10 Major Revisions to the Japanese Civil Code Part Four – Guarantees
This part of our series on revisions to Japan’s Civil Code looks at guarantees. The revised Civil Code contains major changes to interpretations and several major revisions to the law concerning sales contracts. The main feature is that under the revised Code, if there is a problem with the type, quality or quantity of the subject matter, the buyer’s options are no longer limited to compensation for damages or cancellation of the contract. Instead, it will be also possible to make a claim for a reduction of the purchase price or “subsequent completion” (i.e. repair or delivery of a replacement), regardless of whether the subject matter is an “identified good” or “unidentified good”.
Establishment of limits on personal revolving guarantees
The main revision concerning guarantees addresses placing limits on the maximum amount of the principal, interest, penalty and damages that a guarantor is to be liable for under a guarantee that relates to unspecified debts within a specified range (“revolving guarantees”) where the guarantor is not a corporation (i.e. “personal revolving guarantees”). The current Civil Code defines that a “revolving loan guarantee” (a revolving guarantee where the main obligation includes a monetary debt) is invalid if it does not define a maximum amount (current Article 465-2). The revision expands the scope of the article beyond revolving loan guarantees to include all personal revolving guarantees (for example, revolving guarantees for business contracts between enterprises and building lease contracts) (revised Article 465-2).
Personal guarantee limits and notarial deeds
The second major revision concerning guarantees is that, when a guarantor other than a corporation either (1) guarantees a loan that is acquired for the conduct of business, or (2) provides a revolving guarantee that includes loans acquired for the conduct of business within the scope of the guarantee, the guarantee will be invalid unless the guarantor manifests an intention to guarantee the performance via a “notarial deed prepared within one month prior to the contract being concluded” (new Article 465-6 (1)). The following formal requirements apply to the preparation of this notarial deed (new Article 465-6 (2)). However, a personal guarantee by a person substantially involved in the business of the principal obligor is exempt from the above formal requirements (new Article 456-9).
- The person who will become a joint guarantor must give oral instructions to the notary public about the parties and their intention to guarantee the performance of the obligation and the total value.
- These oral statements by the guarantor must be written by the notary public and read back to the guarantor, or read by the guarantor.
- The guarantor sign and affix a seal to confirm the accuracy of the writing.
- The notary public must add a note that the deed was prepared in accordance with (1) to (3), and sign and affix their seal.
Obligation to provide information at the time of concluding the contract
The principal obligor of an obligation taken in the course of business has the duty to provide to an individual (i.e. excluding a corporation) entrusted by the principal obligor to be the guarantor certain information regarding the credit of the principal obligor, so that the guarantor can determine for themselves the possibility of having to perform the guaranteed obligation. Failure to meet this duty is grounds for rescinding the guarantee contract. Specifically, the principal obligor must provide the following information:
- Details of their assets, earnings and expenditure
- the existence of other debts besides the principal obligation, their value and repayment status
- the details of any property that has or will be provided as security for the principal obligation.
If the guarantor enters a guarantee contract on the basis of a mistaken understanding of (i) to (iii) due to the principal obligor either not providing an explanation or there being factual inaccuracies in the explanation, and the creditor is aware that the principal obligor has either not provided the explanation or that there are factual inaccuracies, then the guarantor can rescind the guarantee contract.
Duty to provide information on repayment status when requested by guarantor (new Article 458-2)
When requested by the guarantor, the creditor must, without delay, provide information regarding the principal obligation and all obligations that are secondary to the principal obligation, such as interest, penalties, damages, etc., as well as any amounts that are due or overdue.
Duty to provide information when the principal obligor loses the benefit of time (new Article 458-3)
If a guarantor is unaware that the principal obligor has failed to perform their obligation, it can result in severe consequences for the guarantor if they are subsequently required to perform the guarantee after a large amount of interest or penalties have been accrued due to the delay. Therefore, where the guarantor is an individual (i.e. not a corporation) and the prinicpal obligor loses the benefit of time, the creditor must notify the guarantor within 2 months of becoming aware of the principal obligor’s breach. If notice is not given during this period, the creditor cannot make a claim against the guarantor for any damages for delay that accrue during the period from when the principal obligor lost the benefit of time until the guarantor received notice (excluding any amounts that would have accrued even if the benefit of time had not been lost).
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