Rethinking Contract Practice and Law in Japan

• Author: John O. Haley
• Position: Professor of Law at Washington University School of Law in St. Louis. A.B.(Princeton)
• Pages: 47-69

Page 47

This article explores "the Japanese advantage" in the enforcement of ex ante contract commitments in comparison with the United States, arguing that ostensible convergence of Japanese and United States contract practice in on-going business relationships is based on very different assumptions and conditions. Writing in the early 1960s Takeyoshi Kawashima in Japan and Stewart Macaulay in the United States described prevailing views and practices related to business agreements. Their respective observations indicated a tendency in both countries to avoid formal, legally enforceable contacts. For over four decades scholars on both sides of the Pacific have tended view these observations as grounds for arguing for a convergence of contract practice. Recent research efforts have attempted to verify empirically such convergence. On closer examination, however, the conclusions reached by Kawashima and Macaulay rest on very different assumptions. For Kawashima the avoidance of formal contact appears to be based on a desire to avoid the enforcement of ex ante commitments by those who perceive that their bargaining leverage will remain intact throughout an on-going business relationship, thus enabling them to adjust unilaterally to changing circumstances. Similarly enforceable ex ante contractual commitments may also be viewed as less advantageous to those who may have the disadvantage in bargaining leverage at the time of the contracting to the extent that they perceive that they may gain greater ex post leverage. Macaulay, on the other hand emphasized the transactions costs of formal contracting and uncertainty of enforcement that reduced the efficacy of ex ante commitments. This article explores the predicates for both positions. It concludes that with respect to the concerns raised by Macaulay, Japan has a comparative advantage. Because of the organization and values of Japanese judges as well as the legal rules related to both excused non - performance as a result of changing circumstances, the legal rules favor greater certainty in the enforcement of ex ante commitments thereby supporting Kawashima s foundational observations. Similarly, the greater uncertainty of enforcement as well as the flexibility of the legal rules on impracticability as well as contract termination in the United States justifiesPage 48 Macaulay' s conclusions. Japan s loss of advantage in terms of effective formal enforcement of contract rights, it is argued, is counter - balanced by the strength of supportive mechanisms of private ordering.

I Introduction

In no area of Japanese law have conventional views of Japanese practice and the apparent irrelevance of law established a half century ago persisted so durably as with contract. Takeyoshi Kawashima, the Japanese law scholar whose influence on post WWII perceptions of Japanese law and legal culture remain unparalleled, articulated best the prevailing view. Coining the phrase "legal consciousness" (hoishiki)-, he wrote, that Japanese still clung to traditional patterns and attitudes toward law and contracts, preferring vaguely defined terms and indeterminate commitments that preclude legal enforcement and allow future flexibility and adjustment. Thus, he asserted, ex ante commitments as clearly articulated legal rights and duties are "unsettling" (fuan) for most Japanese.¹ Kawashima was apparently unaware of the contemporaneous and equally seminal work by Stewart Macaulay on relational contracting and business practice in the United States.² Accepting the basic arguments of both Kawashima and Macaulay comparative lawyers and students on both sides of the Pacific have subsequently devoted almost exclusive attention to the question of whether or in what ways Japan does in fact differ from the United States or other "modern" industrial states, particularly in the extent to which relational contracting without legally enforceable commitments prevails.³ One of the most ambitious attempts in this regard was a project in the mid 1990s led by University of Tokyo Professor Takashi Uchida under the auspices of the Center for Global Partnership (Japan Foundation) to developPage 49 empirical data on the similarities and possible differences in Japanese and U.S. contract practice.⁴ Uchida and his team have so far had the last word. No one else has endeavored to replicate their effort or even to question seriously the basic premises and propositions of Kawashima' s and subsequent studies. With the exception of Luke Nottage' s surveys of long-term contract practices in New Zealand⁵ and Gordon Matei' s unpublished student paper on Canadian practice for a class in Japanese law at the University of British Columbia,⁶ all attempts to develop empirical data have apparently focused on a U.S. comparison. Remarkably, no similar efforts, to my knowledge, have been undertaken in either Germany or South Korea despite their greater similarity with Japan in terms of law, economic growth, and, in the case of South Korea, cultural heritage. Equally if not more significant no subsequent study has addressed the fundamental question of why any of this matters other than with respect to an ill-defined concern with the relevance of legal rules. Since the 1960s U.S. scholars have largely ignored substantive contract law.

Kawashima, it should be recalled, had a vision in mind. Heavily influenced by Talcott Parsons' s notion of progression from traditional to modern societies, he understood the question in terms of social and economic change. He emphasized what he considered to be traditional attitudes and behavior. He forecast their transformation as Japan inexorably converged with "modern" Western patterns as a result of economic development and what we today refer to as "globalized" markets. By current standards Kawashima' s views of Japanese contract practice seems almost quaintly anecdotal and impressionistic. Unlike his often-cited observations on Japanese dispute resolution, initially published in English⁷ but subsequently also included as a chapter in his book on Japanese legal consciousness,⁸ he provided no empirical support for his views onPage 50 contract practice. He relied instead on personal experience and narrative. Given the subsequent emphasis on relational contracting, a rereading of Kawashima may surprise some. Nowhere does he mention on-going business relationships or private ordering. His concern was what he observed as a tendency to avoid clarity and legally enforceable rights and duties with a concomitant desire to maintain flexibility in light of supervening events. His description of "traditional" values and contract practices was also closely related to his views on Japanese preference for conciliated settlements and reluctance to litigate. Japanese contract practices reflected an asserted aversion to lawsuits. Adopting a Parsonian view of traditional societies in the process of modernization," he emphasized, however, that Japanese practices were likely to change as society became increasingly commercialized and influenced by western practice.

Most scholars today would dismiss as naïve his notion of institutional change along with his assumption of a linear progression from a "traditional" to a "modern" society. Nonetheless, an unspoken premise -the lemma, if you will -of most of not all subsequent research has been a view of Japanese practice as a product of the past, an aspect of embedded values habits, and social structures, inexorably subject to change and convergence with the more "advanced" economic and legal orders of the West, (mis)represented, of course, by the United States. In a sense, findings of similarity confirm at least for some that Japan has indeed already converged and has become fully modern" to use the unfashionable term. Largely if not completely ignored are other issues and implications. Among them is an issue fundamental to the Kawashima thesis-the contribution of contract practice and law to economic growth. Behind the Parsonian dichotomy his concern is evident: Contract practices and legal rules-as articulated and enforced by the courts-both reflect and contribute to economic change. Kawashima s focus thus presages the interest of contemporary economists-especially those identified with the "new institutional economics" led by Douglass North-who argue that certainty and predictability of enforcement of contracts along with property rights are significant factors in economic growth. As growth-fostering institutions the legal rules and their enforcement matter greatly. For North "key" to the effort to improve economic performance is thus "the creation of an effective judicial system to reduce the costs of contract enforcement."⁹ Add "path dependency," another of North s emphases,¹⁰ and one can reformulate Kawashima' s argument in more acceptable contemporary phraseology -to what extent do embedded Japanese institutions constrain economic growth by restricting the development of contract rights and the predictability of their enforcement. Taken a face value the findings by Uchida, Nottage, and others suggest that for whatever reason Japan is no more constrained than thePage 51 United States. In other words, their convergence, whatever the cause, places both countries in relative parity.

Having some years ago questioned Kawashima' s conclusions regarding a generalized Japanese propensity to avoid litigation.¹¹ I would like here again to take issue with Kawashima s views with, however, renewed admiration for his insight as to what is at state. My purpose, as indicated in the title of this paper, is to rethink Japanese contract practice and law. In so doing I do not question current...