Contracts: An act of good faith or the only thing stopping either party from cheating?

What’s the point of a contract? Is it a sign of good faith? A legally binding document that keeps two individuals in conflict from pulling the wool over the other’s eyes? A confusing document written in an archaic form of the language, too difficult for laymen to understand?

Understanding comparative law is essential for international companies operating in multiple jurisdictions as well as the translators who read through and translate these legal documents.

Few people comb through the entire complexities of an agreement before signing their name and legally binding themselves to its contents. At an office job, one of the most alarming moments I had was when my boss signed an agreement for a business deal drafted by the lawyer without even skimming through the document or asking for any details. (Actually at a previous job, as well, the President would sign documents with a simple understanding of its title without requesting the interpreter to sight read them for him.) In contrast, I had read this contract from front to end.

After all, the devil’s in the details and you never know the concessions and obligations you’ve bound yourself to if you don’t read it and simply signing it is tantamount to conceding your right to negotiation or revoke an offer. However, my mindset on this matter comes from an American legal tradition and likewise my bosses in both cases held assumptions deriving from a Japanese legal tradition.

So then let’s examine the differences on how contracts are viewed in the USA/United Kingdom and Japan and how these assumptions are written into the actual contracts in theses jurisdictions.

All Possible Issues Excluding Force Majeure

In American contract law, a contract is a legally binding document in which something of value must be exchanged and which requires mutual assent, i.e, both parties must agree to the contract. Anglo-American contracts come out of a common law tradition. As Tess Wilkinson-Ryan, Professor at Pennsylvania Law School explains, under contract law the two parties are assumed to have equity in the law so both have the power to revoke an offer or renegotiate the offer prior to signing the contract. One major difference between the UK and US contract laws is that the US leaves it up to the individuals and the market to weed out unfair terms, while the UK has taken legislative action to constrict what can be included in their contents.

In his course to understand English contracts and translate them into Japanese, Noboru Watanabe makes this observation about English contracts and why they are often much longer and more detailed than their Japanese counterparts.

“In contrast to Japanese contracts, contracts in the United States and Great Britain are considered documents for when problems arise or when the reciprocal relationship between the two parties breaks down. (In other words, during a marriage, they write out some lines in case the couple divorces.)”

「日本の契約書に対し、英米では契約書は『問題が生じた時、または当事者間で両行な関係が破綻した時のための文書』(すなわし、結婚する際に、離婚する時のための文章まで作成しておく)という考え方がなされている。」

– From 英契約書の読み方・話し方 at Simul Academy

In her book A Practical Guide to U.S. Law for Japanese Businessmen (アメリカ駐在員のための法律常識), Michiko Ito, an American Attorney at Law, describes the USA as a litigious country and mentions that “Americans want to write a contract for anything they do”. 「アメリカ人は何をやっても契約書を作りたがる。」

A major reason for this is the parole evidence rule, an Anglo-American common law rule, which states that, except in certain exceptions, negotiations prior to agreed upon written contract cannot negate or be considered in the interpretation of the contract. That is to say, if you were told that something could be cancelled free of charge, but in the contract there’s a cancellation penalty, if you signed the contract, you are liable for the penalty, since the contract is considered the final agreement between the parties.

Considering an attorney must take into account all possible ways that the relationship may deteriorate and ascribe all the responsibilities to each party as well as the penalties for breaching these, it’s equally important to list the cases in which neither party are held accountable for not fulfilling their part of the contract. This is described in the Force Majeure (不可抗力) clause. Force Majeure can be translated from French as a “superior force” and means any “Act of God” such as wars, natural disasters, and political or economic upheaval.

“In Anglo-American law, the expectation is that once a contract is established, unless there are exceptions, ‘the obligations therein, which includes the items listed under Force Majeure, must be performed no matter what happens.’ Consequently, as many possible reasons for Force Majeure should be listed so that nothing is omitted.”

「英米法では、一度契約が成立すると、例外規定のない場合は、『不可抗力事態を含め、何があっても契約上の義務は履行しなければならない』という考え方がされる。従って、漏れがないように、『不可抗力』の事態について可能が限り多くの事由が列挙される。」


– From 英契約書の読み方・話し方 at Simul Academy

Sign of Mutual Trust

While the US and Great Britain have a more cynical view of the relationship between the two parties, Japan has a more optimistic approach to contracts and their negotiation. A contract itself is considered 「相互信頼の証」(a sign of mutual trust) rather than the final word in the negotiation, which negates all prior correspondence. As such whereas Anglo-American agreements have Force Majeure to list every possible outcome, Japanese contracts have a clause called 「別途協議条項」(Separate Negotiation Clause) or 「紳士条項」(Gentleman’s Clause), which states if anything unexpected arises outside the parameters set by the contract, the two parties will discuss this with one another and come to an agreement.

An example of this clause:

“If an item not established in the Agreement occurs or questions arise about the interpretation of the clauses therein, both parties will discuss separately in good faith and smoothly resolve this matter.”

「本契約に規定のない事項、および契約の条項の解釈に疑義が生じた場合は甲乙双方、別途誠意をもって協議し円滑に解決を図るものとする」

Extract from 英契約書の読み方・話し方 at Simul Academy

Attorney Michiko Ito in her book mentions her Japanese clients often insist on inserting a clause about good faith 「誠意協議条件」 (good faith negotiation) in their contracts in the USA, but American lawyers often throw out such clauses since they are an agreement to agree on something in the future and as such are considered to be nonsensical and too vague to be included. However, she does mention that this clause could be tweaked in the USA to mention that the two parties will make a decision through arbitration if a dispute occurs, instead of agreeing that they will negotiate and come to an agreement later.

In Japanese contract law, the relationship and trust between the parties is more important than the written contract itself. In fact, the Japanese Civil Code in Article 521 doesn’t specify that the offer and acceptance to necessitate the formation of a contract must be in writing. While the idea of a verbal agreement exists in Anglo-American law, most individuals or companies prefer legally enforceable documentation. In my own case, I feel more assured if I’ve signed a contractor agreement with a company or individual, either drafted by them or myself, rather than us agreeing over the phone or over email that they will pay a certain amount for me to finish a particular project within a certain time frame. As an American it’s hard to trust a gentleman’s agreement, without the terms of the agreement laid out and thinking through how this relationship may break down.

On the flip side, from a Japanese perspective, an American contract seems to indicate an insulting lack of trust between the parties. After all, if you’re marrying someone you trust and they start discussing in detail what will happen if you get a divorce, that may signal to you they don’t have any faith in you. Michiko Ito recounts one story of a license agreement contract, in which the Japanese company upon seeing the thick detailed contract felt impugned and inquired directly to the American company if they didn’t trust them. As she explains, “Japanese people don’t have a clear concept of contracts, but they do respect obligations and humanity” 「日本人は契約に対する概念が明瞭でなく、義理、人情などを重んじる」. For this reason, while a Japanese contract does list potential penalties for breaches, it mostly emphasizes the duties each party should honor and good faith negotiations for any uncertainties or future changes.

Duty of Good Faith

It would be unfair and inaccurate to say that in contrast, Anglo-American contracts denote a lack of good faith. In that very same story which Michiko Ito told, the American company, when questioned about their lack of faith, responded, half jokingly, that they wouldn’t be forming such an important agreement with a company they didn’t trust.

While Japan puts more stress on the idea of good faith, in American contract law there is a general implied duty of good faith to perform and enforce a contract, which is unique for common law countries and is much more in line with civil law countries such as Japan or France. In fact, according to Charles Russell Speechlys LLP , “US law and English law differ as to good faith”. Implied duty of good faith only exists in the UK for specific types of contracts “such as employment law and insurance law in relation to pre-contractual disclosure by a party seeking cover. “

Contracts as Cross-Cultural Exchanges

Whether drafted in the USA, the UK, or Japan, a contract must involve the exchange of something of value and must be time-limited. However, the legal and social culture of the jurisdiction seeps into the contents of the contract itself. In international negotiations and agreements between companies or individuals these assumptions about whether a contract is something written in stone and unchangeable or a sign of good faith that can be negotiated in the future come to the forefront and can lead to conflict or confusion.

Whether reading a contract in its original or translated form, it’s important to understand the specific cultural and legal tradition that the agreement is bound to. As a translator these sorts of cultural-specific assumptions and norms are the most fascinating and frustrating part of my occupation. However, cross-cultural understanding is also imperative for international companies as well. The specific context of cultural assumptions and legal traditions are essential to understand the English translation of a Japanese contract or a Japanese translation of an English contract. Even in translation, a contract still speaks about a specific legal tradition and a specific culture.

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