4.Contract Drafting, Review and Negotiation

A company will enter into contracts to advance its business in all stages of its life, whether the R&D stage, the manufacturing stage or the commercialization stage. In those contracts, it is of course important to negotiate advantageous terms. But, in a given transaction, it is just as important to draft clear language in your contract so that you can avoid any disputes in the future. Even if you think that you have negotiated favorable terms, it is possible that the contract does not accurately reflect your intention, and this can cause you unforeseen trouble in the future as your business grows.

At AZX, we draft and review all kinds of contracts on behalf of our clients. We can also accompany you in negotiations and otherwise support you to conclude your contracts. Of course, in addition to transactions with third parties, we can also support you in various internal contracts, such as those with your employees.

Q1 (IP Rights in Outsource System Development)

What points should we keep in mind in negotiating intellectual property rights when we outsource system development?

Obtaining the intellectual property rights necessary for you to use the anticipated deliverable is important. In principle, the copyright and other intellectual property rights of a work rest with the author, so you need to clearly state in the contract that the intellectual property rights will be assigned to your company. Also in this case, the assignment of rights under the Copyright Act Articles 27 and 28 (adaptation rights and rights of the original author related to use of derivative works) needs to be clearly stated in the contract. Otherwise, the assignee will have the burden to prove that such rights were to be included in the assignment under the Copyright Act. Also, in addition to the copyright in the work itself, there are moral rights (publicity rights, attribution rights and integrity rights), which cannot be transferred under the law. For these rights, it is necessary for the author to contractually agree not to exercise them.

(Posted: January 27, 2012)

Q2 (Invention Ownership in Joint R&D Agreements)

In a joint research and development agreement, what kinds of provisions are typically included regarding the ownership of inventions?

These provisions should be based on the relative contributions of the parties in the research and development, but if you anticipate that both parties will make contributions, joint ownership is a relatively common scenario. In cases of joint ownership, ideally you would specify the ownership allocation, but equal ownership appears to be very common. Also, ideally you would specify terms related to decisions on patent applications and the responsibility for the costs therefor, and what happens if one side doesn’t agree to an application or can’t bear the cost. Further, you may wish to consider clarifying the rules on the use of joint patents by a party and licenses to third parties.

(Posted: January 27, 2012)

Q3 (Antimonopoly Concerns in Distribution Agreements)

We heard that we should be careful about the Antimonopoly Act in our distribution agreement, but for what points?

Resale price restrictions and limitations on sales territories can be problematic points.

Resale price restrictions on distributors are in principle prohibited under the Designation of Unfair Trade Practices. So, even if you want to exercise some control over the resale price, it is safer to only offer suggested resale prices.

As for limitations on sale territories, certain activities may be considered within the scope of the Designation of Unfair Trade Practices. A couple of examples would be a manufacturer with a certain market share strictly forbidding a distributor from selling in a specified territory , or when a territorial limitation results in product price maintenance .

For more details, please see the Japan Fair Trade Commission’s “Guidelines concerning Distribution Systems and Business Practices under the Antimonopoly Act ”.

(Posted: January 27, 2012)

Q4 (Ownership to Improvements in Patent Licenses)

In a patent license agreement, we wish to include a provision under which we are assigned the ownership rights to any improvements that the licensee may develop, at no cost. Is there any issue?

There is a possibility that this could be problematic under the Antimonopoly Act. Under the Antimonopoly Act, so-called “restrictive term transactions” (entering into a transaction with a party with conditions unreasonably restricting the party’s business activities, including transactions of the party with another party) are prohibited as unfair business practices. Imposing an assignment obligation to improvements on the licensee at no cost strengthens the licensor’s position in the technology market and product market. Further, it discourages the licensee from developing improvements. And in most cases it is difficult to find a reasonable justification for such a restriction. So, generally speaking, we believe this would be deemed an unfair trade practice. Even though, in principle, a patent holder can freely exercise its rights under its patents and license them to third parties, you should keep in mind that, depending on the terms of the transaction, there could be a violation of the Antimonopoly Act.

For more details, please see the Japan Fair Trade Commission’s “Guidelines for the Use of Intellectual Property under the Antimonopoly Act”.

(Posted: January 27, 2012)

Q5 (Limitation of Liability in Terms of Use)

Regarding terms of use for services targeting individual users, we wish to include a provision disclaiming our liability for damages. Is this a problem?

We often see disclaimer of liability provisions in terms of use. However, contractual relationships with individual users are often considered consumer contracts under the Consumer Contract Act. This means that disclaimers of liability for damages are restricted. Generally speaking, provisions completely disclaiming liability for damages are invalid, and partial disclaimer provisions are invalid in cases of willful misconduct or gross negligence (which means the provisions are valid in cases of simple negligence). Accordingly, in terms of use targeting individual users, in general, you should not include a complete disclaimer provision, but rather a partial disclaimer provision with a limit on the amount of damages and restrictions on the scope of liability.

(Posted: January 27, 2012)

Q6 (Amendments of Terms of Use)

We wish to amend the terms of use for our web-based service. Is it sufficient to provide a notice of the amendment on our site?

The terms of use, if approved by the user, becomes a contract between the user and the company providing the service. In principle, an amendment to the contract requires the consent of both parties, so it is not possible for the company to unilaterally amend the contract by notice on the web site.

However, if the user is aware of the amendment, and there is a process by which the user can be deemed to have substantively consented, then it is possible that the amendment will be validated. For example, one possibility is to send an e-mail to the user’s registered e-mail address with notice of the amendment, which includes (1) the content of the amendment or a URL where it can be confirmed, and (2) a statement that the amendment will be deemed approved if the user does not object to the amendment or terminate the service within a specified period of time. If the user continues to use the service without objecting within the specified period, you may be able to take the position that the user implicitly consented to the amendment.

Of course, there is some risk that a user may challenge the validity of the amendment due to the abruptness of the e-mail. However, by including a provision like the one above which sets forth the procedure for amendments in the terms of use beforehand, you can lower the risk of such a claim.

(Posted: January 27, 2012)

Q7 (Anti-Social Forces Provisions)

If we are requested by the other party to include a provision in a contract regarding the absence of influence from anti-social forces, what does that mean?

In light of several scandals involving so-called “anti-social forces” (such as organized crime), the securities exchanges have implemented a regulation that prohibits the involvement of anti-social forces in publicly listed companies. In the IPO application process, one of the points considered is “whether or not the applicant has in place a system to prevent the involvement of anti-social forces in the management activities of its group, including whether or not in fact the system is working, and whether or not the actual situation is deemed to be suitable from the standpoint of the protection of the public and investors” (Guidelines Concerning Listing Examination, etc. II6).

In addition, under the recently enacted [Tokyo Metropolitan Ordinance for Eliminating Organized Crime Groups ], any association with any organized crime group is prohibited. All parties subject to the ordinance are required to make efforts to include in each contract a specified anti-organized crime provision.

(Posted: January 27, 2012)

Q8 (Tokyo Ordinance on Organized Crime Groups)

I heard that, under the [Tokyo Metropolitan Ordinance for Eliminating Organized Crime Groups], each contract is required to include a provision on the elimination of organized crime groups.  What is this?

You must make efforts to include the following provisions in each contract. Since the obligation is only to make an effort, there is no penalty. But we think it is desirable to include the following provisions.
(1) If a party discovers that the other party to a contract, its representative or an agent is associated with an organized crime group, the first party can terminate the contract without notice;
(2) If a party discovers that the other party’s subcontractor or a party to another related contract of the other party is associated with an organized crime group, the first party can demand that the subcontract or other related contract be terminated;
(3) If the other party to the contract refuses to terminate the subcontract or other related contract under (2) above, the first party can terminate the contract with the other party.

(Posted: January 27, 2012)

Q9 (Signing Authority)

Is it OK for a general manager of a department to sign a contract instead of a representative director?

When a company becomes a party to a contract, it is important to know whether or not the individual signing the contract has the authority to do so. Since a company’s representative director has the authority to represent the company as a matter of law (Companies Act Article 349, Section 3), in most cases it is safest to obtain the representative director’s signature.

However, an employee such as the general manager of a department or section can be delegated the authority to sign a contract (Companies Act Article 14, Section 1). But it is typically not possible for an outside party to know whether or not the signing authority has been delegated. So if you receive a signature from an employee such as the general manager of a department or section on a material contract, if is safer to take precautions to confirm that the signing authority has been delegated under a power-of-attorney or otherwise.

(Posted: January 27, 2012)

Q10 (Termination of Contract Negotiations)

We have not yet entered a contract (just in the preparatory stage).  If we unilaterally terminate the negotiations, would we incur any liability?

Even if you have not yet executed a contract, a party that has entered in the preparatory stages of contract execution has a duty of good faith to not cause damage to the other party. If you violate this duty and cause damage to the other party, you may be held responsible for such damage.

So, if you have not yet executed a contract but have entered into the preparatory stages, meaning the negotiations have proceeded to a certain point and the other party is preparing for the execution of the transaction based on an expectation of and reliance on the contract being executed, and then you unilaterally terminate the negotiations, you need to be careful about potential liability for any damages suffered by the other party.

(Posted: January 27, 2012)

Q11 (Oral Promises)

If I make an oral promise, but a written contract is not executed, may I understand that there is no contract?

In Japan, the requirement for contract formation is an expression of mutual intention, so even an oral promise without a written agreement can result in a contract (although one exception is that a guarantee must be in writing). Accordingly, you cannot claim that there is no contract just because there is no writing. On the other hand, in the event of a dispute, it will be difficult to prove the existence and content of a contract without a writing. So, as a practical matter, it is important to execute a written contract.

(Posted: January 27, 2012)