rules on real estate leases. As the Civil Code only has a dozen provisions for employment contracts, most of the rules on employee protections are set out in the Labor Contracts Act and Labor Standard Act. Those are special laws, therefore overriding the Civil Code in those areas.

Legislators believe that the Code should be comprehensive for non-experts, incorporating legal developments over the years in its statutes, to enhance transparency in the legal landscape. In addition, it is without doubt that some of the provisions are outdated and needed some reforms long time ago.

While the discussion started with ambitions to amend more than 500 rules in the Code, many of the controversial issues were eliminated as the bill became final. As a result, the majority of the amendments are simply to restate what has been established in practice, and major changes on the substantive rules are relatively limited. In that sense, many of the amendments may look familiar to Japanese legal experts, and the change will have little impact on day-to-day practice.

Going forward, we will highlight several amendments that make substantive changes to existing legal environments in a series of our newsletters. As mentioned, since the effective date is three years ahead, you have plenty of time to get yourself familiar with the new amendments and be ready for them. However, this could have an impact in the way contracts are drafted even before the amendment is effective, as these changes will be coming anyway. For that reason, we believe it is not too early to introduce the changes at this point in time.

Statute of Limitation

Limitation periods for claims and liabilities will be universally five years. Currently, the limitations are ten years for civil claims and five years for commercial claims. In addition, depending on their nature, certain claims have shorter limitation periods (e.g., payments for medical services are limited to three years, attorneys’ fees are two years, transportation fees are one year). Over time, as the nature of business has changed, it has become more and more difficult to justify why these have shorter limitation periods compared to the others. Moreover, it is not always clear, in particular for certain claims arising out of newer types of businesses, whether they are subject to these special limitation periods or to the general rules. Due to that, the new Code eliminated these shorter limitation periods, and whether civil or commercial issues are involved, they are subject to the universal five year statute of limitation.

The limitation period starts to run when claims are due and payable. If a claimant does not know that a claim is becoming due, the five year limitation period starts to run when the claimant comes to know that it is due. However, even if the claimant does not know, it is also subject to the limitation period of ten years from when it actually becomes due. In short, it is subject to two limitation periods, whichever comes first. In Japan, the statute of limitation provides a defense for a debtor, but it does not automatically dismiss lawsuits unless it is asserted.

Tort claims continue to be subject to the limitation period of three years regardless of the above. When a claimant does not know its damages or tortfeasor, the three year limitation period starts to run when the claimant comes to know those. Even if the claimant does not know one or both of these, the statute of limitation lapses in twenty years from the time tortious acts occur.

Whether it is because of tort or breach of contract, death or physical injury to persons have special rules on limitation periods; five years when a claimant comes to know its damages, or twenty years from when it becomes payable, whichever comes earlier.

Statutory Interest Rates

Interest rates for claims will be reduced from five or six percent to three percent. Currently, the rate is five percent for civil claims, and six percent for commercial claims; this will be consolidated and universally will be three percent.

Japan's market interest rate has been incredibly low over the past decade. It is widely known that statutory interest offers better deals than what’s out there in the market, and therefore should be corrected. Not only does the new Code adopt lower interest rates, it also introduces floating rates, under which the statutory rate will be reviewed every three years, and adjusted by one percent if the market rate increases or decreases more than one percent from the latest adjustment of the statutory interest. Practically speaking, it is not likely that the adjustment will occur downwards as the market interest rate is already at a very low level.

(to be continued)