International Transactions and Contracts
In cross-border transactions, the importance of written contracts is even greater than in domestic dealings due to differences in language, legal systems, and business customs. It is essential to clearly agree on the governing law, dispute resolution method, and rules for contract interpretation.
Governing Law
What Is Governing Law?
Governing law determines which country's laws apply to the interpretation and validity of a contract. In international transactions, the parties are in different jurisdictions, making this a critical issue.
Party Autonomy
Under Japan's Act on General Rules for Application of Laws (Article 7), parties may freely choose the governing law of their contract. Specifying this in the contract ensures predictability.
Absence of Agreement
Without a governing law agreement, the law of the most closely connected jurisdiction applies (Article 8). Specifically, the law of the habitual residence of the party performing the characteristic obligation is presumed.
Selection Considerations
- Choosing your own law makes legal risk assessment easier
- If the counterparty's law applies, local legal advice is needed
- A neutral third-country law (e.g., English law, Singapore law) may be chosen
- Consider whether CISG (UN Convention on Contracts for the International Sale of Goods) applies
About CISG
Japan is a party to CISG (the Vienna Sales Convention). When both parties are located in CISG contracting states, CISG automatically applies to contracts for the sale of goods (CISG Article 1).
If you do not want CISG to apply, include an express exclusion clause in the contract.
Dispute Resolution Clauses
Jurisdiction
Determines which country's courts will resolve disputes.
- Exclusive jurisdiction: Only the specified court has jurisdiction
- Non-exclusive jurisdiction: The specified court has jurisdiction, but other courts are not excluded
Key considerations: - Enforcement of foreign judgments requires reciprocity with the foreign country (Code of Civil Procedure, Article 118) - Reciprocity is generally recognized with the US and France, but is debated with China
Arbitration
In international transactions, arbitration is more widely used than litigation.
Advantages: - Under the New York Convention, arbitral awards are enforceable in 170+ countries - Confidential proceedings (protection of trade secrets) - Parties can choose expert arbitrators - Single-instance resolution (no appeals)
Major arbitration institutions: - ICC (International Chamber of Commerce): Paris - SIAC (Singapore International Arbitration Centre) - JCAA (Japan Commercial Arbitration Association): Tokyo - HKIAC (Hong Kong International Arbitration Centre)
Sample arbitration clause: "All disputes arising out of or in connection with this Agreement shall be finally settled by arbitration in Tokyo under the Commercial Arbitration Rules of the JCAA."
Basic Structure of English Contracts
Recitals (Whereas Clauses)
Describes the background and purpose of the contract. Generally not legally binding but serves as an aid to interpretation.
Definitions
Lists definitions of key terms used in the contract. English contracts typically place detailed definitions at the beginning.
Operative Provisions
#### Representations and Warranties Clauses where parties represent and warrant that certain facts are true. This concept does not have a direct equivalent in Japanese law and is unique to common law systems.
Breaches may trigger indemnification obligations or contract termination.
#### Indemnification Establishes the obligation to compensate for losses. Unlike Japanese damages (Civil Code Articles 415 and 709), indemnification characteristically covers defense costs against third-party claims.
#### Limitation of Liability Sets caps on damages and exclusions for indirect damages and lost profits.
#### Force Majeure Provides relief from obligations when unforeseeable events occur (natural disasters, war, epidemics). This clause has gained importance since COVID-19.
#### Term and Termination Specifies the contract duration, renewal conditions, and grounds and procedures for early termination.
#### Confidentiality Governs the handling of confidential information disclosed in connection with the transaction.
#### Entire Agreement Confirms that the contract represents the complete agreement between parties, superseding all prior agreements and understandings. This contractually reinforces the common law parol evidence rule.
General Provisions (Boilerplate)
- Governing Law
- Dispute Resolution
- Assignment: Transfer restrictions
- Notices: Communication methods
- Severability: Effect when part of the contract is invalid
- Waiver: Waiver of rights
- Amendment: Modification procedures
Practical Considerations
Language Clause
When both Japanese and English versions exist, specify which version prevails (or whether they are equal).
Currency Clause
Specify the payment currency and define the exchange rate reference date.
Stamp Tax
Contracts executed in Japan may be subject to stamp tax. Contracts executed overseas are exempt from Japanese stamp tax.
Summary
In international contracts, governing law and dispute resolution clauses are the two most important foundations. Arbitration agreements in particular are the international standard due to enforceability under the New York Convention. Understanding clauses unique to English contracts (representations and warranties, indemnification, etc.) is also essential.